**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 29, 2002

 

or

 

[  ]**TransitionReport Pursuant to Section 13 of 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   

 

Theaggregate market value of voting stock held by non-affiliates of the registranton December 9, 2002 was approximately $6,332,300. On that date, there were6,630,688 shares of Common Stock issued and outstanding.

 

Page 1of 92

Indexto Exhibits appears at Page 49

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## **CAUTIONARY STATEMENT**

 

This Report contains forward-looking statements whichinclude, but are not limited to, statements concerning projected revenues,expenses, gross margin, and income, market acceptance of our products, thecompetitive nature of, and anticipated growth in our markets, our ability toachieve further product integration, the status of evolving technologies andtheir growth potential, the timing of new product introductions, the adoptionof future industry standards, our production capacity, our ability to migrateto smaller process geometries, and the need for additional capital. Theseforward-looking statements are based on our current expectations, estimates,and projections about our industry, management's beliefs, and certainassumptions made by us. Words such as "anticipates, expects, intends, plans,believes, seeks, estimates, may, will," and variations of these words orsimilar expressions are intended to identify forward-looking statements. Inaddition, any statements that refer to expectations, projections, or othercharacterizations of future events or circumstances, including any underlyingassumptions, are forward-looking statements. These statements are notguarantees of future performance and are subject to risks, uncertainties, and assumptionsthat are difficult to predict. Therefore, our actual results could differmaterially and adversely from those results expressed in any forward-lookingstatements, as a result of various factors, some of which are listed under thesection, "Factors Affecting Future Results," at the end of Item 1 of thisReport. We undertake 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 2002 ended September 29, 2002, its fiscal year2001 ended September 30, 2001, and its fiscal year 2000 ended October 1, 2000.

 

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 reduced the number of products it offers by over 50percent 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 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, anetwork of three national and international independent sales representatives,and one domestic and 21 international distributors. In fiscal year 2002, approximately46 percent of the Company's net revenues were derived from OEMs, while salesthrough foreign and domestic distributors accounted for approximately 54percent of net revenues. Among the Company's customers are Sony, Teradyne,Pinnacle Microsystems, Lockheed Martin, GE Medical, Phillips, Acuson, andHoneywell. Approximately 67 percent of the Company's net revenues were derivedfrom within the United States and approximately 33 percent were derived fromforeign sales.

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TheCompany was incorporated under the laws of the State of California in April1983. The Company recently moved its headquarters to 395 W. Java Drive,Sunnyvale, California 94089. The Company's telephone number remains (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 in 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

 

TheCompany believes its core competencies are in high-speed, very large scale,integrated circuit implementation, and in DSP algorithm and architecturedevelopment.

 

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 in DSP, with a focuson high-volume applications. To avoid direct competition with these largercompanies, the Company attempts to identify products and market niches thatdemand the greater performance of programmable DSP, yet are small enough not toattract significant attention from the larger chip manufacturers.

 

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 2002, 2001, and 2000. However, it appears the FCC has recently takensteps to push the industry to catch up and get on schedule for the 2006deadline.

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InMay 2002, the FCC proposed new rules that "contemplate an increasinglysevere level of sanctions every six months the licensee fails to construct,beginning with admonishment, followed by issuance of notices of apparentliability for forfeiture, and culminating in rescission of the licensee's DTVauthorization." Therefore, if the proposed rules are adopted, stationsthat do not stay on track with the construction of their digital facilitieswill begin facing many penalties. In addition, in August 2002, the FCC issuedan order to television manufacturers that requires digital tuners beincorporated into 50 percent of television sets with screens of 36 or more inches starting in2004, in 50 percent of sets with screens of 25-35 inches starting in 2005, and in all setswith screens of 13 inches or more by 2007.

 

Withits significant presence in the broadcast equipment industry, the Company andits customers jointly defined a family of very 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 the HDTV studio equipment begins tosell in higher volume, the Company believes it will benefit from increasingsales.

 

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.

 

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. While the Company anticipates exiting this businessin the future, it still expects further sales in fiscal 2003.

 

#### 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 made anynew product introductions over the past few years. Disappointing execution bythe engineering team and the need to downsize to cut costs have hampered theCompany's ability to introduce new products.

 

Withthe benefit of on-going customer input, the Company currently has new DSPproducts it hopes to introduce within fiscal 2003. At current resource levels,the Company does not anticipate being able to complete all productopportunities it has identified. However, as it considers product developmentcritical to its future success, the Company's product development expenditureswill be dependent upon its success in meeting its staffing needs andobjectives.

 

#### 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 has been dependent upon Taiwan Semiconductor Manufacturing Company(TSMC) as its primary wafer supplier and there can be no assurance that suchrelationship may continue to be on terms satisfactory to the Company. TSMC doesnot guarantee minimum supplies. The inability to obtain adequate quantities ofprocessed wafers could limit the Company's revenues.

 

4

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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 is developing its new products with a newfoundry source, and expects to produce prototypes of new products during fiscal2003.

 

#### 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, a network of three national and internationalindependent sales representatives, and one domestic and 20 internationalelectronics distributors. The Company concentrates its direct marketing effortson high-performance segments of the medical imaging, broadcast equipment, andtelecommunications markets, in applications where high speed is critical. Amongthe Company's OEM customers are Sony, Teradyne, Pinnacle Microsystems, LockheedMartin, GE Medical, Phillips, Acuson, and Honeywell.

 

TheCompany coordinates worldwide sales from its sales office in Warminster,England. In some geographic areas, sales representatives obtain orders on anagency basis and the Company ships directly to its customers. Salesrepresentatives receive commissions on sales within their territories, with thecommission payable upon receipt of payment from the end-customer. Distributorspurchase the Company's products for resale, generally to a broad base of small-to medium-sized customers. As is customary in the industry, the Company'sdistributors receive certain price protection and limited stock rotationrights. However, the Company's distributors are required to simultaneouslyorder an amount equal to or greater than any rotation items returned. Duringfiscal 2002, 2001, and 2000, sales through both international and domesticdistributors accounted for approximately 54%, 69%, and 78% of net revenues,respectively.

 

Infiscal 2002 and 2001, Jan Devices, Inc., a domestic distributor, accounted forapproximately 21% and 32% of net revenues. In fiscal 2000, All AmericanSemiconductor, the Company's former domestic distributor, accounted forapproximately 31% of net revenues, and Insight Memec, an internationaldistributor, accounted for approximately ten percent of net revenues. Inaddition, one non-distributor customer comprised approximately 24% of netrevenues in fiscal 2002. In fiscal 2001 and 2000, no other customer comprisedmore than ten percent of net revenues.

 

Internationalsales are conducted by sales representatives and distributors located inBelgium, Canada, Denmark, England, Finland, France, Germany, Hong Kong, Israel,Italy, Japan, Korea, the Netherlands, Spain, Sweden, and Taiwan. During fiscal2002, 2001, and 2000, the Company's export sales were approximately 33%, 32%,and 39% of net revenues, respectively (see Note 9 in "Notes to FinancialStatements" contained in Item 8). The Company's international sales arebilled in United States dollars, and therefore, settlements are not directlysubject to currency exchange fluctuations. However, changes in the relativevalue of the dollar may create pricing pressures for the Company's products.Although the Company's international sales are subject to certain exportrestrictions, including the Export Administration Amendments Act of 1985 andthe regulations promulgated there under, the Company has not experienced anymaterial difficulties resulting from 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.

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#### Backlog

 

Asof December 2, 2002 and November 28, 2001, the Company's backlog wasapproximately $391,500 and $261,800, respectively. The Company's backlogincludes all released purchase orders shippable within the following 18 months,including orders from distributors. The Company's backlog, although useful forscheduling production, does not represent actual sales and should not be usedas a measure of future sales or revenues at any particular time. In accordancewith accepted industry practice, orders on the backlog are subject tocancellation without penalty at the option of the purchaser at any time priorto shipment. In addition, the backlog does not reflect changes in deliveryschedules and price adjustments that may be passed on to distributors andcredits for returned products. The Company produces catalog products that maybe 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 a new product in a few years, it views newproduct development as the most important factor affecting revenue growth;therefore, it continues its commitment to increase research and developmentlevels. Research and development expenditures were 27%, 19%, and 14% of netrevenues in fiscal 2002, 2001, and 2000, respectively. See "SelectedFinancial Data," "Management's Discussion and Analysis of FinancialCondition and Results of Operations," and "Consolidated Statements ofOperations," 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 andinternational companies that have substantially greater financial, technical,manufacturing, and marketing resources than the Company. The Company facescompetition from other manufacturers of high-performance integrated circuits,many of which have advanced technological capabilities and internal waferproduction capabilities. The ability of the Company to compete in this rapidlyevolving environment depends on elements both in and outside the control of theCompany. These elements include: the Company's ability to develop new productsin a timely manner; the cost effectiveness of its manufacturing; the acceptanceof new products by customers; the speed at which customers incorporate theCompany's products into their systems; the continued access to advancedsemiconductor foundries; the number and capabilities of its competitors as wellas general economic conditions. In the area of high-performance DSP circuits,the Company competes with Altera, Analog Devices, Fairchild Semiconductor,Genesis, Gennum, Grey Chip, Harris, Lucent Technologies, Texas Instruments, andXilinx, among others.

 

#### 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.

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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." TheCompany does not believe that it infringes upon any known patents at this time.If any such infringements exist or arise in the future, the Company may beliable for damages and may, like many companies in the semiconductor industry,find it necessary or desirable to obtain licenses relating to one or more ofits current or future products. Based on industry practice, the Company expectsthat any necessary licenses or rights under patents could be obtained onconditions that would not have a material adverse effect on the Company. Therecan be no assurance, however, that licenses could in fact be obtained oncommercially reasonable terms, or at all, or that litigation would not occur.The Company's inability to obtain such licenses on economically reasonableterms or the occurrence of litigation could adversely affect the Company.

 

#### Employees

 

Asof September 29, 2002, the Company had 31 employees, consultants, and part-timeemployees, of which 23 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.

 

**Factors Affecting Future Results**

 

ThisForm 10-K report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. Any statements about the Company's expectations, beliefs,plans, objectives, assumptions, or future events or performance are nothistorical facts and may be forward-looking. Words and phrases such as,"anticipate, estimate, plans, projects, continuing, ongoing, expect,believes, intends," and similar words or phrases may identifyforward-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  availabilities and terms of financing; and                                    |
|   | - | Opportunities  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.

 

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**Company-related Risks**

 

Dependence on limitedsources of silicon wafers:

 

TheCompany does not manufacture silicon wafers. The Company expects to beginprototype production of certain products with a new foundry in the secondquarter of fiscal 2003. Taiwan Semiconductor Manufacturing Corporation (TSMC),in Taiwan, manufactures current products. If TSMC is unable or unwilling tosupply wafers, the Company's operating results could be harmed. In the past,the Company has experienced delays in obtaining wafers and in securing supplycommitments.

 

Otherfactors could disrupt the Company's wafer supply, which are beyond its control.Since worldwide manufacturing capacity for silicon wafers is limited,significant industry-wide increases in overall wafer demand or interruptions inwafer supply could harm the Company. In addition, a disruption of TSMC'sfoundry operations as a result of a fire, earthquake, or other natural disastercould disrupt its wafer supply and could harm future operating results.

Furthermore,the Company depends on its foundry to deliver reliable silicon wafers withacceptable yields in a timely manner. If it is unable to produce silicon wafersthat meet the Company's specifications, with acceptable yields, for a prolongedperiod, operating results could be harmed. The Company's revenue is derivedfrom products based on advanced silicon wafer manufacturing technology. Thereliable manufacture of high performance semiconductor wafers is a complicatedand technically demanding process requiring:

 
|   | - | A  high degree of technical skill;                                                             |
|--------|---|------------------------------------------------------------------------------------------------|
|   | - | State-of-the-art  equipment;                                                                   |
|   | - | The  absence of defects in the masks used to print circuits on a wafer;                        |
|   | - | The  elimination of minute impurities and errors in each step of the fabrication  process; and |
|   | - | Effective  cooperation between the wafer supplier and the Company's circuit designers.         |

 

Asa result, the Company's foundry may experience difficulties in achievingacceptable quality and yield levels when manufacturing its silicon wafers.

 

Product development:

 

Thesemiconductor industry is a dynamic environment marked by rapid productobsolescence. The Company's future success depends on its ability to introducenew or improved products that meet critical customer needs, while achievingacceptable profit margins. If it fails to introduce these new products in atimely manner or these products fail to achieve market acceptance, operatingresults would be harmed.

 

Theintroduction of new products in a dynamic market environment presentssignificant business challenges. Product development commitments andexpenditures must be made well in advance of product sales, while the successof new products depends on accurate forecasts of long-term market demand andfuture technology developments.

 

Futurerevenue growth is dependent on market acceptance of new products and thecontinued market acceptance of existing products. The success of these productsis dependent on a variety of specific technical factors, including successfulproduct definition; timely and efficient completion of product design; timelyand efficient implementation of wafer manufacturing and assembly processes; andproduct performance, quality and reliability. If, due to these or otherfactors, new products do not achieve market acceptance, the Company's operatingresults would be harmed.

 

Furthermore,to develop new products and maintain the competitiveness of existing products,the Company needs to migrate to more advanced wafer manufacturing processesthat use larger wafer sizes and smaller device geometries. Because it dependsupon foundries to provide facilities and support for its process technologydevelopment, the Company may experience delays in the availability of advancedwafer manufacturing process technologies at its existing or new waferfabrication facilities. As a result, volume production of its processtechnologies may be delayed or not be achieved. This could harm futureoperating results.

 

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Assembly:

 

TheCompany relies on subcontractors to assemble devices with acceptable qualityand yield levels. As is common in the semiconductor industry, the Company hasoccasionally experienced quality and yield problems in the past. If itexperiences prolonged quality or yield problems in the future, the Company'soperating results could be harmed.

 

Themajority of the Company's revenues are derived from semiconductor devicesassembled in advanced packages. This requires a high degree of technical skill;state-of-the-art equipment; the absence of defects in lead frames used toattach semiconductor devices to the package; the elimination of raw materialimpurities or errors in each stage of the process; and effective cooperationbetween the assembly subcontractor and the device manufacturer. As a result, subcontractorscould experience difficulties in achieving acceptable quality and yield levelswhen assembling the Company's semiconductor devices.

##### 

International operations:

 

Theprimary silicon wafer suppliers operate fabs located in Asia. Finished silicon wafersare also assembled and tested by independent subcontractors located in thePhilippines, South Korea, and Taiwan. Economic, financial, social, andpolitical conditions in Asia have been volatile. Financial difficulties,government actions or restrictions, prolonged work stoppages, or any otherdifficulties experienced by the Company's suppliers could harm its operatingresults.

 

TheCompany also has many overseas customers. These export sales are affected byunique risks frequently associated with foreign economies, includinggovernmental controls and trade restrictions; export license requirements andrestrictions on the export of technology; changes in local economic conditions;political instability; changes in tax rates, tariffs, or freight rates; interruptionsin air traffic; and difficulties in staffing and managing foreign salesoffices. Significant changes in the economic climate in the foreign countriesto which the Company derives its export sales could harm future operatingresults.

#####  

Fluctuation in operatingresults:

 

TheCompany's quarterly operating results have fluctuated and will likely continueto fluctuate. Consequently, its operating results may fail to meet theexpectations of analysts and investors. As a result of industry conditions andthe following specific factors, quarterly operating results are more likely tofluctuate and are more difficult to predict than a typical non-technologycompany of similar size and maturity:

 
|   | - | General  economic condition in the countries where the Company's products are sold;                          |
|--------|---|--------------------------------------------------------------------------------------------------------------|
|   | - | The  timing of new product introductions by the Company and its competitors;                                 |
|   | - | Product  obsolescence;                                                                                       |
|   | - | The  scheduling, rescheduling, and cancellation of large orders by customers;                                |
|   | - | The  cyclical nature of demand for customers' products;                                                      |
|   | - | The  Company's ability to develop new products and achieve volume production at  new fabs;                   |
|   | - | Changes  in manufacturing yields;                                                                            |
|   | - | Adverse  movements in exchange rates, interest rates, or tax rates; and                                      |
|   | - | The  availability of adequate supply commitments from wafer foundries and assembly  and test subcontractors. |

 

Asa result of these and other factors, past financial results are not necessarilygood predictors of the Company's future operating results.

#####  

Fluctuations in stock price:

 

In recent years, the price of the Company's common stockhas fluctuated greatly. These price fluctuations have been rapid and severe,and have left investors little time to react. The price of the common stock maycontinue to fluctuate greatly in the future due to a variety of factors,including shortfalls in revenue or earnings from levels expected by analystsand investors; quarter-to-quarter variations in operating results; andannouncements of technological innovations or new products by other companies.

 

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InJuly 2002, the Company received a written warning from NASDAQ indicating thatits common stock failed to comply with NASDAQ's minimum market value ofpublicly held shares requirement and minimum bid price requirement, as setforth in NASDAQ's Marketplace Rules 4450(a)(2) and 4450(a)(5), respectively.Consequently, the Company's common stock was subject to delisting from theNASDAQ National Market, pursuant to NASDAQ's rules. Under the NASDAQ rules, theCompany had 90 days, or until October 15, 2002, to regain compliance, or NASDAQwould provide notification that the Company would be delisted. The Companyreceived the delisting notification on October 17, 2002. In accordance withNASDAQ's rules, the Company appealed the determination to the NASDAQ ListingQualifications Panel. Subsequently, on November 7, 2002, the Company receivedanother notification from the NASDAQ staff that it had regained compliance withthe Marketplace Rules and was, therefore, being removed from the delistingprocess and NASDAQ had closed the file. However, there can be no assurance thatthe Company's stock will continue to satisfy the NASDAQ continued listingrequirements.

**Industry-relatedRisks**

#####  

Cyclical nature ofsemiconductor industry:

 

Thesemiconductor industry is cyclical. The Company's financial performance hasbeen negatively impacted by significant downturns in the semiconductor industryas a result of general reductions in inventory levels by customers; excessproduction capacity; the cyclical nature of the demand for products ofsemiconductor customers; and accelerated declines in the average sellingprices. When these or other conditions in the industry occur, the Company'soperating results can be harmed.

 

##### 

Competitiveness ofsemiconductor industry:

 

Thesemiconductor industry is highly competitive and many of the Company's directand indirect competitors have substantially greater financial, technological,manufacturing, marketing, and sales resources. If it is unable to competesuccessfully in this environment, the Company's operating results could beharmed.

 

Thecurrent level of competition is high and may increase as the Company's marketexpands. The Company currently competes directly with companies that havedeveloped 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.

 

Ability to maintainadequate technical and management personnel:

 

TheCompany's future success greatly depends on its ability to attract and retainhighly qualified technical and management personnel. As a small company, it isparticularly dependent on a relatively small group of key employees.Competition for skilled technical and management employees is intense in thesemiconductor industry. As a result, the Company may be unable to retain itsexisting key technical and management employees, or attract additionalqualified personnel, which could harm its operating results.

 

### ITEM 2.    PROPERTIES

 

During fiscal 2002, Company's executive offices, as wellas its inventories and principal research and design facilities, were locatedin approximately 21,600 square feet of space in Sunnyvale, California, pursuantto a lease expiring November 30, 2002. On November 1, 2002, the Company movedinto a new space of approximately 15,400 square feet, also in Sunnyvale,California, with a new lease expiring September 30, 2007. The Company alsomaintains additional sales or field application support offices in themetropolitan area of San Diego, California, Melbourne, Florida, and Warminster,England. The Company believes that its facilities will be adequate to meet itsreasonably foreseeable needs and, if necessary, that alternative facilitieswill be available to it on acceptable terms, so as to meet its requirements.

10

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### 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 a materialadverse 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.Should the 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. The claims are separate from the aforementioned Lemelsonclaims. Syndia has not filed suit, but has urged the Company to enter into alicensing agreement with Syndia in order to avoid litigation. The Companyunderstands a similar demand has been made upon other manufacturers ofintegrated circuits. 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,the Company might be required to pay damages and other expenses, which couldhave a material adverse effect on the Company's financial position and resultsof operations. In addition, the Company could be required to alter certain ofits production 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 2002.

11

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**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** |
|--------|-------------------|----------------|---------|
|   |              |           |    |   |
|   | **2000**          |           |    |
|   |              | Fourth quarter | $2.00   | $0.88

  |
|   | **2001**          |           |    |
|   |              | First quarter  | $1.59   | $1.06 |
|   |              | Second quarter | $1.65   | $1.00 |
|   |              | Third quarter  | $1.48   | $0.83 |
|   |              | 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 |

 

**Holders**

 

As of December 9, 2002, there were approximately 3,000holders 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 29, 2002:

 
| 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 |                                                                                          | 846,250  |                                                                          | $2.337   |                                                                                                                                        | 46,750  |
|                           |                          |                                                                                          |          |                                                                          |          |                                                                                                                                        |   |
| Equity  compensation plans not |                          |                                                                                          |          |                                                                          |          |                                                                                                                                        |
|                           | approved  by security holders |                                                                                          | -   |                                                                          | -   |                                                                                                                                        | -   |
|                           |                          |                                                                                          |          |                                                                          |          |                                                                                                                                        |   |
|                           | Total                         |                                                                                          | 846,250  |                                                                          | $2.337   |                                                                                                                                        | 46,750  |

12

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### 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 2002 endedSeptember 29, 2002, its fiscal 2001 ended September 30, 2001, and its fiscal2000 ended October 1, 2000.

 

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

 

(Dollars in thousands, except per share amounts)

 
|                                                                                                |  

Fiscal Years  Ended:                                         | Nine Months

Ended                                                   |
|-----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|----------------------------------------------------------------------|
|                                                                                                | September 29,

2002                                                  | September 30,

2001                                                  | October 1,

2000 | October 3,

1999 | September 30,

1998 |
|                                                                                                |                                                                 |                                                                 |   |   |   |
| Net revenues                                                                                        | $   6,573                                        | $ 10,007                                                   | $ 11,786  | $ 12,922  | $  9,562 

  |
| Research and

    development                                                   |  

$   1,776                                |  

$   1,926                                |  

$   1,661  |  

$   1,367  |  

$     959 

  |
| Net (loss) income                                                                                   | $  (2,124)                                                 | $     (212)                                 | $      522  | $      601  | $ (6,334)

  |
| Basic and diluted

    (loss) income per

    common share  |  

 

$ (0.31)                                        |  

 

$ (0.03)                                        |  

 

$ 0.08  |  

 

$ 0.09  |  

 

$(1.03)

  |
| Weighted average

    common shares

    outstanding (000s) |  

 

6,850                                           |  

 

6,842                                           |  

 

6,772  |  

 

6,635  |  

 

6,178 

  |
| Working capital                                                                                     | $ 13,674                                                   | $ 14,882                                                   | $ 14,115  | $ 12,031  | $   9,385 

  |
| Net property and

    equipment                                                 |  

$      931                |  

$   1,592                                |  

$   2,424  |  

$   3,542  |  

$   4,775 

  |
| Total assets                                                                                        | $ 14,927                                                   | $ 17,231                                                   | $ 17,589  | $ 21,244  | $ 23,502 

  |
| Long-term liabilities                                                                               | $         -   | $          3  | $        38  | $      205  | $      414 

  |
| Shareholders' equity                                                                                | $ 14,627                                                   | $ 16,652                                                   | $ 16,845  | $ 15,934  | $ 14,984  |

###  

13

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### 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." The Company undertakes no obligation topublicly release the results of any revisions to these forward-lookingstatements that may reflect events or circumstances after the date of thisreport.

 

**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 either decreased or remained relatively consistent over thepast few years, its revenues from newer products have actually increased topartially take the place of revenues from mature, second-source products.

 

In addition, the events of September 11, 2001 and the"war on terrorism" resulted in the Company receiving approximately$2.92 million in sales to a defense contractor for the cruise missile programduring fiscal 2002. With the continued terrorism threat and the passing of thedefense appropriations bill, the Company anticipates it will receive additionalrevenues from the military programs during fiscal 2003; however, it cannotcurrently estimate these amounts.

 

The Company anticipates its revenues from the newerproprietary products to increase if the HDTV market begins to ramp up resultingfrom recent FCC actions. In May 2002, the FCC proposed new rules that"contemplate an increasingly severe level of sanctions every six monthsthe licensee fails to construct, beginning with admonishment, followed byissuance of notices of apparent liability for forfeiture, and culminating inrescission of the licensee's DTV authorization." Therefore, if theproposed rules are approved, stations that do not stay on track with theconstruction of their digital facilities will begin facing penalties. Inaddition, in August 2002, the FCC issued an order to television manufacturersthat requires digital tuners to be incorporated into 50 percent of television sets withscreens of 36 or more inches starting in 2004, into 50 percent of sets with screens of 25-35inches starting in 2005, and into all sets with screens of 13 inches or more by2007.

 

Notwithstanding the impact of the stalled transition inthe broadcasting industry and the overall downturn in the economy, the Companyhas greatly strengthened its balance sheet in the last few years. As a resultof the 1998 reorganization, aggressive expenditure controls, limitations oncapital expenditures, and increased revenues from military programs, theCompany has increased its cash balance by 642 percent from fiscal 1998 to fiscal2002, while reducing its total liabilities by 96 percent during the sameperiod.

14

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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 last three fiscalyears consisted of 364 days and ended on September 29, 2002, September 30,2001, and October 1, 2000.

