UNITED STATES

**SECURITIES AND EXCHANGECOMMISSION**

** **

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **

**[X] Annual Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

For the Fiscal Year EndedSeptember 28, 2003

 

or

 

[  ]**TransitionReport Pursuant to Section 13 or 15(d)**

**of the Securities ExchangeAct of 1934**

For the Transition Period_____ to _____

 

**Commission file number0-17187**

 

| LOGIC DEVICES INCORPORATED                              |
|---------------------------------------------------------|
| (Exact name of registrant  as specified in its charter) |

 

| **California**           | **94-2893789**                        |
|--------------------------|---------------------------------------|
| (State of Incorporation) | (I.R.S. Employer  Identification No.) |

 

| 395 West Java Drive, Sunnyvale, CA 94089                       |
|----------------------------------------------------------------|
| (Address of principal  executive offices,

including Zip Code) |

 

| **(408) 542-5400**                                    |
|-------------------------------------------------------|
| (Registrant's telephone  number, including Area Code) |

 

Securities registered pursuantto Section 12(b) of the Act

 

| Title of Class | Name of each exchange on  which registered |
|----------------|--------------------------------------------|
| NONE           | NONE                                       |

 

Securities registeredpursuant to Section 12(g) of the Act

 

| Common Stock, without par value |
|---------------------------------|
| (Title of Class)                |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.

Yes   X      No         

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. [     ]

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).

Yes           No   X   

 

Theapproximate aggregate market value of the registrant's common stock held bynon-affiliates as of March 30, 2003 (the last business day of the registrant'smost recently completed second quarter) was $5.9 million based on the closingprice for the common stock on the Nasdaq National Market on such date.

 

Asof December 4, 2003, the Registrant had 6,660,688 shares of its common stockissued and outstanding.

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## **CAUTIONARY STATEMENT**

 

This Annual Report on Form 10-K contains forward-lookingstatements which include, but are not limited to, statements concerningprojected revenues, expenses, gross margin, net income, market acceptance ofthe products of Logic Devices Incorporated (the Company), the competitivenature of and anticipated growth in the Company's markets, the Company'sability to achieve further product integration, the status of evolvingtechnologies and their growth potential, the timing of new productintroductions, the adoption of future industry standards, the Company'sproduction capacity, its ability to migrate to smaller process geometries, andthe need for additional capital. These forward-looking statements are based onthe Company's current expectations, estimates, and projections about itsindustry, management's beliefs, and certain assumptions made by it. Words suchas "anticipates, appears, expects, intends, plans, believes, seeks, estimates,may, will," and variations of these words or similar expressions are intendedto identify forward-looking statements. In addition, any statements that referto expectations, projections, or other characterizations of future events orcircumstances, including any underlying assumptions, are forward-lookingstatements. These statements are not guarantees of future performance and aresubject to risks, uncertainties, and assumptions that are difficult to predict.Therefore, the Company's actual results could differ materially and adverselyfrom those results expressed in any forward-looking statements, as a result ofvarious factors, some of which are listed under the section, "Factors AffectingFuture Results," at the end of Item 1 of this Annual Report on Form 10-K. TheCompany undertakes no obligation to revise or update publicly anyforward-looking statements for any reason.

 

 

**PART I**

 

### ITEM 1.    BUSINESS

** **

#### General Development of the Business

 

LOGICDevices Incorporated (the Company) develops and markets high-performancedigital integrated circuits that address the requirements of original equipmentmanufacturers (OEMs) to provide high-speed electronic computation in digitalsignal processing (DSP), video image processing, and telecommunicationsapplications. The Company's product strategy is to develop and marketproprietary circuits that offer superior performance to meet specificapplication requirements.

 

TheCompany's fiscal year is comprised of 52 weeks of seven days, each beginning onMonday and ending on Sunday, with each fiscal quarter comprised of exactly 13weeks. The Company's fiscal year 2003 ended September 28, 2003, its fiscal year2002 ended September 29, 2002, and its fiscal year 2001 ended September 30,2001.

 

TheCompany's products generally address DSP requirements involvinghigh-performance arithmetic computational and high-speed storage functions. TheCompany is focused on developing proprietary catalog products to addressspecific functional application needs or performance levels that are nototherwise commercially available. The Company seeks to provide related groupsof circuits that OEMs purchase for incorporation into high-performanceelectronic systems. As a result of the Company's focus on high-valueproprietary products, it has reduced the number of products it offers by over80 percent from fiscal 1999 to the current fiscal year.

 

TheCompany relies on third-party silicon foundries to process silicon wafers, eachwafer having up to several hundred integrated circuits of a given Companydesign, from which finished products are then assembled. The Company's strategyis to avoid the substantial investment in capital equipment required toestablish a wafer fabrication facility, by outsourcing wafer processing tothird-party foundries and taking advantage of their expertise. See"Business - Background." While the Company currently has one primarywafer supplier, it is also utilizing another source and continues to explore additional foundry relationships toreduce its dependence on any single wafer foundry.

----

 

TheCompany markets its products worldwide through its own direct sales force, andthrough one domestic and 21 international distributors. In fiscal year 2003,approximately 32 percent of the Company's net revenues were derived from OEMs,while sales through foreign and domestic distributors accounted forapproximately 68 percent of net revenues. Among the Company's customers are GEMedical, Rhode & Schwartz, Lockheed Martin, Tektronix, Thales, Qualcomm,Tadiran, Texas Instruments, Sony, Teradyne, and Raytheon. Approximately 45percent of the Company's net revenues were derived from within the UnitedStates and approximately 55 percent were derived from foreign sales.

 

TheCompany was incorporated under the laws of the State of California in April1983. The Company headquarters are located at 395 West Java Drive, Sunnyvale,California 94089. The Company's telephone number is (408) 542-5400.

 

#### Background

 

Rapidadvances in fabricating silicon-based semiconductors are driving a globalrevolution in electronics. With these ongoing advances, the ability toeconomically compute, communicate, and control seems to be limited only by thecreativity required to implement ever more complex electronic systems. It isbecoming increasingly common to implement entire electronic systems on a singlesmall sliver of silicon. The challenges to the industry have increasinglyturned toward innovative product definition, timely product development,technical customer support, and heavy capital investments in advancedsemiconductor wafer fabrication facilities. The rapid advances in chipfabrication technology have resulted in a specialization of skills within theindustry. In addition to the specialization of materials processing skillsrequired to fabricate semiconductor wafers, the industry increasingly requiresand values system architecture development, interoperability standards, signalprocessing algorithms, and circuit design expertise as essential skills fordeveloping financially successful products. Opportunities have thus emerged forsemiconductor companies that focus on product definition, advanced designtechniques, and technical application support, and that rely on third partiesfor wafer fabrication. The Company focuses its resources on defining anddeveloping high-performance integrated circuit components for growing markets,which require demanding computational throughput.

 

Thesemiconductor industry is intensely competitive, highly cyclical, andcharacterized by rapid technological change, product obsolescence, widefluctuations in both demand and capacity, and steep price erosion. Thesefactors can obsolete processes and products currently utilized or produced bythe Company. In such cases, the Company is required to develop productsutilizing new processes and to either integrate such products into its existingfoundry processes, or seek new foundry sources.

 

#### Markets and Product Strategies

 

DSPis an increasingly important technology for many emerging product technologies.It involves converting light, sound, or other naturally occurring analogwaveforms into a stream of digital values that may then be processed,manipulated, exchanged, or sorted by electronic systems. DSP provides manyadvantages, including: the ability to store and recall information; the abilityto extract information content and compress the amount of data that must bestored, processed, or transmitted; and the ability to process and manipulatedigital data with consistency and precision. Manipulation of video images andspeech requires signal-processing rates and precision that are not practicalwith analog technology or with general-purpose (non-DSP) processors.

 

DSPis becoming commonplace in our lives, resulting from rapid advances insemiconductor process technology and increasing cost effectiveness.Consequently, very large and formidable companies have become interested inDSP, with a focus on high-volume applications. To avoid direct competition withthese larger companies, the Company attempts to identify products and marketniches that demand the greater performance of programmable DSP circuits canachieve, yet are small enough not to attract significant attention from thelarger chip manufacturers.

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Beginningin November 1998, the Federal Communications Commission (FCC) directed thattelevision broadcasters begin a transition from analog broadcasts tohigh-definition digital television (HDTV), which offers clearer pictures andbetter sound, with all analog broadcasts scheduled to cease by 2006.Unfortunately, the broadcasters have resisted and remain behind the scheduledmandates. This slow transition adversely affected the Company's revenues infiscal 2003, 2002, and 2001. However, it appears the FCC has recently takensteps to push the industry to catch up and get on schedule for the 2006deadline.

 

Among other things, inAugust 2002, the FCC issued an order to television manufacturers that requiresdigital tuners be incorporated into 50 percent of the television sets withscreens of 36 or more inches starting in 2004, in 50 percent of the sets withscreens of 25-35 inches starting in 2005, and in all sets with screens of 13inches or more by 2007. On October 29, 2003, the U.S. Court of Appeals for theD.C. Circuit upheld a FCC mandate that, by 2007, all but the very smallesttelevision sets sold in the U.S. must be equipped for receiving digital, alongwith traditional analog, television signals. The court said that the FCC'smandate was needed because the industry was not moving quickly enough to makenew tuners available.

 

TheCompany has historically derived a significant portion of its revenues fromtelevision broadcast equipment manufacturers. In the late 1990's, the Companyjointly defined with its customers a family of high-performance digital imagefiltering circuits that facilitate the smoothing of edges as video images arestretched and resized. The Company has developed and sampled these to OEMs forincorporation into HDTV studio production systems. While sales of HDTV studioequipment have lagged behind market forecasts, the Company believes itsproducts offer unique solutions to certain video image filtering problemsrequired in that equipment. Therefore, if HDTV studio equipment begins to sellin higher volume, the Company believes it will benefit from increasing sales.

 

Inthe meantime, as a result of its initial work on digital filtering and imageresizing circuits, the Company identified secondary applications for thisproduct technology. For example, the Company found that the circuits wereapplicable to, and have been incorporated into, advanced medical imagingequipment, such as ultrasound and computer aided tomography (CAT) scanners, andsecurity camera systems.

 

Lastly,as a result of the recent need to replenish stocks of advanced military weaponssystems, the Company enjoyed increased sales for certain military programs infiscal 2002, with sales to one defense contractor, Lockheed Martin, comprising24 percent of net revenues. One military product comprised 17.4 and 15.5percent of net revenues in fiscal 2002 and 2001, respectively. No otherproducts made up more than 15 percent of net revenues in fiscal 2003, 2002, and2001.

 

#### Products in Development

 

Mostcompanies in the semiconductor industry typically experience a correlationbetween their success in introducing new products and increases in revenues.While the Company remains committed to product development, it has not madesignificant new product introductions over the past few years as a result offocusing on reducing costs and strengthening its cash flow and balance sheet.Disappointing execution by the engineering team and the need to downsize to cutcosts have hampered the Company's ability to introduce new products.

 

Withthe benefit of on-going customer input, the Company currently has new productsit hopes to introduce in fiscal 2004. To address the lack of new productintroductions over the past few years, the Company maintained high levels ofresearch and development expenditures even though its net revenues decreasedduring fiscal 2003. Through hiring and support of the continuing education ofits employees, the Company increased the educational background of its designteam during fiscal 2002 and 2003. It also acquired new software designautomation tools to increase the productivity of its product developmentefforts. These efforts resulted in the fabrication of the first prototypewafers on a new video frame buffer product that the Company is currentlytesting. At current resource levels, the Company does not anticipate being ableto complete all product opportunities it has identified. However, as itconsiders product development critical to its future success, the Companyanticipates that its product development expenditures will continue to besignificant.

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#### Wafer Fabrication Technology

 

TheCompany is a fabless manufacturer. It relies upon third-party foundry suppliersto produce processed wafers from mask patterns designed by the Company. Throughthese wafer suppliers, the Company has access to advanced high-speed,high-density complimentary metal oxide semiconductor (CMOS) process technology,without the significant investment in capital equipment and facilities requiredto establish a wafer fabrication factory. Coupled with the Company's structuredcustom design methodology and experience with high-speed circuit design, thisCMOS technology has allowed the Company to produce products that offer highcomputational speeds, high reliability, high levels of circuit integration(complexity), and low power consumption.

 

TheCompany is primarily dependent upon a single, albeit leading, wafer supplierand does not have a guarantee of minimum supplies. Therefore, there can be noassurance that such relationship will continue to be on terms satisfactory tothe Company. The inability to obtain adequate quantities of processed waferscould limit the Company's revenues.

 

Asa result of this risk, the Company carries a large inventory of unassembledwafers that can be packaged into a variety of carrier styles to supportcustomer requirements. The Company has developed one product, and will continueto attempt to develop additional products with a different foundry source.

 

#### Production, Assembly, and Test

 

TheCompany's production operations consist of functional and parametric testing,package marking, hot and cold testing, final inspection, quality inspection,and shipment. As is customary in the industry, high-volume assemblysubcontractors in the Far East assemble the Company's commercial grade devices.Thereafter, the assembled devices are returned to the Company for final testingand shipment to customers. The Company continues to test materials and productsat various stages in the manufacturing process, utilizing automated testequipment.

 

#### Marketing, Sales, and Customers

 

TheCompany markets its products worldwide to a broad range of customers throughits own sales efforts and through one domestic and 21 international electronicsdistributors. The Company concentrates its direct marketing efforts onhigh-performance segments of the medical imaging, broadcast equipment, andtelecommunications markets, in applications where high speed is critical. Amongthe Company's OEM customers are GE Medical, Rhode & Schwartz, LockheedMartin, Tektronix, Thales, Qualcomm, Tadiran, Texas Instruments, Sony,Teradyne, and Raytheon.

 

TheCompany coordinates worldwide sales from its sales office in Warminster,England. Distributors purchase the Company's products for resale, generally toa broad base of small- to medium-sized customers. As is customary in theindustry, the Company's distributors receive certain price protection andlimited stock rotation rights. However, the Company's distributors are requiredto simultaneously order an amount equal to or greater than any rotation itemsreturned. During fiscal 2003, 2002, and 2001, sales through both internationaland domestic distributors accounted for approximately 68%, 54%, and 69% of netrevenues, respectively.

 

Infiscal 2003, 2002, and 2001, Jan Devices, Inc., a domestic distributor,accounted for approximately 13%, 21%, and 32% of net revenues, respectively. Inaddition, two international distributors, Zwinz Technical Consulting and MCMJapan Ltd., comprised approximately 14% and 12% of net revenues in fiscal 2003,while one non-distributor customer, Lockheed Martin, comprised approximately24% of net revenues in fiscal 2002. No other customers comprised more than tenpercent of net revenues in fiscal 2001.

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Internationalsales are conducted by sales representatives and distributors located inAustralia, Belgium, Canada, Denmark, England, Finland, France, Germany, HongKong, Israel, Italy, Japan, Korea, the Netherlands, Singapore, South Africa,Spain, Sweden, and Taiwan. During fiscal 2003, 2002, and 2001, the Company'sexport sales were approximately 55%, 33%, and 32% of net revenues, respectively(see Note 9 in "Notes to Financial Statements" contained in Item 8).The Company's international sales are billed in United States dollars, andtherefore, settlements are not directly subject to currency exchangefluctuations. However, changes in the relative value of the dollar may createpricing pressures for the Company's products. Although the Company'sinternational sales are subject to certain export restrictions, including theExport Administration Amendments Act of 1985 and the regulations promulgatedthereunder, the Company has not experienced any material difficulties resultingfrom these restrictions to date.

 

TheCompany's domestic and international distributors are not exclusive and theymay also market products competitive with the Company's products. The Companywarrants its products against defects in materials and workmanship for a periodof 12 months from the date of shipment. Warranty expenses to date have beennominal.

 

#### Backlog

 

Asof December 2, 2003 and 2002, the Company's backlog was approximately $164,400and $391,500, respectively. The Company's backlog includes all releasedpurchase orders shippable within the following 12 months, including orders fromdistributors. The Company's backlog, although useful for scheduling production,does not represent actual sales and should not be used as a measure of futuresales or revenues at any particular time. In accordance with accepted industrypractice, all orders on the backlog that are not "last-time buys" aresubject to cancellation without penalty at the option of the purchaser at anytime prior to shipment. In addition, the backlog does not reflect changes indelivery schedules and price adjustments that may be passed on to distributorsand credits for returned products. The Company produces catalog products thatmay be shipped from inventory within a short time after receipt of a purchaseorder. The Company's business for its catalog products, like the businesses ofmany companies in the semiconductor industry, is characterized by short-termorders and shipment schedules rather than by volume purchase contracts. Forthese reasons, the Company's backlog as of any particular date is notrepresentative of actual sales for any succeeding period and the Companybelieves that its backlog is not a good indicator of future revenues.