 

**Results of Operations**

 

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 $2.92 million in military parts to a defensecontractor for 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 are relativelyfixed, such as taxes, insurance, and lease expenditures. In addition, duringfiscal 2002, the Company wrote off $39,900 of inventory and expensed aninventory reserve of $337,000, both of which are reflected in cost of revenues.The Company's gross profit decreased 53 percent, from $3,840,000 in fiscal 2001to $1,792,600 in fiscal 2002. In addition, the gross profit as a percentage ofrevenues decreased from 38 percent in fiscal 2001 to 27 percent in fiscal 2002,mainly as a result of generally fixed overhead expenses with lower 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.

 

Fiscal Year Ended September 30, 2001 compared to FiscalYear Ended October 1, 2000

 

Net revenues for fiscal 2001 were $10,007,300, down 15percent from the $11,785,900 recorded in fiscal 2000. The decrease was largelydue to the downturn in the industry and economy, the continued transition toproprietary products, the obsolescence of mature products, and the stalled rampup in high-definition broadcasting.

 

15

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Cost of revenues decreased from $7,278,800 in fiscal 2000to $6,167,300 in fiscal 2001, due to the decrease in sales. While gross profitdecreased from $4,507,100 in fiscal 2000 to $3,840,000 in fiscal 2001, as apercentage of sales, it remained consistent at 38 percent.

 

Research and development expenses were $1,926,100 infiscal 2001 compared to $1,660,600 in fiscal 2000. Research and developmentexpenses as a percentage of net revenues increased from 14 percent in fiscal2000 to 19 percent in fiscal 2001. As the Company continues to focus ondeveloping new products to encourage future revenue growth, it believes it isnecessary to spend resources on research and development, including findingexperienced engineering personnel.

 

Selling, general, and administrative expenses remained consistent($2,091,400 in fiscal 2001 and $2,076,200 in fiscal 2000). As a percentage ofnet revenues, selling, general, and administrative expenses increased slightlyfrom 18 percent in fiscal 2000 to 21 percent in fiscal 2001. This is due tomany selling, general, and administrative costs being relatively fixed, whilerevenues were lower.

 

For fiscal 2001, the Company recorded an operating loss of$177,500, compared to operating income of $770,300 during fiscal 2000. This ismainly due to the lowered revenues, while costs remained relatively unchangedand spending on product development increased.

 

Interest expense decreased 83 percent, from $314,100 infiscal 2000 to $54,700 in fiscal 2001. This was the result of the Companycarrying a zero balance in bank borrowings for much of fiscal 2001 and a largeportion of the Company's capital lease obligations being nearly retired.

 

Due to the decrease in revenues, increased spending onresearch and development, and generally fixed selling, general, and administrativecosts, net earnings decreased from $522,400 in fiscal 2000 to a net loss of$212,000 in fiscal 2001.

 

**Liquidity and Capital Resources**

 

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.

 

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.

 

During fiscal 2000, the Company had $4,088,000 of net cashprovided from operations, resulting from net income of $522,400 and a decreasein accounts receivable of $3,398,100. During fiscal 2000, the Company workedclosely with customers to spread their shipments more evenly throughout aquarter, and maintained close relations to encourage prompt payment. During thefiscal year, the Company used this cash from operations and $389,300 of cashfrom the exercise of warrants and stock options, to reduce accounts payable by$638,400, repay related party notes payable of $250,000, and reduce bankborrowings by $3,490,000.

 

16

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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. The Company's belief is based on the fact that, as ofDecember 9, 2002, it holds approximately $2.5 million in cash reserves and itscash usage for operations is approximately equal to or less than its currentrevenue rate. Therefore, it 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.

 

Working Capital

 

The Company's investment in inventories has beensignificant and will continue to be significant in the future. Over priorperiods, the Company, due to the nature of its business, has maintained highlevels of inventories in order to be responsive to its customer base. As itcontinues to shift from more competitive second source products to proprietarysole source products, the Company believes it will be able to streamline itsinventories. 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 has onlyone 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 determinerecoverability of items on-hand using the lower-of-cost-or-market (LOCOM) andexcess methods. For fiscal 2002 and 2001, the Company did further analysis dueto the slowing economy, the industry down-cycle, and the stalling of some ofits target markets. The Company groups and evaluates products based on theirunderlying die or wafer type (our raw materials, silicon wafers, can generallybe used to make multiple products), to determine the total quantity on-hand andaverage unit costs. For the excess analysis, the Company compares salesquantities for the current fiscal year to the quantity on-hand at the end ofthe year. If the quantity on-hand exceeds the quantity sold during the year,the Company provides a reserve for potentially obsolete or slow-moving items.For the LOCOM analysis, the Company compared the average unit cost to theaverage sales price for items (determined by averaging the upcoming fiscalyear's price list and the average selling price of the products during thecurrent fiscal year). If the average unit cost exceeds the average sales price,the Company provides a reserve. During fiscal 2002 and 2001, these two reservestotaled $337,000 and $753,200, respectively.

 

With the slow economic conditions continuing, the Companyfelt it necessary to provide additional reserves against inventory in fiscal2001. Using forecasted sales and reviews of raw materials and work-in-process,the Company directly wrote off $634,100 of inventory, and determined anadditional reserve of $1,114,500 was necessary. During fiscal 2002, the Companydirectly wrote off $1,907,600 of its inventory, using its prior year reserve of$1,867,700, plus an additional $39,900 against cost of revenues. The Companybelieves its current reserve of $337,000 for LOCOM and excess inventoryprovides a reasonable estimate of the recoverability of inventories afterapplying the large previously described write-offs.

 

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 portions ofinventory to write-off at a future date.

17

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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 resulted in year-endaccounts receivable balances being at their highest point for the respectiveperiod. In the past few years, the Company has been able to reduce its accountsreceivable levels through increased interaction with its customers to spreadtheir orders and shipments more evenly between months and through added pressureto pay within the Company's terms. However, the accounts receivable balancesfor fiscal 2002 and 2001 increased due to approximately $685,100 and$2,654,900, respectively, of the ending accounts receivable balance being fromone customer, who is a distributor holding products that are critical tocertain defense programs. These receivables were subsequently collected afterthe respective fiscal year-ends.

 

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. The Company's belief is based on the factthat, as of December 9, 2002, it holds approximately $2.5 million in cashreserves and its anticipated cash usage for operations is approximately equalto or less than its current revenue rate. Therefore, it believes it can coverits cash operating expenses using future revenues, while saving current cashreserves for the stock repurchase plan and future capital expenditures, such asmask tooling for new products.

 

New Accounting Pronouncements

 

In April 2002, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145,"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASBStatement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFASNo. 4, "Reporting Gains and Losses from Extinguishment of Debt," andan amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Madeto Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44,"Accounting for Intangible Assets of Motor Carriers." Further, SFASNo. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects that are similar to sale-leaseback transactions. In addition, it alsoamends other existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions. SFAS No. 145 is effective for financial statements issued on orafter May 15, 2002. The adoption of SFAS No. 145 resulted in no material impacton the Company's financial position, results of operations, or cash flows.

 

In July 2002, the FASB issued SFAS No. 146,"Accounting for Costs Associated with Exit or Disposal Activities."SFAS No. 146 requires that a liability for costs associated with an exit ordisposal activity be recognized and measured initially at fair value only whenthe liability is incurred. SFAS No. 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. The Company does notexpect the adoption of SFAS No. 146 to a material impact on the Company'sfinancial position, results of operations, or cash flows.

 

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

 

The Company conducts all its transactions, including thosewith foreign suppliers and customers, in U.S. dollars. It is therefore notdirectly subject to the risks of foreign currency fluctuations and does nothedge or otherwise deal in currency instruments in an attempt to minimize suchrisks. However, demand from foreign customers and the ability or willingness offoreign suppliers to perform their obligations to the Company may be affectedby the relative change in value of such customer or supplier's domesticcurrency to the value of the U.S. dollar. Furthermore, changes in the relativevalue of the U.S. dollar may change the price of the Company's prices relativeto the prices of its foreign competitors. The Company also does not hold anymarket risk sensitive instruments that are not considered cash under generallyaccepted accounting principles.

18

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**ITEM 8    FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

** **

**Index to Financial Statements and Financial StatementSchedules**

 

 
| FINANCIAL STATEMENTS:                                                                                     | Page            |
|-----------------------------------------------------------------------------------------------------------|-----------------|
|                                                                                                      |            |   |
| Independent Auditors' Report                                                                              | 20              |
| Report of Independent Certified Public Accountants                                                        | 21              |
| Balance Sheets, September 29, 2002 and September 30,  2001                                                | 22              |
| Statements of Operations, fiscal years ended September  29, 2002, September 30, 2001, and October 1, 2000 | 23              |
| Statements of Shareholders' Equity, fiscal years ended  September 29, 2002, September 30, 2001, and       |            |
|                                                                                                      | October 1, 2000 | 24 |
| Statements of Cash Flows, fiscal years ended September  29, 2002, September 30, 2001, and October 1, 2000 | 25              |
| Summary of Accounting Policies                                                                            | 26              |
| Notes to Financial Statements                                                                             | 30              |
| Quarterly Financial Data (unaudited), fiscal years ended  September 29, 2002, September 30, 2001, and     |            |
|                                                                                                      | October 1, 2000 | 38 |

** **

**Financial Statement Schedule**

** **
| Schedule II - Valuation and Qualifying Accounts | 45 |
|-------------------------------------------------|----|

 

19

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**Independent Auditors' Report**

 

 

 

To the Board of Directors

LOGIC Devices Incorporated

Sunnyvale, California

 

We have audited the accompanying balance sheet as ofSeptember 29, 2002 of LOGIC Devices Incorporated, and the related statements ofoperations, shareholders' equity, and cash flows for the fiscal year thenended.  We have also audited theaccompanying consolidated balance sheet as of September 30, 2001 of LOGICDevices Incorporated, and the related consolidated statements of operations,shareholders' 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 financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. The consolidated financial statementsof LOGIC Devices Incorporated for the fiscal year ended October 1, 2000, andthe 2000 information included in Schedule II, were audited by other auditors,whose report 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 standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the 2002 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 consolidated financial statements present fairly, inall material respects, the consolidated financial position of LOGIC DevicesIncorporated as of September 30, 2001, and the results of its operations andits cash flows for the fiscal year then ended in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, Schedule II, when considered in relation to the basic financialstatements taken as a whole, presents fairly, in all material respects, the2002 and 2001 information set forth therein.

 

  /s/  Hood and StrongLLP   

Hood and Strong LLP

 

 

Menlo Park, California

November 6, 2002

20

----

 

 

**Report of Independent Certified Public Accountants**

 

 

 

Board of Directors and Shareholders

LOGIC Devices Incorporated

Sunnyvale, California

 

We have audited theaccompanying consolidated statements of operations, shareholders' equity, andcash flows for the fiscal year ended October 1, 2000. We have also auditedSchedule II - Valuation and Qualifying Accounts (the Schedule) as of and forthe year ended October 1, 2000. These financial statements and the Schedule arethe responsibility of the Company's management. Our responsibility is toexpress an opinion on these financial statements and the Schedule based on ouraudits. 

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsand Schedule are free of material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements and Schedule. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements and Schedule.We believe our audit provides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and cash flows of LOGIC DevicesIncorporated for the fiscal year ended October 1, 2000, in conformity withaccounting principles generally accepted in the United States of America.

 

Also, in our opinion, the Schedule presents fairly, in allmaterial respects, the information set forth therein.

 

  /s/  BDO Seidman,LLP   

BDO Seidman, LLP

 

 

San Francisco, California

November 7, 2000

21

----

**LOGIC Devices Incorporated**

** **

**Balance Sheets**

 

 
|                                                  |                                                                                                                                     |                                               | September 29,

2002             |                                               | September 30,

2001             |
|-------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------|---------------------------------|----------------------------------------------------|---------------------------------|
|                                                  |                                                                                                                                     |                                               |                            |                                               | (Consolidated)                  |
| ASSETS

                                         |                                                                                                                                     |                                               |                            |
| Current assets:                                       |                                                                                                                                     |                                               |                            |
|                                                  | Cash and cash equivalents                                                                                                                | $   1,061,100                  |                            | $      217,500  |
|                                                  | Accounts receivable, net of allowance for doubtful  accounts of

  $20,000 (Notes 9, 10, and 13)                               |  

2,795,900                             |                            |  

3,352,200                             |
|                                                  | Inventories (Notes 1, 9, and 13)                                                                                                         | 9,591,100                                     |                            | 11,695,700                                    |
|                                                  | Prepaid expenses (Note 3)                                                                                                                | 525,900                                       |                            | 192,600                                       |
|                                                  |                                                                                                                                     |                                               | Total current assets            | 13,974,000                                    |                            | 15,458,000 

  |
| Property and equipment, net (Notes 2, 7, and 11)      | 930,900                                                                                                                             |                                               | 1,592,000                  |
| Other assets (Note 4)                                 | 21,700                                                                                                                              |                                               | 181,000                    |
|                                                  |                                                                                                                                     |                                               |  

$ 14,926,600  |                                               |  

$ 17,231,000  |
|                                                  |                                                                                                                                     |                                               |                            |                                               |                            |
|  

LIABILITIES AND SHAREHOLDERS' EQUITY:

  |                                                                                                                                     |                                               |                            |
| Current liabilities:                                  |                                                                                                                                     |                                               |                            |
|                                                  | Accounts payable                                                                                                                         | $      129,100  |                            | $      268,100  |
|                                                  | Accrued payroll and vacation                                                                                                             | 148,000                                       |                            | 190,900                                       |
|                                                  | Accrued commissions                                                                                                                      | 18,800                                        |                            | 54,600                                        |
|                                                  | Other accrued expenses                                                                                                                   | 900                                           |                            | 5,500                                         |
|                                                  | Income taxes payable (Note 5)                                                                                                            | -                                        |                            | 1,900                                         |
|                                                  | Capital lease obligations, current portion (Notes 2, 7,  and 11)                                                                         | 2,900                                         |                            | 54,700                                        |
|                                                  |                                                                                                                                     |                                               | Total current liabilities       | 299,700                                       |                            | 575,700 

  |
| Capital lease obligations, net of current portion     | -                                                                                                                              |                                               | 2,900                      |
|  

Total liabilities                             |  

299,700                                                                                                                     |                                               |  

578,600            |
|                                                  |                                                                                                                                     |                                               |                            |                                               |                            |
| Commitments and contingencies (Note 7)

         |                                                                                                                                     |                                               |                            |
| Shareholders' equity (Notes 6, 8, and 14):            |                                                                                                                                     |                                               |                            |
|                                                  | 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;

  6,852,888 and 6,841,888 shares issued and  outstanding           |  

18,539,900                            |                            |  

18,522,700                            |
|                                                  | Additional paid-in capital                                                                                                               | 100,000                                       |                            | 19,000                                        |
|                                                  | Accumulated deficit                                                                                                                      | (4,013,000)                                        |                            | (1,889,300)                                        |
|  

Total shareholders' equity                    |  

14,626,900                                                                                                                  |                                               |  

16,652,400         |
|  

                                         |                                                                                                                                     |                                               |  

$ 14,926,600  |                                               |  

$ 17,231,000  |

 

 

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

22

----

**LOGIC Devices Incorporated**

** **

**Statements of Operations**

 

 
|                                                       | Fiscal Years  Ended:                 |
|------------------------------------------------------------|--------------------------------------|
|                                                       | September 29,

2002                  |   | September 30,

2001 |   | October 1,

2000 |
|  

                                              |                                 |   | (Consolidated) |   | (Consolidated) |
| Net revenues (Notes 9 and 13)

                       | $  6,572,600          |   | $ 10,007,300  |   | $ 11,785,900  |
| Cost of revenues                                           | 4,780,000                       |   | 6,167,300  |   | 7,278,800  |
|  

Gross profit (Note 13)                             |  

1,792,600               |   |  

3,840,000  |   |  

4,507,100  |
|  

Operating expenses:                                |                                 |   |   |   |   |
|                                                       | Research and development             | 1,775,700  |   | 1,926,100  |   | 1,660,600  |
|                                                       | Selling, general, and administrative | 2,138,400  |   | 2,091,400  |   | 2,076,200  |
|  

Total operating expenses                           |  

3,914,100               |   |  

4,017,500  |   |  

3,736,800  |
|  

(Loss) income from operations                      |  

(2,121,500)                  |   |  

(177,500) |   |  

770,300  |
|  

Other (income) expense:                            |                                 |   |   |   |   |
|                                                       | Interest expense                     | 37,900  |   | 54,700  |   | 314,100  |
|                                                       | Interest income                      | (7,800) |   | (10,100) |   | (8,100) |
|                                                       | Other income, net                    | (37,300) |   | (20,500) |   | (47,900) |
|  

Total other (income) expense                       |  

(7,200)                      |   |  

24,100  |   |  

258,100  |
|  

(Loss) income before provision for income taxes    |  

(2,114,300)                  |   |  

(201,600) |   |  

512,200  |
|  

(Provision) benefit for income taxes (Note 5)      |  

(9,400)                      |   |  

(10,400) |   |  

10,200  |
|  

Net (loss) income                                  |  

$ (2,123,700)           |   |  

$    (212,000) |   |  

$     522,400  |
|  

Basic and diluted (loss) income per share          |  

$ (0.31)                     |   |  

$ (0.03) |   |  

$  0.08  |
|  

Basic weighted average common shares outstanding   |  

6,850,096               |   |  

6,841,888  |   |  

6,771,826  |
|  

Diluted weighted average common shares outstanding |  

6,850,096               |   |  

6,841,888  |   |  

6,892,610  |

 

 

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

  23
**LOGIC Devices Incorporated**

** **

**Statements of Shareholders' Equity**

 

 

 

Common  Stock

 

  Additional

Paid-in

Capital

 

 

  (Accumulated)

Deficit

 

 

 

Total

Shares

 

Amount

(Consolidated)

Balances, October 1, 1999

 

6,650,488 

 

 

$ 18,133,400 

 

 

$           -  

 

 

$ (2,199,700)

 

 

$ 15,933,700 

 

Issuance of common stock  on

    exercise of  stock options

    (Note 8)

 

 

91,400 
 

 

 

242,400 

 

 

 

-  

 

 

 

-  

 

 

 

242,400 

 

Issuance of common stock

 on exercise of warrants (Note 8)

 

 

100,000 

 

 

 

146,900 

 

 

 

-  

 

 

 

-  

 

 

 

146,900 

 

Net income

 

-  

 

 

-  

 

 

-  

 

 

522,400 

 

 

522,400 

 

(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 

 

 

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

 

24

**LOGIC Devices Incorporated**

** **

**Statements of Cash Flows**

 

 

 

 

 

 

Fiscal Years  Ended:

 

 

 

 

September 29,

2002

 

September 30,

2001

 

October 1,

2000

 

Cash flows from operating activities:

 

 

(Consolidated)

 

(Consolidated)

 

Net (loss) income

$ (2,123,700)

 

$    (212,000)

 

$     522,400 

 

Adjustments to reconcile net (loss) income to net

  cash provided by (used in) operating  activities:

 

 

 

 

 

 

 

Depreciation and amortization

814,200 

 

1,181,200 

 

1,357,200 

 

 

Loss (gain) on disposal of capital equipment

-  

 

3,600 

 

(48,000)

 

 

Allowance for doubtful accounts

-  

 

-  

 

(233,500)

 

 

Issuance of common stock warrants for services

81,000 

 

19,000 

 

-  

 

 

Changes in current assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

556,300 

 

(1,703,400)

 

3,398,100 

 

 

 

Inventories

2,104,600 

 

486,600 

 

(344,000)

 

 

 

Prepaid expenses

(269,300)

 

42,700 

 

4,100 

 

 

 

Income taxes receivable

-  

 

-  

 

68,000 

 

 

 

Accounts payable

(139,000)

 

76,100 

 

(638,400)

 

 

 

Accrued payroll and vacation

(42,900)

 

37,400 

 

(52,400)

 

 

 

Accrued commissions

(35,800)

 

(60,700)

 

75,300 

 

 

 

Other accrued expenses

(4,600)

 

(39,100)

 

(26,000)

 

 

 

Income taxes payable

(1,900)

 

(3,300)

 

5,200 

Net cash provided by (used in) operating activities

938,900

 

(171,900)

 

4,088,000 

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

(43,000)

 

(163,200)

 

(247,800)

 

Proceeds from sale of capital equipment

-  

 

-  

 

158,100 

 

Other assets

(14,800)

 

9,000 

 

49,500 

Net cash used in investing activities

(57,800)

 

(154,200)

 

(40,200)

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock

17,200 

 

-  

 

389,300 

 

Proceeds from bank borrowings

1,050,000 

 

500,000 

 

-  

 

Repayments of bank borrowings

(1,050,000)

 

(500,000)

 

(3,490,000)

 

Payment of notes payable, related party

-  

 

-  

 

(250,000)

 

Payments of capital lease obligations

(54,700)

 

(209,700)

 

(181,500)

Net cash used in financing activities

(37,500)

 

(209,700)

 

(3,532,200)

 

Net increase (decrease) in cash and cash equivalents

 

843,600 

 

 

(535,800)

 

 

515,600 

 

Cash and cash equivalents, beginning of period

 

217,500 

 

 

753,300 

 

 

237,700 

 

Cash and cash equivalents, end of period

 

$  1,061,100 

 

 

$     217,500 

 

 

$     753,300 

 

 

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

 

25

**LOGIC Devices Incorporated**

 

**Summary of Accounting Policies**

 

 

*The Company*

 

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 46 percent of theCompany's net revenues were derived from original equipment manufacturers,while sales through foreign and domestic distributors accounted forapproximately 54 percent of net revenues. Approximately 67 percent of theCompany's net revenues were derived from within the United States andapproximately 33 percent from foreign sales.

 

*Principles of Consolidation*

 

Theaccompanying fiscal 2001 and 2000 consolidated financial statements include theaccounts of the Company and its wholly owned subsidiary, LOGIC DevicesInternational, a foreign sales corporation. All significant intercompanyaccounts and transactions were eliminated in consolidation. The Company'sfiscal 2002 financial statements are not consolidated, as it dissolved theforeign sales corporation on December 31, 2001.

 

*Change in Fiscal Year*

 

EffectiveSeptember 16, 1999, the Company adopted a fiscal year consisting of 52 weeks ofseven days, ending on Sundays. As a result of this change, the Company's 2002,2001, and 2000 fiscal years ended on September 29, September 30, and October 1,respectively.

 

*Reclassifications*

 

Certainitems were reclassified in the consolidated financial statements for fiscal2000 to conform to the basis used in the consolidated financial statements forfiscal 2001.

 

*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.

26

**LOGIC Devices Incorporated**

 

**Summary of Accounting Policies**

 

 

*Inventories*

 

Inventoriesare stated at the lower of cost (first-in, first-out) or market (Notes 1 and10). Cost includes the purchase 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 arecapitalized by the Company and are amortized on a straight-line basis over theshorter of the related product life cycle or five years.

 

*Excess of Cost OverFair Value of Net Assets Acquired*

 

Excessof cost over the fair value of net assets acquired (or goodwill) generally isamortized on a straight-line basis over 40 years. The carrying amount ofgoodwill is reviewed if facts and circumstances suggest that it may beimpaired. If this review indicates that goodwill will not be recoverable, asdetermined based on the estimated undiscounted cash flows of the entityacquired over the remaining amortization period, the carrying amount of thegoodwill is reduced by the estimated shortfall of cash flows. During the yearended September 29, 2002, the Company determined the goodwill acquired in thepurchase of assets of Star Semiconductor Corporation in 1995 to be impaired andhas consequently written down the net book value of approximately $80,000 atSeptember 29, 2002 to zero. The Company no longer produces the productsacquired in the purchase and believes that the product line has reached the endof its useful life.

 

*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.

27

**LOGIC Devices Incorporated**

 

**Summary of Accounting Policies**

 

 

*Income (Loss) Per Common Share*

 

Basicincome (loss) per share is computed by dividing the net income (loss)attributable to common shares, by the weighted average number of common sharesoutstanding during each period. Diluted income (loss) per share is similar tobasic income (loss) per share, except that the weighted average number ofcommon shares outstanding is increased to reflect the dilutive effect ofpotential common shares, such as those issuable upon the exercise of stockoptions or warrants, contingent shares, and the conversion of preferred stock,as if they had been issued.

 

Forthe fiscal years ended September 29, 2002, September 30, 2001, and October 1,2000, there is no difference between basic and diluted income (loss) per share,as there were no dilutive stock options in fiscal 2002 and 2001, and the numberof stock options with a dilutive effect was minimal in fiscal 2000. For fiscal2002, 2001, and 2000, options to purchase 961,800, 1,001,500, and 754,800shares of common stock were excluded from the computation of diluted income(loss) per share since their effect would be antidilutive.

 

*Fair Value of Financial Instruments*

* *

Thecarrying amounts of cash and cash equivalents, accounts receivable, andaccounts payable approximate fair value because of the short maturity of theseitems. The Company's bank borrowings approximate fair value because theinterest rate fluctuates with changes in the prime rate. The Company's capitallease obligations approximate fair value, based on rates currently availablefrom a bank for debt with similar terms and maturities.

 

*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*

 

TheCompany has adopted the provisions of SFAS No. 123, "Accounting forStock-Based Compensation." Under this standard, companies are encouraged,but not required, to adopt the fair value method of accounting for employeestock-based transactions. Under the fair value method, compensation cost ismeasured at the grant date based on the fair value of the award and isrecognized over the service period, which is usually the vesting period.Companies are permitted to continue to account for employee stock-basedtransactions under Accounting Principles Board (APB) No. 25, "Accountingfor Stock Issued to Employees," but are required to disclose pro forma netincome (loss) and income (loss) per share as if the fair value method had beenadopted. The Company has elected to continue to account for employeestock-based compensation under APB No. 25.

 

*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.

28

**LOGIC Devices Incorporated**

 

**Summary of Accounting Policies**

 

 

*Adoption of NewAccounting Pronouncements*

 

In April 2002, the Financial Accounting Standards Board(FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and64, Amendment of FASB Statement No. 13, and Technical Corrections." SFASNo. 145 rescinds SFAS No. 4, "Reporting Gains and Losses fromExtinguishment of Debt, and an amendment of that Statement, SFAS No. 64,"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."It also rescinds SFAS No. 44, "Accounting for Intangible Assets of MotorCarriers." Further, SFAS No. 145 amends SFAS No. 13, "Accounting forLeases," to eliminate an inconsistency between the required accounting forsale-leaseback transactions and the required accounting for certain leasemodifications that have economic effects that are similar to sale-leasebacktransactions. In addition, it also amends other existing authoritativepronouncements to make various technical corrections, clarify meanings, ordescribe their applicability under changed conditions. SFAS No. 145 iseffective for financial statements issued on or after May 15, 2002. Theadoption of SFAS No. 145 resulted in no material impact on the Company'sfinancial position, results of operations, or cash flows.

 

In July 2002, the FASB issued SFAS No. 146,"Accounting for Costs Associated with Exit or Disposal Activities."SFAS No. 146 requires that a liability for costs associated with an exit ordisposal activity be recognized and measured initially at fair value only whenthe liability is incurred. SFAS No. 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. The Company does notexpect the adoption of SFAS No. 146 to have a material impact on the Company'sfinancial position, results of operations, or cash flows.

 

29

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

**1.       Inventories**

 

A summary of inventories follows:

 

 

*September 29,*

*2002*

 

*September 30,*

*2001*

 

Raw materials

 

$  1,232,600 

 

 

$  1,544,800 

Work-in-process

6,967,500 

 

6,801,900 

Finished goods

1,391,000 

 

3,349,000 

 

 

$  9,591,100 

 

 

$11,695,700 

 

**2.       Propertyand Equipment**

 

A summary of property and equipment follows:

 

 

*September 29,*

*2002*

 

*September 30,*

*2001*

 

Equipment

 

$ 5,082,200 

 

 

$ 5,047,500 

Tooling costs

2,175,100 

 

2,175,100 

Leasehold  improvements

77,600 

 

69,300 

 

7,334,900 

 

7,291,900 

 

Less  accumulated depreciation and amortization

 

6,404,000 

 

 

5,699,900 

 

 

$    930,900 

 

 

$ 1,592,000 

 

Equipment under capital lease obligations aggregated $357,400 and$397,600 as of September 29, 2002 and September 30, 2001, with relatedaccumulated amortization of $317,200 and $257,400, respectively. For fiscal2002, 2001, and 2000, amortization expense for equipment under capital leaseobligations was $59,800, $76,500, and $120,000, respectively.

 

**3.       PrepaidExpenses**

 

A summary of prepaid expenses follows:

 

 

*September 29,*

*2002*

 

*September 30,*

*2001*

 

 

 

 

Software  licensing fees

$ 154,300 

 

$   24,300 

Insurance

141,500 

 

11,900 

Rent and  deposits

129,700 

 

500 

Consulting fees

40,700 

 

-  

Annual report  costs

20,300 

 

27,400 

Recruiting,  education, and immigration costs

2,900 

 

80,500 

Other prepaid  expenses

36,500 

 

48,000 

 

 

 

$ 525,900 

 

 

$ 192,600 

 

30

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

**4.        Other Assets**

 

A summary of other assets follows:

 

 

*September 29,*

*2002*

 

*September 30,*

*2001*

 

Capitalized  software, net of accumulated amortization of $2,342,500

 

$         -  

 

 

$          -  

Excess costs  over fair value of net assets acquired, net of

    accumulated  amortization of $309,500 and $199,200, respectively

 

-  

 

 

110,300 

Deposits and  other assets

21,700 

 

70,700 

 

 

$ 21,700 

 

 

$181,000 

 

In fiscal 2002, 2001, and 2000, amortization expense for other assetstotaled $30,300, $155,100, and $178,300, respectively. In 1995, the Companyacquired certain intangible assets from a semiconductor manufacturer. The Companyused the acquired technology to produce and sell proprietary digital signalprocessors. During the current fiscal year, the Company determined that theproprietary products were at the end of their product life cycle and recordedan impairment expense of approximately $80,000, which was included in selling,general, and administrative expense.

** **

**5.        (Provision) Benefit for Income Taxes**

 

The provision for income taxes for fiscal 2002 and 2001 includescurrent state expenses of $9,400 and $10,400, respectively. In fiscal 2000, thebenefit from income taxes was comprised of a current federal benefit of$21,800, offset by a current state expense of $11,600, for a net benefit of$10,200.

 

The following summarizes the difference between the income tax(expense) benefit and the amount computed by applying the Federal income taxrate of 34 percent in fiscal 2002, 2001, and 2000, to (loss) income beforetaxes:

 

 

 

*2002*

 

*2001*

 

*2000*

 

Federal income  tax (provision) benefit at

 

 

 

 

 

 

statutory rate

$ 718,900 

 

$   68,500 

 

$ (174,100)

Tax credit  carryforwards originated in current

 

 

 

 

 

 

year

44,500 

 

60,800 

 

34,700 

State operating  loss carryforward originated in

 

 

 

 

 

 

current year

73,500 

 

-  

 

-  

State income  taxes, net of federal tax benefit

(6,200)

 

(7,000)

 

(7,700)

Common stock  option and warrant exercises

-  

 

-  

 

171,000 

Adjustment of  prior year net operating loss

 

 

 

 

 

 

carryforwards  before valuation allowance

(58,600)

 

(275,000)

 

-  

Miscellaneous  permanent differences and

 

 

 

 

 

 

adjustments of  estimated income tax accruals

12,100 

 

40,400 

 

50,000 

Change in  valuation allowance attributable to:

 

 

 

 

 

 

Net operating  loss and tax credit

 

 

 

 

 

 

 

carryforwards  not recognized

(877,900)

 

163,300 

 

-  

 

Valuation of  net deferred assets

84,300 

 

(61,400)

 

(63,700)

 

 

 

 

$    (9,400)

 

 

$  (10,400)

 

 

$   10,200 

 

31

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

Deferred tax assets and liabilities comprise the following:

 

 

*September 29,*

*2002*

 

*September 30,*

*2001*

 

Deferred tax  assets:

 

 

 

 

Net operating  loss carryforwards

$  2,060,200 

 

$  1,226,800 

 

Reserves not  currently deductible

987,800 

 

1,088,200 

 

Capitalized  inventory costs

254,700 

 

312,600 

 

Tax credit  carryforwards

502,300 

 

457,800 

 

Other

54,300 

 

42,200 

 

 

 

Gross deferred  tax assets

 

3,859,300 

 

 

3,127,600 

 

Deferred tax  liabilities:

 

 

 

 

State tax  benefit

(328,300)

 

(290,000)

 

Depreciation

-  

 

(100,200)

 

 

 

Gross deferred  tax liabilities

 

(328,300)

 

 

(390,200)

 

Net deferred  tax assets

 

3,531,000 

 

 

2,737,400 

 

Valuation  allowance

 

(3,531,000)

 

 

(2,737,400)

 

Net deferred  taxes

 

$                -  

 

 

$                -  

 

Thevaluation allowance was increased $793,600 from fiscal 2001 to fiscal 2002.This was the result of an increase in the net deferred tax assets, primarilynet operating loss carryforwards (NOLs) and capitalized inventory costs.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 29, 2002, the Company has Federal and State NOLs totalingapproximately $5,177,500 and $3,222,100, respectively, available to offsetfuture taxable income. These NOLs expire at various times through 2022 and2007, respectively. The Company also has Federal and State research anddevelopment credit carryforwards totaling approximately $104,300 and $109,200,respectively, expiring at various times through 2022. The Company has statemanufacturing tax credit carryforwards totaling approximately $288,700, whichexpire at various times through 2012.

 

**6.       RelatedParty Transactions**

 

During fiscal 2001, the Companyrecognized $19,000 of expense related to the issuance of 67,000 stock optionsto related party consultants, with an exercise price of $1.9375. The Companyused the Black-Scholes pricing model for valuating the options. Please see Note8 for the terms of the options and the assumptions used in the pricing model.

32

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

**7.       Commitmentsand Contingencies**

 

The Company leases its facilities and certain equipment under capitalleases. 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 $805,200, $816,700, and $981,700 forfiscal 2002, 2001, and 2000, respectively.

 

A summary of future minimum lease payments under capitalized leases,together with the present value of such minimum lease payments, and futureminimum payments required under non-cancelable operating leases with terms inexcess of one year, follows:

 

 

*Capitalized*

*Leases*

 

*Operating*

*Leases*

 

*Fiscal years  ending:*

 

 

 

 

 

September 28,  2003

 

$   3,000 

 

 

$   421,700 

 

September 27,  2004

-  

 

420,600 

 

September 26,  2005

-  

 

315,500 

 

September 25,  2006

-  

 

226,900 

 

September 24, 2007

-  

 

227,600 

 

Thereafter

-  

 

19,000 

 

 

Future minimum  lease payments

 

3,000 

 

 

$ 1,631,300 

 

 

Less amounts  representing interest (10.75%)

 

100 

 

 

 

 

Present value  of future minimum lease payments

 

2,900

 

 

 

 

Less current  portion

 

-  

 

 

 

 

 

 

$    2,900 

 

 

 

Sublease receipts aggregating approximately $8,800 reduced the futureoperating lease commitment for the fiscal year ending September 28, 2003.

** **

**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 will expire on October 5, 2003. The Company valuedthe warrants using the Black-Scholes valuation model, with the followingassumptions: expected life of 18 months, risk-free interest rate of 4.65percent, volatility of 97.5 percent, and a dividend yield of zero.

 

33

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

*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 29, 2002, September 30, 2001, and October 1, 2000, and changes duringthe fiscal years then ended, is presented in the following table:

 

 

Options  Outstanding

 

September 29,  2002

 

September 30,  2001

 

October 1, 2000

 

 

Shares

 

Wtd Avg

Ex. Price

 

 

Shares

 

Wtd Avg

Ex. Price

 

 

Shares

 

Wtd Avg

Ex. Price

 

Beginning

 

1,001,500 

 

 

$ 2.705 

 

 

754,800 

 

 

$ 3.076 

 

 

1,061,400 

 

 

$ 3.087 

Granted

240,000 

 

$ 1.137 

 

314,500 

 

$ 1.835 

 

115,000 

 

$ 3.832 

Exercised

(11,000)

 

$ 1.565 

 

-  

 

-  

 

(91,400)

 

$ 2.653 

Forfeited

(268,750)

 

$ 2.668 

 

(67,800)

 

$ 2.582 

 

(330,200)

 

$ 3.444 

 

Ending

 

961,750 

 

 

$ 2.337 

 

 

1,001,500 

 

 

$ 2.705 

 

 

754,800 

 

 

$ 3.076

 

Exercisable at

   year-end

 

 

846,250 

 

 

 

 

 

784,200 

 

 

 

 

 

656,900 

 

 

 

Weighted-average fair value of

   options granted during year

 

 

 

$ 1.137 

 

 

 

 

 

$ 1.835 

 

 

 

 

 

$ 3.832 

 

 

The following table summarizesinformation about common stock options outstanding as of September 29, 2002:

 

 

 

 

Options  Outstanding

 

Options  Exercisable

 

 

Range of

Exercise Prices

 

 

Number

Outstanding

at 09/29/02

 

Wtd Avg

Remaining

Contractual

Life

 

 

Wtd Avg

Exercise

Price

 

 

Number

Exercisable

at 09/29/02

 

 

Wtd Avg

Exercise

Price

 

$0.000 - 2.000

 

 

477,250 

 

 

6.25 years

 

 

$ 1.488 

 

 

370,500 

 

 

$ 1.391 

$2.001 - 4.000

 

432,500 

 

3.16 years

 

$ 2.818 

 

423,750 

 

$ 2.827 

$4.001 - 6.000

 

40,000 

 

3.00 years

 

$ 5.563 

 

40,000 

 

$ 5.563 

$6.001 - 8.000

 

12,000 

 

3.17 years

 

$ 8.000 

 

12,000 

 

$ 8.000 

 

 

 

961,750 

 

 

 

 

$ 2.337 

 

 

846,250 

 

 

$ 2.401 

 

34

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

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 $243,900, $97,000, and $509,200 inrelated compensation expenses during the fiscal 2002, 2001, and 2000,respectively. Under the provisions of SFAS No. 123, the pro forma net (loss)income and basic and diluted (loss) income per share for the fiscal years endedSeptember 29, 2002, September 30, 2001, and October 1, 2000, follows:

 

 

*2002*

 

*2001*

 

*2000*

* *

*Net (loss) income*

 

 

 

 

 

 

As reported

$ (2,123,700)

 

$   (212,000)

 

$    522,400 

 

 

Pro forma

 

$ (2,367,600)

 

 

$   (299,000)

 

 

$      13,200 

* *

*Basic and diluted  (loss) earnings per share*

 

 

 

 

 

 

As reported

$  (0.31)

 

$  (0.03)

 

$   0.08 

 

 

Pro forma

 

$  (0.35)

 

 

$  (0.04)

 

 

$   0.00 

 

The pro forma informationprovided above was estimated at the date of grant, using the Black-Scholesoption-pricing model, with the following weighted average assumptions:

 

 

*2002*

 

*2001*

 

*2000*

 

Expected life  (in years)

 

3.0 

 

 

3.0 

 

 

3.0 

Risk-free  interest rate

2.32%

 

3.5%

 

6.0%

Volatility

97.6%

 

90.4%

 

72.0%

Dividend yield

0.0 

 

0.0 

 

0.0 

 

The Black-Scholes valuationmodel was developed for use in estimating the fair value of traded options thathave no vesting restrictions and are fully transferable. Because the Company'soptions have characteristics significantly different from those of tradingoptions, management believes that the existing pricing models do notnecessarily provide a reliable single measure of the fair value of its options.

 

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

 

*Major Customers and Suppliers*

 

For fiscal 2002, two customersaccounted for approximately 21 and 24 percent of net revenues, with accountsreceivable of $685,200 and $1,506,600, respectively, as of September 29, 2002.For fiscal 2001, one customer accounted for approximately 32 percent of netrevenues, with an accounts receivable balance of $2,654,900 as of September 30,2001. For fiscal 2000, two customers accounted for approximately 31 percent and10 percent of net revenues, one of which was the Company's exclusive domesticdistributor, with accounts receivable of $615,200 and $209,800, respectively,as of October 1, 2000.

 

The Company had one supplierthat comprised approximately 23 percent of its purchases in fiscal 2001, whileno suppliers comprised 10 percent or more of purchases in fiscal 2002 and 2000.

35

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

*Export Sales*

 

 

*2002*

 

*2001*

 

*2000*

 

Western Europe

 

$ 1,682,500 

 

 

$ 2,652,800 

 

 

$ 3,520,500 

Far East

363,300 

 

392,600 

 

1,106,700 

Other

94,000 

 

180,500 

 

19,000 

 

 

 

$ 2,139,800 

 

 

$ 3,225,900 

 

 

$ 4,646,200 

 

No one country comprised morethan 10 percent or more of net revenues in fiscal 2002, 2001, or 2000.

** **

**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 itsproducts, end-customers, and geographic sales areas. The Company performscredit evaluations of its customers' financial condition whenever necessary.The Company generally does not require cash collateral or other security tosupport customer 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. 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.    Statement of Cash Flows**

 

The Company paid $37,900,$54,700, and $314,100 for interest during fiscal 2002, 2001, and 2000,respectively. The Company paid $9,400, $15,900, and $3,800 for income taxesduring fiscal 2002, 2001, and 2000, respectively. 

 

Non-cash investing and financialactivities for fiscal 2001 and 2000 consisted of the acquisition of $34,800 and$40,200 of equipment under capital leases, respectively. In addition, theCompany extended 150,000 common stock warrants to a distributor, recorded at anamount of $81,000 in fiscal 2002, and issued 67,000 common stock options to aconsultant, recorded at an amount of $19,000 in fiscal 2001.

36

**LOGIC Devices Incorporated**

 

**Notes to Financial Statements**

 

 

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

 

The Company has a 401(k) SavingsPlan (the Plan), which was adopted on September 1, 2000. Employees may makevoluntary contributions and the Company has the discretion to make matchingcontributions. The Plan covers all employees meeting certain age and servicerequirements, and who are not covered by collective bargaining agreements. TheCompany funds expenses incurred in connection with the Plan, on a currentbasis. The Company made no matching contributions in fiscal 2002, 2001, or2000.

 

**13.    Results of Operations**

 

Due to the cyclical nature ofthe semiconductor industry, coupled with the downturn in the overall industrysales and economy during the past two years, the Company's net revenuesdecreased 34 percent in fiscal 2002 and 15 percent in fiscal 2001. TheCompany's gross profit margin, as a percentage of sales, decreased from 38percent in fiscal 2000 and 2001, to 27 percent in fiscal 2002.

 

At September 29, 2002 andSeptember 30, 2001, accounts receivable and inventories account for a largeportion of the working capital and net assets of the Company. Accountsreceivable are discussed more fully in Note 10.

 

Inventory levels are generallydriven by actual customer orders and forecasted sales. Inventories were reducedby approximately $486,000 in fiscal 2001, resulting in total inventories ofapproximately $11.7 million at September 30, 2001. During fiscal 2002, theCompany reduced its inventories approximately $2.1 million, 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 29, 2002 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.

 

**14.    Subsequent Event**

 

On October 9, 2002, the Board ofDirectors of the Company authorized the repurchase of up to $500,000 of itscommon stock.

 

37

 

**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 29, 2002 and September 30, 2001:

 

 

Fiscal Quarters  Ended:

 

 

 

 

12/31/01

 

 

03/01/02

 

 

06/30/02

 

 

09/29/02

 

 

Total

 

Net revenues

 

$ 1,771 

 

 

$ 1,120 

 

 

$ 1,801 

 

 

$ 1,881 

 

 

$   6,573 

 

Gross margin

 

$    441 

 

 

$    205 

 

 

$    258 

 

 

$    889 

 

 

$   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 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Quarters  Ended:

 

 

 

 

12/31/00

 

 

04/01/01

 

 

07/01/01

 

 

09/30/01

 

 

Total

 

Net revenues

 

$ 3,058 

 

 

$ 2,540 

 

 

$2,490 

 

 

$ 1,919 

 

 

$ 10,007 

 

Gross margin

 

$ 1,218

 

 

$ 1,216 

 

 

$ 1,331 

 

 

$      75 

 

 

$   3,840 

 

(Loss) income from operations

 

$    105 

 

 

$      23 

 

 

$      22 

 

 

$   (328)

 

 

$     (178)

 

(Loss) income before income taxes

 

$      98 

 

 

$      22 

 

 

$      14 

 

 

$   (336)

 

 

$     (202)

 

Net (loss) income

 

$      97 

 

 

$      12 

 

 

$      14 

 

 

$   (335)

 

 

$     (212)

 

Basic (loss) income per share

 

$   0.01 

 

 

$       -  

 

 

$       -  

 

 

$  (0.04)

 

 

$    (0.03)

 

Weighted average common shares

 

6,842 

 

 

6,842 

 

 

6,642 

 

 

6,642 

 

 

6,842 

 

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 2002 and 2001.

 

 

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

 

Not applicable.

38

**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 9, 2002:

 

 

Name

 

 

Age

 

 

Position(s) held with the Company

 

Years with  the  Company

 

Howard L. Farkas

 

 

78

 

 

Chairman of the Board

 

 

19

William J. Volz

 

55

 

President and Director

 

19

Albert Morrison Jr.

 

66

 

Director

 

19

Fredric J. Harris

 

62

 

Director

 

3

Joel S. Kanter

 

46

 

Director

 

1

Kimiko Milheim

 

32

 

Chief Financial Officer and Secretary

 

3

Dennis Gross

 

48

 

Vice President of Sales

 

7

 

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, Union Bank& Trust, Northwestern Engineering Company, U.S. Nursing Corporation, NDGCorporation, and Ivory LLC, Aragorn LLC, and Strider LLC, which are in the gasand 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 the Companysince 1983. He has also served as Chairman of Morrison Brown Argiz &Company, P.C., a certified public accounting firm in Miami, Florida, since1969. He is a member of the Board of Directors of Heico Corporation, a memberof the Board of Directors for Florida International University, and Chairman ofthe 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 andSignal Processing Institute at San Diego State University, where he has taughtsince 1967. 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 will be a fellow of the Institute of Electrical and ElectronicEngineers, effective January 2003.

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; GreystoneMedical Group, Inc., a development stage pharmaceutical company; I-FlowCorporation, a publicly-traded manufacturer of home infusion pumps; Magna Labs,Inc., a publicly-traded development stage medical device company; and MarinerPost Acute Network, Inc., a publicly-traded leading provider of skilled nursingcare.

 

KIMIKO MILHEIM joined the Company in 1999 as ChiefFinancial Officer. Ms. Milheim is a certified public accountant with a Mastersof Business Administration from the University of California, Irvine. She is amember of the American Institute of Certified Public Accountants and theCalifornia Society of CPAs. Prior to joining the Company, Ms. Milheim wasGeneral Accounting Manager with ArthroCare Corporation and an Audit Managerwith BDO Seidman, LLP.

 

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.

39

**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 2002 and Form 5 and amendments theretofurnished to the Company with respect to fiscal 2002, 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 as haspreviously been reported by the Company, and that Messrs. Harris and Morrisonhave not filed a Form 5 for the fiscal year ended September 29, 2002, Messrs.Kanter and Volz filed their Form 5s late (one transaction reported) for thefiscal year ended September 29, 2002, and Mr. Farkas filed his Form 5 late (twotransactions reported) for the fiscal year ended September 29, 2002.

 

 

**ITEM 11.    EXECUTIVE COMPENSATION**

 

**Summary Compensation Table**

 

The following tables sets forth the compensation paid bythe Company during fiscal 2002, 2001, and 2000, to the Company's most highlypaid executive officers serving at the end of fiscal 2002, whose total annualsalary and bonus exceeded $100,000 (the Named Executive Officers):

 

 

 

 

 

 

 

Annual  Compensation

 

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

Name and Position

Year

 

Salary ($)  1

 

Bonus ($)

 

 

William J. Volz, President

 

2002

 

 

172,600 

 

 

-  

 

 

-  

 

2001

 

160,600 

 

-  

 

-  

 

2000

 

126,600 

 

-  

 

-  

 

 

 

 

 

 

 

 

Kimiko Milheim, Chief Financial Officer

2002

 

103,000 

 

-  

 

-  

 

2001

 

97,100 

 

5,000 

 

40,000 

 

2000

 

75,400 

 

5,000 

 

15,000 

 

1 Due to the Company having afiscal year comprised of 52 weeks of seven days each, beginning Monday andending Sunday, the fiscal years referenced above are as follows: for 2002,fiscal year ended September 29, 2002; for 2001, fiscal year ended September 30,2001; and for fiscal 2000, fiscal year ended October 1, 2000.

 

**Stock Options**

 

There were no common stock options granted to or exercisedby the Named Executive Officers during fiscal 2002.

 

As of September 29, 2002, no Named Executive Officers held"in-the-money" options, which are options whose exercise price wasless than the market price of the common stock as of September 29, 2002 ($0.76per share on The NASDAQ National Market, as of September 27, 2002, the lasttrading day within the Company's fiscal 2002).

 

Ms. Milheim held 31,250 exercisable common stock optionsand 23,750 non-exercisable common stock options as of September 29, 2002. Mr.Volz holds no common stock options, as a result of the April 2, 2002 voluntaryforfeiture of his 200,000 common stock options under the 1998 Director Stock IncentivePlan.

 

40

**Compensation of Directors**

 

Non-employee directors did not receive any cashcompensation during fiscal 2002, or in previous years, for either theirservices as directors 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 the 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.

 

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 amendmentof the 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 currently has no employment agreements withany of its employees. None of the Company's executive officers have employmentor severance agreements with the Company.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

All matters concerning executive compensation in fiscal2002 were addressed by the full Board of Directors of the Company, includingMessrs. Farkas, Volz, Morrison, Harris, and Kanter. Mr. Volz also acts as theCompany's President and principal executive officer, and does not participatein compensation matters pertaining to his salary or option grants. While Mr.Volz is eligible, he has never received 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.

41

*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 2001.

 

*Cash Incentive Compensation.* TheCompany has no regular established cash incentive compensation program for itsexecutive officers. The Board does review the possibility of cash incentivesfor executive officers based on the performance of the specific officer and onthe 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 2000 to 2002 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 2002 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 2002 was not increased fromhis base annual compensation in fiscal 2001.