 

#### Research and Development

 

Asthe Company has not introduced any significant new products in a few years, itviews new product development as the most important factor affecting revenuegrowth; therefore, it continues its commitment to increase research anddevelopment levels. Research and development expenditures were 36%, 27%, and19% of net revenues in fiscal 2003, 2002, and 2001, respectively. See"Selected Financial Data," "Management's Discussion and Analysisof Financial Condition and Results of Operations," and "ConsolidatedStatements of Operations," contained in Items 6, 7, and 8, respectively.

 

#### Competition

 

Thesemiconductor industry is intensely competitive and characterized by rapidtechnological change and rates of product obsolescence, price erosion, periodicshortage of materials, variations in manufacturing yields and efficiencies, andincreasing foreign competition. The industry includes many major domestic and internationalcompanies that have substantially greater financial, technical, manufacturing,and marketing resources than the Company. The Company faces competition fromother manufacturers of high-performance integrated circuits, many of which haveadvanced technological capabilities and internal wafer production capabilities.The ability of the Company to compete in this rapidly evolving environmentdepends on elements both in and outside the control of the Company. Theseelements include the Company's ability to develop new products in a timelymanner, the cost effectiveness of its manufacturing, the acceptance of newproducts by customers, the speed at which customers incorporate the Company'sproducts into their systems, the continued access to advanced semiconductorfoundries, the number and capabilities of its competitors, and general economicconditions. In the area of high-performance DSP circuits, the Company competeswith Altera, Analog Devices, Fairchild Semiconductor, Intersil, LucentTechnologies, Texas Instruments, and Xilinx, among others.

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#### Patents and Copyrights

 

Becauseof the rapidly changing technology in the semiconductor industry, the Companyrelies primarily upon its design know-how, rather than patents and copyrights,to develop and maintain its competitive position. The Company attempts toprotect its trade secrets and other proprietary information throughconfidentiality agreements with employees, consultants, suppliers, andcustomers, but there can be no assurance that those measures will be adequateto protect the Company's interests.

 

TheCompany is of the opinion that patent maskwork protection is of lesssignificance in the Company's business than other factors, such as theexperience and innovative skill of its personnel and the abilities of itsmanagement. There can be no assurance that others will not develop or patenttechnology similar to the Company's technology, or copy or otherwise duplicatethe Company's products. The Company owns five patents awarded by the UnitedStates Patent and Trademark Office.

 

Since others have obtained patents covering varioussemiconductor designs and processes, certain of the Company's present or futuredesigns or processes may be claimed to infringe upon the patents of thirdparties. 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 onpatent or other intellectual property rights of third parties. See Item 3 -"Legal Proceedings." The Company does not believe that it infringes upon anyknown patents at this time. If any such infringements exist or arise in thefuture, the Company may be liable for damages and may, like many companies inthe semiconductor industry, find it necessary or desirable to obtain licensesrelating to one or more of its current or future products. Based on industrypractice, the Company expects that any necessary licenses or rights underpatents could be obtained on conditions that would not have a material adverseeffect on the Company. There can be no assurance, however, that licenses couldin fact be obtained on commercially reasonable terms, or at all, or thatlitigation would not occur. The Company's inability to obtain such licenses oneconomically reasonable terms or the occurrence of litigation could adverselyaffect the Company.

 

**Factors Affecting Future Results**

 

ThisAnnual Report on Form 10-K contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. Any statements about the Company'sexpectations, beliefs, plans, objectives, assumptions, or future events orperformance are not historical facts and may be forward-looking. Words andphrases such as "anticipate, appears, estimate, plans, projects,continuing, ongoing, expect, believes, intends," and similar words orphrases may identify forward-looking statements.

 

Forward-lookingstatements involve estimates, assumptions, and uncertainties that could causeactual results to differ materially from those expressed in them. Anyforward-looking statements are qualified in their entirety by reference to thefactors discussed throughout this Form 10-K report. Among the key factors thatcould cause actual results to differ materially from the forward-lookingstatements include:

 
    -  Delay in product or     technology development;Lack of market     acceptance or demand for new products;The impact of     competitive products and prices;Changes in economic     conditions of the Company's various markets;Dependencies on silicon     wafer suppliers and subcontracted assemblers and testers;The availability and     terms of financing; andOpportunities or     acquisitions the Company may pursue.
 

Actualresults could differ materially from those expressed in any forward-lookingstatements made by the Company. Further, any forward-looking statement appliesonly as of the date on which it is made. The Company is not required to updateany forward-looking statement to reflect events or circumstances after the dateon which such statement was made, or to reflect the occurrence of unanticipatedevents.

*The Company has arecent history of losses and its future operating results could be harmed dueto semiconductor industry business cycles.*

** **

TheCompany has sustained substantial net losses during fiscal 2003, 2002, and2001. These net losses are attributable principally to delays in the televisionbroadcast industry's transition to high definition digital broadcasting fromcurrent analog standards, the prolonged downturn in the semiconductor industry,and delays in new product development. Many factors will affect the Company'sability to become profitable or sustain profitability, such as continued demandfor the Company's products by its customers, lack of price erosion, efficiency ofits manufacturing subcontractors, continued product innovation and design wins,and the Company's continued ability to manage its operating expenses.

 

The Company produces and sells semiconductors and itsoperations are therefore impacted by the repeated and severe business cyclesthat have historically been experienced by the semiconductor industry. TheCompany's financial performance has been negatively impacted by significantdownturns in the semiconductor industry as a result of:
-  general reductions in     inventory levels by customers;excess production     capacity;the cyclical nature of     the demand for products of semiconductor customers; andaccelerated declines in     average product selling prices.
Whenthese or other conditions in the industry occur, the Company's operatingresults could be adversely impacted.

 

*TheCompany is a small company with limited resources compared to its current andpotential competitors and it may not be able to compete effectively in itshighly competitive industry.*

 

The semiconductor industry is highly competitive and manyof the Company's direct and indirect competitors have substantially greaterfinancial, technological, manufacturing, and sales resources. If the Company isunable to compete successfully in this environment, its operating results couldbe harmed.

 

The current level of competition is high and may increaseas the Company's market expands. The Company competes directly with companiesthat have developed similar products. It also competes indirectly with numeroussemiconductor companies that offer products and solutions based on alternativetechnologies. These direct and indirect competitors are establishedmultinational semiconductor companies, as well as emerging companies. Inaddition, the Company may experience additional competition from foreigncompanies in the future.

 

*The Company depends on a limited number of customersfor a majority of its sales and its sales orders are typically concentrated inthe third month of every quarter, making its financial results particularlysusceptible to the loss of a key customer and making sales in a quarterdifficult to predict.*

 

TheCompany anticipates that the concentration of its sales among relatively fewcustomers will continue in the future. The Company has no long-term purchasecommitments from any of its customers. Therefore, these customers could ceasepurchasing the Company's products with limited notice and with no penalty.

 

TheCompany's dependence on a small number of customers increases the risksassociated with its potential loss of customers resulting from businesscombinations or consolidations. If a customer were acquired or combined withanother company, the resulting company could cancel purchase orders as part ofthe integration process.

 

Inaddition, the Company frequently ships more products during the third month ofeach quarter than in the first two months of the quarter. Moreover, shipmentsin the third month are generally higher toward the end of the month. TheCompany's sales are therefore concentrated in the latter part of each quarter,making it difficult to predict its revenues and results of operations for anyfiscal quarter or other fiscal period.

 

*Continueddelay in High Definition Television (HDTV) broadcasting could adversely impactsales of the Company's HDTV application products.*

 

Beginning in November 1998, the Federal CommunicationsCommission directed that television broadcasters begin a transition fromcurrent analog broadcasts to HDTV broadcasts. All analog broadcasts arescheduled to cease by the year 2006.  Itis generally acknowledged that the industry will not meet the 2006 conversiondeadline.

 

The Company developed in fiscal 1998 and tested in fiscal1999, products that were designed-in (incorporated) into HDTV compatible studiosystems.  Since fiscal 2000, sales ofthe Company's HDTV-related products have not met expectations, and the Companyanticipates that its future revenues will be adversely affected if the slowtransition persists.

 

*The Company depends on third parties to fabricatesilicon wafers and to assemble and test its products, which exposes it to arisk of production disruption or uncontrolled price changes.*

 

The Company does notmanufacture silicon wafers. It  relies primarily upon one wafer supplier andsolely upon twoassembly/test subcontractors. These suppliers do not have a contractualobligation or commitment to supply such wafers or services in the future. Ifthe suppliers are unable or unwilling to supply wafers or services, theCompany's operating results could be harmed. The Company may not be able tofind sufficient suppliers at a reasonable price or at all if such disruptionsoccur. As a result of its reliance on third parties, the Company facessignificant risks, including:
-  reduced control over delivery schedules and quality;longer lead times;the potential lack of     adequate capacity during periods of excess industry demand;difficulties selecting     and integrating new subcontractors;limited warranties on     products supplied to the Company;potential increases in     prices due to capacity shortages; andpotential     misappropriation of the Company's intellectual property.
If the Company fails to deliver its products on time or ifthe costs of its products increase, then its profitability and customerrelationships could be harmed.

 

*The Company's international operations subject it torisks not present in solely domestic operations.*

 

The Company's primary silicon wafer supplier and assemblysubcontractors are located in Asia, primarily in South Korea and Taiwan.  Economic, financial, social, and politicalconditions in Asia have been volatile. Financial difficulties, government actions or restrictions, prolongedwork stoppages, or any other difficulties experienced by the Company's supplierscould harm future operating results.

 

The Company also has many overseas customers. Its exportsales are affected by unique risks frequently associated with foreigneconomics, including:
-  governmental controls     and trade restrictions;export license     requirements and restrictions on the export of technology;changes in local     economic conditions;political instability;changes in tax rates,     tariffs, or freight rates;interruptions in air     traffic; anddifficulties in     staffing and managing foreign sales offices.
Significantchanges in the economic climate in the foreign countries from which the Companyderives its export sales could harm future operating results.

 

*Thecomplex nature of semiconductors makes the Company highly susceptible tomanufacturing problems and these problems could have a negative impact onfuture operating results.*

 

Making semiconductors is a highly complex and preciseprocess, requiring production in a tightly controlled, clean environment. Evenminute imperfections in its materials, difficulties in the wafer fabricationprocess, defects in the masks used to print circuits on a wafer or otherfactors can cause a substantial percentage of wafers to be rejected or numerouschips on each wafer to be nonfunctional. The Company may experience problems inachieving an acceptable quality and yield rate in the manufacture of wafers.The interruption of wafer fabrication or the failure to achieve acceptableyields could harm future operating results. The Company may also experiencemanufacturing problems in its assembly and test operations, and in theintroduction of new packaging materials.

 

*TheCompany depends on third parties to deliver its products.*

 

The Company relies on independent carriers and freighthaulers to transport its products between manufacturing locations and to deliverits products to its customers. Any transport or delivery problems because oftheir errors, or because of unforeseen interruptions, such as strikes,political instability, terrorism, natural disasters and accidents, could harmthe Company's future operating results.

 

*Earthquakes, other natural disasters, and powershortages may damage the Company's business.*

 

The Company's California facility and some of itssuppliers are located near major earthquake faults that have experiencedearthquakes in the past. In addition, the risk of power shortages and outagesin California has been widely reported. In the event of a major earthquake orother natural disaster near the Company's facility or a sustained loss of powerat its facility, its operations could be harmed. Similarly, a major earthquakeor other natural disaster near one or more of the Company's suppliers, such asthe one that occurred in Taiwan in September 1999, could disrupt the operationsof its suppliers, which could limit the supply of its products and harm itsbusiness.

 

Althoughthe Company has not experienced any material disruption to its business todate, it cannot assume that if major earthquakes, other natural disasters, orshortages occur in the future, they will not adversely affect its business.

 

*The Company maintains high levels of inventory thatdecrease its liquidity and substantially increase the risk of write-offs.*

 

The Company has historically maintained and expects tocontinue to maintain high levels of inventory of processed silicon wafers,packaging materials, and finished goods. For some product types, it must purchase, in a short period of time, allof its anticipated inventory needs for the life of the product.  The Company commits capital to maintainthese high inventory levels, which prevents it from using that capital forother purposes, such as research and development, and requires it to utilizemore capital than it would otherwise require. The Company's high inventory levels also heighten its risk of inventoryobsolescence and write-offs.  Further,the Company may forecast demand incorrectly and produce insufficient inventory,resulting in supply shortages.

 

*The Company currently has no bank credit facility andmust rely solely upon existing cash reserves and funds from existing operationsto finance future operations.*

 

Although the Company sustained substantial net losses duringthe fiscal years ended September 28, 2003, September 29, 2002, and September30, 2001, its cash flows from operations were positive during fiscal 2003 and2002, due to its reductions in accounts receivable and inventory and its costreduction efforts. However, these reductions cannot continue indefinitely. Ifthe Company is unable to return to profitability, it would have to utilize cashreserves and thereafter obtain additional funding through debt or equityfinancing. If the Company is able to obtain debt financing, which is notassured, the terms of such financing are unknown, since it does not presentlyhave a credit facility, and may be unfavorable to it. Similarly, there can beno assurance that the Company would be able to sell capital stock on favorableterms or at all and any such sales may adversely affect its existingshareholders.

 

*The Company's operating success depends upon itsability to develop new products and access new technologies.*

 

The semiconductor industry is a dynamic environment markedby rapid product obsolescence. The Company's future success depends on itsability to introduce new or improved products that meet critical customerneeds, while achieving acceptable profit margins. If the Company fails tointroduce these new products in a timely manner or these products fail toachieve market acceptance, operating results would be harmed. The introductionof new products in a dynamic market environment presents significant businesschallenges. Product development commitments and expenditures must be made wellin advance of product sales, while the success of new products depends onaccurate forecasts of long-term market demand and future technologydevelopments.

 

Future revenue growth is dependent on market acceptance ofnew products and the continued market acceptance of existing products. Thesuccess of these products is dependent on a variety of specific technicalfactors, including:
-  successful product     definition;timely and efficient     completion of product design;timely design into     customers' future products and maintenance of close working relationships     with customers;timely and efficient     access to wafer manufacturing and assembly processes; andproduct performance,     quality and reliability.
If, due to these or other factors, new products do notachieve market acceptance, the Company's operating results would be harmed.Furthermore, to develop new products and maintain the competitiveness ofexisting products, the Company needs to migrate to more advanced wafermanufacturing processes that use larger wafer sizes and smaller geometries.

 

*The loss of key personnel or failure to hire andretain additional qualified personnel could impair the Company's ability todevelop and market its products.*

 

The Company's future success greatly depends on the abilityto attract and retain highly qualified technical and management personnel. As asmall company, the Company is particularly dependent on a relatively smallgroup of key employees.  Competition forskilled technical and management employees is intense in the semiconductorindustry. As a result, the Company may be unable to retain its existing keytechnical and management employees, or attract additional qualified personnel,which could harm its operating results. The Company does not have employmentagreements with, or key person life insurance policies on the lives of, any ofits key employees. In addition, one of the Company's key officers, its VicePresident of Sales, is a consultant and not an employee.

 

*The Company's failure to protect its proprietaryrights, or the costs of protecting these rights, may harm its ability tocompete.*

 

TheCompany owns several patents but relies primarily on its design know-how andcontinued access to advanced wafer process technology to develop and maintainits competitive position. The Company attempts to protect its trade secrets andother proprietary information through confidentiality agreements withemployees, consultants, suppliers and customers. However, competitors maydevelop, patent or gain access to similar know-how and technology, or reverseengineer the Company's products. The Company's inability to adequately protectits proprietary rights could result in its competitors offering similarproducts, potentially causing the Company to lose a competitive advantage andleading to decreased revenue. The Company may not obtain an adequate remedy inthe event its confidentiality agreements are breached or any remedy if itstrade secrets are independently developed by others. Despite the Company'sefforts to protect its proprietary rights, existing intellectual property lawsafford only limited protection, especially under the laws of some foreign countries.Litigation may be necessary in the future to enforce the Company's intellectualproperty rights, to protect its trade secrets or to determine the validity andscope of the proprietary rights of others. This litigation could result insubstantial costs and diversion of resources.