 

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

 

Joel S. Kanter

 

42

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

 

The following table sets forth, as of December 9, 2002,certain information 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*:

 

 

 

 

 

S.A. Hellerstein, Trustee of the Farkas Trusts  (3)

 

624,305 

 

9.4%

 

 

1139 Delaware St.

Denver, CO 80204

 

 

 

 

 

Chicago Investments, Inc.  (4)

 

550,000 

 

8.3%

 

 

934 N. Main St.

Sheridan, WY 82801

 

 

 

 

 

Dimensional Fund Advisors, Inc.  (5)

 

347,400 

 

5.2%

 

 

1299 Ocean Ave., 11th Fl.

Santa Monica, CA 90401

 

 

 

 

 

*Directors:*

 

 

 

 

 

Howard L. Farkas  (6) (7) (9)

 

295,000 

 

4.5%

 

 

6601 E. Progress Ave.

Englewood, CO 80111

 

 

 

 

 

William J. Volz

 

598,438 

 

9.0%

 

 

395 W. Java Dr.

Sunnyvale, CA 94089

 

 

 

 

 

Albert Morrison Jr.  (6) (7)

 

95,877 

 

1.5%

 

 

1001 Brickell Bay Dr., 9th Fl.

Miami, FL 33131

 

 

 

 

 

Fredric J. Harris  (6) (8)

 

100,000 

 

1.5%

 

 

Electrical and Computer Engineering Department

San Diego State University

5500 Companile Dr.

San Diego, CA 92182-1309

 

 

 

 

 

Joel S. Kanter  (6) (10)

 

50,000 

 

0.8%

 

 

8000 Towers Crescent Dr.

Vienna, VA 22182

 

 

 

 

 

*Named Executive Officers:*

 

 

 

 

 

Kimiko Milheim  (11)

 

35,000 

 

0.5%

 

 

395 W. Java Dr.

Sunnyvale, CA 94089

 

 

 

 

 

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

 

*1,174,315 *

 

*17.7%*

 

 

 

 

 

 

(1)

Assumes  the exercise of any warrants or options held by such person that are  exercisable as of December 9, 2002 or within 60 day s thereafter, but not the  exercise of any other person's warrants or options.

(2)

Assumes  6,630,688 shares of common stock outstanding as of December 9, 2002.

(3)

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

43

(4)

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

(5)

Based  solely on the Schedule 13F filed by Dimensional Fund Advisors, Inc. on  October 28, 2002.

(6)

Such  beneficial share ownership includes options for common stock obtained from  special one-time option grants of 75,000 to Mr. Farkas, and 50,000 to Messrs.  Farkas, Morrison, Harris, and Kanter, pursuant to the 1998 Director Stock  Incentive Plan. See "Executive Compensation - Compensation of  Directors."

(7)

Such  beneficial share ownership includes options for 45,000 shares of common stock  granted upon reelection to the Board under the 1998 Director Stock Incentive  Plan. See "Executive Compensation - Compensation of Directors."

(8)

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."

(9)

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

(10)

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

(11)

Such  beneficial share ownership reflects the number of shares underlying granted  options for common stock that are exercisable as of December 9, 2002, or  within 60 days thereafter. Ms. Milheim has also been granted options for an  additional 20,000 shares of common stock, which are not exercisable as of  December 9, 2002, and will not become exercisable within 60 days thereafter.

 

 

**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 14.    CONTROLS ANDPROCEDURES**

 

Based upon an evaluation within 90 days prior to thefiling date of this Annual Report on Form 10-K, the Company's President andChief Financial Officer concluded that the Company's disclosure controls andprocedures are effective. There have been no significant changes in theCompany's internal controls or in other factors that could significantly affectthe Company's internal controls subsequent to the date of evaluation, includingany corrective actions with regard to significant deficiencies and materialweaknesses.

 

**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 20 to  37 of this report; see Index to Financial Statements at page 19 of this  report.

 

 

(2)

The Financial Statement Schedule appears at page 45 of  this report; see Index to Financial Statements at page 19 of this report.

 

 

(3)

The Index to Exhibits appears at page 49 of this report.

 

(B)

Reports on Form 8-K: During the final quarter of fiscal  2002, the Company filed two Current Reports on Form 8-K, which disclosed the  following: 

 

 

 

(a)

July 23, 2002 - The Company disclosed the receipt of a  NASDAQ Staff Determination letter regarding non-compliance with listing  requirements.

 

 

 

(b)

September 3, 2002 - The Company disclosed the Board's  approval of the exemption of Mr. William J. Volz from the definition of an  "acquiring person" under the Company's shareholder Rights Agreement.

44

**Schedule II - Valuation and Qualifying Accounts**

 

 

 

Description
   
Balance at  beginning of period

 

Charged to costs  and expenses

 

 

 

Deductions

 

 

Balance at end of  period

 

*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)

 

$               -  

 

$               -  

* *

*2000*
   
 

 

 

 

 

 

 

Allowance for:

 
   
 

 

 

 

 

 

7

 

Doubtful accounts
   
$     253,000 

 

$               -  

 

$     233,500 

 

$       20,000 

 

 

Inventory reserve
   
$  1,784,200 

 

$     652,100 

 

$               -  

 

$  2,436,300 

 

 

Sales returns
   
$       50,000 

 

$               -  

 

$       18,000 

 

$       32,000 

 

The Company periodically reviews its inventory forobsolescence and standard costs accuracy. During fiscal 2002 and 2001, theCompany used $1,867,700 and $634,100, respectively, of its inventory reservefor direct write-offs of obsolete products and excess overhead absorbed inprior years.

 

45

**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 9, 2002

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 9, 2002

  /s/  Kimiko  Milheim         

    Kimiko Milheim

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

December 9, 2002

  /s/  Howard L.  Farkas       

    Howard L. Farkas

 

 

Chairman of the Board of Directors

 

 

December 9, 2002

  /s/  Albert Morrison,  Jr.    

    Albert Morrison Jr.

 

 

Director

 

 

December 9, 2002

  /s/  Fredric J.  Harris          

    Fredric J. Harris

 

 

Director

 

 

December 9, 2002

  /s/  Joel S.  Kanter             

    Joel S. Kanter

 

Director

 

December 9, 2002

 

46

**CERTIFICATIONS**

 

I, William J. Volz, President and Principal ExecutiveOfficer of LOGIC Devices Incorporated, certify that:

 

(1)

I have reviewed this annual report on Form 10-K of the  registrant.

 

(2)

Based on my knowledge, this annual 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 annual report.

 

(3)

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

 

(4)

The registrant's other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:

 

 

(a)

Designed such controls and procedures to ensure that  material information relating to the registrant is made known to us by others  within the entity, particularly during the period in which this annual report  is being prepared;

 

 

(b)

Evaluated the effectiveness of the registrant's  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this annual report (the Evaluation Date); and

 

 

(c)

Presented in this annual report our conclusions about  the effectiveness of the disclosure controls and procedures, based on our  evaluation as of the Evaluation Date:

 

(5)

The registrant's other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant's auditors  and the audit committee of the registrant's board of directors (or persons  performing the equivalent function):

 

 

(a)

All significant deficiencies in the design or operation  of internal controls that could adversely affect the registrant's ability to  record, process, summarize, and report financial data and have identified for  the registrant's auditors any material weaknesses in internal controls; and

 

 

(b)

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

 

(6)

The registrant's other certifying officer and I have  indicated in this annual report whether or not there were significant changes  in internal controls or in other factors that could sifnificantly affect  internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses.

 

 

Dated: December 10, 2002

By:   /s/  William J.  Volz                        

 

 

William J. Volz, President and

Principal Executive Officer

 

47

I, Kimiko Milheim, Chief Financial Officer of LOGICDevices Incorporated, certify that:

 

(1)

I have reviewed this annual report on Form 10-K of the  registrant.

 

(2)

Based on my knowledge, this annual 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 annual report.

 

(3)

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

 

(4)

The registrant's other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:

 

 

(a)

Designed such controls and procedures to ensure that  material information relating to the registrant is made known to us by others  within the entity, particularly during the period in which this annual report  is being prepared;

 

 

(b)

Evaluated the effectiveness of the registrant's  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this annual report (the Evaluation Date); and

 

 

(c)

Presented in this annual report our conclusions about  the effectiveness of the disclosure controls and procedures, based on our  evaluation as of the Evaluation Date:

 

(5)

The registrant's other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant's auditors  and the audit committee of the registrant's board of directors (or persons  performing the equivalent function):

 

 

(a)

All significant deficiencies in the design or operation of  internal controls that could adversely affect the registrant's ability to  record, process, summarize, and report financial data and have identified for  the registrant's auditors any material weaknesses in internal controls; and

 

 

(b)

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

 

(6)

The registrant's other certifying officer and I have  indicated in this annual report whether or not there were significant changes  in internal controls or in other factors that could sifnificantly affect  internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses.

(1)

I have reviewed this Annual Report on Form 10-K of the  Registrant.

 

(2)

Based on my knowledge, the 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 the Report.

 

(3)

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

 

 

Dated: December 10, 2002

By:   /s/  Kimiko  Milheim                       

 

 

Kimiko Milheim,

Chief Financial Officer

 

48

**INDEX TOEXHIBITS**

 

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. [10.1] (2)

10.2

Real Estate lease regarding Registrant's new Sunnyvale  facilities.

10.3

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

10.4

LOGIC Devices Incorporated 1998 Director Stock Incentive  Plan, as amended.

10.5

Rights Agreement, dated April 30, 1997. [1] (4)

10.6

Registration Rights Agreement dated October 3, 1998  between William J. Volz, BRT Partnership, and Registrant. [10.19] (5)

23.1

Consent letter of Hood & Strong LLP.

23.2

Consent letter of BDO Seidman, LLP.

99.1

Certifications of Principal Executive Officer and Chief  Financial Officer.

 

 

 

 

 

[  ]

 

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-3, as filed with the  SEC on November 21, 1996 [Registration No. 333-16591].

(3)

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

(4)

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

[Registration No. 000-17187].

(5)

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.

 

49

**EXHIBIT 10.2**

 

 

**STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANTLEASE - NET**

AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

** **

1. **Basic Provisions ("Basic Provisions")**.

 

1.1 **Parties:**This Lease **("Lease")**, dated  for reference purposes only July 8, 2002, is made by and between Star One  Credit Union, a California Credit Union **("Lessor" or  "Landlord")**and Logic Devices, Inc., a California corporation **("Lessee"  or "Tenant")**, (collectively the **"Parties"**, or  individually a **"Party"**).

 

1.2(a) **Premises:**That certain portion of the Project (as  defined below), including all improvements therein or to be provided by  Lessor under the terms of this Lease, commonly known by the street address of  395 Java Drive, located in the City of Sunnyvale, County of Santa Clara,  State of California, with zip code 94089, as outlined on Exhibit A attached  hereto **("Premises")**and generally described as (describe  briefly the nature of the Premises): A portion of a larger freestanding  single story building and associated improvements consisting of approximately  15,355 square feet. In addition to Lessee's rights to use and occupy the  Premises as hereinafter specified, Lessee shall have non-exclusive rights to  the Common Areas (as defined in Paragraph 2.7 below) as hereinafter  specified, but shall not have any rights to the roof, exterior walls or  utility raceways of the building containing the Premises **("Building")**or to any other buildings in the Project. The Premises, the Building, the  Common Areas, the land upon which they are located, along with all other  buildings and improvements thereon, are herein collectively referred to as  the **"Project."**(See also Paragraph 2)

 

1.2(b) **Parking:**61 unreserved vehicle parking spaces **("Unreserved  Parking Spaces")**; and N/A reserved vehicle parking spaces **("Reserved  Parking Spaces")**. (See also Paragraph 2.6) The number of Lessee's  Unreserved Parking Spaces shall be reduced upon completion of Lessor's  construction of the fenced in area at the rear of the Premises as requested  by Lessee, as reasonably determined by Lessor and Lessee. The Unreserved  Parking Spaces allocated to Lessee shall be located at the end of the  Building in which the Premises are located, as depicted in Exhibit B attached  hereto and incorporated herein by reference.

 

1.3 **Term:**Five (5) years and 0 months **("Original  Term")**commencing October 1, 2002 **("Commencement Date")**and ending September 30, 2007 **("Expiration Date")**. (See  also Paragraph 3)

 

1.4 **Early Possession:**Upon substantial completion * **("Early  Possession Date")**. *****of TI work, Lessee shall be allowed  access to the Premises for Lessee's installation of phones, furnishings, and  other fixturing. (See also Paragraphs 3.2 and 3.3)

 

1.5 **Base Rent:**$16,890.50 per month **("Base  Rent")**, payable on the First (1st) day of each month commencing two  months following the Commencement Date (see attached rental schedule) . (See  also Paragraph 4)

**X** - If this box is checked, there are provisions in this Lease  for the Base Rent to be adjusted.

 

1.6 **Lessee's Share of Common Area Operating Expenses:**Forty  Seven & Eighty* percent (47.87%) **("Lessee's Share")**. *  Seven Hundredths

 

1.7 **Base Rent and Other Monies Paid Upon Execution:**

 

(a) **Base Rent:**$16,890.50 for the third month of the  Original Term.

 

(b) **Common Area Operating Expenses:**$To Be Determined for  the period December 1, 2002 to December 31, 2002 to be billed later.

 

(c) **Security Deposit:**$19,040.20 **("Security  Deposit")**. (See also Paragraph 5)

 

(d) **Other:**$N/A for.

 

(e) **Total Due Upon Execution of this Lease:**$35,930.70.

 

1.8 **Agreed Use:**General office, R&D and other related  legal uses of the premises in conformity with municipal zoning requirements  of the City of Sunnyvale . (See also Paragraph 6)

 

1.9 **Insuring Party**. Lessor is the **"Insuring  Party"**. (See also Paragraph 8)

 

1.10 **Real Estate Brokers:**(See also Paragraph 15)

 

(a) **Representation:**The following real estate brokers  (the **"Brokers"**) and brokerage relationships exist in this  transaction (check applicable boxes):

**X** - Colliers International represents Lessor exclusively (**"Lessor's  Broker"**);

 

50

**X** - Cornish & Carey represents Lessee exclusively (**"Lessee's  Broker"**); or

 

(b) **Payment to Brokers:**Upon execution and delivery of  this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee  agreed to in a separate written agreement.

 

1.11 **Guarantor**. The obligations of the Lessee under this  Lease are to be guaranteed by N/A **("Guarantor")**. (See also  Paragraph 37)

 

1.12 **Addenda and Exhibits**. Attached hereto is an Addendum  or Addenda consisting of Paragraphs 1 through 8 and Exhibit A **(floorplan  with Tenant Improvements)**, all of which constitute a part of this Lease.

2. **Premises**.

 

2.1 **Letting**. Lessor hereby leases to Lessee, and Lessee  hereby leases from Lessor, the Premises, for the term, at the rental, and  upon all of the terms, covenants and conditions set forth in this Lease.  Unless otherwise provided herein, any statement of size set forth in this  Lease, or that may have been used in calculating Rent, is an approximation  which the Parties agree is reasonable and any payments based thereon are not  subject to revision whether or not the actual size is more or less.

 

2.2 **Condition**. Lessor shall deliver the Premises and  building systems "as is" in good working condition, including the  roof in water tight condition, mechanical, electrical, and plumbing systems.  Lessor will transfer to the Lessee, to the extent possible and in Lessor's  possession, any warranties or service contracts on systems in the Premises  that the Lessee is responsible to maintain during the tem of the Lease.  Lessee shall have forty-five (45) days from the Commencement Date to notify  Lessor of any system needing repair and Lessor shall complete said repairs at  Lessor's expense. If Lessee does not give Lessor written notice of a  non-compliance within the provisions of this Paragraph 2.2, within said  forty-five (45) days, then Lessor shall have no further obligation under this  Paragraph 2.2 to complete such repairs (however, nothing stated herein shall  excuse any of Lessor's other obligations under the Lease, as the same may be  modified or amended).

 

2.3 **Compliance**. Lessor does notwarrant that the  improvements on the Premises and the Common Areas comply with the building  codes that were in effect at the time that each such improvement, or portion  thereof, was constructed, and also with all applicable laws, covenants or  restrictions of record, regulations, and ordinances in effect on the  Commencement Date **("Applicable Requirements")**. IF the  Project, Building, Premises and/or the Common Areas, or any portion thereof,  are not in compliance with all Applicable Requirements (including, without  limitation, the Americans With Disabilities Act and Title 24) as of the  Commencement Date, then, promptly following receipt of notice of such  non-compliance, Lessor shall, at no cost to Lessee (and without passing  through to Lessee any such costs as a Common Area Operating Expense or  otherwise), promptly take all action necessary to bring the area or  improvement into compliance. **NOTE: Lessee is responsible for determining  whether or not the Applicable Requirements, and especially the zoning, are  appropriate for Lessee's intended use, and acknowledges that past uses of the  Premises may no longer be allowed**. If the Applicable Requirements are  hereafter changed following the Commencement Date so as to require during the  term of this Lease the construction of an addition to or an alteration of the  Premises and/or Building, , or the reinforcement or other physical  modification of the Premises and/or Building **("Capital  Expenditure")**, Lessor and Lessee shall allocate the cost of such  work as follows:

 

(a) Subject to Paragraph 2.3(c) below, if such Capital  Expenditures are required as a result of the specific and unique use of the  Premises by Lessee as compared with uses by tenants in general, Lessee shall  be fully responsible for the cost thereof, provided, however that if such  Capital Expenditure is required during the last six monthsof this  Lease and the cost thereof exceeds 2 months' Base Rent, Lessee may instead  terminate this Lease unless Lessor notifies Lessee, in writing, within 10  days after receipt of Lessee's termination notice that Lessor has elected to  pay the difference between the actual cost thereof and the amount equal to 2  months' Base Rent. If Lessee elects termination, Lessee shall immediately  cease the use of the Premises which requires such Capital Expenditure and  deliver to Lessor written notice specifying a termination date at least 90  days thereafter. Such termination date shall, however, in no event be earlier  than the last day that Lessee could legally utilize the Premises without  commencing such Capital Expenditure.

 

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(b) Subject to Paragraph 2.3(c) below, if such Capital  Expenditure is not required as a result of the specific and unique use of the  Premises by Lessee (such as, governmentally mandated seismic modification),  then such Capital Expenditure shall be amortized over the useful life of such  structural or capital improvement, alteration or addition (with interest  thereon at the then market rate of interest at which Lessor could borrow  funds for the purpose of constructing such structural or capital  improvements) and Lessee's Share (as defined in Paragraph 1.6 of the Lease)  of such amortized cost shall be paid by Lessee each month with the Base Rent  to be paid by Lessee, commencing on the date such structural or capital  improvement is completed by Lessor until the earlier of (x) the expiration of  the Term, or (y) the expiration of the useful life of such structural or  capital improvement, alteration or addition. The preceding to the contrary  notwithstanding, if the monthly amortized cost (including interest) of any  structural or capital improvement(s) referred to in the immediately preceding  sentence exceeds $0.15 per square foot of the Premises per month, then Lessee  shall have the right to terminate the Lease, as amended, by giving written  notice to Lessor unless Lessor notifies Lessee, in writing, within ten (10)  days after receipt of Lessee's termination notice that Lessor has elected to  pay the difference between the monthly amortized cost (including interest) of  such structural or capital improvement(s) and the amount of $0.15 per square  foot of the Premises per month. If Lessee elects to terminate this Lease as  provided above, then Lessee shall immediately cease the use of the Premises  and deliver to Lessor written notice specifying the termination date at least  90 days thereafter.

 

(c) Notwithstanding the above, the provisions concerning Capital  Expenditures are intended to apply only to non-voluntary, unexpected, and new  Applicable Requirements. If the Capital Expenditures are instead triggered by  Lessee as a result of an actual or proposed change in use, change in  intensity of use, or modification to the Premises then, and in that event,  Lessee shall be fully responsible for the cost thereof, and Lessee shall not  have any right to terminate this Lease.

 

2.4 **Acknowledgements**. Lessee acknowledges that: (a) it  has been advised by Lessor and/or Brokers to satisfy itself with respect to  the condition of the Premises (including but not limited to the electrical,  HVAC and fire sprinkler systems, security, environmental aspects, and  compliance with Applicable Requirements and the Americans with Disabilities  Act), and their suitability for Lessee's intended use, (b) Lessee has made  such investigation as it deems necessary with reference to such matters, and  (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or  written representations or warranties with respect to said matters other than  as set forth in this Lease. In addition, Lessor acknowledges that: (i)  Brokers have made no representations, promises or warranties concerning  Lessee's ability to honor the Lease or suitability to occupy the Premises,  and (ii) it is Lessor's sole responsibility to investigate the financial  capability and/or suitability of all proposed tenants.

 

2.6 **Vehicle Parking**. Lessee shall be entitled to use the  number of Unreserved Parking Spaces and Reserved Parking Spaces specified in  Paragraph 1.2(b) on those portions of the Common Areas designated from time  to time by Lessor for parking. Lessee shall not use more parking spaces than  said number. Said parking spaces shall be used for parking by vehicles no  larger than full-size passenger automobiles or pick-up trucks, herein called **"Permitted  Size Vehicles."**Lessor may regulate the loading and unloading of  vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No  vehicles other than Permitted Size Vehicles may be parked in the Common Area  without the prior written permission of Lessor.

 

(a) Lessee shall not permit or allow any vehicles that belong to  or are controlled by Lessee or Lessee's employees, suppliers, shippers,  customers, contractors or invitees to be loaded, unloaded, or parked in areas  other than those designated by Lessor for such activities. 

 

(b) Lessee shall not service or store any vehicles in the Common  Areas.

 

(c) If Lessee permits or allows any of the prohibited activities  described in this Paragraph 2.6, then Lessor shall have the right, without  notice, in addition to such other rights and remedies that it may have, to  remove or tow away the vehicle involved and charge the cost to Lessee, which  cost shall be immediately payable upon demand by Lessor.

 

2.7 **Common Areas - Definition**. The term **"Common  Areas"**is defined as all areas and facilities outside the Premises  and within the exterior boundary line of the Project and interior utility  raceways and installations within the Unit that are provided and designated  by the Lessor from time to time for the general non-exclusive use of Lessor,  Lessee and other tenants of the Project and their respective employees,  suppliers, shippers, customers, contractors and invitees, including parking  areas, loading and unloading areas, trash areas, roadways, walkways,  driveways and landscaped areas.

 

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2.8 **Common Areas - Lessee's Rights**. Lessor grants to  Lessee, for the benefit of Lessee and its employees, suppliers, shippers,  contractors, customers and invitees, during the term of this Lease, the  non-exclusive right to use, in common with others entitled to such use, the  Common Areas as they exist from time to time, subject to any rights, powers,  and privileges reserved by Lessor under the terms hereof or under the terms  of any rules and regulations or restrictions governing the use of the  Project. Under no circumstances shall the right herein granted to use the  Common Areas be deemed to include the right to store any property,  temporarily or permanently, in the Common Areas. Any such storage shall be  permitted only by the prior written consent of Lessor or Lessor's designated  agent, which consent may be revoked at any time. In the event that any unauthorized  storage shall occur then Lessor shall have the right, without notice, in  addition to such other rights and remedies that it may have, to remove the  property and charge the cost to Lessee, which cost shall be immediately  payable upon demand by Lessor.

 

2.9 **Common Areas - Rules and Regulations**. Lessor or such  other person(s) as Lessor may appoint shall have the exclusive control and  management of the Common Areas and shall have the right, from time to time,  to establish, modify, amend and enforce reasonable rules and regulations **("Rules  and Regulations")**for the management, safety, care, and cleanliness  of the grounds, the parking and unloading of vehicles and the preservation of  good order, as well as for the convenience of other occupants or tenants of  the Building and the Project and their invitees. Lessee agrees to abide by  and conform to all such Rules and Regulations, and to cause its employees,  suppliers, shippers, customers, contractors and invitees to so abide and  conform. Lessor shall not be responsible to Lessee for the non-compliance  with said Rules and Regulations by other tenants of the Project.

 

2.10 **Common Areas - Changes**. Lessor shall have the right,  in Lessor's sole discretion, from time to time:

 

(a) To make changes to the Common Areas, including, without  limitation, changes in the location, size, shape and number of driveways,  entrances, parking spaces, parking areas, loading and unloading areas,  ingress, egress, direction of traffic, landscaped areas, walkways and utility  raceways;

 

(b) To close temporarily any of the Common Areas for maintenance  purposes so long as reasonable access to the Premises remains available;

 

(c) To designate other land outside the boundaries of the  Project to be a part of the Common Areas;

 

(d) To add additional buildings and improvements to the Common  Areas;

 

(e) To use the Common Areas while engaged in making additional  improvements, repairs or alterations to the Project, or any portion thereof;  and

 

(f) To do and perform such other acts and make such other  changes in, to or with respect to the Common Areas and Project as Lessor may,  in the exercise of sound business judgment, deem to be appropriate.

 

Lessor shall not make any of the changes or undertake any of the  actions described in Paragraph 2.10(a) through (f) if the same would (i)  impair Lessee's access to the Premises, (ii) reduce the number of Unreserved  Parking Spaces available to Lessee and its agents, employees, guests and  invitees for their use, (iii) reduce the number of total parking spaces  within the Project to a number less than that required by local parking  ordinances, or (iv) interfere with Lessee's use or occupancy of the  Premsises.

3. **Term**.

 

3.1 **Term**. The Commencement Date, Expiration Date and  Original Term of this Lease are as specified in Paragraph 1.3, except as  otherwise provided in the Lease.

 

3.2 **Early Possession**. Early possession shall be for the  purposes described in Section 1.4 above only, and the obligation to pay Base  Rent, Common Area Operating Expenses, or any other costs or expenses of  Lessor associated with the operation, maintenance, repair or ownership of the  Project or any portion thereof, shall be abated for the period of such early  possession. Early Possession of the Premises by Lessee or any of its agents,  employees, contractors, consultants or other authorized representatives for  purposes of installing telephones, computers, telecommunication systems,  furnishings and other fixturing shall not constitute conducting Lessee's  business in the Premises for purposes of determining the Commencement Date.  Any such early possession shall not affect the Expiration Date.

 

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3.3 **Delay In Possession**. Lessor agrees to use its best  commercially reasonable efforts to deliver possession of the Premises to  Lessee by the Commencement Date. If, despite said efforts, Lessor is unable  to deliver possession as agreed, Lessor shall not be subject to any liability  therefor, nor shall such failure affect the validity of this Lease. Further,  if the Tenant Improvements described in Exhibit A to the Lease are not  completed by Lessor by October 1, 2002, then Lessee shall be entitled to 1  day of free Rent for each day following October 1, 2002, until such Tenant  Improvements are completed, and such free Rent shall apply to the period  commencing on the third month of the Term (as the Rent payable during the  first two months' of the Term are already free). Lessee shall not, however,  be obligated to pay Rent or perform its other obligations until it receives  possession of the Premises. If possession is not delivered within 60 days  after the Commencement Date, Lessee may, at its option, by notice in writing  prior to the date possession of the Premises is delivered to Lessee, cancel  this Lease, in which event the Parties shall be discharged from all obligations  hereunder. If such written notice is not received by Lessor prior to the date  possession of the Premises is delivered to Lessee, Lessee's right to cancel  shall terminate. Except as otherwise provided, if possession is not tendered  to Lessee by the October 1, 2002 and Lessee does not terminate this Lease, as  aforesaid, the Original Term shall run from the date of delivery of  possession and continue for a period equal to what Lessee would otherwise  have enjoyed under the terms hereof, but minus any days of delay caused by  the acts or omissions of Lessee.

 

3.4 **Lessee Compliance**. Lessor shall not be required to  tender possession of the Premises to Lessee until Lessee complies with its  obligation to provide evidence of insurance (Paragraph 8.5).

 

3.5 **Possession Defined.** Possession of the Premises shall  not be deemed tendered or delivered to Lessee for purposes of Paragraph 3.3  of the Lease, and the Original Term of the Lease shall no commence, until the  earlier of (1)(i) the Tenant Improvements described in Exhibit A to the Lease  required to be constructed or installed by Lessor, at Lessor's sole cost,  have been completed, (ii) Lessee has completed a walk-through of the Premises  and identified all defective and/or incomplete items, and Lessor has repaired  or completed all items to the extent they would interfere with Lessee's use  and occupancy of the Premises, and (iii) a certificate of occupancy or its  equivalent has veen issued by the governmental agency having jurisdiction  over the build out of the Tenant Improvements described in Exhibit A to the  Lease, or (2) Lessee takes occupancy of the Premises and commences operation  of its business therein; provided, however, in no event shall the Original  Term commence or the Commencement Date be prior to October 1, 2002. Promptly  following the execution of the Lease, and Lessor's receipt of all permits and  approvals needed to construct or install the Tenant Improvements described in  Exhibit A attached to the Lease, Lessor shall cause its general contractor, who  shall be licensed in California, to commence and complete the Tenant  Improvements described in Exhibit A attached to the Lease. Lessor shall  exercise its best efforts to cause the Tenant Improvements described in  Exhibit A to the Lease to be completed prior to October 1, 2002. Lessor shall  cause the Tenant Improvements to be completed in accordance with all  Applicable Requirements. Lessor shall assign to Lessee all warranties and  guaranties received by Lessor in connection with the Tenant Improvements described  in Exhibit A to the Lease and Lessor also hereby warrants the Tenant  Improvements described in Exhibit A to the Lease against defects in  workmanship and/or materials for a period of one (1) year following the  completion of such Tenant Improvements.

4. **Rent**.

 

4.1 **Rent Defined**. All monetary obligations of Lessee to  Lessor under the terms of this Lease (except for the Security Deposit) are  deemed to be rent **("Rent")**.

 

4.2 **Common Area Operating Expenses**. Lessee shall pay to  Lessor during the term hereof, in addition to the Base Rent, Lessee's Share  (as specified in Paragraph 1.6) of all Common Area Operating Expenses, as  hereinafter defined, during each calendar year of the term of this Lease, in  accordance with the following provisions:

 

(a) **"Common Area Operating Expenses"**are  defined, for purposes of this Lease, as all costs reasonably incurred by  Lessor relating to the operation of the Project, including, but not limited  to, the following:

 

(i) The operation, repair and maintenance, in neat, clean, good  order and condition of the following:

 

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(aa) The Common Areas and Common Area improvements, including  parking areas, loading and unloading areas, trash areas, roadways, parkways,  walkways, driveways, landscaped areas, bumpers, irrigation systems, Common  Area lighting facilities, fences and gates, elevators, HVAC**,**roofs,  and roof drainage systems.

 

(bb) Exterior signs and any tenant directories.

 

(cc) Any fire detection and/or sprinkler systems.

 

(ii) The cost of water, gas, electricity and telephone to  service the Common Areas and any utilities not separately metered.

 

(iii) Trash disposal, pest control services, property management  (not to exceed 1% of the Base Rent payable by Lessee), and security services.

 

(v) Real Property Taxes (as defined in Paragraph 10). Not  including, however, interest on taxes and penalties resulting from Lessor's  failure to timely pay taxes; any taxes which are essentially payments to a  governmental agency for the right to make improvements to the Project or the  Buliding, or portion thereof; any additional costs which would result if, by  law, any taxes or assessments may be paid in installments at the option of  the taxpayer and Lessor elects not to pay taxes and assessments in such  installments.

 

(vi) The cost of the premiums for the insurance maintained by  Lessor pursuant to Paragraph 8. Not including, however, premiums for  earthquake insurance in excess of $10,000 per year.

 

(vii) Any deductible portion of an insured loss concerning the  Building or the Common Areas. Not including, however, any deductible in  excess of $10,000 in any lease year.

 

(viii) The reasonable cost incurred by Lessor in constructing or  installing any capital or structural improvements to the Project, or  applicable portion thereof, to (1) comply with any law(s) enacted after the  Commencement Date or (2) to reduce the amount of the Common Area Operating  Expense (but then only to the extent of the savings in such Common Area  Operating Expense); provided, however, such capital or structural improvement  costs shall be amortized over the useful life of such improvement (with  interest thereon at the then market rate of interest at which Lessor could  borrow funds for the purpose of constructing such structural or capital  improvements) and Lessee's Share (as defined in Paragraph 1.6 of the Lease)  of such amortized cost shall be paid by Lessee each month with the Base Rent  to be paid by Lessee, commencing on the date such structural or capital  improvement is completed by Lessor until the earlier of (x) the expiration of  the Term, or (y) the expiration of the useful life of such structural or  capital improvement.

 

(ix) Any other services to be provided by Lessor that are stated  elsewhere in this Lease to be a Common Area Operating Expense.

 

(b) Any Common Area Operating Expenses and Real Property Taxes  that are specifically attributable to the Unit, the Building or to any other  building in the Project or to the operation, repair and maintenance thereof,  shall be allocated entirely to such Unit, Building, or other building.  However, any Common Area Operating Expenses and Real Property Taxes that are  not specifically attributable to the Building or to any other building or to  the operation, repair and maintenance thereof, shall be equitably allocated  by Lessor to all buildings in the Project.

 

(c) The inclusion of the improvements, facilities and services  set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation  upon Lessor to either have said improvements or facilities or to provide  those services unless the Project already has the same, Lessor already  provides the services, or Lessor has agreed elsewhere in this Lease to  provide the same or some of them.

 

(d) Lessee's Share of Common Area Operating Expenses shall be  payable by Lessee within 30 days after a reasonably detailed statement of  actual expenses is presented to Lessee. At Lessor's option, however, an  amount may be estimated by Lessor from time to time of Lessee's Share of  annual Common Area Operating Expenses and the same shall be payable monthly  or quarterly, as Lessor shall designate, during each 12 month period of the  Lease term, on the same day as the Base Rent is due hereunder. Lessor shall  deliver to Lessee within 60 days after the expiration of each calendar year a  reasonably detailed statement showing Lessee's Share of the actual Common  Area Operating Expenses incurred during the preceding year. If Lessee's  payments under this Paragraph 4.2(d) during the preceding year exceed  Lessee's Share as indicated on such statement, Lessor shall credit the amount  of such over-payment against Lessee's Share of Common Area Operating Expenses  next becoming due. If Lessee's payments under this Paragraph 4.2(d) during  the preceding year were less than Lessee's Share as indicated on such statement,  Lessee shall pay to Lessor the amount of the deficiency within 30 days after  delivery by Lessor to Lessee of the statement.

 

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(e) Lessee or its authorized representatives shall have the  right from time to time, but not more often than once each year, to inspect  the books and records of Lessor during the business hours of Lessor at  Lessor's office for the purpose of verifying the Common Area Operating  Expenses and/or the information contained in the annual reconciliation  statement. If Lessor has overcharged Lessee for Lessee's Share of Common Area  Operating Expenses by more than four percent (4%) of the amount that Lessee  is obligated to pay pursuant to the terms of the Lease, as amended, then  Lessor shall pay to Lessee, in addition to the excess charges, within thirty  (30) days following receipt of an invoice or statement, an amount equal to  the costs incurred by Lessee or its auditors in reviewing or auditing  Lessor's books and records.

 

(f) Notwithstanding anything to the contrary In the definition  of "Common Area Operating Expenses" as set forth in Paragraph  4.2(a) of the Lease, Common Area Operating Expenses shall be defined so as to  exclude the following:

 

(i) Any ground lease rental;

 

(ii) Costs incurred by Lessor with respect to goods and services  (Including utilities sold and supplied to tenants and occupants of the  Building) to the extent that Lessor is entitled to reimbursement for such  costs other than through the Common Area Operating Expense pass-through  provisions of such tenant leases;

 

(iii) Costs incurred by Lessor for repairs, replacements and/or  restoration to or of the Project, Building or Common Area to the extent that  Lessor is reimbursed by insurance of condemnation proceeds or by tenants,  warrantors or other third persons;

 

(iv) Costs,  including costs of plans, construction, permit, Iicense and inspection costs,  incurred with respect to the installation of tenant improvements made for  other tenants in the Project or Building or incurred in renovating or  otherwise improving, decorating, painting or redecorating vacant space for  tenants or other occupants of the Project or Building;

 

(v) Attorneys' fees and other costs and expenses Incurred In  connection with negotiations or disputes with present or prospective tenants  or other occupants of the Project or Building;

 

(vi) Costs of a capital nature, including, without limitation,  capital improvements, capital replacements, capital repairs, capital  equipment and capital tools, all as determined in accordance with generally  accepted accounting principles, consistently applied: provided, however, that  the following costs (amortized over the useful life of the improvement  together with interest) of the following capital improvements shall be  included in the definition of Common Area Operating Expenses: (i) capital  improvements made to comply with any law enacted after the Commencement Date:  and (ii) any other capital improvements which reduce Common Area Operating  Expenses, but limited to the amount of Common Area Operating Expenses reduced  thereby;

 

(vii) Brokerage commissions, tenant incentives, finders' fees,  attorneys' fees, advertising expenses, entertainment and travel expenses and  other costs incurred by Lessor in leasing or attempting to lease space in the  Project or Building;

 

(viii) Interest on debt or amortization on any mortgage or  mortgages encumbering the Project, the Building or Common Area;

 

(ix) Landlord's general corporate overhead;

 

(x) Subject to the provision set forth in Subparagraph (vi)  above, rental payments incurred in leasing air conditioning systems,  elevators or other equipment ordinarily considered to be of a capital nature,  except operating/maintenance equipment not affixed to the Building or Common  Areas which is used in providing janitorial services;

 

(xi) Costs of sculptures, paintings and objects of art for the  Project, Building and/or Common Areas;

 

(xii) Advertising expenditures;

 

(xiii) Taxes and assessments attributable to the property of  other tenants of the Project or Building;

 

(xiv) Costs incurred to correct any defect in the original  construction of the Project, Building or Common Areas and/or any defect  existing as of the Commencement Date of the Lease;

 

(xv) Repairs, alterations, additions, improvements or  replacements made to rectify or correct any defect in the design, materials  or workmanship of the Project, Building or Common Area;

 

(xvi) Repairs or replacements covered by warranties or  guaranties to the extent of service or payment thereunder;

 

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(xvii) Damage and repairs of a capital nature to the Common  Areas attributable to condemnation, fire or other casualty, and damage and  repairs of a non-capital nature to the Common Areas attributable to  condemnation, fire or other casualty to the extent of awards or insurance  proceeds received by Lessor;

 

(xviii) Damage and repairs necessitated by the negligence or  willful misconduct of Lessor or any of Lessor's employees, contractors or  agents;

 

(xix) Executive salaries or salaries of service personnel  (including the Building superintendent) to the extent that such  service-personnel perform services other than in connection with the  management, operation, repair or maintenance of the Project, Building or  Common Areas, and salaries, wages and benefits of any of Lessor's employees  above the level of building manager;

 

(xx) Accountants' fees and other expenses associated with the  enforcement of any leases or defense of Lessor's title to or interest in the  Project, the Building or any part thereof;

 

(xxi) Costs incurred with respect to the repair and maintenance  of the Project, Building or Common Area due to (1) violation by Lessor of the  terms and conditions of any provision of this Lease or any other lease in the  Project or Building, or (2) violation by any other tenant in the Project or  Building of the terms and conditions of any lease of space in the Project or  Building to the extent of recovery of such costs from such violating parties  or from third parties; or (3) violation by Lessor or any of its agents,  employees, contractors or other representatives of any governmental rule or  authority;

 

(xxii) Services, installations, or benefits furnished to some  tenants which are not furnished to Lessee or quantities of such services  furnished to some tenants which are also furnished to Lessee but are furnished  to other tenants in an amount materially in excess of that which would  represent a fair proportion of such services;

 

(xxiii) Any other expense which would not be considered a normal  Common Area Operating Expense under generally accepted accounting principles.  Lessor shall not collect in excess of one hundred percent (100%) of all  Common Area Operating Expenses.

 

4.3 **Payment**. Lessee shall cause payment of Rent to be  received by Lessor in lawful money of the United States, without offset or  deduction (except as specifically permitted in this Lease), on or before the  day on which it is due. Rent for any period during the term hereof which is  for less than one full calendar month shall be prorated based upon the actual  number of days of said month. Payment of Rent shall be made to Lessor at its  address stated herein or to such other persons or place as Lessor may from  time to time designate in writing. Acceptance of a payment which is less than  the amount then due shall not be a waiver of Lessor's rights to the balance  of such Rent, regardless of Lessor's endorsement of any check so stating. In  the event that any check, draft, or other instrument of payment given by  Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor  the sum of $25 in addition to any late charges which may be due.

5. **Security Deposit**. Lessee shall deposit with Lessor  upon execution hereof the Security Deposit as security for Lessee's faithful  performance of its obligations under this Lease. If Lessee fails to pay Rent,  or otherwise Defaults under this Lease, Lessor may use, apply or retain all  or any portion of said Security Deposit for the payment of any amount due  Lessor or to reimburse or compensate Lessor for any liability, expense, loss  or damage which Lessor may suffer or incur by reason thereof. If Lessor uses  or applies all or any portion of the Security Deposit, Lessee shall within 10  days after written request therefor deposit monies with Lessor sufficient to  restore said Security Deposit to the full amount required by this Lease.  Lessor shall not be required to keep the Security Deposit separate from its  general accounts. Within 14 days after the expiration or termination of this  Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent,  and otherwise within 30 days after the Premises have been vacated pursuant to  Paragraph 7.4(c) below, Lessor shall return that portion of the Security  Deposit not used or applied by Lessor. No part of the Security Deposit shall  be considered to be held in trust, to bear interest or to be prepayment for  any monies to be paid by Lessee under this Lease.

6. **Use**.

 

6.1 **Use**. Lessee shall use and occupy the Premises only  for the Agreed Use, or any other legal use which is reasonably comparable  thereto, and for no other purpose. Lessee shall not use or permit the use of  the Premises in a manner that is unlawful, creates damage, waste or a  nuisance, or that unreasonably disturbs occupants or that causes damage to  neighboring premises or properties. Lessor shall not unreasonably withhold or  delay its consent to any written request for a modification of the Agreed  Use, so long as the same will not impair the structural integrity of the  improvements on the Premises or the mechanical or electrical systems therein,  and/or is not significantly more burdensome to the Premises. If Lessor elects  to withhold consent, Lessor shall within 7 days after such request give  written notification of same, which notice shall include an explanation of  Lessor's objections to the change in the Agreed Use.

 

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6.2 **Hazardous Substances**.

 

(a) **Reportable Uses Require Consent**. The term **"Hazardous  Substance"**as used in this Lease shall mean any product, substance,  or waste whose presence, use, manufacture, disposal, transportation, or  release, either by itself or in combination with other materials expected to  be on the Premises, is either: (i) potentially injurious to the public  health, safety or welfare, the environment or the Premises, (ii) regulated or  monitored by any governmental authority, or (iii) a basis for potential  liability of Lessor to any governmental agency or third party under any  applicable statute or common law theory. Hazardous Substances shall include,  but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or  any products, by-products or fractions thereof. Lessee shall not engage in  any activity in or on the Premises which constitutes a Reportable Use of  Hazardous Substances without the express prior written consent of Lessor and  timely compliance (at Lessee's expense) with all Applicable Requirements. **"Reportable  Use"**shall mean (i) the installation or use of any above or below  ground storage tank, (ii) the generation, possession, storage, use,  transportation, or disposal of a Hazardous Substance that requires a permit  from, or with respect to which a report, notice, registration or business  plan is required to be filed with, any governmental authority, and/or (iii)  the presence at the Premises of a Hazardous Substance with respect to which  any Applicable Requirements requires that a notice be given to persons  entering or occupying the Premises or neighboring properties. Notwithstanding  the foregoing, Lessee may use any ordinary and customary materials reasonably  required to be used in the normal course of the Agreed Use, so long as such  use is in compliance with all Applicable Requirements, is not a Reportable  Use, and does not expose the Premises or neighboring property to any  meaningful risk of contamination or damage or expose Lessor to any liability  therefor. In addition, Lessor may condition its consent to any Reportable Use  upon receiving such additional assurances as Lessor reasonably deems  necessary to protect itself, the public, the Premises and/or the environment  against damage, contamination, injury and/or liability, including, but not  limited to, the installation (and removal on or before Lease expiration or  termination) of protective modifications (such as concrete encasements)  and/or increasing the Security Deposit.

 

(b) **Duty to Inform Lessor**. If Lessee knows, or has  reasonable cause to believe, that a Hazardous Substance has come to be  located in, on, under or about the Premises, other than as previously  consented to by Lessor, Lessee shall immediately give written notice of such  fact to Lessor, and provide Lessor with a copy of any report, notice, claim  or other documentation which it has concerning the presence of such Hazardous  Substance.

 

(c) **Lessee Remediation**. Lessee shall not cause or permit  any Hazardous Substance to be spilled or released in, on, under, or about the  Premises (including through the plumbing or sanitary sewer system) and shall  promptly, at Lessee's expense, take all investigatory and/or remedial action  reasonably recommended, whether or not formally ordered or required, for the  cleanup of any contamination of, and for the maintenance, security and/or  monitoring of the Premises or neighboring properties, that was caused or  materially contributed to by Lessee, or pertaining to or involving any  Hazardous Substance brought onto the Premises during the term of this Lease,  by or for Lessee, or any of Lessee's agents or employees. Lessor hereby  acknowledges and agrees that, anything in the Lease to the contrary  notwithstanding, Lessee shall not be obligated to clean up, remediate or monitor,  or contribute to the cost of cleaning up, remediating or monitoring, any  Hazardous Substances existing on, in or under the Project, the Building or  the Common Areas, or any portion thereof, as of the Commencement Date of the  Lease and/or caused by or contributed to by any person or entity other than  Lessee or any of its agents or employees.

 

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(d) **Lessee Indemnification**. Lessee shall indemnify,  defend and hold Lessor, its agents, employees, lenders and ground lessor, if  any, harmless from and against any and all loss of rents and/or damages,  liabilities, judgments, claims, expenses, penalties, and attorneys' and  consultants' fees arising out of or involving any Hazardous Substance brought  onto the Premises by or for Lessee, or any of Lessee's agents or employees  (provided, however, that Lessee shall have no liability under this Lease with  respect to underground migration of any Hazardous Substance under the  Premises from areas outside of the Project). Lessee's obligations shall  include, but not be limited to, the effects of any contamination or injury to  person, property or the environment created or suffered by Lessee, and the  cost of investigation, removal, remediation, restoration and/or abatement,  and shall survive the expiration or termination of this Lease. No  termination, cancellation or release agreement entered into by Lessor and  Lessee shall release Lessee from its obligations under this Lease with  respect to Hazardous Substances, unless specifically so agreed by Lessor in  writing at the time of such agreement.

 

(e) **Lessor Indemnification**. Lessor and its successors and  assigns shall indemnify, defend, reimburse and hold Lessee, its employees and  lenders, harmless from and against any and all environmental damages,  including the cost of remediation, which existed as a result of Hazardous  Substances on the Premises prior to the Commencement Date (or the date Lessee  occupies the Premises, if earlier) or which are caused by Lessor, its agents  or employees. Lessor's obligations, as and when required by the Applicable  Requirements, shall include, but not be limited to, the cost of  investigation, removal, remediation, restoration and/or abatement, and shall  survive the expiration or termination of this Lease.

 

(f) **Investigations and Remediations**. Lessor shall retain  the responsibility and pay (at no cost to Lessee) for any investigations or  remediation measures required by governmental entities having jurisdiction  with respect to the existence of Hazardous Substances on the Premises prior  to the Commencement Date (or the date Lessee occupies the Premises, if  earlier), unless such remediation measure is required as a result of Lessee's  use (including "Alterations", as defined in paragraph 7.3(a) below)  of the Premises, in which event Lessee shall be responsible for such payment.  Lessee shall reasonably cooperate at no cost to Lessee in any such activities  at the request of Lessor, including allowing Lessor and Lessor's agents to  have reasonable access to the Premises at reasonable times in order to carry  out Lessor's investigative and remedial responsibilities.

 

6.3 **Lessee's Compliance with Applicable Requirements**.  Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole  expense, fully, diligently and in a timely manner, materially comply with all  Applicable Requirements pertaining to Lessee's specific and distinct manner  of use of the Premises or any Alterations to the Premises made by Lessee, and  the requirements of any applicable fire insurance underwriter or rating  bureau, without regard to whether said requirements are now in effect or  become effective after the Start Date. Lessee shall, within 10 days after  receipt of Lessor's written request, provide Lessor with copies of all  permits and other documents, and other information evidencing Lessee's  compliance with any Applicable Requirements specified by Lessor, and shall  immediately upon receipt, notify Lessor in writing (with copies of any  documents involved) of any threatened or actual claim, notice, citation,  warning, complaint or report pertaining to or involving the failure of Lessee  or the Premises to comply with any Applicable Requirements.

 

6.4 **Inspection; Compliance**. Lessor and Lessor's **"Lender"**(as defined in Paragraph 30) and consultants shall have the right to  enter into Premises at any time, in the case of an emergency, and otherwise  at reasonable times and upon reasonable and advance notice, for the purpose  of inspecting the condition of the Premises and for verifying compliance by  Lessee with this Lease. The cost of any such inspections shall be paid by  Lessor, unless a violation of Applicable Requirements in connection with  Lessee's specific and distinct manner of use of the Premises or any  Alterations to the Premises made by Lessee, or a contamination caused by  Lessee or any of its agents or employees is found to exist or be imminent. In  such case, Lessee shall upon request reimburse Lessor for the cost of such  inspection, so long as such inspection is reasonably related to the violation  or contamination. 

 

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7. **Maintenance; Repairs, Utility Installations; Trade  Fixtures and Alterations**.

 

7.1 **Lessee's Obligations**.

 

(a) **In General**. Subject to the provisions of Paragraph  2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable  Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14  (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,  Utility Installations (intended for Lessee's exclusive use, no matter where  located), and Alterations in good order, condition and repair (whether or not  the portion of the Premises requiring repairs, or the means of repairing the  same, are reasonably or readily accessible to Lessee, and whether or not the  need for such repairs occurs as a result of Lessee's use, any prior use, the  elements or the age of such portion of the Premises), including, but not  limited to, all equipment or facilities, such as exposed plumbing,  electrical, lighting facilities, boilers, pressure vessels, fixtures,  interior walls, interior surfaces of exterior walls, ceilings, floors,  windows, doors, plate glass, and skylights but excluding any items which are  the responsibility of Lessor pursuant to Paragraph 7.2. Lessee, in keeping  the Premises in good order, condition and repair, shall exercise and perform  good maintenance practices. Lessee's obligations shall include restorations,  replacements or renewals when necessary to keep the Premises and all  improvements thereon or a part thereof in good order, condition and state of  repair. Lessee shall not be obligated to incur any capital expenditures in  satisfying Lessor's obligations under Paragraph 7.1(a). Provided, however,  that Lessor shall not be precluded from passing through any cost of such  capital expenditures to Lessee as a Common Area Operating Expense to the extent  provided in Paragraph 4.2(a)(viii) or otherwise expressly provided in the  Lease.

 

(b) **Failure to Perform**. If Lessee fails to perform  Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the  Premises after 10 days' prior written notice to Lessee (except in the case of  an emergency, in which case no notice shall be required), perform such  obligations on Lessee's behalf, and put the Premises in good order, condition  and repair, and Lessee shall promptly reimburse Lessor for the cost thereof.