 

*The Company could be harmed by litigation involvingpatents and other intellectual property rights.*

 

Asa general matter, the semiconductor and related industries are characterized bysubstantial litigation regarding patent and other intellectual property rights.The Company has been and in the future may be accused of infringing theintellectual property rights of third parties. Furthermore, the Company mayhave certain indemnification obligations to customers with respect to theinfringement of third-party intellectual property rights by its products.Infringement claims by third parties or claims for indemnification by customersor end-users of Company products resulting from infringement claims may beasserted in the future and such assertions, if proven to be true, may harm theCompany's business.

 

Anylitigation relating to the intellectual property rights of third parties,whether or not determined in the Company's favor or settled by the Company,could be costly and could divert the efforts and attention of management andengineering personnel. In the event of any adverse ruling in any suchlitigation, the Company could be required to pay substantial damages, cease themanufacturing, use and sale of infringing products, discontinue the use ofcertain processes or obtain a license under the intellectual property rights ofthe third party claiming infringement. A license might not be available onreasonable terms, if at all.

 

*The Company has adopted certain anti-takeover,indemnification and limited liability provisions which may adversely affect itsstock price.*

 

TheCompany has adopted a shareholder rights plan that is designed to make a changeof control through the acquisition of large amounts of its common stock, orthrough a tender offer to its shareholders, prohibitively expensive unless itsboard of directors has approved the transaction. The Company's restatedarticles of incorporation and bylaws also provide for the indemnification ofits officers and directors and insulate its directors from monetary liabilityfor certain breaches of their duty of care to the Company. These provisions mayalso have the effect of delaying or preventing a change in control withoutaction by the Company's shareholders, and therefore could adversely affect theprice of the Company's common stock.

 

The *price of the Company's common stockmay continue to be volatile and its trading volume may continue to berelatively low.*

 

Themarket price of the Company's common stock has fluctuated significantly todate. In the future, the market price of the common stock could be subject tosignificant fluctuations due to general market conditions and in response toquarter-to-quarter variations in:
-  the Company's     anticipated or actual operating results;announcements or     introductions of new products;technological     innovations or setbacks by the Company or its competitors;conditions in the     semiconductor markets;the commencement of     litigation; andgeneral  economic     and market conditions.
InJuly 2002, the Company received a written warning from the Nasdaq Stock Marketindicating that its common stock was not in compliance with minimum marketvalue of publicly held shares required and minimum bid price required forcontinued listing on the Nasdaq National Market. The common stock subsequentlyregained compliance and was not delisted. However, there can be no assurancethat the Company's common stock will continue to satisfy the Nasdaq continuedlisting requirements.  In the event ofdelisting, if the Company's shares are not then traded on an exchange oranother quotation system, a public market for the shares would not exist andthe ability of individuals to buy and sell shares would be limited. Even if theshares are traded on an exchange or another quotation system, there can be noassurance that the trading volume in the shares would be comparable to thepresent volume on the Nasdaq National Market. Any reduction in liquidity of theshares may reduce the value that a holder can obtain for them, regardless ofthe Company's performance or financial condition.

 
Employees
 

Asof September 28, 2003, the Company had 31 employees, consultants, and part-timeemployees, of which 26 were full-time employees. The Company's ability toattract and retain qualified personnel is an important factor in its continuedsuccess. None of the Company's employees are represented by a collectivebargaining agreement, and the Company has never experienced any work stoppage.The Company believes that its employee relations are good.

 
Regulations
 

Federal, state, and local regulations impose variousenvironmental controls on the discharge of chemicals and gases in connectionwith the wafer manufacturing process. Since the Company relies on third partymanufacturers and its activities do not involve utilization of hazardoussubstances generally associated with semiconductor processing, the Companybelieves such regulations are unlikely to have a material affect on itsbusiness or operations.

 
ITEM 2.    PROPERTIES
 

The Company's executive offices, as well as itsinventories and principal research and design facilities, are located inapproximately 15,400 square feet, in Sunnyvale, California, with a leaseexpiring September 30, 2007. The Company also maintains additional sales orfield application support offices in the metropolitan area of San Diego,California and Warminster, England. The Company believes that its facilitieswill be adequate to meet its reasonably foreseeable needs and, if necessary,that alternative facilities will be available to it on acceptable terms, so asto meet its requirements.
 ITEM 3.    LEGAL PROCEEDINGS
 

From time to time, the Company receives demands fromvarious parties asserting patent claims. These demands are often not based onany specific knowledge of the Company's products or operations. Because of theuncertainties inherent in litigation, the outcome of any such claim, includingsimply the cost of a successful defense against such a claim, could have amaterial adverse impact on the Company.

 

In January 1998, the Company was contacted by theattorneys representing the estate of Mr. Jerome Lemelson, charging that theCompany infringed on certain patents registered by Mr. Lemelson. The attorneysfor the estate have not filed suit, but have urged the Company to enter into alicensing agreement with the estate in order to avoid litigation. The Companyunderstands a similar demand has been made upon other manufacturers ofintegrated circuits, and that some have successfully defeated the claims. Shouldthe estate file suit, the Company would vigorously defend itself in thismatter. However, because of the inherent uncertainties of litigation, theoutcome of this action could be unfavorable, in which event the Company mightbe required to pay damages and other expenses, which could have a materialadverse effect on the Company's financial position and results of operations.In addition, the Company could be required to alter certain of its productionprocesses or products as a result of this matter.

 

In September 2002, the Company was contacted by SyndiaCorporation, the owner of certain patents of which Mr. Jerome Lemelson is anamed inventor (Syndia patents). Syndia has not filed suit, but has urged theCompany to enter into a licensing agreement with Syndia in order to avoidlitigation. The Company understands a similar demand has been made upon othermanufacturers of integrated circuits. On June20, 2003, Taiwain Semiconductor Manufacturing Corporation (TSMC), the Company'sprimary wafer supplier, filed a claim against Syndia for a declaratory judgment ofnon-infringement, invalidity, and unenforceability of the Syndia patents.Further, TSMC claimed intentional interference with contractual relations,unfair business practices, and unfair competition arising from Syndia'sbad-faith allegations that TSMC and TSMC's customers infringe the Syndiapatents. On November 10, 2003, TSMC and Syndia jointly announced they hadreached a settlement that resolved all outstanding legal claims raised by bothparties, with no admission of liability by either party. TSMC alsostated in the announcement that it settled this dispute for business reasons and to protectits customers from potential claims relating to products manufactured for themby TSMC.

 

Should Syndia file suit, the Company would vigorouslydefend itself in this matter. However, because of the inherent uncertainties oflitigation, the outcome of this action could be unfavorable, in which event theCompany might be required to pay damages and other expenses, which could have amaterial adverse effect on the Company's financial position and results ofoperations. In addition, the Company could be required to alter certain of itsproduction processes or products as a result of this matter.  

 
ITEM 4.    SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS
 

No matters were submitted to a vote of the Company'ssecurity holders during the last quarter of fiscal 2003.

 

**PART II**

** **
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY ANDRELATED SHAREHOLDER MATTERS
 

The Company's Common Stock is traded under the symbol,LOGC, on The Nasdaq National Market. The following table sets forth, for theperiods indicated, the high and low closing sale prices for the Company'sCommon Stock, as reported by Nasdaq during the following calendar quarters:

 

 

**Calendar Year**

**High**

**Low**

 

 

 

 

 

 

**2001**

 

 

 

 

Fourth quarter

$3.71

$0.91

 

 

**2002**

 

 

 

 

First quarter

$3.25

$1.20

 

 

Second quarter

$1.60

$0.56

 

 

Third quarter

$1.00

$0.40

 

 

Fourth quarter

$1.48

$0.72

 

 

**2003**

 

 

 

 

First quarter

$1.30

$0.89

 

 

Second quarter

$1.46

$0.94

 

 

Third quarter

$1.91

$1.22

 

**Holders**

 

As of December 4, 2003, there were approximately 2,300holders of record of the Company's Common Stock.

 

**Dividends**

 

The Company has not paid any dividends on its Common Stocksince its incorporation.

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

 

Thefollowing table represents the position of the Company's equity compensationplans as of September 28, 2003:

 

Plan  category
 
Number of securities to be  issued upon exercise of outstanding options, warrants, and rights

 

Weighted-average exercise  price of outstanding options, warrants, and rights

 

Number of securities  remaining available for future issuance under equity compensation plans  (excluding securities reflected in column a)

 

 

(a)

 

(b)

 

(c)

 

Equity  compensation plans

 

 

 

 

 

 

 

approved  by security holders

 

624,750 

 

$2.077 

 

394,750 

 

 

 

 

 

 

 

 

Equity  compensation plans not

 

 

 

 

 

 

 

approved  by security holders

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Total

 

624,750 

 

$2.077 

 

394,750 

 
ITEM 6.    SELECTED FINANCIAL DATA
 

The Company's fiscal year is comprised of 52 weeks ofseven days, each beginning on Monday and ending on Sunday, with each year'sfiscal quarters comprised of exactly 13 weeks. The Company's fiscal 2003, 2002,and 2001 ended on September 28, September 29,and September 30, respectively.

 

The following table sets forth selected financial data forthe Company's last five fiscal periods. This information is derived from theCompany's audited financial statements, unless otherwise stated. This datashould be read in conjunction with the financial statements, related notes, andother financial information included elsewhere in this report.

 

(Dollars in thousands, except per share amounts)

 

 

Fiscal Years  Ended:

 

September 28,

2003

September 29,

2002

September 30,

2001

October 1,

2000

October 3,

1999

 

 

 

 

 

 

Net revenues

$   5,009 

$   6,573 

$ 10,007 

$ 11,786   

$ 12,922

 

Research and

    development

 

$   1,785 

 

$   1,776 

 

$   1,926 

 

$   1,661 

 

$   1,367 

 

Net (loss) income

$ (2,461)

$ (2,124)

$    (212)

$      522 

$      601

 

Basic and diluted

    (loss) income per

    common share

 

 

 

$ (0.37)

 

 

$ (0.31)

 

 

$ (0.03)

 

 

$ 0.08 

 

 

$ 0.09 

Weighted average

    common shares

    outstanding (000s)

 

 

6,652 

 

 

6,850 

 

 

6,842 

 

 

6,772 

 

 

6,635

 

Working capital

$ 11,084 

$ 13,674 

$ 14,882 

$ 14,115 

$ 12,031

 

Net property and

    equipment

 

$      857 

 

$      931 

 

$   1,592 

 

$   2,424 

 

$   3,542

 

Total assets

$ 12,248 

$ 14,927 

$ 17,231 

$ 17,589 

$ 21,244

 

Long-term liabilities

$        40 

$         -  

$          3 

$        38 

$      205

 

Shareholders' equity

$ 11,943 

$ 14,627 

$ 16,652 

$ 16,845 

$ 15,934 

 
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

Reported financial results may not be indicative of thefinancial results of future periods. All non-historical information containedin the following discussion constitutes forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements are not guarantees of futureperformance and involve a number of risks and uncertainties, including but notlimited to operating results, new product introductions and sales, competitiveconditions, customer demand, capital expenditures and resources, manufacturingcapacity utilization, and intellectual property claims and defense.  Factors that could cause actual results todiffer materially are included in, but not limited to, those identified in"Factors Affecting Future Results" at the end of Item 1 of this Annual Reporton Form 10-K. The Company undertakes no obligation to publicly release theresults of any revisions to these forward-looking statements that may reflectevents or circumstances after the date of this report.

 

**Overview**

 

The Company is one of the smallest publicly tradedsemiconductor makers. Following its formation, the Company initially developedplug-compatible second source products that were form, fit, and functioncompatible with products offered by other manufacturers. Beginning in 1996, theCompany began identifying unique, proprietary products driven by its existingcustomer base. While this transition to proprietary products required theCompany to obtain advanced design automation tools and to increase the numberof people involved in product development, it enabled the Company to focus itssales channels and limit the costs of those channels, and to compete in marketswith pricing and delivery demands that are not as highly competitive as themarkets for second source products. The Company's focus on proprietary DSPproducts continues, as it primarily derives its revenues from the sale ofsemiconductor chips that perform high-speed DSP in video image filtering anddigital communications applications.

 

The Company's transition to a proprietary product focushas had a significant impact on its financial results. In 1998, the Companyrecorded significant write-downs of inventory and long-lived assets, as itrecognized the obsolescence of its more mature, second-source products. TheCompany anticipated increased revenues from the HDTV market starting in 1999,but the delays in the broadcast industry's transition to high-definition fromanalog signals resulted in less revenues from these products than the Companyanticipated. In the meantime, revenues from the Company's older second-sourceproducts dropped dramatically as they were obsoleted. Therefore, while theCompany's revenues have decreased over the past few years, revenues from newerproducts have actually increased to partially take the place of revenues frommature, second-source products.

 

In addition, the events of September 11, 2001 and the"war on terrorism" resulted in the Company receiving approximately$2,920,000 in sales to a defense contractor for the cruise missile programduring fiscal 2002. The Company anticipated receiving additional revenues fromthe military programs during fiscal 2003; however, these revenues wererelatively insignificant.

 

The Companyanticipates revenues from its newer proprietary products to increase if the HDTVmarket begins to ramp up as a result of recent FCC actions. Among other things,in August 2002, the FCCissued an order to television manufacturers that requires digital tuners to beincorporated into 50 percent of the television sets with screens of 36 or moreinches starting in 2004, into 50 percent of the sets with screens of 25-35inches starting in 2005, and into all sets with screens of 13 inches or more by2007. On October 29, 2003, the U.S. Court of Appeals for the D.C. Circuitupheld the FCC mandate that, by 2007, all but the very smallest television setssold in the U.S. must be equipped for receiving digital, along with traditionalanalog, television signals. The court said the FCC's mandate was needed becausethe industry was not moving quickly enough to make new tuners available.

 

Notwithstanding the impact of the stalled transition inthe broadcasting industry and the overall downturn in the economy, the Companyhas strengthened its balance sheet in the last few years. As a result of the1998 reorganization, aggressive expenditure controls, limitations on capitalexpenditures, reductions of inventory levels, and increased revenues frommilitary programs, the Company has increased its cash balance by 1,164 percentfrom fiscal 1998 to fiscal 2003, while reducing its total liabilities by 96percent during the same period.

 

The Company's fiscal year is comprised of 52 weeks ofseven days, each beginning on Monday and ending on Sunday, with each year's fiscalquarters comprised of exactly 13 weeks. The Company's last three fiscal yearsended on September 28, 2003, September 29, 2002, and September 30, 2001,respectively.

 

**Results of Operations**

 

*Fiscal Year Ended September 28, 2003 compared to FiscalYear Ended September 29, 2002*

 

Net revenues for fiscal 2003 decreased 24 percent, from$6,572,600 in fiscal 2002 to $5,009,000. This decrease was due to the continueddown cycle of the semiconductor industry, the continued sluggish economy, andthe prolonged delay in HDTV broadcasting. These factors limited the Company'scommercial product revenues to only a slight increase in fiscal 2003 comparedto 2002. However, a sharp drop in sales of chips to military programs adversely impactedthe Company's overall revenues in fiscal 2003. During fiscal 2002,approximately 24 percent of revenues were derived from sales to defensecontractors, while fiscal 2003 defense related sales were insignificant.

 

While the Company's net revenues decreased 24 percent, theCompany's cost of revenues also decreased by 25 percent. The Company was ableto reduce the cost of revenues at a rate proportional to the drop in revenues,in spite of having certain overhead expenses that are relatively fixed, due toaggressive cost cutting for the past several years. In addition, during fiscal2003, the Company obsoleted $1,072,800 and scrapped $560,200 of inventory, bothof which are reflected in the cost of revenues. The Company's gross profitdecreased 21 percent from $1,792,600 in fiscal 2002 to $1,411,800 in fiscal2003. Gross profit as a percent of revenues increased from 27 percent in fiscal2002 to 28 percent in fiscal 2003.

 

Research and development expenditures increased less thanone percent, from $1,775,700 in fiscal 2002 to $1,784,600 in fiscal 2003. TheCompany believes that new product development is a key ingredient for futuregrowth and elected to maintain research and development levels in spite of thedrop in revenues. As a result, research and development expenditures, as apercentage of net revenues, increased from 27 percent in fiscal 2002 to 36percent in fiscal 2003.

 

Selling, general, and administrative expenses decreasedslightly from $2,138,400 in fiscal 2002 to $2,110,900 in fiscal 2003. TheCompany was able to contain SG&A expenses as a result of on-going costcontrol efforts.

 

As a result of the significant decrease in revenues andthe sustained funding of research and development levels, the Company had a netloss from operations of $2,483,700 in fiscal 2003, compared to a net loss fromoperations of $2,121,500 in fiscal 2002.

 

Because the Company had essentially no borrowing duringfiscal 2003, it had no interest expense, compared to $37,900 in fiscal 2002.