 

7.2 **Lessor's Obligations**. Subject to the provisions of  Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area Operating  Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and  14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph  4.2, shall keep in good order, condition and repair the foundations, exterior  walls, structural condition of interior bearing walls, exterior roof, fire  sprinkler system, Common Area fire alarm and/or smoke detection systems, HVAC  system serving the Building and Premises, fire hydrants, parking lots,  walkways, parkways, driveways, landscaping, fences, signs and utility systems  serving the Common Areas and all parts thereof, as well as providing the  services for which there is a Common Area Operating Expense pursuant to  Paragraph 4.2. Lessor shall not be obligated to paint the exterior or  interior surfaces of exterior walls nor shall Lessor be obligated to  maintain, repair or replace windows, doors or plate glass of the Premises.  Lessee expressly waives the benefit of any statute now or hereafter in effect  to the extent it is inconsistent with the terms of this Lease. If Lessor  fails to perform any of its obligations under this Paragraph 7.2 and such  failure continues for a period of longer than thirty (30) days following  receipt of written notice from Lessee, then Lessee may, but shall not be  obligated to, on behalf of Lessor, cure such failure and, in such event,  Lessor shall, within thirty (30) days following receipt of a written invoice  or statement, reimburse Lessee for the reasonable costs incurred by Lessee in  curing Lessor's failure (plus interest thereon at the rate of 10% per annum  commencing on the date thirty (30) days from the date of Lessor's receipt of  such invoice or statement). Provided, however, that Lessee shall not take  such action if Lessor has commenced performance of its obligations within  said thirty (30) days and is diligently pursuing completion thereof.

 

7.3 **Utility Installations; Trade Fixtures; Alterations**.

 

(a) **Definitions**. The term **"Utility  Installations"**refers to all floor and window coverings, air lines,  power panels, electrical distribution, security and fire protection systems,  communication systems, lighting fixtures, exposed plumbing, and fencing in or  on the Premises. The term **"Trade Fixtures"**shall mean  Lessee's machinery and equipment that can be removed without doing material  damage to the Premises. The term **"Alterations"**shall mean  any modification of the improvements, other than Utility Installations or  Trade Fixtures, whether by addition or deletion. **"Lessee Owned  Alterations and/or Utility Installations"**are defined as Alterations  and/or Utility Installations made by Lessee that are not yet owned by Lessor  pursuant to Paragraph 7.4(a).

 

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(b) **Consent**. Lessee shall not make any Alterations or  Utility Installations to the Premises without Lessor's prior written consent  in accordance with the provisions of this Paragraph 7.3(b). Lessee may,  however, make non-structural Utility Installations to the interior of the  Premises (excluding the roof) without such consent but upon notice to Lessor,  as long as they are not visible from the outside, do not involve puncturing,  relocating or removing the roof or any existing walls, and the cumulative cost  thereof during this Lease as extended does not exceed a sum equal to 3  month's Base Rent in the aggregate or a sum equal to one month's Base Rent in  any one year. Notwithstanding the foregoing, Lessee shall not make or permit  any roof penetrations and/or install anything on the roof without the prior  written approval of Lessor. Lessor may, as a precondition to granting such  approval, require Lessee to utilize a contractor chosen and/or approved by  Lessor. Any Alterations or Utility Installations that Lessee shall desire to  make and which require the consent of the Lessor shall be presented to Lessor  in written form with detailed plans (the **"Alterations Request"**).  Lessor shall have fourteen (14) days from receipt of Lessee's Alterations  Request to notify Lessee in writing of Lessor's approval or disapproval of  said Alterations Request. Lessor's failure to so notify Lessee within said  fourteen (14) days shall be deemed approval of Lessee's Alterations Request.  Lessor's consent to Lessee's Alterations Request shall not be unreasonably  withheld, conditioned or delayed. Provided, that if Lessor has delivered an  Early Termination Notice as described in Paragraph 8 of Addendum No. 1 to  this Lease, or if Lessor delivers an Early Termination Notice within the  fourteen (14) days allowed for Lessor's approval or disapproval of Lessee's  Alterations Request, then Lessor's consent shall be in Lessor's sole and  absolute discretion. Consent shall be deemed conditioned upon Lessee's: (i)  acquiring all applicable governmental permits, (ii) furnishing Lessor with  copies of both the permits and the plans and specifications prior to  commencement of the work, and (iii) compliance with all conditions of said  permits and other Applicable Requirements in a prompt and expeditious manner.  Any Alterations or Utility Installations shall be performed in a workmanlike  manner with good and sufficient materials. Lessee shall promptly upon  completion furnish Lessor with as-built plans and specifications. For work  which costs an amount in excess of $250,000, Lessor may condition its consent  upon Lessee providing a lien and completion bond in an amount equal to 150%  of the estimated cost of such Alteration or Utility Installation.

 

(c) **Indemnification**. Lessee shall pay, when due, all  claims for labor or materials furnished or alleged to have been furnished to  or for Lessee at or for use on the Premises, which claims are or may be  secured by any mechanic's or materialman's lien against the Premises or any  interest therein. Lessee shall give Lessor not less than 5 days notice prior  to the commencement of any work in, on or about the Premises, and Lessor  shall have the right to post notices of non-responsibility. If Lessee shall  contest the validity of any such lien, claim or demand, then Lessee shall, at  its sole expense defend and protect itself, Lessor and the Premises against  the same and shall pay and satisfy any such adverse judgment that may be  rendered thereon before the enforcement thereof. If Lessor shall require,  Lessee shall furnish a surety bond in an amount equal to 150% of the amount  of such contested lien, claim or demand, indemnifying Lessor against  liability for the same. If Lessor elects to participate in any such action,  Lessee shall pay Lessor's reasonableattorneys' fees and costs.

 

7.4 **Ownership; Removal; Surrender; and Restoration**.

 

(a) **Ownership**. Subject to Lessor's right to require  removal, all Alterations and Utility Installations made by Lessee shall be  the property of Lessee, but considered a part of the Premises. Unless otherwise  instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and  Utility Installations shall, at the expiration or termination of this Lease,  become the property of Lessor and be surrendered by Lessee with the Premises.

 

(b) **Removal**. By delivery to Lessee of written notice from  Lessor prior to Lessee's installation of any Alterations or Utility  Installations, Lessor shall advise Lessee as to whether Lessor will require  that any or all Lessee Owned Alterations or Utility Installations be removed  by the expiration or termination of this Lease. Lessee shall have no  obligation to remove such Lessee Owned Alterations or Utility Installations  from the Premises if Lessor fails to submit said written notice. Lessor may  require the removal at any time of all or any part of any Lessee Owned  Alterations or Utility Installations made without the required consent. 

 

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(c) **Surrender; Restoration**. Lessee shall surrender the  Premises by the Expiration Date or any earlier termination date, with all of  the improvements, parts and surfaces thereof broom clean and free of debris,  and in good operating order, condition and state of repair, ordinary wear and  tear excepted. "Ordinary wear and tear" shall not include any  damage or deterioration that would have been prevented by good maintenance  practice. Lessee shall repair any damage occasioned by the installation,  maintenance or removal by Lessee of Trade Fixtures, Lessee owned Alterations  and/or Utility Installations, furnishings, and equipment as well as the  removal of any storage tank installed by or for Lessee. Lessee shall also  completely remove from the Premises any and all Hazardous Substances brought  onto the Premises by or for Lessee, or of Lessee's agents or employees  (except Hazardous Substances which were deposited via underground migration  from areas outside of the Project) even if such removal would require Lessee  to perform or pay for work that exceeds statutory requirements. Before  surrendering the Premises, Lessee shall remove all of its personal property  and Trade Fisctures (which shall remain the property of Lessee) and such  Alterations or additions to the Premises made by Lessee which are to be  removed pursuant to Paragraph 7.4(b) or other applicable provisions of this  Lease. If Lessee fails to so remove its personal property and Trade Fixtures,  the same shall be deemd abandoned and shall become the property of the  Lessor. Lessee shall deliver all keys to Lessor. The failure by Lessee to  timely vacate the Premises pursuant to this Paragraph 7.4(c) without the  express written consent of Lessor shall constitute a holdover under the  provisions of Paragraph 26 below.

8. **Insurance; Indemnity**.

 

8.1 **Payment of Premiums**. The cost of the premiums for the  insurance policies required to be carried by Lessor, pursuant to Paragraphs  8.2(b), 8.3(a) and 8.3(b), shall be a Common Area Operating Expense. Premiums  for policy periods commencing prior to, or extending beyond, the term of this  Lease shall be prorated to coincide with the corresponding Start Date or  Expiration Date. 

 

8.2 **Liability Insurance**.

 

(a) **Carried  by Lessee**. Lessee mayobtain and keep in force a Commercial  General Liability policy of insurance protecting Lessee and Lessor as an  additional insured against claims for bodily injury, personal injury and property  damage based upon or arising out of the ownership, use, occupancy or  maintenance of the Premises and all areas appurtenant thereto. Such insurance  shall be on an occurrence basis providing single limit coverage in an amount  not less than $1,000,000 per occurrence with an annual aggregate of not less  than $2,000,000, and shall contain an "Additional Insured-Managers or  Lessors of Premises Endorsement." The policy  shall not contain any intra-insured exclusions as between insured persons or  organizations, but shall include coverage for liability assumed under this  Lease as an **"insured contract"**for the performance of  Lessee's indemnity obligations under this Lease. The limits of said insurance  shall not, however, limit the liability of Lessee nor relieve Lessee of any  obligation hereunder. All insurance carried by Lessee shall be primary to and  not contributory with any similar insurance carried by Lessor, whose  insurance shall be considered excess insurance only.

 

(b) **Carried by Lessor**. Lessor shall maintain liability  insurance as described in Paragraph 8.2(a), in addition to, and not in lieu  of, the insurance required to be maintained by Lessee. Lessee shall not be  named as an additional insured therein.

 

8.3 **Property Insurance - Building, Improvements and Rental  Value**.

 

(a) **Building and Improvements**. Lessor shall obtain and  keep in force a policy or policies of insurance in the name of Lessor, with  loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or  damage to the Premises. The amount of such insurance shall be equal to the  full replacement cost of the Premises, as the same shall exist from time to  time, or the amount required by any Lender, but in no event more than the  commercially reasonable and available insurable value thereof. Lessee Owned  Alterations and Utility Installations, Trade Fixtures, and Lessee's personal  property shall be insured by Lessee under Paragraph 8.4. If the coverage is  available and commercially appropriate, such policy or policies shall insure  against all risks of direct physical loss or damage (except the perils of  earthquake unless required by a Lender), including coverage for debris  removal and the enforcement of any Applicable Requirements requiring the  upgrading, demolition, reconstruction or replacement of any portion of the  Premises as the result of a covered loss. Said policy or policies shall also  contain an agreed valuation provision in lieu of any coinsurance clause,  waiver of subrogation, and inflation guard protection causing an increase in  the annual property insurance coverage amount by a factor of not less than  the adjusted U.S. Department of Labor Consumer Price Index for All Urban  Consumers for the city nearest to where the Premises are located. If such  insurance coverage has a deductible clause, the deductible amount shall not  exceed $1,000 per occurrence. Provided, that Lessee shall not be obligated to  pay any deductible allocable to any earthquake insurance that Lessor may  elect to carry or maintain during the Lease term.

 

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(b) **Rental Value**. Lessor shall also obtain and keep in  force a policy or policies in the name of Lessor with loss payable to Lessor  and any Lender, insuring the loss of the full Rent for one year with an  extended period of indemnity for an additional 180 days ("Rental Value  insurance"). Said insurance shall contain an agreed valuation provision  in lieu of any coinsurance clause, and the amount of coverage shall be  adjusted annually to reflect the projected Rent otherwise payable by Lessee,  for the next 12 month period.

 

(c) **Adjacent Premises**. Lessee shall pay for any increase  in the premiums for the property insurance of the Building and for the Common  Areas or other buildings in the Project if said increase is caused by  Lessee's acts, omissions, use or occupancy of the Premises (other than  Lessee's Agreed Use of the Premises). 

 

(d) **Lessee's Improvements**. Since Lessor is the Insuring  Party, Lessor shall not be required to insure Lessee Owned Alterations and  Utility Installations unless the item in question has become the property of  Lessor under the terms of this Lease.

 

8.4 **Lessee's Property; Business Interruption Insurance**.

 

(a) **Property Damage**. Lessee shall obtain and maintain  insurance coverage on all of Lessee's personal property, Trade Fixtures, and  Lessee Owned Alterations and Utility Installations. Such insurance shall be  full replacement cost coverage with a deductible of not to exceed $1,000 per  occurrence. The proceeds from any such insurance shall be used by Lessee for  the replacement of personal property, Trade Fixtures and Lessee Owned  Alterations and Utility Installations. Lessee shall provide Lessor with  written evidence that such insurance is in force.

 

(b) **Business Interruption**. Lessee shall obtain and  maintain loss of income and extra expense insurance in amounts as will  reimburse Lessee for direct or indirect loss of earnings attributable to all  perils commonly insured against by prudent lessees in the business of Lessee  or attributable to prevention of access to the Premises as a result of such  perils.

 

(c) **No Representation of Adequate Coverage**. Lessor makes  no representation that the limits or forms of coverage of insurance specified  herein are adequate to cover Lessee's property, business operations or  obligations under this Lease.

 

8.5 **Insurance Policies**. Insurance required herein shall  be by companies duly licensed or admitted to transact business in the state  where the Premises are located, and maintaining during the policy term a  "General Policyholders Rating" of at least B+, V, as set forth in  the most current issue of "Best's Insurance Guide", or such other  rating as may be required by a Lender. Lessee shall not do or permit to be  done anything which invalidates the required insurance policies. Lessee  shall, prior to the Start Date, deliver to Lessor certified copies of  policies of such insurance or certificates evidencing the existence and  amounts of the required insurance. No such policy shall be cancelable or  subject to modification except after 30 days prior written notice to Lessor.  Lessee shall, at least 30 days prior to the expiration of such policies,  furnish Lessor with evidence of renewals or "insurance binders"  evidencing renewal thereof, or Lessor may order such insurance and charge the  reasonable cost thereof to Lessee, which amount shall be payable by Lessee to  Lessor upon demand. Such policies shall be for a term of at least one year,  or the length of the remaining term of this Lease, whichever is less. If  either Party shall fail to procure and maintain the insurance required to be  carried by it, the other Party may, but shall not be required to, procure and  maintain the same.

 

8.6 **Waiver of Subrogation**. Without affecting any other  rights or remedies, Lessee and Lessor each hereby release and relieve the  other, and waive their entire right to recover damages against the other, for  loss of or damage to its property arising out of or incident to the perils  required to be insured against herein. The effect of such releases and  waivers is not limited by the amount of insurance carried or required, or by  any deductibles applicable hereto. The Parties agree to have their respective  property damage insurance carriers waive any right to subrogation that such  companies may have against Lessor or Lessee, as the case may be.

 

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8.7 **Indemnity**. Except for Lessor's gross negligence or  willful misconduct, Lessee shall indemnify, protect, defend and hold harmless  the Premises, Lessor and its agents, Lessor's master or ground lessor,  partners and Lenders, from and against any and all claims, loss of rents  and/or damages, liens, judgments, penalties, attorneys' and consultants'  fees, expenses and/or liabilities arising out of, involving, or in connection  with, the use and/or occupancy of the Premises by Lessee. If any action or  proceeding is brought against Lessor by reason of any of the foregoing  matters, Lessee shall upon notice defend the same at Lessee's expense by  counsel reasonably satisfactory to Lessor and Lessor shall cooperate with  Lessee in such defense. Lessor need not have first paid any such claim in  order to be defended or indemnified. Anything in the Lease, as amended, to  the contrary notwithstanding, Lessee shall not be liable to Lessor for any  injury to Lessor's business or for any loss of income or profit therefrom.

 

8.8 **Exemption of Lessor from Liability**. Except in  connection with or related to the negligence or willful misconduct of Lessor  or any of its agnets, employees, contractors or other representatives, Lessor  shall not be liable for injury or damage to the person or goods, wares,  merchandise or other property of Lessee, Lessee's employees, contractors,  invitees, customers, or any other person in or about the Premises, whether  such damage or injury is caused by or results from fire, steam, electricity,  gas, water or rain, or from the breakage, leakage, obstruction or other  defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or  lighting fixtures, or from any other cause, whether the said injury or damage  results from conditions arising upon the Premises or upon other portions of  the Building, or from other sources or places. Lessor shall not be liable for  any damages arising from any act or neglect of any other tenant of Lessor nor  from the failure of Lessor to enforce the provisions of any other lease in the  Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor  shall under no circumstances be liable for injury to Lessee's business or for  any loss of income or profit therefrom.

9. **Damage or Destruction**.

 

9.1 **Definitions**.

 

(a) **"Premises Partial Damage"**shall mean damage  or destruction to the improvements on the Premises, other than Lessee Owned  Alterations and Utility Installations, which can reasonably be repaired in 6  months or less from the date of the damage or destruction, and the cost  thereof does not exceed a sum equal to 6 month's Base Rent. Lessor shall  notify Lessee in writing within 30 days from the date of the damage or  destruction as to whether or not the damage is Partial or Total.

 

(b) **"Premises Total Destruction"**shall mean  damage or destruction to the improvements on the Premises, other than Lessee  Owned Alterations and Utility Installations and Trade Fixtures, which cannot  reasonably be repaired in 6 months or less from the date of the damage or  destruction and/or the cost thereof exceeds a sum equal to 18 month's Base  Rent. Lessor shall notify Lessee in writing within 30 days from the date of  the damage or destruction as to whether or not the damage is Partial or  Total.

 

(c) **"Insured Loss"**shall mean damage or  destruction to improvements on the Premises, other than Lessee Owned  Alterations and Utility Installations and Trade Fixtures, which was caused by  an event required to be covered by the insurance described in Paragraph  8.3(a), irrespective of any deductible amounts or coverage limits involved.

 

(d) **"Replacement Cost"**shall mean the cost to  repair or rebuild the improvements owned by Lessor at the time of the  occurrence to their condition existing immediately prior thereto, including  demolition, debris removal and upgrading required by the operation of  Applicable Requirements, and without deduction for depreciation.

 

(e) **"Hazardous Substance Condition"**shall mean  the occurrence or discovery of a condition involving the presence of, or a  contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in,  on, or under the Premises.

 

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9.2 **Partial Damage - Insured Loss**. If a Premises Partial  Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's  expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned  Alterations and Utility Installations) as soon as reasonably possible and  this Lease shall continue in full force and effect; provided, however, that  Lessee shall, at Lessor's election, make the repair of any damage or  destruction the total cost to repair of which is $5,000 or less, and, in such  event, Lessor shall make any applicable insurance proceeds available to  Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing,  if the required insurance was not in force or the insurance proceeds are not  sufficient to effect such repair, the Insuring Party shall promptly  contribute the shortage in proceeds as and when required to complete said  repairs. In the event, however, such shortage was due to the fact that, by reason  of the unique nature of the improvements, full replacement cost insurance  coverage was not commercially reasonable and available, Lessor shall have no  obligation to pay for the shortage in insurance proceeds or to fully restore  the unique aspects of the Premises unless Lessee provides Lessor with the  funds to cover same, or adequate assurance thereof, within 10 days following  receipt of written notice of such shortage and request therefor. If Lessor  receives said funds or adequate assurance thereof within said 10 day period,  the party responsible for making the repairs shall complete them as soon as  reasonably possible and this Lease shall remain in full force and effect. If  such funds or assurance are not received, Lessor may nevertheless elect by  written notice to Lessee within 10 days thereafter to: (i) make such  restoration and repair as is commercially reasonable with Lessor paying any  shortage in proceeds, in which case this Lease shall remain in full force and  effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall  not be entitled to reimbursement of any funds contributed by Lessee to repair  any such damage or destruction. Premises Partial Damage due to flood or  earthquake shall be subject to Paragraph 9.3, notwithstanding that there may  be some insurance coverage, but the net proceeds of any such insurance shall  be made available for the repairs if made by either Party.

 

9.3 **Partial Damage - Uninsured Loss**. If a Premises  Partial Damage that is not an Insured Loss occurs, unless caused by a  negligent or willful act of Lessee (in which event Lessee shall make the  repairs at Lessee's expense), Lessor may either: (i) repair such damage as  soon as reasonably possible at Lessor's expense, in which event this Lease  shall continue in full force and effect, or (ii) terminate this Lease by  giving written notice to Lessee within 30 days after receipt by Lessor of  knowledge of the occurrence of such damage. Such termination shall be  effective 60 days following the date of such notice. In the event Lessor  elects to terminate this Lease, Lessee shall have the right within 10 days  after receipt of the termination notice to give written notice to Lessor of  Lessee's commitment to pay for the repair of such damage without  reimbursement from Lessor. Lessee shall provide Lessor with said funds or  satisfactory assurance thereof within 30 days after making such commitment.  In such event this Lease shall continue in full force and effect, and Lessor  shall proceed to make such repairs as soon as reasonably possible after the  required funds are available. If Lessee does not make the required  commitment, this Lease shall terminate as of the date specified in the  termination notice.

 

9.4 **Total Destruction**. Notwithstanding any other  provision hereof, if a Premises Total Destruction occurs, this Lease shall  terminate 60 days following such Destruction. If the damage or destruction  was caused by the gross negligence or willful misconduct of Lessee, Lessor  shall have the right to recover Lessor's damages from Lessee, except as  provided in Paragraph 8.6.

 

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9.5 **Damage Near End of Term**. If at any time during the  last 6 months of this Lease there is damage for which the cost to repair  exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may  terminate this Lease effective 60 days following the date of occurrence of  such damage by giving a written termination notice to Lessee within 30 days  after the date of occurrence of such damage. Notwithstanding the foregoing,  if Lessee at that time has an exercisable option to extend this Lease or to  purchase the Premises, then Lessee may preserve this Lease by, (a) exercising  such option and (b) providing Lessor with any shortage in insurance proceeds  (or adequate assurance thereof) needed to make the repairs on or before the  earlier of (i) the date which is 10 days after Lessee's receipt of Lessor's  written notice purporting to terminate this Lease, or (ii) the day prior to  the date upon which such option expires. If Lessee duly exercises such option  during such period and provides Lessor with funds (or adequate assurance  thereof) to cover any shortage in insurance proceeds, Lessor shall, at  Lessor's commercially reasonable expense, repair such damage as soon as  reasonably possible and this Lease shall continue in full force and effect.  If Lessee fails to exercise such option and provide such funds or assurance  during such period, then this Lease shall terminate on the date specified in  the termination notice and Lessee's option shall be extinguished.

 

9.6 **Abatement of Rent; Lessee's Remedies**.

 

(a) **Abatement**. In the event of Premises Partial Damage or  Premises Total Destruction or a Hazardous Substance Condition for which  Lessee is not responsible under this Lease, the Rent payable by Lessee for  the period required for the repair, remediation or restoration of such damage  shall be abated in proportion to the degree to which Lessee's use of the  Premises is impaired. All other obligations of Lessee hereunder shall be  performed by Lessee, and Lessor shall have no liability for any such damage,  destruction, remediation, repair or restoration except as provided herein.

 

(b) **Remedies**. If Lessor shall be obligated to repair or  restore the Premises and does not commence, in a substantial and meaningful  way, such repair or restoration within 90 days after such obligation shall  accrue, Lessee may, at any time prior to the commencement of such repair or  restoration, give written notice to Lessor and to any Lenders of which Lessee  has actual notice, of Lessee's election to terminate this Lease on a date not  less than 60 days following the giving of such notice. If Lessee gives such  notice and such repair or restoration is not commenced within 30 days  thereafter, this Lease shall terminate as of the date specified in said  notice. If the repair or restoration is commenced within such 30 days, this  Lease shall continue in full force and effect. "Commence" shall  mean either the unconditional authorization of the preparation of the  required plans, or the beginning of the actual work on the Premises,  whichever first occurs.

 

9.7 **Termination; Advance Payments**. Upon termination of  this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable  adjustment shall be made concerning advance Base Rent and any other advance  payments made by Lessee to Lessor. Lessor shall, in addition, return to  Lessee so much of Lessee's Security Deposit as has not been, or is not then  required to be, used by Lessor.

 

9.8 **Waive Statutes**. Lessor and Lessee agree that the  terms of this Lease shall govern the effect of any damage to or destruction  of the Premises with respect to the termination of this Lease and hereby  waive the provisions of any present or future statute to the extent  inconsistent herewith.

10. **Real Property Taxes**.

 

10.1 **Definition**. As used herein, the term **"Real  Property Taxes"**shall include any form of assessment; real estate,  general, special, ordinary or extraordinary, or rental levy or tax (other  than inheritance, personal income or estate taxes); improvement bond; and/or  license fee imposed upon or levied against any legal or equitable interest of  Lessor in the Project, Lessor's right to other income therefrom, and/or  Lessor's business of leasing, by any authority having the direct or indirect  power to tax and where the funds are generated with reference to the Project  address and where the proceeds so generated are to be applied by the city,  county or other local taxing authority of a jurisdiction within which the  Project is located. The term "Real Property Taxes" shall also include  any tax, fee, levy, assessment or charge, or any increase therein, imposed by  reason of events occurring during the term of this Lease, including but not  limited to, a change in the ownership of the Project or any portion thereof  or a change in the improvements thereon. In calculating Real Property Taxes  for any calendar year, the Real Property Taxes for any real estate tax year  shall be included in the calculation of Real Property Taxes for such calendar  year based upon the number of days which such calendar year and tax year have  in common.

 

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10.2 **Payment of Taxes**. Lessor shall pay the Real Property  Taxes applicable to the Project, and except as otherwise provided in  Paragraph 10.3, any such amounts shall be included in the calculation of  Common Area Operating Expenses in accordance with the provisions of Paragraph  4.2.