 

Due to the above factors, the Company experienced a netloss of $2,461,300 in fiscal 2003 compared to a net loss of $2,123,700 infiscal 2002.

 

*Fiscal Year Ended September 29, 2002 compared to FiscalYear Ended September 30, 2001*

 

Net revenues for fiscal 2002 decreased 34 percent, from$10,007,300 in fiscal 2001 to $6,572,700. This decrease was largely due to thecontinued down cycle of the semiconductor industry, the continued sluggisheconomy, and the prolonged delay in HDTV broadcasting. While commercialrevenues decreased significantly in 2002, the Company's revenues were aided bythe sales of approximately $2,920,000 in military parts to a defense contractorfor the cruise missile program.

 

As the Company's net revenues decreased 34 percent, thecost of revenues also decreased by 22 percent, from $6,167,300 in fiscal 2001to $4,780,000 in fiscal 2002. The cost of revenues did not decrease as much asthe net revenues, as the Company has certain overhead expenses that arerelatively fixed, such as taxes, insurance, and lease expenditures. Inaddition, during fiscal 2002, the Company wrote off $39,900 of inventory andexpensed an inventory reserve of $337,000, both of which are reflected in costof revenues. The Company's gross profit decreased 53 percent, from $3,840,000in fiscal 2001 to $1,792,600 in fiscal 2002. In addition, the gross profit as apercentage of revenues decreased from 38 percent in fiscal 2001 to 27 percentin fiscal 2002, mainly as a result of generally fixed overhead expenses withlower revenues.

 

Research and development expenses decreased eight percent,from $1,926,100 in fiscal 2001 to $1,775,700 in fiscal 2002. While the Companycontinues to believe that product development is a key ingredient for futuresuccess and growth, its lower revenues forced it to cut additional costs in theresearch and development area. This decrease was primarily the result ofemployee layoffs. As a percent of net revenues, research and developmentexpense increased from 19 percent to 27 percent. However, if the Company's netrevenues had remained consistent with the prior year, research and developmentwould have been approximately 18 percent of net revenues, which is near theCompany's target of 20 percent.

 

Selling, general, and administrative expenses increasedslightly from $2,091,400 in fiscal 2001 to $2,138,400 in fiscal 2002. While theCompany continues to attempt to control its costs, it experienced increasedcosts for the move of its headquarters. However, the Company felt the move wasnecessary, as it anticipates future costs for the new facility will beapproximately 60 percent less than the old facility. Further, the Companydetermined the goodwill from the 1995 acquisition of assets from StarSemiconductor was fully impaired and wrote-off the remaining balance ofapproximately $80,000 at the end of fiscal 2002.

 

As a result of the significant decrease in revenues andthe disproportionate decrease in expenses, the Company had a loss fromoperations of $2,121,500 in fiscal 2002, compared to a loss of $177,500 infiscal 2001.

 

Interest expense decreased 31 percent, from $54,700 infiscal 2001 to $37,900 in fiscal 2002, as a result of the Company carrying nobalance on its line of credit for the majority of the fiscal year, prior to theline's expiration, and the expiration of the majority of the Company's capitallease obligations.

 

Due to the significant decrease in revenues and therelatively fixed nature of certain of its costs, the Company experienced a netloss of $2,123,700 in fiscal 2002, compared to a net loss of $212,000 in fiscal2001.

 

**Liquidity and Capital Resources**

** **

During fiscal 2003, the Company's operations produced$1,318,200 of net cash, despite its $2,461,300 net loss. This was mainly theresult of the net collection of accounts receivable of $1,972,300 and adecrease in prepaid expenses of $333,800. At the same time, the Companyattempted to maintain its prompt payment terms with vendors, so accountspayable decreased $82,100. The Company used some of the cash from operations topurchase capital assets aggregating $326,900 and to fund the repurchase of $233,700of its common stock on the open market. The Company's cash position increasedfrom $1,061,100 at the end of fiscal 2002 to $1,806,100 at the end of fiscal2003.

 

During fiscal 2002, the Company produced net cash of$938,900 from operations, despite its $2,123,700 net loss. While the Companyspent $269,300 for prepaid expenses, $139,000 for accounts payable, and $83,300for accrued expenses, it netted $556,300 from accounts receivable collections.In addition, the Company was able to produce $1,767,600 from its inventories asmany of its fiscal 2002 revenues were shipped from existing stock. The Companyused some of the cash from operations to fund capital expenditures of $43,000and to repay capital lease obligations of $54,700. The Company's cash positionincreased from $217,500 at the end of fiscal 2001 to $1,061,100 at the end offiscal 2002.

 

During fiscal 2001, the Company used net cash of $171,900in operations, as a result of the net loss of $212,000 and an increase inaccounts receivable of $1,703,400. The downturn in the industry and theeconomy, as a whole, caused many of the Company's customers to pay 14 to 30days past due. While certain customers extended payments, the Companymaintained its current schedule of paying vendors within terms, without drawingon its then-existing line of credit. This also contributed to the net cash usedin operations, as the Company reduced accrued expenses by $62,400, paid$163,200 for capital expenditures, and repaid capital leases aggregating$209,700. Fortunately, the Company was able to reduce its physical inventoriesby $1,055,200 and its inventory reserves by $568,600, which saved it fromexpending additional cash in operations.

 

The Company's current working capital requirements aregreatly reduced due to the cost cutting of the past few years. The Companybelieves that these cost cutting actions and its continued focus onhigher-margin products should result in after-tax cash earnings beingsufficient to support its working capital and capital expenditure requirementsfor the next 12 months. Based on the fact that, as of December 4, 2003, itholds approximately $1,654,100 in cash reserves and its cash usage foroperations is approximately equal to or less than its current revenue rate, theCompany believes it can cover its cash operating expenses using futurerevenues, while saving current cash reserves for the stock repurchase plan andfuture capital expenditures, such as mask tooling for new products.

 

*Working Capital*

 

The Company's investment in inventories has beensignificant and will continue to be significant in the future. However, over thepast few years, the Company has been able to reduce itslevels of inventories as itshifts from more competitive second source products to proprietarysole source products. The Company believes it will be able to streamline itsinventories as it continues its shift to sole source proprietary products. It also intends to continue its shortened accounts receivablecollection cycle by re-focusing on direct sales to customers rather thanthrough distribution channels.

 

The Company relies on third party suppliers for its rawmaterials, particularly its processed wafers, for which it currently reliesprimarily onone supplier, and as a result, maintains substantial inventory levels toprotect against disruption in supplies. The Company has periodicallyexperienced disruptions in obtaining wafers. As the Company continues to shifttowards higher margin proprietary products, it expects to be able to reduceinventory levels by streamlining its product offerings.

 

Periodically,the Company reviews inventory to determine recoverability of items on-handusing the lower-of-cost-or-market (LOCOM) and excess methods. The Companygroups and evaluates its products based on their underlying die or wafer type(the Company's raw materials, silicon wafers, can generally be used to makemultiple products), to determine the total quantity on-hand and average unitcosts. Management uses judgment in comparing the sales quantities for up to theprior 18 fiscal months to the quantity on-hand at the end of the fiscal year.If the quantity on-hand exceeds the sales quantities, the Company provides areserve for the potentially obsolete or slow-moving items. For the LOCOManalysis, the Company compared the average sales price to the average unit costof inventories at the end of the fiscal year. If the average unit cost exceedsthe average sales price, the Company provides a reserve. During fiscal 2003 and2002, the Company's LOCOM and excess reserves totaled $1,043,200 and $337,000,respectively.

 

Withthe continuing slow economic conditions, the Company felt it necessary toreview its raw materials and work-in-process as well. During fiscal 2003, theCompany obsoleted $1,072,800 of work-in-process inventory and scrapped anadditional $560,200, which were directly expensed to the cost of revenues.During fiscal 2002, the Company directly wrote-off $1,907,600 of its inventory,using its prior year reserve of $1,867,700, plus an additional $39,900 againstcost of revenues. The Company believes its current reserve of $1,043,200 forLOCOM and excess inventory provides a reasonable estimate of the recoverabilityof inventories at the end of fiscal 2003.

 

Although current levels of inventory impact the Company'sliquidity, the Company believes that this is a less costly alternative toowning a wafer fabrication facility. The Company continues to evaluatealternative suppliers to diversify its risk of supply disruption. However, thisrequires a significant investment in product development to tool masks with newsuppliers. Such efforts compete for the Company's limited product developmentresources. The Company seeks to achieve on-going reductions in inventory,although there can be no assurance it will be successful. In the event economicconditions remain slow, the Company may consider identifying additional portions ofinventory to write-off at a future date.

 

Historically, due to customer order scheduling, up to 80%of the quarterly revenues were often shipped in the last month of the quarter,so a large portion of the shipments included in year-end accounts receivablewere not yet due per the Company's net 30-day terms. This results in year-endaccounts receivable balances being at their highest point for the respectiveperiod. 

 

*Financing*

 

On July 31, 2002, the Company elected not to renew its$2,000,000 revolving line of credit with its bank. While the Company willcontinue to evaluate future debt and equity financing opportunities, it feelsthe cost reductions taken in the past few years have resulted in the cash flowgenerated from operations providing an adequate base of liquidity to fundfuture operating and capital needs. Based on the fact that, as of December 4,2003, it holds approximately $1,654,100 in cash reserves and its anticipatedcash usage for operations is approximately equal to or less than its currentrevenue rate, the Company believes it can cover its cash operating expensesusing future revenues, while saving current cash reserves for the stockrepurchase plan and future capital expenditures, such as mask tooling for newproducts.

 

*Impact of New Financial Accounting Standards*

 

In December 2002, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123*. This Statement amends SFAS No. 123, *Accounting forStock-Based Compensation*, to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedcompensation. In addition, this Statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. Thetransition guidance and annual disclosure provisions of SFAS No. 148 areeffective for fiscal years ending after December 15, 2002. The interim disclosureprovisions are effective for financial reporting containing financialstatements for interim periods beginning after December 15, 2002. Because theCompany accounts for the compensation cost associated with its stock optionplans under the intrinsic value method, the alternative methods of transitionwill not apply to the Company. The additional disclosure requirements of thestatement are included in these financial statements. In management's opinion,the adoption of this Statement did not have a material impact on the Company'sconsolidated financial position or results of operations.

 

**ITEM 7A.    QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company conducts all of its transactions, includingthose with foreign suppliers and customers, in U.S. dollars. It is thereforenot directly subject to the risks of foreign currency fluctuations and does nothedge or otherwise deal in currency instruments in an attempt to minimize suchrisks. Of course, demand from foreign customers and the ability or willingnessof foreign suppliers to perform their obligations to the Company may beaffected by the relative change in value of such customer or supplier'sdomestic currency to the value of the U.S. dollar. Furthermore, changes in therelative value of the U.S. dollar may change the price of the Company's pricesrelative to the prices of its foreign competitors. The Company also does nothold any market risk sensitive instruments that are not considered cash underaccounting principles generally accepted in the United States of America.

 

**ITEM 8.    FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

** **

**Index to Financial Statements and Financial StatementSchedules**

 

FINANCIAL STATEMENTS:

Page

 

 

 

Independent Auditors' Report

23

Independent Auditors' Report

24

Balance Sheets, September 28, 2003 and September 29,  2002

25

Statements of Operations, fiscal years ended September  28, 2003, September 29, 2002, and 

 

 

September 30, 2001

26

Statements of Shareholders' Equity, fiscal years ended  September 28, 2003, September 29, 2002, and

 

 

September 30, 2001

27

Statements of Cash Flows, fiscal years ended September  28, 2003, September 29, 2002, and 

 

 

September 30, 2001

28

Summary of Accounting Policies

29

Notes to Financial Statements

33

Quarterly Financial Data (unaudited), fiscal years ended  September 28, 2003, September 29, 2002, and

 

 

September 30, 2001

40

** **

**Financial Statement Schedule**

** **

Schedule II - Valuation and Qualifying Accounts

49

 

 

 

**INDEPENDENTAUDITOR'S REPORT**

 

 

 

TheShareholders

   andBoard of Directors

LOGICDevices Incorporated

Sunnyvale,California

 

We haveaudited the accompanying balance sheet of LOGIC Devices Incorporated (the"Company") as of September 28, 2003 and the related statements ofoperations, shareholders' equity, and cash flows for the fiscal year thenended.  We have also audited the 2003information included in Schedule II - Valuation and Qualifying Accounts(Schedule II).  These financialstatements are the responsibility of the Company's management.  Our responsibility is to express an opinionon these financial statements based on our audit.  The financial statements of the Company for the fiscal year endedSeptember 29, 2002 and the consolidated financial statements for the fiscalyear ended September 30, 2001, and the 2002 and 2001 information included inSchedule II, were audited by other auditors, whose report, datedNovember 6, 2002 expressed an unqualified opinion on those statements andschedules.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In ouropinion, the 2003 financial statements referred to above present fairly, in allmaterial respects, the financial position of LOGIC Devices Incorporated as ofSeptember 28, 2003 and the results of its operations and its cash flows for theyear then ended, in conformity with accounting principles generally accepted inthe United States of America.  Also, inour opinion, Schedule II, when considered in relation to the basic financialstatements taken as a whole, presents fairly, in all material respects, the2003 information set forth therein.

 

 

 

/s/Perry-Smith LLP

 

 

 

Sacramento, California

November 5, 2003

 

 

 

**Independent Auditors'Report**

 

 

THE BOARD OF DIRECTORS

LOGICDEVICES INCORPORATED

Sunnyvale, California

 

We have audited the accompanying balance sheet as ofSeptember 29, 2002 of **LOGIC DEVICESINCORPORATED (the Company)**,and the related statements of operations, stockholders' equity, and cash flowsfor the fiscal year then ended.  We havealso audited the accompanying consolidated balance sheet as of September 30,2001 of LOGIC Devices Incorporated and the related consolidated statements ofoperations, stockholders' equity, and cash flows for the fiscal year then ended.  We have also audited the 2002 and 2001information included in Schedule II - Valuation and Qualifying Accounts(Schedule II).  These financialstatements are the responsibility of the Company's management.  Our responsibility is to express an opinionon these financial statements based on our audits.  The consolidated financial statements of LOGIC DevicesIncorporated for the fiscal year ended October 1, 2000, and the 2000information included in Schedule II, were audited by other auditors, whosereport dated November 7, 2000 expressed an unqualified opinion on thosestatements and schedule.

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of LOGICDevices Incorporated as of September 29, 2002, and the results of itsoperations and its cash flows for the fiscal year then ended in conformity withaccounting principles generally accepted in the United States of America.  Also, in our opinion, the 2001 consolidatedfinancial statements present fairly, in all material respects, the consolidatedposition of LOGIC Devices Incorporated as of September 30, 2001, and theresults of its operations and its cash flows for the fiscal year then ended inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, ScheduleII, when considered in relation to the basic financial statements taken as awhole, presents fairly, in all material respects, the 2002 and 2001 informationset forth therein.

 

 

/s/ Hood & Strong LLP

 

 

Menlo Park, California

November 6, 2002

 

 

**LOGIC Devices Incorporated**

** **

**Balance Sheets**

 

 

 

 

 

September 28,

2003

 

September 29,

2002

 

 

 

 

 

 

ASSETS

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$   1,806,100 

 

$   1,061,100 

 

Accounts receivable, net of allowance for doubtful  accounts of

 $3,500 and $20,000 (Notes 9, 10, and 13)

 

840,100 

 

 

2,795,900 

 

Inventories (Notes 1, 9, and 13)

8,510,900 

 

9,591,100 

 

Prepaid expenses (Note 3)

192,300 

 

525,900 

 

 

 

Total current assets

11,349,400 

 

13,974,000 

 

Property and equipment, net (Notes 2, 7, and 11)

856,700 

 

930,900 

Other assets (Note 4)

42,400 

 

21,700 

 

 

 

 

$ 12,248,500 

 

 

$ 14,926,600 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$        47,000 

 

$      129,100 

 

Accrued payroll and vacation

160,500 

 

148,000 

 

Accrued commissions

20,200 

 

18,800 

 

Other accrued expenses

38,000 

 

900 

 

Capital lease obligations, current portion (Notes 2, 7,  and 11)

-  

 

2,900 

 

 

 

Total current liabilities

265,700 

 

299,700

 

Deferred rent

39,900 

 

-  

 

Total liabilities

 

305,600 

 

 

299,700 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

Shareholders' equity (Notes 6 and 8):

 

 

 

 

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;

  6,640,688 and 6,852,888 shares issued and  outstanding

 

18,317,200 

 

 

18,539,900 

 

Additional paid-in capital

100,000 

 

100,000 

 

Accumulated deficit

(6,474,300)

 

(4,013,000)

 

Total shareholders' equity

 

11,942,900 

 

 

14,626,900 

 

 

 

 

 

$ 12,248,500 

 

 

$ 14,926,600 

 

 

*See accompanyingsummary of accounting policies and notes to financial statements.*

 

**LOGIC Devices Incorporated**

** **

**Statements of Operations**

 

 

 

Fiscal Years  Ended:

 

September 28,

2003

 

September 29,

2002

 

September 30,

2001

 

 

 

 

 

 

(Consolidated)

Net revenues (Notes 9 and 13)

 

$  5,009,000 

 

$  6,572,600 

 

$ 10,007,300 

Cost of revenues

3,597,200 

 

4,780,000 

 

6,167,300 

 

Gross profit (Note 13)

 

1,411,800 

 

 

1,792,600 

 

 

3,840,000 

 

Operating expenses:

 

 

 

 

 

 

Research and development

1,784,600 

 

1,775,700 

 

1,926,100 

 

Selling, general, and administrative

2,110,900 

 

2,138,400 

 

2,091,400 

 

Total operating expenses

 

3,895,500 

 

 

3,914,100 

 

 

  4,017,500 

 

Loss from operations

 

(2,483,700)

 

 

(2,121,500)

 

 

(177,500)

 

Other (income) expense:

 

 

 

 

 

 

Interest expense

-

 

37,900 

 

54,700 

 

Interest income

(23,600)

 

(7,800)

 

(10,100)

 

Other income, net

400 

 

(37,300)

 

(20,500)

 

Total other (income) expense

 

(23,200)

 

 

(7,200)

 

 

24,100 

 

Loss before provision for income taxes

 

(2,460,500)

 

 

(2,114,300)

 

 

(201,600)

 

Provision for income taxes (Note 5)

 

(800)

 

 

(9,400)

 

 

(10,400)

 

Net loss

 

$ (2,461,300)

 

 

$ (2,123,700)

 

 

$    (212,000)

 

Basic and diluted loss per share

 

$ (0.37)

 

 

$ (0.31)

 

 

$ (0.03)

 

Basic weighted average common shares outstanding

 

6,651,705 

 

 

6,850,096 

 

 

6,841,888 

 

Diluted weighted average common shares outstanding

 

6,651,705 

 

 

6,850,096 

 

 

6,841,888 

 

 

*Seeaccompanying summary of accounting policies and notes to financial statements.*

 

**LOGIC Devices Incorporated**

** **

**Statements of Shareholders' Equity**

 

 

Common Stock

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

 

Total

Shares

 

Amount

(Consolidated)

Balances, October 1, 2000

 

6,841,888 

 

 

$ 18,522,700 

 

 

$           -  

 

 

$ (1,677,300)

 

 

$ 16,845,400 

 

Issuance of common stock

 options to non-employees  

(Notes 6 and 8)

 

 

-  

 

 

 

-  

 

 

 

19,000 

 

 

 

-  

 

 

 

19,000 

 

Net loss

 

-  

 

 

-  

 

 

-  

 

 

(212,000)

 

 

(212,000)

 

(Consolidated)

Balances, September 30, 2001

 

6,841,888 

 

 

18,522,700 

 

 

19,000 

 

 

(1,889,300)

 

 

16,652,400 

 

Issuance of common stock on

exercise of stock options (Note 8)

 

 

 

11,000 

 

 

 

17,200 

 

 

 

-  

 

 

 

-  

 

 

 

17,200 

Extension of common stock

warrants (Note 8)

 

-  

 

 

-  

 

81,000

 

 

-  

 

81,000

 

Net loss

 

-  

 

 

-  

 

 

-  

 

 

(2,123,700)

 

 

(2,123,700)

 

Balances, September 29, 2002

 

6,852,888 

 

 

18,539,900 

 

 

100,000 

 

 

(4,013,000)

 

 

14,626,900 

Repurchase of common stock

(Note 8)

 

 

(222,200)

 

 

 

(233,700)

 

 

 

-  

 

 

 

-  

 

 

 

(233,700)

 

Issuance of common stock on

 exercise of stock options (Note 8)

 

 

10,000 

 

 

 

11,000 

 

 

 

-  

 

 

 

-  

 

 

 

11,000 

 

Net loss

 

-  

 

 

-  

 

 

-  

 

 

(2,461,300)

 

 

(2,461,300)

 

Balances, September 28, 2003

 

6,640,688 

 

 

$ 18,317,200 

 

 

$ 100,000 

 

 

$ (6,474,300)

 

 

$ 11,942,900 

 

 

*See accompanyingsummary of accounting policies and notes to financial statements.*

 

**LOGIC Devices Incorporated**

** **

**Statements of Cash Flows**

 

 

 

 

 

 

Fiscal Years  Ended:

 

 

 

 

September 28,

2003

 

September 29,

2002

 

September 30,

2001

 

Cash flows from operating activities:

 

 

 

 

(Consolidated)

 

Net loss

$ (2,461,300)

 

$ (2,123,700)

 

$    (212,000)

 

Adjustments to reconcile net loss to net

  cash provided by (used in) operating  activities:

 

 

 

 

 

 

 

Depreciation and amortization

400,800 

 

814,200 

 

1,181,200 

 

 

Allowance for doubtful accounts

(16,500)

 

-  

 

-  

 

 

Deferred rent

39,900 

 

-  

 

-  

 

 

Loss on disposal of capital equipment

300 

 

-  

 

3,600 

 

 

Issuance of common stock warrants for services

-  

 

81,000 

 

-  

 

 

Issuance of common stock options for services

-  

 

-  

 

19,000 

 

 

Changes in current assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

1,972,300 

 

556,300 

 

(1,703,400)

 

 

 

Inventories

1,080,200 

 

2,104,600 

 

486,600 

 

 

 

Prepaid expenses

333,800 

 

(269,300)

 

42,700 

 

 

 

Accounts payable

(82,100)

 

(139,000)

 

76,100 

 

 

 

Accrued payroll and vacation

12,500 

 

(42,900)

 

37,400 

 

 

 

Accrued commissions

1,400 

 

(35,800)

 

(60,700)

 

 

 

Other accrued expenses

37,100 

 

(4,600)

 

(39,100)

 

 

 

Income taxes payable

-  

 

(1,900)

 

(3,300)

Net cash provided by (used in) operating activities

1,318,200 

 

938,900 

 

(171,900)

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

(326,900)

 

(43,000)

 

(163,200)

 

Other assets

(20,700)

 

(14,800)

 

9,000 

Net cash used in investing activities

(347,600)

 

(57,800)

 

(154,200)

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock

11,000 

 

17,200 

 

-  

 

Repurchase of common stock

(233,700)

 

-  

 

-  

 

Proceeds from bank borrowings

-  

 

1,050,000 

 

500,000 

 

Repayments of bank borrowings

-  

 

(1,050,000)

 

(500,000)

 

Payments of capital lease obligations

(2,900)

 

(54,700)

 

(209,700)

Net cash used in financing activities

(225,600)

 

(37,500)

 

(209,700)

 

Net increase in cash and cash equivalents

 

745,000 

 

 

843,600 

 

 

(535,800)

 

Cash and cash equivalents, beginning of period

 

1,061,100 

 

 

217,500 

 

 

753,300 

 

Cash and cash equivalents, end of period

 

$  1,806,100 

 

 

$  1,061,100 

 

 

$     217,500 

 

 

*See accompanyingsummary of accounting policies and notes to financial statements.*

 

 

 

**LOGIC Devices Incorporated**

** **

**S****ummaryof Accounting Policies**

 

*The Company and Nature of Business*

 

LOGICDevices Incorporated (the Company) develops and markets high-performanceintegrated circuits. The Company's products include high-speed digital signalprocessing chips that are used in digital communications, broadcast and medicalimaging processing applications, instrumentation, and smart weapons systems.The Company markets its products worldwide, such that 32 percent of theCompany's net revenues in fiscal 2003 were derived from original equipmentmanufacturers, while sales through foreign and domestic distributors accountedfor approximately 68 percent of net revenues. Approximately 45 percent of theCompany's net revenues in fiscal 2003 were derived from within the UnitedStates and approximately 55 percent from foreign sales.

 

*Principlesof Consolidation*

 

Theaccompanying fiscal 2001 statement of operations includes accounts of theCompany and its wholly owned subsidiary, LOGIC Devices International, a foreignsales corporation. All significant intercompany accounts and transactions wereeliminated in consolidation. The Company's fiscal 2003 and 2002 financialstatements are not consolidated, as it dissolved the foreign sales corporationon December 31, 2001.

* *

*Fiscal Year*

 

TheCompany's  fiscal year consists of 52weeks of seven days, ending on Sundays. The Company's 2003, 2002, and 2001fiscal years ended on September 28, September 29, and September 30,respectively.

 

*Reclassifications*

 

Certainitems in the fiscal 2002 financial statements were reclassified to conform tothe basis used in the fiscal 2003 financial statements.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

*Cash and Cash Equivalents*

 

TheCompany considers all highly liquid investments with original maturities ofthree months or less to be cash equivalents.

 

*AccountsReceivable*

 

TheCompany establishes a general allowance for doubtful accounts based oncollectibility. Historically, the Company has not experienced significantlosses related to receivables.

 

*Inventories*

 

Inventoriesof raw materials, work-in-process, and finished goods are stated at the lowerof cost (first-in, first-out) or market (Notes 1 and 10). Cost includes thepurchase price of parts, assembly costs, and overhead.

 

*Property and Equipment*

 

Propertyand equipment are stated at cost. Depreciation on equipment is calculated onthe straight-line method over the estimated useful lives of the assets,generally three to seven years. Leasehold improvements and assets held undercapital lease are amortized on a straight-line basis over the shorter of thelease terms or the estimated lives of the assets. Certain tooling costs are capitalizedby the Company and are amortized on a straight-line basis over the shorter ofthe related product life cycle or five years. Upon disposition, the cost andrelated accumulated depreciation is removed from the accounts and the resultinggain or loss is reflected in income for the period.

 

*Excess of Cost Over Fair Value of Net AssetsAcquired*

 

Goodwillrepresents the excess of the purchase price over the fair value of acquiredassets of the Star Semiconductor Corporation in 1995. Prior to September 30,2001, goodwill was being amortized on a straight-line basis over 40 years. Asof September 29, 2002 and in accordance with SFAS No. 142, *Goodwill andOther Intangible Assets*, the Company reviewed the carrying amount ofgoodwill and determined the goodwill to be impaired. During fiscal year 2002,goodwill was written down from the net book value of approximately $80,000 tozero.

 

*Researchand Development Costs*

 

Researchand development costs are charged to operations as incurred.

 

*Capitalized Software Costs*

 

Internaltest computer software development costs are capitalized as incurred during theapplication development stage, as defined by Statement of Position 98-1,"Accounting for the Costs of Computer Software Developed or Obtained forInternal Use." The capitalized software costs are amortized on astraight-line basis over the shorter of the related expected product life cycleor five years.

 

*Revenue Recognition*

 

Revenueis generally recognized upon shipment of product. Sales to distributors aremade pursuant to agreements that provide the distributors certain rights ofreturn and price protection on unsold merchandise. Revenues from such sales arerecognized upon shipment, with a provision for estimated returns and allowancesrecorded at that time, if applicable.

 

*Income Taxes*

 

TheCompany accounts for income taxes in accordance with Statement of FinancialAccounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred income tax assetsand liabilities are recognized based on the temporary differences between thefinancial statement and income tax basis of assets, liabilities, andcarryforwards using enacted tax rates. Valuation allowances are established fordeferred tax assets to the extent of the likelihood that the deferred taxassets may not be realized.

 

*Loss Per Common Share*

 

Basicloss per share is computed by dividing the net loss attributable to commonshares, by the weighted average number of common shares outstanding during eachperiod. Diluted loss per share is similar to basic loss per share, except thatthe weighted average number of common shares outstanding is increased toreflect the dilutive effect of potential common shares, such as those issuableupon the exercise of stock options or warrants, contingent shares, and the conversionof preferred stock, as if they had been issued.

 

Forthe fiscal years ended September 28, 2003, September 29, 2002, and September30, 2001, there is no difference between basic and diluted loss per share, asthere were no dilutive stock options.

 

*Fair Value of Financial Instruments*

* *

Thecarrying amounts of cash and cash equivalents, accounts receivable, accountspayable, and capital lease obligations approximate fair value because of theshort maturity of these items. 

 

*Long-Lived Assets*

 

Long-livedassets, including property and equipment, goodwill, and other intangibleassets, are assessed for possible impairment whenever events or changes incircumstances indicate that the carrying amounts may not be recoverable, orwhenever management has committed to a plan to dispose of the assets. Suchassets are carried at the lower of book value or fair value as estimated bymanagement based on appraisals, current market value, and comparable salesvalue, as appropriate. Assets to be held and used affected by such impairmentloss are depreciated or amortized at their new carrying amounts over theremaining estimated life; assets to be sold or otherwise disposed of are notsubject to further depreciation or amortization. In determining whether animpairment exists, the Company uses undiscounted future cash flows withoutinterest charges compared to the carrying value of the assets.

 

*Stock-based Compensation*

 

AtSeptember 28, 2003, the Company has stock-based compensation plans (the Plans),which are described more fully in Note 8. The Company accounts for the Plansunder the recognition and measurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees and Related Interpretations*. No stock-basedemployee compensation cost is reflected in net loss, as all options grantedunder the Plans had an exercise price equal to the market value of theunderlying common stock on the date of grant.

 

Forpurposes of pro forma disclosures, the estimated fair value of stock-basedcompensation plans and other options is amortized to expense primarily over thevesting period. The following table illustrates the effect on net loss if theCompany had applied the fair value recognition provision of FASB Statement No.123, *Accounting for Stock-Based Compensation*, to stock-based employeecompensation:

 

 

*2003*

 

*2002*

 

*2001*

* *

*Net loss*

 

 

 

 

 

 

As reported

$ (2,461,300)

 

$ (2,123,700)

 

$    (212,000) 

 

 

Pro forma

 

$ (2,515,500)

 

 

$ (2,367,600)

 

 

$   (299,000)

* *

*Basic and diluted  loss per share*

 

 

 

 

 

 

As reported

$  (0.37)

 

$  (0.31)

 

$  (0.03)

 

 

Pro forma

 

$  (0.38)

 

 

$  (0.35)

 

 

$  (0.04)

 

Thepro forma information provided above was estimated at the date of grant, usingthe Black-Scholes option-pricing model, with the following weighted averageassumptions:

 

*2003*

 

*2002*

 

*2001*

 

Expected life  (in years)

 

3.0 

 

 

3.0 

 

 

3.0 

Risk-free  interest rate

2.63%

 

2.32%

 

3.5%

Volatility

91.2%

 

97.6%

 

90.4%

Dividend yield

0.0 

 

0.0 

 

0.0 

 

TheBlack-Scholes valuation model was developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fullytransferable. Because the Company's options have characteristics significantlydifferent from those of trading options, management believes that the existingpricing models do not necessarily provide a reliable single measure of the fairvalue of its options.

 

*SegmentReporting*

 

TheCompany is organized in a single operating segment for purposes of makingoperating decisions and assessing performance. The president (the chiefoperating decision maker) evaluates performance, makes operating decisions, andallocates resources based on financial data consistent with the presentation inthe accompanying financial statements.

 

*Impact of New Financial Accounting Standards*

 

In December 2002, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123*. This Statement amends SFAS No. 123, *Accounting forStock-Based Compensation*, to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedcompensation. In addition, this Statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. Thetransition guidance and annual disclosure provisions of SFAS No. 148 areeffective for fiscal years ending after December 15, 2002. The interimdisclosure provisions are effective for financial reporting containingfinancial statements for interim periods beginning after December 15, 2002.Because the Company accounts for the compensation cost associated with itsstock option plans under the intrinsic value method, the alternative methods oftransition will not apply to the Company. The additional disclosurerequirements of the statement are included in these financial statements. Inmanagement's opinion, the adoption of this Statement did not have a materialimpact on the Company's consolidated financial position or results ofoperations.