 

10.3 **Additional Improvements**. Common Area Operating  Expenses shall not include Real Property Taxes specified in the tax  assessor's records and work sheets as being caused by additional improvements  placed upon the Project by other lessees or by Lessor for the exclusive  enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof,  Lessee shall, however, pay to Lessor at the time Common Area Operating  Expenses are payable under Paragraph 4.2, the entirety of any increase in  Real Property Taxes if assessed solely by reason of Alterations, Trade  Fixtures or Utility Installations placed upon the Premises by Lessee or at  Lessee's request.

 

10.4 **Joint Assessment**. If the Building is not separately  assessed, Real Property Taxes allocated to the Building shall be an equitable  proportion of the Real Property Taxes for all of the land and improvements  included within the tax parcel assessed, such proportion to be determined by  Lessor from the respective valuations assigned in the assessor's work sheets  or such other information as may be reasonably available. Lessor's reasonable  determination thereof, in good faith, shall be conclusive.

 

10.5 **Personal Property Taxes**. Lessee shall pay prior to  delinquency all taxes assessed against and levied upon Lessee Owned  Alterations and Utility Installations, Trade Fixtures, furnishings, equipment  and all personal property of Lessee contained in the Premises. When possible,  Lessee shall cause its Lessee Owned Alterations and Utility Installations,  Trade Fixtures, furnishings, equipment and all other personal property to be  assessed and billed separately from the real property of Lessor. If any of  Lessee's said property shall be assessed with Lessor's real property, Lessee  shall pay Lessor the taxes attributable to Lessee's property within 10 days  after receipt of a written statement setting forth the taxes applicable to  Lessee's property.

11. **Utilities**. Lessee shall pay for all water, gas, heat,  light, power, telephone, trash disposal and other utilities and services  supplied to the Premises, together with any taxes thereon. Notwithstanding  the provisions of Paragraph 4.2, if at any time in Lessor's sole judgment,  Lessor determines that Lessee is using a disproportionate amount of water,  electricity or other commonly metered utilities, or that Lessee is generating  such a large volume of trash as to require an increase in the size of the  dumpster and/or an increase in the number of times per month that the dumpster  is emptied, then Lessor may increase Lessee's Base Rent by an amount equal to  such increased costs. Lessor represents and warrants to the Lessee that  water, gas, heat, light, power and electricity shall be separately metered to  the Premises as of the Commencement Date.

12. **Assignment and Subletting**.

 

12.1 **Lessor's Consent Required**.

 

(a) Lessee shall not voluntarily or by operation of law assign,  transfer, mortgage or encumber (collectively, **"assign or  assignment"**) or sublet all or any part of Lessee's interest in this  Lease or in the Premises without Lessor's prior written consent.

 

(b) A change in the control of Lessee shall constitute an  assignment requiring consent. The transfer, on a cumulative basis, of 25% or  more of the voting control of Lessee shall constitute a change in control for  this purpose.

 

(c) The involvement of Lessee or its assets in any transaction,  or series of transactions (by way of merger, sale, acquisition, financing,  transfer, leveraged buy-out or otherwise), whether or not a formal assignment  or hypothecation of this Lease or Lessee's assets occurs, which results or  will result in a reduction of the Net Worth of Lessee by an amount greater  than 25% of such Net Worth as it was represented at the time of the execution  of this Lease or at the time of the most recent assignment to which Lessor  has consented, or as it exists immediately prior to said transaction or  transactions constituting such reduction, whichever was or is greater, shall  be considered an assignment of this Lease to which Lessor may withhold its  consent. **"Net Worth of Lessee"**shall mean the net worth of  Lessee (excluding any guarantors) established under generally accepted  accounting principles.

 

(d) An assignment or subletting without consent of Lessor (where  such consent is required) shall be a Default curable after notice per  Paragraph 13.1(c) of this Lease.

 

(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor  shall be limited to compensatory damages and/or injunctive relief.

 

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12.2 **Terms and Conditions Applicable to Assignment and  Subletting**.

 

(a) Regardless of Lessor's consent, no assignment or subletting  shall: (i) be effective without the express written assumption by such  assignee or sublessee of the obligations of Lessee under this Lease, (ii) release  Lessee of any obligations hereunder, or (iii) alter the primary liability of  Lessee for the payment of Rent or for the performance of any other  obligations to be performed by Lessee.

 

(b) Lessor may accept Rent or performance of Lessee's  obligations from any person other than Lessee pending approval or disapproval  of an assignment. Neither a delay in the approval or disapproval of such  assignment nor the acceptance of Rent or performance shall constitute a  waiver or estoppel of Lessor's right to exercise its remedies for Lessee's  Default or Breach.

 

(c) Lessor's consent to any assignment or subletting shall not  constitute a consent to any subsequent assignment or subletting.

 

(d) In the event of any Default or Breach by Lessee, Lessor may  proceed directly against Lessee, any Guarantors or anyone else responsible  for the performance of Lessee's obligations under this Lease, including any  assignee or sublessee, without first exhausting Lessor's remedies against any  other person or entity responsible therefore to Lessor, or any security held  by Lessor.

 

(e) Each request for consent to an assignment or subletting  shall be in writing, accompanied by information relevant to Lessor's  determination as to the financial and operational responsibility and appropriateness  of the proposed assignee or sublessee, including but not limited to the  intended use and/or required modification of the Premises, if any. Lessee  agrees to provide Lessor with such other or additional information and/or  documentation as may be reasonably requested.

 

(f) Any assignee of, or sublessee under, this Lease shall, by  reason of accepting such assignment or entering into such sublease, be deemed  to have assumed and agreed to conform and comply with each and every term,  covenant, condition and obligation herein to be observed or performed by  Lessee during the term of said assignment or sublease, other than such  obligations as are contrary to or inconsistent with provisions of an  assignment or sublease to which Lessor has specifically consented to in  writing.

 

(g) Lessor's consent to any assignment or subletting shall not  transfer to the assignee or sublessee any Option granted to the original  Lessee by this Lease unless such transfer is specifically consented to by  Lessor in writing. (See Paragraph 39.2)

 

(h) With respect to Subparagraphs 12.2(a) and 12.2(f) of the  Lease, a sublessee of Lessee shall not be obligated to assume the Lessee's  obligations under the Lease.

 

(i) Notwithstanding anything contained in Paragraph 12 of the  Lease, so long as no uncured default exists under the Lease, upon the  satisfaction of the conditions set forth in Subparagraph 12.1(i), Lessee  shall have the right to assign this Lease or sublet all or a portion of the  Premises to a wholly owned subsidiary or an Affiliate of Lessee at any time,  without the prior written consent of Lessor. Notwithstanding the foregoing,  such assignment or sublease shall not be effective until Lessee has given  Lessor all of the following at least fifteen (15) days prior to the effective  date of such assignment or subletting: (i) written notice of such assignment  or sublease, (ii) the identity of the assignee or subtenant, and (iii) an  executed copy of the assignment or sublease. As used herein,  "Affiliate" shall mean any entity controlling, controlled by or  under common control with Lessee. Any additional assignment or subletting by  Lessee's Affiliates shall be subject to all of the terms and conditions of  Paragraph 12 of the Lease.

 

(j) Notwithstanding anything to the contrary contained in the  Lease, Tenant, without Lessor's prior written consent (but with notice to  Lessor in accordance with Paragraph 12.2(i) immediately preceding), may  sublet the Premises or assign this Lease to (i) a successor corporation  related to Tenant by merger, consolidation, non-bankruptcy reorganization or  government action; or (ii) a purchaser of all or substantially all of  Tenant's stock or Tenant's assets located at the Premises.

 

12.3 **Additional Terms and Conditions Applicable to Subletting**.  The following terms and conditions shall apply to any subletting by Lessee of  all or any part of the Premises and shall be deemed included in all subleases  under this Lease whether or not expressly incorporated therein:

 

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(a) Lessee hereby assigns and transfers to Lessor all of  Lessee's interest in all Rent payable on any sublease, and Lessor may collect  such Rent and apply same toward Lessee's obligations under this Lease;  provided, however, that until a Breach shall occur in the performance of  Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by  reason of the foregoing or any assignment of such sublease, nor by reason of  the collection of Rent, be deemed liable to the sublessee for any failure of  Lessee to perform and comply with any of Lessee's obligations to such  sublessee. Lessee hereby irrevocably authorizes and directs any such  sublessee, upon receipt of a written notice from Lessor stating that a Breach  exists in the performance of Lessee's obligations under this Lease, to pay to  Lessor all Rent due and to become due under the sublease. Sublessee shall  rely upon any such notice from Lessor and shall pay all Rents to Lessor  without any obligation or right to inquire as to whether such Breach exists,  notwithstanding any claim from Lessee to the contrary.

 

(b) In the event of a Breach by Lessee, Lessor may, at its  option, require sublessee to attorn to Lessor, in which event Lessor shall  undertake the obligations of the sublessor under such sublease from the time  of the exercise of said option to the expiration of such sublease; provided,  however, Lessor shall not be liable for any prepaid rents or security deposit  paid by such sublessee to such sublessor or for any prior Defaults or  Breaches of  such sublessor.

 

(c) Any matter requiring the consent of the sublessor under a  sublease shall also require the consent of Lessor.

 

(d) No sublessee shall further assign or sublet all or any part  of the Premises without Lessor's prior written consent.

 

(e) Lessor shall deliver a copy of any notice of Default or  Breach by Lessee to the sublessee, who shall have the right to cure the  Default of Lessee within the grace period, if any, specified in such notice.  The sublessee shall have a right of reimbursement and offset from and against  Lessee for any such Defaults cured by the sublessee.

 

(f) Lessor reserves the right to recapture the Premises in the  event of any sublease by Lessee. Any excess rent or other consideration  received by Lessee above the amount payable by the Lessee (including rent,  real estate taxes, maintenance charges, etc.), prorated on a square foot  basis as to the portion of the Premises subleased to such sublessee, shall be  divided equally between Lessor and Lessee. Provided, however, that Lessee  shall be entitled to recover its actual out-of-pocket expenses reasonably  incurred for market real estate commissions, tenant improvements, and  reasonable legal fees, the recovery of which shall be amortized over the term  of the sublease.

13. **Default; Breach; Remedies**.

 

13.1 **Default; Breach**. A **"Default"**is  defined as a failure by the Lessee to comply with or perform any of the  terms, covenants, conditions or Rules and Regulations under this Lease. A **"Breach"**is defined as the occurrence of one or more of the following Defaults,  and the failure of Lessee to cure such Default within any applicable grace  period:

 

(a) The abandonment of the Premises; or the vacating of the  Premises without providing a commercially reasonable level of security, or  where the coverage of the property insurance described in Paragraph 8.3 is  jeopardized as a result thereof, or without providing reasonable assurances  to minimize potential vandalism.

 

(b) The failure of Lessee to make any payment of Rent or any  Security Deposit required to be made by Lessee hereunder, whether to Lessor  or to a third party, when due, to provide reasonable evidence of insurance or  surety bond, or to fulfill any obligation under this Lease which endangers or  threatens life or property, where such failure continues for a period of 5  business days following written notice to Lessee.

 

(c) The failure by Lessee to provide (i) reasonable written  evidence of compliance with Applicable Requirements, (ii) the service  contracts, (iii) the rescission of an unauthorized assignment or subletting,  (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence  concerning any guaranty and/or Guarantor, (vii) any document requested under  Paragraph 41 (easements), or (viii) any other documentation or information  which Lessor may reasonably require of Lessee under the terms of this Lease,  where any such failure continues for a period of 10 days following written  notice to Lessee.

 

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(d) A Default by Lessee as to the terms, covenants, conditions  or provisions of this Lease, or of the rules adopted under Paragraph 2.9  hereof, other than those described in subparagraphs 13.1(a), (b) or (c),  above, where such Default continues for a period of 30 days after written  notice; provided, however, that if the nature of Lessee's Default is such  that more than 30 days are reasonably required for its cure, then it shall  not be deemed to be a Breach if Lessee commences such cure within said 30 day  period and thereafter diligently prosecutes such cure to completion.

 

(e) The occurrence of any of the following events: (i) the  making of any general arrangement or assignment for the benefit of creditors;  (ii) becoming a **"debtor"**as defined in 11 U.S.C. § 101 or  any successor statute thereto (unless, in the case of a petition filed  against Lessee, the same is dismissed within 60 days); (iii) the appointment  of a trustee or receiver to take possession of substantially all of Lessee's  assets located at the Premises or of Lessee's interest in this Lease, where  possession is not restored to Lessee within 30 days; or (iv) the attachment,  execution or other judicial seizure of substantially all of Lessee's assets  located at the Premises or of Lessee's interest in this Lease, where such  seizure is not discharged within 30 days; provided, however, in the event  that any provision of this subparagraph (e) is contrary to any applicable  law, such provision shall be of no force or effect, and not affect the  validity of the remaining provisions.

 

(f) The discovery that any financial statement of Lessee or of  any Guarantor given to Lessor was materially false.

 

(g) If the performance of Lessee's obligations under this Lease  is guaranteed: (i) the death of a Guarantor, (ii) the termination of a  Guarantor's liability with respect to this Lease other than in accordance  with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or  the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the  guaranty, or (v) a Guarantor's breach of its guaranty obligation on an  anticipatory basis, and Lessee's failure, within 60 days following written  notice of any such event, to provide written alternative assurance or  security, which, when coupled with the then existing resources of Lessee,  equals or exceeds the combined financial resources of Lessee and the  Guarantors that existed at the time of execution of this Lease.

 

13.2 **Remedies**. If Lessee fails to perform any of its  affirmative duties or obligations, within 10 days after written notice (or in  case of an emergency, without notice), Lessor may, at its option, perform  such duty or obligation on Lessee's behalf, including but not limited to the  obtaining of reasonably required bonds, insurance policies, or governmental  licenses, permits or approvals. The costs and expenses of any such  performance by Lessor shall be due and payable by Lessee upon receipt of  invoice therefor. If any check given to Lessor by Lessee shall not be honored  by the bank upon which it is drawn, Lessor, at its option, may require all  future payments to be made by Lessee to be by cashier's check. In the event  of a Breach, Lessor may, with or without further notice or demand, and  without limiting Lessor in the exercise of any right or remedy which Lessor  may have by reason of such Breach:

 

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(a) Terminate Lessee's right to possession of the Premises by  any lawful means, in which case this Lease shall terminate and Lessee shall  immediately surrender possession to Lessor. In such event Lessor shall be  entitled to recover from Lessee: (i) the unpaid Rent which had been earned at  the time of termination; (ii) the worth at the time of award of the amount by  which the unpaid rent which would have been earned after termination until  the time of award exceeds the amount of such rental loss that the Lessee  proves could have been reasonably avoided; (iii) the worth at the time of  award of the amount by which the unpaid rent for the balance of the term  after the time of award exceeds the amount of such rental loss that the  Lessee proves could be reasonably avoided; and (iv) any other amount  necessary to compensate Lessor for all the detriment proximately caused by  the Lessee's failure to perform its obligations under this Lease or which in  the ordinary course of things would be likely to result therefrom, including  but not limited to the cost of recovering possession of the Premises,  expenses of reletting, including necessary renovation and alteration of the  Premises, reasonable attorneys' fees, and that portion of any leasing  commission paid by Lessor in connection with this Lease applicable to the  unexpired term of this Lease. The worth at the time of award of the amount  referred to in provision (iii) of the immediately preceding sentence shall be  computed by discounting such amount at the discount rate of the Federal  Reserve Bank of the District within which the Premises are located at the  time of award plus one percent. Efforts by Lessor to mitigate damages caused  by Lessee's Breach of this Lease shall not waive Lessor's right to recover  damages under Paragraph 12. If termination of this Lease is obtained through  the provisional remedy of unlawful detainer, Lessor shall have the right to  recover in such proceeding any unpaid Rent and damages as are recoverable  therein, or Lessor may reserve the right to recover all or any part thereof  in a separate suit. If a notice and grace period required under Paragraph  13.1 was not previously given, a notice to pay rent or quit, or to perform or  quit given to Lessee under the unlawful detainer statute shall also  constitute the notice required by Paragraph 13.1. In such case, the  applicable grace period required by Paragraph 13.1 and the unlawful detainer  statute shall run concurrently, and the failure of Lessee to cure the Default  within the greater of the two such grace periods shall constitute both an  unlawful detainer and a Breach of this Lease entitling Lessor to the remedies  provided for in this Lease and/or by said statute.

 

(b) Continue the Lease and Lessee's right to possession and  recover the Rent as it becomes due, in which event Lessee may sublet or  assign, subject only to reasonable limitations. Acts of maintenance, efforts  to relet, and/or the appointment of a receiver to protect the Lessor's  interests, shall not constitute a termination of the Lessee's right to  possession.

 

(c) Pursue any other remedy now or hereafter available under the  laws or judicial decisions of the   state wherein the Premises are located. The expiration or termination  of this Lease and/or the termination of Lessee's right to possession shall  not relieve Lessee from liability under any indemnity provisions of this  Lease as to matters occurring or accruing during the term hereof or by reason  of Lessee's occupancy of the Premises.

 

13.4 **Late Charges**. Lessee hereby acknowledges that late  payment by Lessee of Rent will cause Lessor to incur costs not contemplated  by this Lease, the exact amount of which will be extremely difficult to  ascertain. Such costs include, but are not limited to, processing and  accounting charges, and late charges which may be imposed upon Lessor by any  Lender. Accordingly, if any Rent shall not be received by Lessor within 5  days after such amount shall be due, then, without any requirement for notice  to Lessee, Lessee shall pay to Lessor a one-time late charge equal to 10% of  each such overdue amount or $100, whichever is greater. The parties hereby  agree that such late charge represents a fair and reasonable estimate of the  costs Lessor will incur by reason of such late payment. Acceptance of such  late charge by Lessor shall in no event constitute a waiver of Lessee's  Default or Breach with respect to such overdue amount, nor prevent the  exercise of any of the other rights and remedies granted hereunder. In the  event that a late charge is payable hereunder, whether or not collected, for  3 consecutive installments of Base Rent, then notwithstanding any provision  of this Lease to the contrary, Base Rent shall, at Lessor's option, become  due and payable quarterly in advance.

 

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13.5 **Interest**. Any monetary payment due Lessor hereunder,  other than late charges, not received by Lessor, when due as to scheduled  payments (such as Base Rent) or within 30 days following the date on which it  was due for non-scheduled payment, shall bear interest from the date when  due, as to scheduled payments, or the 31st day after it was due as to  non-scheduled payments. The interest (**"Interest"**) charged  shall be equal to the prime rate reported in the Wall Street Journal as  published closest prior to the date when due plus 4%, but shall not exceed  the maximum rate allowed by law. Interest is payable in addition to the potential  late charge provided for in Paragraph 13.4.

 

13.6 **Breach by Lessor**.

 

(a) **Notice of Breach**. Lessor shall not be deemed in  breach of this Lease unless Lessor fails within a reasonable time to perform  an obligation required to be performed by Lessor. For purposes of this  Paragraph, a reasonable time shall in no event be less than 30 days after  receipt by Lessor, and any Lender whose name and address shall have been  furnished Lessee in writing for such purpose, of written notice specifying  wherein such obligation of Lessor has not been performed; provided, however,  that if the nature of Lessor's obligation is such that more than 30 days are  reasonably required for its performance, then Lessor shall not be in breach  if performance is commenced within such 30 day period and thereafter  diligently pursued to completion.

 

(b) **Performance by Lessee on Behalf of Lessor**. In the  event that neither Lessor nor Lender cures said breach within 30 days after  receipt of said notice, or if having commenced said cure they do not  diligently pursue it to completion, then Lessee may elect to cure said breach  at Lessee's expense and offset from Rent an amount equal to the greater of  one month's Base Rent or the Security Deposit, and to pay an excess of such  expense under protest, reserving Lessee's right to reimbursement from Lessor.  Lessee shall document the cost of said cure and supply said documentation to  Lessor.

14. **Condemnation**. If the Premises or any portion thereof  are taken under the power of eminent domain or sold under the threat of the  exercise of said power (collectively **"Condemnation"**), this  Lease shall terminate as to the part taken as of the date the condemning  authority takes title or possession, whichever first occurs. If more than 10%  of the floor area of the Premises, or more than 25% of Lessee's Unreserved  Parking Spaces, is taken by Condemnation, Lessee may, at Lessee's option, to  be exercised in writing within 10 days after Lessor shall have given Lessee  written notice of such taking (or in the absence of such notice, within 10  days after the condemning authority shall have taken possession) terminate  this Lease as of the date the condemning authority takes such possession. If  Lessee does not terminate this Lease in accordance with the foregoing, this Lease  shall remain in full force and effect as to the portion of the Premises  remaining, except that the Base Rent shall be reduced in proportion to the  reduction in utility of the Premises caused by such Condemnation.  Condemnation awards and/or payments shall be the property of Lessor, whether  such award shall be made as compensation for diminution in value of the  leasehold, the value of the part taken, or for severance damages; provided,  however, that Lessee shall be entitled to any compensation for Lessee's  relocation expenses, loss of business goodwill and/or Trade Fixtures, without  regard to whether or not this Lease is terminated pursuant to the provisions  of this Paragraph. All Alterations and Utility Installations made to the  Premises by Lessee, for purposes of Condemnation only, shall be considered  the property of the Lessee and Lessee shall be entitled to any and all  compensation which is payable therefor. In the event that this Lease is not  terminated by reason of the Condemnation, Lessor shall repair any damage to  the Premises caused by such Condemnation.

15. **Brokerage Fees**.

 

15.3 **Representations and Indemnities of Broker Relationships**.  Lessee and Lessor each represent and warrant to the other that it has had no  dealings with any person, firm, broker or finder (other than the Brokers, if  any) in connection with this Lease, and that no one other than said named  Brokers is entitled to any commission or finder's fee in connection herewith.  Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold  the other harmless from and against liability for compensation or charges  which may be claimed by any such unnamed broker, finder or other similar  party by reason of any dealings or actions of the indemnifying Party,  including any costs, expenses, attorneys' fees reasonably incurred with  respect thereto.

16. **Estoppel Certificates**.

 

(a) Each Party (as **"Responding Party"**) shall  within 20 days after written notice from the other Party (the **"Requesting  Party"**) execute, acknowledge and deliver to the Requesting Party a  statement in writing in form similar to the then most current **"Estoppel  Certificate"**form published by the American Industrial Real Estate  Association, plus such additional information, confirmation and/or statements  as may be reasonably requested by the Requesting Party.

 

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(b) If the Responding Party shall fail to execute or deliver the  Estoppel Certificate within such 10 day period, the Requesting Party may  execute an Estoppel Certificate stating that: (i) the Lease is in full force  and effect without modification except as may be represented by the  Requesting Party, (ii) there are no uncured defaults in the Requesting  Party's performance, and (iii) if Lessor is the Requesting Party, not more  than one month's rent has been paid in advance. Prospective purchasers and  encumbrances may rely upon the Requesting Party's Estoppel Certificate, and  the Responding Party shall be estopped from denying the truth of the facts  contained in said Certificate.

17. **Definition of Lessor**. The term **"Lessor"**as  used herein shall mean the owner or owners at the time in question of the fee  title to the Premises, or, if this is a sublease, of the Lessee's interest in  the prior lease. In the event of a transfer of Lessor's title or interest in  the Premises or this Lease, Lessor shall deliver to the transferee or  assignee (in cash or by credit) any unused Security Deposit held by Lessor.  Except as provided in Paragraph 15, upon such transfer or assignment and  delivery of the Security Deposit, as aforesaid, the prior Lessor shall be  relieved of all liability with respect to the obligations and/or covenants  under this Lease thereafter to be performed by the Lessor, provided such  assignee or transferee assumes Lessor's obligations under this Lease accruing  from and after the date of such assignment or transfer. Subject to the  foregoing, the obligations and/or covenants in this Lease to be performed by  the Lessor shall be binding only upon the Lessor as hereinabove defined.  Notwithstanding the above, and subject to the provisions of Paragraph 20  below, the original Lessor under this Lease, and all subsequent holders of  the Lessor's interest in this Lease shall remain liable and responsible with  regard to the potential duties and liabilities of Lessor pertaining to Hazardous  Substances as outlined in Paragraph 6.2 above.

18. **Severability**. The invalidity of any provision of this  Lease, as determined by a court of competent jurisdiction, shall in no way  affect the validity of any other provision hereof.

19. **Days**. Unless otherwise specifically indicated to the  contrary, the word **"days"**as used in this Lease shall mean  and refer to calendar days.

20. **Limitation on Liability**. Subject to the provisions of  Paragraph 17 above, the obligations of Lessor under this Lease shall not  constitute personal obligations of Lessor, the individual partners of Lessor  or its or their individual partners, directors, officers or shareholders, and  Lessee shall look to the Premises, and the rent, issues and profits from the  Project and Lessor's interest in insurance proceeds applicable to the  Project, or applicable portion thereof; and to no other assets of Lessor, for  the satisfaction of any liability of Lessor with respect to this Lease, and  shall not seek recourse against the individual partners of Lessor, or its or  their individual partners, directors, officers or shareholders, or any of  their personal assets for such satisfaction. The provisions of this Paragraph  20 shall not be applicable to Lessor's failure to return the Security Deposit  if required under the Lease, which shall be a personal obligation of Lessor  and Lessee shall not be limited to seeking recourse from the Premises for the  return of such Security Deposit.

21. **Time of Essence**. Time is of the essence with respect  to the performance of all obligations to be performed or observed by the  Parties under this Lease.