 

**LOGIC Devices Incorporated**

** **

**Notesto Financial Statements**

 

**1.      Inventories**

 

A summary of inventories follows:

 

 

*September 28,*

*2003*

 

*September 29,*

*2002*

 

Raw materials

 

$    919,600 

 

 

$  1,232,600 

Work-in-process

4,521,200 

 

6,967,500 

Finished goods

3,070,100 

 

1,391,000 

 

 

$  8,510,900 

 

 

$  9,591,100 

 

**2.      Propertyand Equipment**

 

A summary of property and equipment follows:

 

 

*September 28,*

*2003*

 

*September 29,*

*2002*

 

Equipment

 

$ 2,446,700 

 

 

$ 5,082,200 

Tooling costs

1,412,300 

 

2,175,100 

Leasehold  improvements

167,600 

 

77,600 

 

4,026,600 

 

7,334,900 

 

Less  accumulated depreciation and amortization

 

3,169,900 

 

 

6,404,000 

 

 

$    856,700 

 

 

$    930,900 

 

There were no capital lease obligations as of September 28, 2003.Equipment under capital lease obligations was $357,400 as of September 29,2002, with related accumulated amortization of $317,200. For fiscal 2002 and2001, amortization expense for equipment under capital lease obligations was$59,800 and $76,500, respectively.

 

**3.      PrepaidExpenses**

 

A summary of prepaid expenses follows:

 

 

*September 28,*

*2003*

 

*September 29,*

*2002*

 

 

 

 

Annual report  costs

$   35,100 

 

$   20,300 

Consulting fees

35,000 

 

40,700 

Rent and  deposits

28,500 

 

129,700 

Software  licensing fees

25,200 

 

154,300 

Recruiting,  education, and immigration costs

21,400 

 

2,900 

Insurance

6,300 

 

141,500 

Other prepaid  expenses

40,800 

 

36,500 

 

 

 

$ 192,300 

 

 

$ 525,900 

 

**4.      OtherAssets**

 

A summary of other assets follows:

 

 

*September 28,*

*2003*

 

*September 29,*

*2002*

 

Capitalized  software, net of accumulated amortization of

 

 

 

 

 

 

$2,342,500

$ 14,900 

 

$         -  

Security  deposits and other assets

27,500 

 

21,700 

 

 

$ 42,400 

 

 

$ 21,700 

 

In fiscal 2002 and 2001, amortization expense for other assets totaled$30,300 and $155,100, respectively. There was no amortization expense in fiscal2003.

 

**5.      Provisionfor Income Taxes**

 

The provision for income taxes for fiscal 2003, 2002 and 2001 includescurrent state expenses of $800, $9,400 and $10,400, respectively.

 

The following summarizes the difference between the income tax expenseand the amount computed by applying the Federal income tax rate of 34 percentin fiscal 2003, 2002, and 2001, to the loss before taxes:

 

 

 

*2003*

 

*2002*

 

*2001*

 

Federal income  tax provision benefit at

 

 

 

 

 

 

statutory rate

$      836,900 

 

$      718,900 

 

$        68,500 

Tax credit  carryforwards originated in current

 

 

 

 

 

 

year

33,800 

 

44,500 

 

60,800 

State operating  loss carryforward originated in

 

 

 

 

 

 

current year

72,200 

 

73,500 

 

-  

State income  taxes, net of federal tax benefit

54,000 

 

(6,200)

 

(7,000)

Common stock  option and warrant exercises

-  

 

-  

 

-  

Adjustment of  prior year net operating loss

 

 

 

 

 

 

carryforwards  before valuation allowance

259,300 

 

(58,600)

 

(275,000)

Miscellaneous  permanent differences and

 

 

 

 

 

 

adjustments of  estimated income tax accruals

121,000 

 

12,100 

 

40,400 

Change in  valuation allowance attributable to:

 

 

 

 

 

 

Net operating  loss and tax credit

 

 

 

 

 

 

 

carryforwards  not recognized

(1,126,000)

 

(877,900)

 

163,300 

 

Valuation of  net deferred assets

(252,000)

 

84,300 

 

(61,400)

 

 

 

 

$           (800)

 

 

$         (9,400)

 

 

$       (10,400)

Deferred tax assets and liabilities comprise the following:

 

 

*September 28,*

*2003*

 

*September 29,*

*2002*

 

Deferred tax  assets:

 

 

 

 

Net operating  loss carryforwards

$  3,186,300 

 

$  2,060,200 

 

Reserves not  currently deductible

446,900 

 

227,000 

 

Capitalized  inventory costs

199,300 

 

254,700 

 

Tax credit  carryforwards

570,900 

 

502,300 

 

Other

88,600 

 

54,300 

 

 

 

Gross deferred  tax assets

 

4,492,000 

 

 

3,098,500 

 

Deferred tax  liabilities:

 

 

 

 

State tax  benefit

(337,700)

 

(328,300)

 

Depreciation

(6,400)

 

-  

 

 

 

Gross deferred  tax liabilities

 

(344,100)

 

 

(328,300)

 

Net deferred  tax assets

 

4,147,900 

 

 

2,770,200 

 

Valuation  allowance

 

(4,147,900)

 

 

(2,770,200)

 

Net deferred  taxes

 

$                -  

 

 

$                -  

 

Thevaluation allowance was increased $1,377,000 from fiscal 2002 to fiscal 2003.This was the result of an increase in the net deferred tax assets, primarilynet operating loss carryforwards (NOLs) and reserves not currently deductible.Because the Company management is unable to determine whether it is more likelythan not that the net deferred tax assets will be realized, the Companycontinues to record a 100 percent valuation against the net deferred taxassets.

 

Asof September 28, 2003, the Company has Federal and State NOLs totalingapproximately $8,160,000 and $4,661,000, respectively, available to offsetfuture taxable income. These NOLs expire at various times through 2023 and2008, respectively. The Company also has Federal and State research anddevelopment credit carryforwards totaling approximately $129,000 and $131,700,respectively, expiring at various times through 2023. The Company has statemanufacturing tax credit carryforwards totaling approximately $289,700, whichexpire at various times through 2013.

 

**6.      RelatedParty Transactions**

 

Duringfiscal 2001, the Company recognized $19,000 of expense related to the issuanceof 67,000 common stock options to related party consultants, with an exerciseprice of $1.9375. The Company used the Black-Scholes pricing model for valuingthe options. Please see Note 8 for the terms of the options and the assumptionsused in the pricing model.

**7.      Commitmentsand Contingencies**

 

*Leases*

 

The Company leases its facilities and certain equipment under operatingleases. The facility leases require the Company to pay certain maintenance andoperating expenses, such as taxes, insurance, and utilities. Rent expenserelated to these operating leases was $779,600, $805,200 and $816,700 forfiscal 2003, 2002, and 2001, respectively.

 

A summary of future minimum payments required under non-cancelableoperating leases with terms in excess of one year, follows:

 

 

 

*Operating*

*Leases*

 

*Fiscal years  ending:*

 

 

 

 

September 27,  2004

 

 

$  382,300 

 

September 26,  2005

 

389,800 

 

September 25,  2006

 

252,700 

 

September 24,  2007

 

227,600 

 

September 23,  2008

 

19,000 

 

 

 

 

 

$ 1,271,400 

 

During fiscal 2002, the Company leased certain equipment under capitalleases. As of September 28, 2003, there were no capital leases.

 

*Contingencies*

 

The Company is subject to legal proceedings and claims that arise inthe ordinary course of business. In the opinion of management, the amount ofultimate liability with respect to such actions will not materially affect thefinancial position or results of operations of the Company.

 

**8.      Shareholders'Equity**

 

*Common Stock Warrants*

 

During fiscal 2002, the Company recognized $81,000 of expense for theextension of warrants (originally issued in April 1999) to a distributor forthe purchase of 150,000 shares of its common stock, with an exercise price of$1.875. The warrants expired on October 5, 2003.

 

*Common Stock Option Plans*

 

The Company issues common stockoptions to its employees, certain consultants, and certain of its boardmembers. Options granted to its employees and consultants generally vest overfour years and expire ten years from the date of grant. Options granted to theboard members generally vest immediately and expire five years from the date ofgrant. A summary of the status of the Company's common stock option plans as ofSeptember 28, 2003, September 29, 2002, and September 30, 2001, and changesduring the fiscal years then ended, is presented in the following table:

 

 

 

Options  Outstanding

 

September 28,  2003

 

September 29,  2002

 

September 30,  2001

 

 

Shares

 

Wtd Avg

Ex. Price

 

 

Shares

 

Wtd Avg

Ex. Price

 

 

Shares

 

Wtd Avg

Ex. Price

 

Beginning

 

961,750 

 

 

$ 2.337 

 

 

1,001,500 

 

 

$ 2.705 

 

 

754,800 

 

 

$ 3.076 

Granted

50,000 

 

$ 1.400 

 

225,000 

 

$ 1.106 

 

314,500 

 

$ 1.835 

Exercised

(10,000)

 

$ 1.100 

 

(11,000)

 

$ 1.565 

 

-  

 

-  

Forfeited

(377,000)

 

$ 2.724 

 

(253,750)

 

$ 2.659 

 

(67,800)

 

$ 2.582 

 

 

 

624,750 

 

 

$ 2.077 

 

 

961,750 

 

 

$ 2.337 

 

 

1,001,500 

 

 

$ 2.705 

 

Exercisable at

   year-end

 

 

555,125 

 

 

 

 

 

846,250 

 

 

 

 

 

784,200 

 

 

 

Weighted-average fair value of

   options granted during year

 

 

 

$ 0.530 

 

 

 

 

 

$ 0.660 

 

 

 

 

 

$ 0.780 

 

The following table summarizesinformation about common stock options outstanding as of September 28, 2003:

 

 

 

Options  Outstanding

 

Options  Exercisable

 

 

Range of

Exercise Prices

 

 

Number

Outstanding

at 09/28/03

 

Wtd Avg

Remaining

Contractual

Life

 

 

Wtd Avg

Exercise

Price

 

 

Number

Exercisable

at 09/28/03

 

 

Wtd Avg

Exercise

Price

 

$0.000 - 2.000

 

 

412,250 

 

 

5.58 years

 

 

$ 1.422 

 

 

342,625 

 

 

$ 1.373 

$2.001 - 4.000

 

172,500 

 

3.31 years

 

$ 2.924 

 

172,500 

 

$ 2.924 

$4.001 - 6.000

 

40,000 

 

1.50 years

 

$ 5.563 

 

40,000 

 

$ 5.563 

 

 

 

624,750 

 

 

 

 

$ 2.077 

 

 

555,125 

 

 

$ 2.145 

 

The difference between theexercise price and the fair market value of the options issued on the dates ofgrant is accounted for as unearned compensation and amortized to expense overthe related vesting period. The Company recognized $19,000 of expense in fiscal2001, related to stock options granted to consultants. As discussed in theSummary of Accounting Policies, the Company follows APB No. 25 for measurementand recognition of employee stock-based transactions. Had the Company electedto adopt the measurement and recognition provisions of SFAS No. 123, theCompany would have incurred an additional $54,000, $243,900 and $97,000 inrelated compensation expenses during fiscal 2003, 2002, and 2001, respectively.

 

*Share Repurchase Plan*

 

During fiscal 2003, the Company approved a share repurchase planauthorizing the purchase of the Company's common stock up to a total cost of$500,000. As of September 28, 2003, the Company had repurchased 222,200 shareson the open market at a total cost of $233,700.

 

**9.      MajorCustomers, Major Suppliers, and Export Sales**

 

*Major Customers and Suppliers*

 

For fiscal 2003, three customersaccounted for approximately 12, 13, and 14 percent of net revenues, one ofwhich is the Company's domestic distributor, with accounts receivable of$136,000, $92,600 and $162,400 respectively, as of September 28, 2003. Forfiscal 2002, two customers accounted for approximately 21 and 24 percent of netrevenues, with accounts receivable of $685,200 and $1,506,600, respectively, asof September 29, 2002. For fiscal 2001, one customer accounted forapproximately 32 percent of net revenues, with an accounts receivable balanceof $2,654,900 as of September 30, 2001.

 

The Company had two suppliersthat comprised approximately 44 percent and 12 percent of the purchases infiscal 2003. The Company had one supplier that comprised approximately 23 percentof its purchases in fiscal 2001, while no suppliers comprised ten percent ormore of purchases in fiscal 2002.

 

*Export Sales*

 

 

*2003*

 

*2002*

 

*2001*

 

Western Europe

 

$ 1,990,300 

 

 

$ 1,682,500 

 

 

$ 2,652,800 

Far East

645,200 

 

363,300 

 

392,600 

Other

104,700 

 

94,000 

 

180,500 

 

 

 

$ 2,740,200 

 

 

$ 2,139,800 

 

 

$ 3,225,900 

 

In fiscal 2003, Austria (forGermany) and Japan accounted for 14 and 12 percent of net revenues,respectively. No one country comprised ten percent or more of net revenues infiscal 2002 or 2001.

** **

**10.   Use of Estimates and Concentration of CreditRisks**

 

The Company's financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America, which require the use of managementestimates. These estimates are impacted, in part, by the following risks anduncertainties:

 

Financial instruments, whichpotentially subject the Company to concentration of credit risk, consistprincipally of cash and cash equivalents and trade receivables. The Companyplaces its cash and cash equivalents with high quality financial institutions,and, by policy, limits the amounts of credit exposure to any one financialinstitution.

 

A significant portion of theCompany's accounts receivable has historically been derived from one majorclass of customer (distributors) with the remainder being spread across manyother customers in various electronic industries. The Company believes any riskof accounting loss is significantly reduced due to the diversity of its products,end-customers, and geographic sales areas. The Company performs creditevaluations of its customers' financial condition whenever necessary. TheCompany generally does not require cash collateral or other security to supportcustomer receivables.

 

The Company currently isdependent on one supplier as its primary wafer-processing source. If thissupply was to be interrupted or the terms were to become unfavorable to theCompany, this could have a material adverse impact on the Company's operations.

 

The Company produces inventorybased on orders received and forecasted demand. The Company must order wafersand build inventory well in advance of product shipments. Due to the Company'sreliance upon a limited number of suppliers, high levels of inventory are alsomaintained to protect against a disruption in supply. Because the Company'smarkets are volatile and subject to rapid technology and price changes, thereis a risk that the Company will forecast incorrectly and produce excess orinsufficient inventories of particular products. This inventory risk isheightened because many of the Company's customers place orders with short leadtimes. Demand will differ from forecasts and such differences may have amaterial effect on actual operations.

 

**11.   Statements of Cash Flows**

 

The Company paid $37,900 and$54,700, for interest during fiscal 2002 and 2001, respectively. There was nointerest paid during fiscal 2003. The Company paid $800, $9,400 and $15,900 forincome taxes during fiscal 2003, 2002, and 2001, respectively.

 

There were no non-cash investingand financing activities for fiscal 2003. Non-cash investing and financingactivities for fiscal 2001 consisted of the acquisition of $34,800 of equipmentunder capital leases. In addition, the Company extended 150,000 common stockwarrants to a distributor, recorded at an amount of $81,000 in fiscal 2002, andissued 67,000 common stock options to a consultant, recorded at an amount of$19,000 in fiscal 2001.

 

**12.   401(k) Savings Plan**

 

The Company discontinued its401(k) Savings Plan (the Plan) on April 30, 2003. The Plan was originallyadopted on September 1, 2000. Employees were able to make voluntarycontributions and the Company had the discretion to make matchingcontributions. The Plan covered all employees meeting certain age and servicerequirements. The Company funded expenses incurred in connection with the Plan.The Company made no matching contributions in fiscal 2003, 2002, or 2001.

 

**13.   Results of Operations**

 

Due to the cyclical nature ofthe semiconductor industry, coupled with the downturn in the overall industrysales and economy, the Company's net revenues decreased 24 percent in fiscal2003 and 34 percent in fiscal 2002. The Company's gross profit margin, as apercentage of sales fluctuated from 38 percent in fiscal 2001 to 27 percent infiscal 2002, and then to 28 percent in fiscal 2003.

 

At September 28, 2003 andSeptember 29, 2002, accounts receivable and inventories account for a largeportion of the working capital and net assets of the Company, which arediscussed more fully in Note 10.

 

Inventory levels are generallydriven by actual customer orders and forecasted sales. During fiscal 2003, theCompany reduced its inventories approximately $1.1 million, resulting in totalinventories of approximately $8.5 million at September 28, 2003. Inventorieswere reduced by approximately $2.1 million in fiscal 2002, resulting in totalinventories of approximately $9.6 million at September 29, 2002. 

 

As discussed in the Summary ofAccounting Policies, inventories are carried at the lower of cost or market.The Company believes inventories on hand at September 28, 2003 will be sold inthe normal course of business, at amounts in excess of their carrying value.However, depending upon the level of demand, the period over which currentinventories will be sold may exceed one year.

**Quarterly Financial Data (Unaudited)**

 

The following is a summary of unaudited results ofoperations (dollars in thousands, except per share data) for the fiscal yearsended September 28, 2003 and September 29, 2002:

 

 

Fiscal Quarters  Ended:

 

 

 

 

12/29/02

 

 

03/30/03

 

 

06/29/03

 

 

09/28/03

 

 

Total

 

Net revenues

 

$ 1,323 

 

 

$ 1,366 

 

 

$ 1,206 

 

 

$ 1,114 

 

 

$   5,009 

 

Gross margin

 

$    239 

 

 

$    483 

 

 

$    387 

 

 

$    303 

 

 

$   1,412 

 

Loss from operations

 

$   (725)

 

 

$   (453)

 

 

$   (575)

 

 

$   (731)

 

 

$  (2,484)

 

Loss before income taxes

 

$   (726)

 

 

$   (445)

 

 

$   (566)

 

 

$   (724)

 

 

$  (2,461)

 

Net loss

 

$   (726)

 

 

$   (445)

 

 

$   (566)

 

 

$   (724)

 

 

$  (2,461)

 

Basic loss per share

 

$  (0.11)

 

 

$  (0.07)

 

 

$  (0.08)

 

 

$  (0.11)

 

 

$    (0.37)

 

Weighted average common shares

 

6,705 

 

 

6,631 

 

 

6,631 

 

 

6,641 

 

 

6,652 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Quarters  Ended:

 

 

 

 

12/30/01

 

 

03/31/02

 

 

06/30/02

 

 

09/29/02

 

 

Total

 

Net revenues

 

$ 1,771 

 

 

$ 1,120 

 

 

$ 1,801 

 

 

$ 1,881 

 

 

$   6,573 

 

Gross margin

 

$    441 

 

 

$    205 

 

 

$      58 

 

 

$ 1,089 

 

 

$   1,793 

 

(Loss) income from operations

 

$   (559)

 

 

$   (812)

 

 

$   (840)

 

 

$      90 

 

 

$  (2,121)

 

(Loss) income before income taxes

 

$   (554)

 

 

$   (834)

 

 

$   (851)

 

 

$    125 

 

 

$  (2,114)

 

Net (loss) income

 

$   (554)

 

 

$   (840)

 

 

$   (854)

 

 

$    124 

 

 

$  (2,124)

 

Basic (loss) income per share

 

$  (0.08)

 

 

$  (0.12)

 

 

$  (0.12)

 

 

$   0.01 

 

 

$    (0.31)

 

Weighted average common shares

 

6,843 

 

 

6,851 

 

 

6,853 

 

 

6,854 

 

 

6,850 

 

At the end of fiscal 2002, the Company wrote off theremaining balance of the goodwill from its 1995 acquisition of StarSemiconductor (approximately $80,000), as it determined the asset was fullyimpaired. There were no other unusually or infrequently occurring items duringfiscal 2003 and 2002.

 

**ITEM 9.    CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

**ITEM 9A.    CONTROLS ANDPROCEDURES**

 

Based upon an evaluation as of September 28, 2003, theCompany's President and Chief Financial Officer concluded that the Company'sdisclosure controls and procedures are effective. There have been no changes inthe Company's internal control over financial reporting that occurred duringthe final quarter of the Company's fiscal year ended September 28, 2003 thatmaterially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting.

**PART III**

 

**ITEM 10.    DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**

 

The following is a list of the directors and executiveofficers of the Company as of December 4, 2003:

 

 

Name

 

 

Age

 

 

Position(s) held  with the Company

 

Years with  the Company

 

Howard L. Farkas

 

 

79

 

 

Chairman of the Board

 

 

20

William J. Volz

 

56

 

President and Director

 

20

Albert Morrison Jr.

 

67

 

Director

 

20

Fredric J. Harris

 

63

 

Director

 

4

Brian P. Cardozo

 

45

 

Director

 

1

Joel S. Kanter

 

47

 

Director

 

2

Gary Schaefer

 

49

 

Chief Financial Officer  

 

1

Dennis Gross

 

49

 

Vice President of Sales

 

8

 

HOWARD L. FARKAS has been a director of the Company sinceits inception. Mr. Farkas is the owner and managing broker of Windsor GardensRealty, Inc., a residential real estate brokerage company, which he co-foundedin 1964. He also serves as President of Farkas Group, Inc., a company thatprovides management services to various business interests. He serves as adirector of Synthetech, Inc., a public chemical research and manufacturingcompany whose products are used extensively in new drug research, NorthwesternEngineering Company, and Ivory LLC, Aragorn LLC, and Strider LLC, which are inthe gas and oil exploration and development business.

 

WILLIAM J. VOLZ is a founder of the Company and has been adirector since its inception. Mr. Volz has been President and principalexecutive officer of the Company since December 1987. He served as theCompany's Vice President of Engineering from August 1983 to December 1987.

 

ALBERT MORRISON JR. has served as a director of theCompany since 1983. He has also served as Chairman of Morrison Brown Argiz& Company, P.C., a certified public accounting firm in Miami, Florida,since 1969. He is a member of the Board of Directors of Heico Corporation, amember of the Board of Directors for Florida International University, andChairman of the Miami-Dade County Industrial Development Authority.

 

FREDRIC J. HARRIS joined the Board of Directors in 1999.He holds the CUBIC Signal Processing Chair of the Communication Systems and SignalProcessing Institute at San Diego State University, where he has taught since1967. He holds a number of patents on digital receiver and digital signalprocessing ("DSP") technology and lectures throughout the world on DSPapplications. He consults for organizations requiring high-performance DSPsystems and is a fellow of the Institute of Electrical and ElectronicEngineers.

 

BRIAN P. CARDOZOjoined the Board of Directors in 2003. Mr. Cardozo holds a B.S.C. from SantaClara University, an M.B.A. in accounting from Saint Louis University, and anM.B.A. in finance from Saint Louis University. Since May 2000, Mr. Cardozohas been owner and operator of two Harley-Davidson dealerships. He was an Audit and FinancialServices Partner of BDO Seidman LLP and Audit Partner-in-Charge of the SanJose, California office of BDO Seidman LLP until October 2000. More than fiveyears prior to this Form 10-K, Mr. Cardozo was a founding partner in Meredith Cardozo Lanz & Chiu LLP, aregional public accounting firm that merged into BDO Seidman LLP in October 1999. In additionto his years of public accounting experience, he has industry experience with alocal Fortune 500 company, Amdahl, working in the areas of corporate budgeting,corporate reporting, financial policies and procedures, and SEC reporting. Mr.Cardozo has specialized in servicing high technology, software, manufacturing,distribution, and other industries, ranging from start-ups to largemulti-national enterprises. He has provided emerging growth companies withadvice ranging from introductions to traditional financial sources, accountingsystem consulting, potential financial employee referrals, and merger andacquisition assistance. He is a member of the American Institute of CertifiedPublic Accountants, the California Society of Certified Public Accountants, andthe Association for Corporate Growth.  

 

JOEL S. KANTERjoined the Board of Directors in 2002. Since 1986, he has served as Presidentand Director of Windy City, Inc., a privately held firm specializing in publicand private equity investments. He also serves as a director for Encore MedicalCorporation, a publicly-traded manufacturer of implant devices; I-FlowCorporation, a publicly-traded manufacturer of home infusion pumps; and MagnaLabs, Inc., a publicly-traded development stage medical device company. Mr.Kanter is also on the boards of numerous other private companies andnot-for-profit groups.

 

GARY C. SCHAEFER joined the Company in 2003 as ChiefFinancial Officer. Mr. Schaefer has over 15 years of experience at pre-IPO andpublicly-traded high technology semiconductor corporations. Most recently, hewas President of Guardian Enterprises, Inc., a financial consulting firmspecializing in assessing business operational performances for private equityfunding, which began in 2001. Previously, he was CFO/Treasurer/V.P. of Finance & Administrationat ZMD America/ASIC Semiconductor Design in 2000 to 2001; BusinessPartner/Controller at PerkinElmer Optoelectronics Division in 1999 to 2000; andCFO/V.P. of Finance & Administration at Alphatech Semiconductor Electronicsfrom 1996 to 1999. He holds a B.S. and an M.B.A. from Santa Clara University.

 

DENNIS GROSS joined the Company in 1995, and was appointedVice President of Sales in November 1999. For the five prior years, he servedas European Sales Director, during which Europe was the Company's fastestgrowing sales region. Prior to joining the Company, Mr. Gross was with RaytheonCorporation.

 

**Compliancewith Section 16(a) of the Exchange Act**

 

Based solely uponreview of Forms 3 and 4 and amendments thereto furnished to the Companypursuant to Rule 16a-3(e) during fiscal 2003 and Form 5 and amendments theretofurnished to the Company with respect to fiscal 2003, the Company is not awareof any directors, officers, or beneficial owners of more than 10% of the sharesof the Company's Common Stock who failed to file on a timely basis, asdisclosed in the above Forms, reports required by Section 16(a) of the ExchangeAct during the most recent fiscal year or prior fiscal year, except aspreviously reported by the Company and except that Mr. Kanter filed one Form 4late (one transaction not timely reported), Mr. Volz filed two Forms 4 late(each with one transaction reported), Mr. Harris filed his Form 5 for fiscal2003 late (two transactions reported) and Mr. Morrison filed his Form 5 forfiscal 2003 late (two transactions reported).

 

**Code of Business Ethics**

The Company hasadopted a Code of Business Ethics that applies to its President and ChiefExecutive Officer and its Chief Financial Officer. The full text of the Code ofBusiness Ethics is published on the Company's web site atwww.logicdevices.com under, thecaptions "Company Information - About LOGIC - Code of Ethics." TheCompany intends to disclose future amendments to, or waivers from, certainprovisions of the Code of Business Ethics on this web site within five businessdays following the date of such amendment or waiver.

 

**ITEM 11.    EXECUTIVECOMPENSATION**

 

**Summary Compensation Table**

 

The Company defines a Named Executive Officers as anyexecutive officer whose total annual salary and bonus exceeded $100,000 in themost recent fiscal year. The following table sets forth the compensation paidduring fiscal 2003, 2002, and 2001 to the Company's only Named ExecutiveOfficer:

 

 
   
 

 

 

 

 

Annual Compensation

 

Long-term  Compensation Awards (No. of Shares Underlying Options)

Name and Position
   
Year

 

Salary ($)  1

 

Bonus ($)

 

 

William J. Volz, President
   
 

2003

 

 

172,600 

 

 

-  

 

 

-  

 
   
2002

 

172,600 

 

-  

 

-  

 
   
2001

 

160,600 

 

-  

 

-  

 

1    Due to the Company having a fiscal year comprised of 52 weeks ofseven days each, beginning Monday and ending Sunday, the fiscal yearsreferenced above are as follows: for 2003, fiscal year ended September 28,2003; for 2002, fiscal year ended September 29, 2002; and for fiscal 2001,fiscal year ended September 30, 2001.

 

**Stock Options**

 

There were no common stock options granted to or exercisedby the Named Executive Officers during fiscal 2003.

 

**Compensation of Directors**

 

Non-employee directors did not receive any cash compensationduring fiscal 2003, or in previous years, for either their services asdirectors or for their services on the various Board committees.

 

Under the Company's 1998 Director Stock Incentive Plan,each non-employee director who is elected and continues to serve on the Boardreceives an automatic annual grant of 10,000 common stock options, beginningwith the first Annual Shareholder Meeting following their initial election orappointment to the Board. Each of these options has an exercise price per shareequal to the closing fair market value of the Company's common stock on theautomatic grant date, and has a maximum term of five years. Each option isimmediately exercisable for all  10,000 shares. Since the available pool ofoptions to be granted was only 15,000 as of March 12, 2002, each of Messrs. Farkas, Morrison, and Harris received an option to purchase 5,000 shares of theCompany's common stock, following his reelection to the Board by theshareholders of the Company on such date. These options have an exercise priceof $1.60. Mr. Kanter did not serve on the Board prior to March 12, 2002, so hewas not eligible to receive an automatic grant on such date. Because there wereno options available for grant as of March 13, 2003, there were no optionsgranted to the directors during fiscal 2003.

 

On April 2, 2002, Mr. Volz voluntarily forfeited his200,000 stock options granted to him in 1998, under the 1998 Director StockIncentive Plan. Subsequently, on May 20, 2002, the Board authorized amendment ofthe 1998 Director Stock Incentive Plan to allow one-time special grants of50,000 common stock options to the non-employee directors, at an exercise priceof $1.10, the closing fair market value on that date. Therefore, Messrs.Farkas, Morrison, Harris, and Kanter each received a grant of 50,000 commonstock options.

 

**Employment Agreements**

 

The Company does nothave any employment or severance agreements with its Chief Executive Officer.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

All matters concerning executive compensation in fiscal2003 were addressed by the full Board of Directors of the Company, includingMessrs. Farkas, Volz, Morrison, Harris, and Kanter and, after election to theBoard, Mr. Cardozo. Mr. Volz also acts as the Company's President and principalexecutive officer, and does not participate in compensation matters pertainingto his salary or option grants. While Mr. Volz is eligible, he has neverreceived any option grants under the employees' stock incentive plans.

 

**Report on Executive Compensation**

 

The Board of Directors is principally responsible forexecutive compensation matters, including but not limited to: review andapproval of base salaries, approval of individual bonuses and bonus programsfor executive officers, administration of certain employee benefit programs,and review and approval of stock option grants to all employees, including theexecutive officers of the Company.

**Overview**

 

The overall policyof the Board of Directors is to offer the Company's executive officerscompetitive compensation opportunities, based upon their personal performance,the financial performance of the Company, and their contribution to thatperformance. Each executive officer's compensation package is generallycomprised of three elements: (i) base salary, which is determined on the basisof the individual's position and responsibilities with the Company, the levelof the individual's performance, and the financial performance of the Company;(ii) incentive performance awards payable in cash and tied to the achievementof performance goals; and (iii) long-term stock-based incentive awards designedto strengthen the mutuality of interest between the executive officers and theCompany's shareholders.

 

**Components of Executive Compensation**

 

Several importantfactors considered in establishing the components of each executive officer'scompensation package are summarized below. Additional factors were taken intoaccount to a lesser degree. The Board of Directors may, at its discretion,apply entirely different factors, such as different measures of financialperformance, for future fiscal years.

 

*Base Salary.* The base salary foreach officer is set primarily on the basis of personal performance and internalcomparability considerations and, to a lesser extent, on the financialperformance of the Company. Because of the Company's financial performance overthe past five fiscal years, the base salary levels of the executive officershave not increased significantly above the levels in effect for them for fiscalyear 2002.

 

*Cash Incentive Compensation.* Therewere no cash incentives awarded in fiscal 2003. The Board does review thepossibility of cash incentives for executive officers based on the performanceof the specific officer and on the financial performance of the Company.

 

*Long-term Stock-Based Incentive Compensation.*The Company has two long-term stock-based incentivecompensation programs, consisting of the 1996 Stock Incentive Plan and theLogic Devices Incorporated Incentive and Non-Qualified Stock Option Plan(collectively, the Stock Incentive Plans), for which each of the Company'sexecutive officers have been eligible to participate. Under the Stock IncentivePlans, the Board periodically approves grants of common stock options to theexecutive officers. The grants are designed to align the interest of eachexecutive officer with those of the shareholders, and to provide eachindividual with a significant incentive to manage the Company from theperspective of an owner with an equity stake in the business. Generally, eachgrant allows the officer to acquire shares of the Company's Common Stock at afixed price per share (the market price on the grant date) over a specifiedperiod of time (up to 10 years), thus providing a return to the executiveofficer only if the market price of the shares appreciates over the option termand the officer continues in the Company's employ. The size of the option grantto each executive officer is designed to create a meaningful opportunity forstock ownership and is based upon the executive officer's current position withthe Company, internal comparability with option grants made to other Companyexecutives, the current level of ownership in relation to other executiveofficers, the executive officer's current level of performance, and theexecutive officer's potential for future responsibility and promotion over theoption term. The Board also takes into account the number of vested andunvested options held by the executive officer to maintain an appropriate levelof equity incentive for that individual. The Board does not adhere to anyspecific guidelines as to the relative option holding of the Company'sexecutive officers under the Stock Incentive Plans. The options granted to theNamed Executive Officers under the Stock Incentive Plans, for the Company'sfiscal years 2001 to 2003 are included in the Summary Compensation Table asLong-term Compensation Awards.

* *

**Compensation of the Principal Executive Officer**

 

The Company's President and principal executive officer'sbase compensation for fiscal 2003 was determined by evaluating the factorsdiscussed above in connection with assessing the overall performance of thePresident, comparing his base salary to that of other chief executive officersin the semiconductor industry, and evaluating the performance of the Company.The President's base annual compensation for fiscal 2003 was not increased fromhis base annual compensation in fiscal 2002.

 

The foregoing Report on Executive Compensation shall notbe deemed to be incorporated by reference by any general statementincorporating by reference this Form 10-K into any filings of the Companypursuant to the Securities Act of 1933, as amended, or the Securities ExchangeAct of 1934, as amended, except to the extent the Company specificallyincorporates the Report on Executive Compensation by reference therein, andshall not be deemed filed under either such Act.

 

The Board of Directors

 

Howard L. Farkas

 

William J. Volz

 

Albert Morrison Jr.

 

Fredric J. Harris

 

Brian P. Cardozo

 

Joel S. Kanter

**ITEM 12.    SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth, as of December4, 2003, certaininformation concerning the beneficial ownership of Common Stock by eachshareholder known by the Company to be the beneficial owner of more than fivepercent, by each director, by each Named Executive Officer, and by NamedExecutive Officers and directors as a group. The Company believes thebeneficial owners named in the table have sole voting and investment power withrespect to the shares owned by them, subject to community property laws whereapplicable and the information contained in the footnotes to this table:

 

          **Name  and Address of Beneficial Owner**

 

 

**Beneficial  Share Ownership (1)**

 

** **

**Percentage of  Ownership (2)**

 

*5% Shareholders*:

 

 

 

 

 

Steven J. Revenig, Trustee of the Farkas Trusts  (3)

 

624,305 

 

9.4%

 

 

1873 S. Bellaire St., Ste. 1000

Denver, CO 80222

 

 

 

 

 

Chicago Investments, Inc.  (4)

 

436,000 

 

6.6%

 

 

934 N. Main St.

Sheridan, WY 82801

 

 

 

 

 

*Directors:*

 

 

 

 

 

Howard L. Farkas  (5) (6) (8)

 

210,000 

 

3.1%

 

 

6601 E. Progress Ave.

Englewood, CO 80111

 

 

 

 

 

William J. Volz

 

710,438 

 

10.7%

 

 

395 W. Java Dr.

Sunnyvale, CA 94089

 

 

 

 

 

Albert Morrison Jr.  (5) (6)

 

85,877 

 

1.3%

 

 

1001 Brickell Bay Dr., 9th Fl.

Miami, FL 33131

 

 

 

 

 

Fredric J. Harris  (5) (7)

 

100,000 

 

1.5%

 

 

Electrical and Computer Engineering Department

San Diego State University

5500 Companile Dr.

San Diego, CA 92182-1309

 

 

 

 

 

Brian P. Cardozo

 

-  

 

-  

 

 

395 W. Java Dr.

Sunnyvale, CA 94089

 

 

 

 

 

Joel S. Kanter  (5) (9)

 

30,000 

 

0.4%

 

 

8000 Towers Crescent Dr.

Vienna, VA 22182

 

 

 

 

 

*All Directors and Executive Officers as a group  (eight persons)*

 

*1,148,815 *

 

*16.5%*

 

 

 

 

 

 

(1)

Assumes  the exercise of any warrants or options held by such person that are  exercisable as of December 4, 2003 or within 60 day s thereafter, but not the  exercise of any other person's warrants or options.

(2)

Assumes  6,660,688 shares of common stock outstanding as of December 4, 2003.

(3)

Consists  of 15 irrevocable trusts administered by Mr. Revenig, an independent trustee,  the beneficiaries of which consist of Mr. Farkas and members of his family.

(4)

A  Delaware corporation, whose directors and officers include a Kanter family  member, but exclude Mr. Kanter.

(5)

Such  beneficial share ownership includes options for common stock obtained from  special one-time option grants of 50,000 to Messrs. Farkas, Morrison, Harris,  and Kanter, pursuant to the 1998 Director Stock Incentive Plan. See  "Executive Compensation - Compensation of Directors." Mr. Kanter  has 20,000 of these options remaining as of December 4, 2003.
   
Such  beneficial share ownership includes options for 35,000 shares of common stock  granted upon reelection to the Board under the 1998 Director Stock Incentive  Plan. See "Executive Compensation - Compensation of Directors."

(7)

Such  beneficial share ownership includes 25,000 shares of common stock granted to  Mr. Harris at the time of his accepted appointment to the Board, and options  for 25,000 shares of common stock granted upon reelection to the Board under  the 1998 Director Stock Incentive Plan. See "Executive Compensation -  Compensation of Directors."

(8)

Mr.  Farkas disclaims any beneficial share ownership of the shares held by Mr.  Revenig, as trustee of the Farkas Trusts.

(9)

Mr.  Kanter disclaims any beneficial share ownership of the shares held by Chicago  Investments, Inc.

 

 

**ITEM 13.    CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Since the beginning of its last fiscal year, the Companyhas engaged in no transactions or series of similar transactions with any ofits officers, directors, or principal shareholders, or, to the knowledge of theCompany, with any of their affiliates in which the amount invested exceeded$60,000. Also, no such transactions are currently contemplated.

 

**ITEM 15.    EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(A)

The following documents are filed as part of this  report:

 

 

(1)

The Company's Financial Statements, Summary of  Accounting Policies, and Notes to Financial Statements appear at pages 23 to  39 of this report; see Index to Financial Statements and Financial Statement  Schedules at page 22 of this report.

 

 

(2)

The Financial Statement Schedule appears at page 49 of  this report; see Index to Financial Statements and Financial Statement  Schedules at page 22 of this report.

 

 

(3)

The Index to Exhibits appears at page 51 of this report.

 

(B)

Reports on Form 8-K: During the final quarter of fiscal  2003, the Company filed three Current Reports on Form 8-K, which disclosed  the following: 

 

 

 

(a)

July 11, 2003 - The Company disclosed the forfeiture of  165,000 common stock options by two of its executive officers, and an  additional 7,000 common stock options by two senior engineers.

 

 

 

(b)

August 7, 2003 - The Company disclosed the release of  its earnings for the third fiscal quarter, which ended June 29, 2003.

 

 

 

(c)

September 2, 2003 - The Company disclosed the  appointment of Mr. Gary C. Schaefer as Chief Financial Officer as his  predecessor, Ms. Kimiko Milheim, began maternity leave at the end of August  2003.

 

 

 

 

**Schedule II - Valuation and Qualifying Accounts**

 

 

 

Description

 

Balance at  beginning of period

 

Charged to costs  and expenses

 

 

 

Deductions

 

 

Balance at end of  period

 

*2003*

 

 

 

 

 

 

 

 

Allowance for:

 

 

 

 

 

 

 

 

 

      Doubtful accounts

 

$       20,000 

 

$                 -  

 

$        16,500 

 

$          3,500 

 

      Inventory reserve

 

$     337,000 

 

$  1,779,000 

 

$  1,072,800 

 

$  1,043,200 

 

      Sales returns

 

$                 -  

 

  $                 -  

 

$                 -  

 

$                 -  

 

*2002*

 

 

 

 

 

 

 

 

Allowance for:

 

 

 

 

 

 

 

 

 

      Doubtful accounts

 

$       20,000 

 

$                  -  

 

$                 -  

 

$       20,000 

 

      Inventory reserve

 

$  1,867,700 

 

$     337,000 

 

$  1,867,700 

 

$     337,000 

 

      Sales returns

 

$                 -  

 

$                 -  

 

$                 -  

 

$                 -  

 

* 2001*

 

 

 

 

 

 

 

 

Allowance for:

 

 

 

 

 

 

 

 

 

      Doubtful accounts

 

$       20,000 

 

$               -  

 

$                 -  

 

$       20,000 

 

      Inventory reserve

 

$  2,436,300 

 

$       65,500 

 

$     634,100 

 

$  1,867,700 

 

      Sales returns

 

$       32,000 

 

$      (32,000)

 

$                 -  

 

$                 -  

 

The Company periodically reviews its inventory forobsolescence and standard costs accuracy. During fiscal 2003 and 2002, theCompany used $1,072,780 and $1,867,700, respectively, of its inventory reservefor direct write-offs of obsolete products and excess overhead absorbed inprior years.

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

LOGIC DEVICES INCORPORATED

 

Dated: December 4, 2003

By:   /s/  William J.  Volz                        

 

 

William J. Volz, President and

Principal Executive Officer

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, as amended, this report has been signed below by the followingpersons in the capacities and on the dates indicated.

 

Signature

 

Title

 

Dated

 

  /s/  William J.  Volz          

    William J. Volz

 

President and Director

(Principal Executive Officer)

 

 

December 4, 2003

  /s/  Gary C.  Schaefer         

    Gary C. Schaefer

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

December 4, 2003

  /s/  Howard L.  Farkas       

    Howard L. Farkas

 

 

Chairman of the Board of Directors

 

 

December 4, 2003

  /s/  Albert Morrison,  Jr.    

    Albert Morrison Jr.

 

 

Director

 

 

December 4, 2003

  /s/  Fredric J.  Harris          

    Fredric J. Harris

 

 

Director

 

 

December 4, 2003

  /s/  Joel S.  Kanter             

    Joel S. Kanter

 

 

Director

 

December 4, 2003

  /s/  Brian P.  Cardozo          

    Brian P. Cardozo

 

Director

 

December 4, 2003

 

 

 

 

 

** INDEX TO EXHIBITS**

 

Exhibit No.

Description

 

3.1

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

3.2

Bylaws, as amended. [3.2] (1)

10.1

Real Estate lease regarding Registrant's Sunnyvale  facilities. [10.2] (5)

10.2

LOGIC Devices Incorporated 1996 Stock Incentive Plan.  [99.1] (2)

10.3

LOGIC Devices Incorporated 1998 Director Stock Incentive  Plan, as amended. [10.3] (5)

10.4

Rights Agreement, dated April 30, 1997. [1] (3)

10.5

Registration Rights Agreement dated October 3, 1998  between William J. Volz, BRT Partnership, and Registrant. [10.19] (4)

23.1

Consent letter of Perry-Smith LLP.

23.2

Consent letter of Hood & Strong LLP.

31.1

Certification of Chief 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 Chief 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)

Registration Statement on Form S-18, as filed with the  SEC on August 23, 1988 [Registration No. 33-23763-LA].

(2)

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

(3)

Registration Statement on Form 8-A, as filed with the  SEC on May 5, 1997

[Registration No. 000-17187].

(4)

Annual Report on Form 10-K for the transition period  January 1, 1998 to October 3, 1999, as filed with the SEC on January 13,  1999.

(5)

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

the SEC on December 10, 2002.

 

** EXHIBIT 23.1**

 

 

 

INDEPENDENT AUDITOR'S CONSENT

 

 

 

We consent to the incorporation byreference in Registration Statement No. 333-109261 and No. 333-32819 of LOGICDevices Incorporated on Form S-8 and Registration Statement No. 333-16591 ofLOGIC Devices Incorporated on Form S-3 of our report, dated November 5, 2003,appearing in this Annual Report on Form 10-K of LOGIC Devices Incorporated, forthe year ended September 28, 2003.

 

 

 

/s/ Perry-Smith LLP

 

 

 

Sacramento, California

December 5, 2003

 

 

**EXHIBIT 23.2**

 

 

 

**Independent Auditors' Consent**

** **

** **

BOARDOF DIRECTORS

LOGICDEVICES, INC.

Sunnyvale,California

 

 

Weconsent to the incorporation by reference in Registration No. 333-32819 and No.333-109261 of LOGIC Devices Incorporated on Form S-8 and Registration StatementNo. 333-16591 of LOGIC Devices Incorporated on Form S-3, of our report, datedNovember 6, 2002, appearing in this Annual Report on Form 10-K of LOGIC DevicesIncorporated for the fiscal years ended September 29, 2002 and September 30,2001.

 

/s/ Hood & Strong LLP

 

 

MenloPark, California

December 5, 2003

 

**EXHIBIT 31.1**

 

 

**Certification**

 

I,William J. Volz, certify that:

 

1.

I  have reviewed this annual report on Form 10-K of LOGIC Devices Incorporated  (the registrant);

 

2.

Based  on my knowledge, this report does not contain any untrue statement of a  material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this report;

 

3.

Based  on my knowledge, the financial statements, and other financial information  included in this report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this report;

 

4.

The  registrant's other certifying officer and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

 

(a)

Designed  such disclosure controls and procedures, or caused such disclosure controls  and procedures to be designed under our supervision, to ensure that material  information relating to the registrant is made known to us by others,  particularly during the period in which this report is being prepared;

 

 

(b)

Evaluated  the effectiveness of the registrant's disclosure controls and procedures and  presented in this report our conclusions about the effectiveness of the  disclosure controls and procedures, as of the end of the period covered by  this report, based on such evaluation; and

 

 

(c)

Disclosed  in this report any change in the registrant's internal control over financial  reporting that occurred during the registrant's most recent fiscal quarter  that has materially affected, or is reasonably likely to materially affect,  the registrant's internal control over financial reporting; and

 

5.

The  registrant's other certifying officer and I have disclosed, based on our most  recent evaluation of internal control over financial reporting, to the  registrant's auditors and the audit committee of the registrant's board of  directors:

 

 

(a)

All  significant deficiencies and material weaknesses in the design or operation  of internal control over financial reporting which are reasonably likely to  adversely affect the registrant's ability to record, process, summarize and  report financial information; and

 

 

(b)

Any  fraud, whether or not material, that involves management or other employees  who have a significant role in the registrant's internal control over financial  reporting.

 

 

Date:  December 5, 2003

  /s/  William J.  Volz                        

 

William  J. Volz

 

President  and Chief Executive Officer

**EXHIBIT 31.2**

 

 

**Certification**

 

I,Gary C. Schaefer, certify that:

 

1.

I  have reviewed this annual report on Form 10-K of LOGIC Devices Incorporated  (the registrant);

 

2.

Based  on my knowledge, this report does not contain any untrue statement of a  material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this report;

 

3.

Based  on my knowledge, the financial statements, and other financial information  included in this report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this report;

 

4.

The  registrant's other certifying officer and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

 

(a)

Designed  such disclosure controls and procedures, or caused such disclosure controls  and procedures to be designed under our supervision, to ensure that material  information relating to the registrant is made known to us by others,  particularly during the period in which this report is being prepared;

 

 

(b)

Evaluated  the effectiveness of the registrant's disclosure controls and procedures and  presented in this report our conclusions about the effectiveness of the  disclosure controls and procedures, as of the end of the period covered by  this report, based on such evaluation; and

 

 

(c)

Disclosed  in this report any change in the registrant's internal control over financial  reporting that occurred during the registrant's most recent fiscal quarter  that has materially affected, or is reasonably likely to materially affect,  the registrant's internal control over financial reporting; and

 

5.

The  registrant's other certifying officer and I have disclosed, based on our most  recent evaluation of internal control over financial reporting, to the  registrant's auditors and the audit committee of the registrant's board of  directors:

 

 

(a)

All  significant deficiencies and material weaknesses in the design or operation  of internal control over financial reporting which are reasonably likely to  adversely affect the registrant's ability to record, process, summarize and  report financial information; and

 

 

(b)

Any  fraud, whether or not material, that involves management or other employees  who have a significant role in the registrant's internal control over  financial reporting.

 

 

Date:  December 5, 2003

  /s/  Gary C. Shaefer                        

 

Gary  C. Schaefer

 

Chief  Financial Officer

**EXHIBIT 32.1**

 

 

**Certifications of**

**Chief Executive Officer and Chief FinancialOfficer**

**Pursuant to 18 U.S.C. Section 1350,**

**as Adopted Pursuant to**

**Section 906 of the Sarbanes-Oxley Act of 2002**

 

 

We, William J. Volz, President and Chief ExecutiveOfficer, and Gary C. Schaefer, Chief Financial Officer, of LOGIC DevicesIncorporated (the Company), do hereby certify in accordance with 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that, based on our knowledge:

 

(1)

the Annual Report on Form 10-K of the registrant, to  which this certification is attached as an exhibit (the Report), fully  complies with the requirements of Section 13(a) or 15(d) of the Securities  Exchange Act of 1934; and

 

(2) 

the information contained in this Report fairly presents,  in all material respects, the financial condition and results of operations  of the Company.

 

 

Dated: December 5, 2003

By:   /s/  William J.  Volz                        

 

 

William J. Volz, President and

Chief Executive Officer

 

 

 

Dated: December 5, 2003

By:   /s/  Gary C.  Schaefer                       

 

 

Gary C. Schaefer,

Chief Financial Officer

 

 

 

 

A signed original of thiswritten statement required by Section 906 has been provided to LOGIC DevicesIncorporated and will be retained by LOGIC Devices Incorporated and furnishedto the Securities and Exchange Commission or its staff upon request.