22. **No Prior or Other Agreements**. This Lease contains all  agreements between the Parties with respect to any matter mentioned herein,  and no other prior or contemporaneous agreement or understanding shall be  effective.

23. **Notices**.

 

23.1 **Notice Requirements**. All notices required or  permitted by this Lease or applicable law shall be in writing and may be  delivered in person (by hand or by courier) or may be sent by certified or  registered mail**,**return receipt requested**,**or U.S. Postal  Service Express Mail, with postage prepaid, or by facsimile transmission, and  shall be deemed sufficiently given if served in a manner specified in this  Paragraph 23. The addresses noted adjacent to a Party's signature on this  Lease shall be that Party's address for delivery or mailing of notices.  Either Party may by written notice to the other specify a different address  for notice, except that upon Lessee's taking possession of the Premises, the  Premises shall constitute Lessee's address for notice. A copy of all notices  to Lessor shall be concurrently transmitted to such party or parties at such  addresses as Lessor may from time to time hereafter designate in writing.

 

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23.2 **Date of Notice**. Any notice sent by registered or  certified mail, return receipt requested, shall be deemed given on the date  of delivery shown on the receipt card, or if no delivery date is shown, the  postmark thereon. Notices delivered by United States Express Mail or  overnight courier that guarantee next day delivery shall be deemed given 24  hours after delivery of the same to the Postal Service or courier. Notices  transmitted by facsimile transmission or similar means shall be deemed  delivered upon telephone confirmation of receipt (confirmation report from  fax machine is sufficient), provided a copy is also delivered via delivery or  mail. If notice is received on a Saturday, Sunday or legal holiday, it shall  be deemed received on the next business day.

24. **Waivers**. No waiver by Lessor of the Default or Breach  of any term, covenant or condition hereof by Lessee, shall be deemed a waiver  of any other term, covenant or condition hereof, or of any subsequent Default  or Breach by Lessee of the same or of any other term, covenant or condition  hereof. Lessor's consent to, or approval of, any act shall not be deemed to  render unnecessary the obtaining of Lessor's consent to, or approval of, any  subsequent or similar act by Lessee, or be construed as the basis of an  estoppel to enforce the provision or provisions of this Lease requiring such  consent. The acceptance of Rent by Lessor shall not be a waiver of any  Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor  on account of moneys or damages due Lessor, notwithstanding any qualifying  statements or conditions made by Lessee in connection therewith, which such  statements and/or conditions shall be of no force or effect whatsoever unless  specifically agreed to in writing by Lessor at or before the time of deposit  of such payment.

25. **Disclosures Regarding The Nature of a Real Estate Agency  Relationship**.

 

(a) When entering into a discussion with a real estate agent  regarding a real estate transaction, a Lessor or Lessee should from the  outset understand what type of agency relationship or representation it has  with the agent or agents in the transaction. Lessor and Lessee acknowledge  being advised by the Brokers in this transaction, as follows:

 

(i) Lessor's Agent. A Lessor's agent under a listing  agreement with the Lessor acts as the agent for the Lessor only. A Lessor's  agent or subagent has the following affirmative obligations: To the Lessor:  A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings  with the Lessor. To the Lessee and the Lessor: (a) Diligent exercise  of reasonable skills and care in performance of the agent's duties. (b) A  duty of honest and fair dealing and good faith. (c) A duty to disclose all  facts known to the agent materially affecting the value or desirability of  the property that are not known to, or within the diligent attention and  observation of, the Parties. An agent is not obligated to reveal to either  Party any confidential information obtained from the other Party which does  not involve the affirmative duties set forth above.

 

(ii) Lessee's Agent. An agent can agree to act as agent  for the Lessee only. In these situations, the agent is not the Lessor's  agent, even if by agreement the agent may receive compensation for services  rendered, either in full or in part from the Lessor. An agent acting only for  a Lessee has the following affirmative obligations. To the Lessee: A  fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings  with the Lessee. To the Lessee and the Lessor: (a) Diligent exercise  of reasonable skills and care in performance of the agent's duties. (b) A  duty of honest and fair dealing and good faith. (c) A duty to disclose all  facts known to the agent materially affecting the value or desirability of  the property that are not known to, or within the diligent attention and  observation of, the Parties. An agent is not obligated to reveal to either  Party any confidential information obtained from the other Party which does  not involve the affirmative duties set forth above.

 

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(iii) Agent Representing Both Lessor and Lessee. A real  estate agent, either acting directly or through one or more associate  licenses, can legally be the agent of both the Lessor and the Lessee in a  transaction, but only with the knowledge and consent of both the Lessor and  the Lessee. In a dual agency situation, the agent has the following  affirmative obligations to both the Lessor and the Lessee: (a) A fiduciary  duty of utmost care, integrity, honesty and loyalty in the dealings with  either Lessor or the Lessee. (b) Other duties to the Lessor and the Lessee as  stated above in subparagraphs (i) or (ii). In representing both Lessor and  Lessee, the agent may not without the express permission of the respective  Party, disclose to the other Party that the Lessor will accept rent in an  amount less than that indicated in the listing or that the Lessee is willing  to pay a higher rent than that offered. The above duties of the agent in a  real estate transaction do not relieve a Lessor or Lessee from the responsibility  to protect their own interests. Lessor and Lessee should carefully read all  agreements to assure that they adequately express their understanding of the  transaction. A real estate agent is a person qualified to advise about real  estate. If legal or tax advice is desired, consult a competent professional.

 

(c) Buyer and Seller agree to identify to Brokers as  "Confidential" any communication or information given Brokers that  is considered by such Party to be confidential.

26. **No Right To Holdover**. Lessee has no right to retain  possession of the Premises or any part thereof beyond the expiration or  termination of this Lease. In the event that Lessee holds over, then the Base  Rent shall be increased to 150% of the Base Rent applicable immediately  preceding the expiration or termination. Nothing contained herein shall be  construed as consent by Lessor to any holding over by Lessee.

27. **Cumulative Remedies**. No remedy or election hereunder  shall be deemed exclusive but shall, wherever possible, be cumulative with  all other remedies at law or in equity.

28. **Covenants and Conditions; Construction of Agreement**.  All provisions of this Lease to be observed or performed by Lessee are both  covenants and conditions. In construing this Lease, all headings and titles  are for the convenience of the Parties only and shall not be considered a  part of this Lease. Whenever required by the context, the singular shall  include the plural and vice versa. This Lease shall not be construed as if  prepared by one of the Parties, but rather according to its fair meaning as a  whole, as if both Parties had prepared it.

29. **Binding Effect; Choice of Law**. This Lease shall be  binding upon the parties, their personal representatives, successors and  assigns and be governed by the laws of the State in which the Premises are  located. Any litigation between the Parties hereto concerning this Lease  shall be initiated in the county in which the Premises are located.

30. **Subordination; Attornment; Non-Disturbance**.

 

30.1 **Subordination**. This Lease and any Option granted  hereby shall be subject and subordinate to any ground lease, mortgage, deed  of trust, or other hypothecation or security device (collectively, **"Security  Device"**), now or hereafter placed upon the Premises, to any and all  advances made on the security thereof, and to all renewals, modifications,  and extensions thereof. Lessee agrees that the holders of any such Security  Devices (in this Lease together referred to as **"Lender"**)  shall have no liability or obligation to perform any of the obligations of  Lessor under this Lease. Any Lender may elect to have this Lease and/or any  Option granted hereby superior to the lien of its Security Device by giving  written notice thereof to Lessee, whereupon this Lease and such Options shall  be deemed prior to such Security Device, notwithstanding the relative dates  of the documentation or recordation thereof.

 

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30.2 **Attornment**. In the event that Lessor transfers title  to the Premises, or the Premises are acquired by another upon the foreclosure  or termination of a Security Device to which this Lease is subordinated (i)  Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3,  attorn to such new owner, and upon request, enter into a new lease,  containing all of the terms and provisions of this Lease, with such new owner  for the remainder of the term hereof, or, at the election of such new owner,  this Lease shall automatically become a new Lease between Lessee and such new  owner, upon all of the terms and conditions hereof, for the remainder of the  term hereof, and (ii) Lessor shall thereafter be relieved of any further  obligations hereunder and such new owner shall assume all of Lessor's  obligations hereunder, except that such new owner shall not: (a) be liable  for any act or omission of any prior lessor or with respect to events  occurring prior to acquisition of ownership; (b) be subject to any offsets or  defenses which Lessee might have against any prior lessor, (c) be bound by  prepayment of more than one month's rent, or (d) be liable for the return of  any security deposit paid to any prior lessor.

 

30.3 **Non-Disturbance**. With respect to Security Devices  entered into by Lessor after the execution of this Lease, Lessee's  subordination of this Lease shall be subject to receiving a commercially  reasonable non-disturbance agreement (a **"Non-Disturbance  Agreement"**) from the Lender which Non-Disturbance Agreement provides  that Lessee's possession of the Premises, and this Lease, including any  options to extend the term hereof, will not be disturbed so long as Lessee is  not in Breach hereof and attorns to the record owner of the Premises.  Further, within 60 days after the execution of this Lease, Lessor shall use  its commercially reasonable efforts to obtain a Non-Disturbance Agreement  from the holder of any pre-existing Security Device which is secured by the  Premises. In the event that Lessor is unable to provide the Non-Disturbance  Agreement within said 60 days, then Lessee may, at Lessee's option, directly  contact Lender and attempt to negotiate for the execution and delivery of a  Non-Disturbance Agreement.

 

30.4 **Self-Executing**. The agreements contained in this  Paragraph 30 shall be effective without the execution of any further  documents; provided, however, that, upon written request from Lessor or a  Lender in connection with a sale, financing or refinancing of the Premises,  Lessee and Lessor shall execute such further writings as may be reasonably  required to separately document any subordination, attornment and/or  Non-Disturbance Agreement provided for herein.

31. **Attorneys' Fees**. If any Party or Broker brings an  action or proceeding involving the Premises whether founded in tort, contract  or equity, or to declare rights hereunder, the Prevailing Party (as hereafter  defined) in any such proceeding, action, or appeal thereon, shall be entitled  to reasonable attorneys' fees. Such fees may be awarded in the same suit or  recovered in a separate suit, whether or not such action or proceeding is  pursued to decision or judgment. The term, **"Prevailing Party"**shall  include, without limitation, a Party or Broker who substantially obtains or  defeats the relief sought, as the case may be, whether by compromise,  settlement, judgment, or the abandonment by the other Party or Broker of its  claim or defense. The attorneys' fees award shall not be computed in  accordance with any court fee schedule, but shall be such as to fully  reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall  be entitled to attorneys' fees, costs and expenses incurred in the  preparation and service of notices of Default and consultations in connection  therewith, whether or not a legal action is subsequently commenced in  connection with such Default or resulting Breach ($200 is a reasonable  minimum per occurrence for such services and consultation).

32. **Lessor's Access; Showing Premises; Repairs**. Lessor  and Lessor's agents shall have the right to enter the Premises at any time,  in the case of an emergency, and otherwise at reasonable times and upon at  least 24 hours prior written notice to Lessee for the purpose of showing the  same to prospective purchasers, lenders, or tenants, and making such  alterations, repairs, improvements or additions to the Premises as Lessor may  deem necessary. All such activities shall be without abatement of rent or  liability to Lessee. Lessor may at any time place on the Premises any  ordinary **"For Sale"**signs and Lessor may during the last 6  months of the term hereof place on the Premises any ordinary **"For  Lease"**signs. Lessee may at any time place on the Premises any  ordinary **"For Sublease"**sign.

33. **Auctions**. Lessee shall not conduct, nor permit to be  conducted, any auction upon the Premises without Lessor's prior written  consent. Lessor shall not be obligated to exercise any standard of reasonableness  in determining whether to permit an auction.

 

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34. **Signs**. Except for ordinary "For Sublease"  signs which may be placed only on the Premises, Lessee shall not place any  sign upon the Project without Lessor's prior written consent. All signs must  comply with all Applicable Requirements. Lessor has agreed that both building  and monument sign rights are granted to Lessee (at Lessee's sole cost and  expense) from the Premises and as reasonably allowed by Lessor. Lessor will  move one of the monument sign(s), at Lessor's sole cost, placing it in front  of the Premises, the exact location to be determined between the parties.

35. **Termination; Merger**. Unless specifically stated  otherwise in writing by Lessor, the voluntary or other surrender of this  Lease by Lessee, the mutual termination or cancellation hereof, or a  termination hereof by Lessor for Breach by Lessee, shall automatically  terminate any sublease or lesser estate in the Premises; provided, however,  that Lessor may elect to continue any one or all existing subtenancies.  Lessor's failure within 10 days following any such event to elect to the  contrary by written notice to the holder of any such lesser interest, shall  constitute Lessor's election to have such event constitute the termination of  such interest.

36. **Consents**. Except as otherwise provided herein,  wherever in this Lease the consent of a Party is required to an act by or for  the other Party, such consent shall not be unreasonably withheld or delayed.  Lessor's actual reasonable costs and expenses (including but not limited to  architects', attorneys', engineers' and other consultants' fees) incurred in  the consideration of, or response to, a request by Lessee for any Lessor  consent, including but not limited to consents to an assignment, a subletting  or the presence or use of a Hazardous Substance, shall be paid by Lessee upon  receipt of an invoice and supporting documentation therefor. Lessor's consent  to any act, assignment or subletting shall not constitute an acknowledgment  that no Default or Breach by Lessee of this Lease exists, nor shall such  consent be deemed a waiver of any then existing Default or Breach, except as  may be otherwise specifically stated in writing by Lessor at the time of such  consent. The failure to specify herein any particular condition to Lessor's  consent shall not preclude the imposition by Lessor at the time of consent of  such further or other conditions as are then reasonable with reference to the  particular matter for which consent is being given. In the event that either  Party disagrees with any determination made by the other hereunder and  reasonably requests the reasons for such determination, the determining party  shall furnish its reasons in writing and in reasonable detail within 10  business days following such request.

37. **Guarantor**.

 

37.1 **Execution**. The Guarantors, if any, shall each  execute a guaranty in the form most recently published by the American  Industrial Real Estate Association, and each such Guarantor shall have the  same obligations as Lessee under this Lease.

 

37.2 **Default**. It shall constitute a Default of the Lessee  if any Guarantor fails or refuses, upon request to provide: (a) evidence of  the execution of the guaranty, including the authority of the party signing  on Guarantor's behalf to obligate Guarantor, and in the case of a corporate  Guarantor, a certified copy of a resolution of its board of directors  authorizing the making of such guaranty, (b) current financial statements,  (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is  still in effect.

38. **Quiet Possession**. Subject to payment by Lessee of the  Rent and performance of all of the covenants, conditions and provisions on  Lessee's part to be observed and performed under this Lease, Lessee shall  have quiet possession and quiet enjoyment of the Premises during the term  hereof.

39. **Options**. If Lessee is granted an option, as defined  below, then the following provisions shall apply.

 

39.1 **Definition**. **"Option"**shall mean:  (a) the right to extend the term of or renew this Lease or to extend or renew  any lease that Lessee has on other property of Lessor; (b) the right of first  refusal or first offer to lease either the Premises or other property of  Lessor; (c) the right to purchase or the right of first refusal to purchase  the Premises or other property of Lessor.

 

39.2 **Options Personal To Original Lessee**. Any Option  granted to Lessee in this Lease is personal to the original Lessee and those  entities described in Paragraphs 12.2(i) and (j) to whom Lessee may assign this  Lease or sublet all or a portion of the Premises without Lessor's prior  written consent (collectively the **"Preapproved Transferees"**);  and cannot be assigned or exercised by anyone other than said original Lessee  and Preapproved Transferee and only while the original Lessee or Preapproved  Transferee is in full possession of the Premises and, if requested by Lessor,  with Lessee  or said Preapproved  Transferee certifying that Lessee or said Preapproved Transferee has no  intention of thereafter assigning or subletting.

 

39.3 **Multiple Options**. In the event that Lessee has any  multiple Options to extend or renew this Lease, a later Option cannot be  exercised unless the prior Options have been validly exercised.

 

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39.4 **Effect of Default on Options**.

 

(a) Lessee shall have no right to exercise an Option: (i) during  the period commencing with the giving of any notice of Default and continuing  until said Default is cured, (ii) during the period of time any Rent is  unpaid (without regard to whether notice thereof is given Lessee), (iii)  during the time Lessee is in Breach of this Lease, or (iv) in the event that  Lessee has been given 3 or more notices of separate Default, whether or not  the Defaults are cured, during the 12 month period immediately preceding the  exercise of the Option.

 

(b) The period of time within which an Option may be exercised  shall not be extended or enlarged by reason of Lessee's inability to exercise  an Option because of the provisions of Paragraph 39.4(a).

 

(c) An Option shall terminate and be of no further force or  effect, notwithstanding Lessee's due and timely exercise of the Option, if,  after such exercise and prior to the commencement of the extended term, (i)  Lessee fails to pay Rent for a period of 30 days after such Rent becomes due  (without any necessity of Lessor to give notice thereof), (ii) Lessor gives  to Lessee 3 or more notices of separate Default during any 12 month period,  whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of  this Lease.

40. **Security Measures**. Lessee hereby acknowledges that  the Rent payable to Lessor hereunder does not include the cost of guard  service or other security measures, and that Lessor shall have no obligation  whatsoever to provide same. Lessee assumes all responsibility for the  protection of the Premises, Lessee, its agents and invitees and their  property from the acts of third parties.

41. **Reservations**. Lessor reserves the right: (i) to  grant, without the consent or joinder of Lessee, such easements, rights and  dedications that Lessor deems necessary, (ii) to cause the recordation of  parcel maps and restrictions, and (iii) to create and/or install new utility  raceways, so long as such easements, rights, dedications, maps, restrictions,  and utility raceways do not unreasonably interfere with the use of the  Premises by Lessee. Lessee agrees to sign any documents reasonably requested  by Lessor to effectuate such rights.

42. **Performance Under Protest**. If at any time a dispute  shall arise as to any amount or sum of money to be paid by one Party to the  other under the provisions hereof, the Party against whom the obligation to  pay the money is asserted shall have the right to make payment "under  protest" and such payment shall not be regarded as a voluntary payment  and there shall survive the right on the part of said Party to institute suit  for recovery of such sum. If it shall be adjudged that there was no legal  obligation on the part of said Party to pay such sum or any part thereof,  said Party shall be entitled to recover such sum or so much thereof as it was  not legally required to pay.

43. **Authority**. If either Party hereto is a corporation,  trust, limited liability company, partnership, or similar entity, each  individual executing this Lease on behalf of such entity represents and  warrants that he or she is duly authorized to execute and deliver this Lease  on its behalf. Each party shall, within 30 days after request, deliver to the  other party satisfactory evidence of such authority.

44. **Conflict**. Any conflict between the printed provisions  of this Lease and the typewritten or handwritten provisions shall be  controlled by the typewritten or handwritten provisions.

45. **Offer**. Preparation of this Lease by either party or  their agent and submission of same to the other Party shall not be deemed an  offer to lease to the other Party. This Lease is not intended to be binding  until executed and delivered by all Parties hereto.

46. **Amendments**. This Lease may be modified only in  writing, signed by the Parties in interest at the time of the modification.  As long as they do not materially change Lessee's obligations hereunder,  Lessee agrees to make such reasonable non-monetary modifications to this  Lease as may be reasonably required by a Lender in connection with the  obtaining of normal financing or refinancing of the Premises.

47. **Multiple Parties**. If more than one person or entity  is named herein as either Lessor or Lessee, such multiple Parties shall have  joint and several responsibility to comply with the terms of this Lease.

48. **Waiver of Jury Trial**. The Parties hereby waive their  respective rights to trial by jury in any action or proceeding involving the  Property or arising out of this Agreement.

49. **Mediation and Arbitration of Disputes**. An Addendum  requiring the Mediation and/or the Arbitration of all disputes between the  Parties and/or Brokers arising out of this Lease is not attached to this  Lease.

** **

 

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**LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE ANDEACH TERM AND PROVISION CONTAINED HEREIN, AN BY THE EXECUTION OF THIS LEASESHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREETHAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARECOMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR ANDLESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION ORRECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BYANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OFTHIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:**

**1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OFTHIS LEASE.**

**2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THECONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITEDTO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES,THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS,COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THEPREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES ARE LOCATED IN ASTATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BEREVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.**

 

The parties hereto have executed this Lease at the place and onthe dates specified above their respective signatures.

 

Executed at: 1:00 p.m.

Executed at: 4:50 p.m.

on: August 6, 2002

on: August 5, 2002

 

By LESSOR:

Star One Credit Union, a Califonria Credit Union

 

By LESSEE:

Logic Devices Inc., a California corporation

 

By: /s/ Gary Rodrigues

 

By: /s/ K. Lauris

Name Printed: Gary Rodrigues

Name Printed: Kimiko Lauris

Title: EVP

Title: CFO

 

By: /s/ Rick Heldebrant

 

By: /s/ William J. Volz

Name Printed: Rixk Heldebrant

Name Printed: William J. Volz

Title: President

Title: President

Address: 

166 8th Avenue, Bldg. 166

Address:

 

Sunnyvale, CA 94089

 

 

Telephone: (408) 742-2801

Telephone: (408) 542-5400

Facsimile: (408) 742- 2867

Facsimile: (408) 542-5444

Federal ID No. 94-6069237

Federal ID No. 94-2893789

** **

****79

**ADDENDUM NO. 1 TO STANDARD INDUSTRIAL/COMMERICAL MULTI-TENANT -NET**

 

This Addendum No. 1 to that certain Standard Industrial/CommericalMulti-Tenant - Net dated, for reference purposes only, as of July 8, 2002 (the"Lease"), by and between Star One Credit Union, a California CreditUnion ("Lessor" or "Landlord") and Logic Devices, Inc., aCalifornia corporation ("Lessee" or "Tenant"). Lessor andLessee hereby agree to modify, clarify and supplement the Lease as moreparticularly set forth below:

 

1. **Rental Schedule.**

 
Months
 
NNN Rent/Month
01-02

 

$0.00 (Lessee shall not pay NNN expenses during this period)

03-12

 

$16,890.50

13-24

 

$17,351.15

25-36

 

$17,965.35

37-48

 

$18,579.55

49-60

 

$19,040.20

 

2. **Capitalized Terms.** Except as otherwise expresslyprovided herein, the capitalized terms and phrases in this Addendum No. 1 shallhave the same meaning as are given such terms in the Lease.

 

3. **Lessee's Representatives and Warranties.** Lesseecovenants and warrants as of the date of execution of the Lease the following:

 

A. Lessee has the financial strength and assets to meet all of  its obligations under the terms and conditions of the Lease.

B. To the actual knowledge of Lessee, at the time of execution  of the Lease, neither Lessee nor any Lessee affiliate is:

 

(1) In default under any material terms or conditions of any  other lease for real property beyond any applicable cure period.

 

(2) In foreclosure of any real property owned by Lessee.

 

(3) Under the protection of any bankruptcy laws.

C. Each individual executing this Addendum No. 1 on behalf of  Lessee is duly authorized to execute and deliver this Addendum No. 1 on  behalf of Lessee.

 

4. **Interpretation.** The doctrine that ambiguities in awritten agreement shall be construed against the drafting party shall not beemployed in connection with this Addendum No. 1. This Addendum No. 1 shall beconstrued or interpreted in accordance with its fair meaning. In the event ofany conflict or inconsistency between the terms of this Addendum No. 1 and theLease, the terms of this Addendum No. 1 shall control.

 

5. **Right of First Refusal.**Provided that Lease is not in default under the Lease beyond any applicable cureor grace period, Lessee shall have a right of first refusal to lease the balanceof the Building exclusive of the Premises, or such applicable portion thereof(hereinafter the "First Refusal Space"), pursuant to the terms of theimmediately preceding sentence, at any time during the Term of the Lease, Lessorreceives an offer from a third party to lease any portion of the First RefusalSpace (and such offer is acceptable to Lessor) or if Lessor desires to lease anyportion of the First Refusal Space to an unaffiliated third party, then Lessorshall give Lessee written notice of the terms and conditions on which such thirdparty is willing to lease the First Refusal Space to an unaffiliated thirdparty, as the case may be ("Offer") and Lessee shall have a right of firstrefusal to lease the First Refusal Space on the same terms and conditions setforth in the Offer. Lessee may exercise its right of first refusal hereunder bygiving Lessor written notice of such exercise within seven (7) business daysafter the date of Lessee's receipt of the Offer. Lessee's failure to givewritten notice of its exercise of the right of first refusal within said seven(7) business day period referred to above shall be deemed Lessee's waiver of itsright of first refusal to lease the First Refusal Space as provided herein. IfLessee fives timely written notice of its exercise of the right of firstrefusal, then Lessor shall prepare an amendment to this Lease that incorporatesthe First Refusal

 

80

 Space into thePremises or a new lease covering the First Refusal Space on the applicable termsand conditions set forth in the Offer and otherwise on the terms and conditionsset forth in this Lease. Lessor and Lessee agree to execute an amendment to thisLease that incorporates the First Refusal Space as contemplated herein withinten (10) days after Lessor delivers the same to Lessee. If Lessee fails totimely exercise its right of first refusal in accordance with the terms setforth above, then Lessee's right of first refusal with respect to the FirstRefusal Space shall be deemed terminated and Lessor shall have the unfetteredright, notwithstanding the provisions of this Paragraph 5 above, to lease theFirst Refusal Space to a third party in accordance with the terms set forthabove, such third party shall be deemed to lease such First Refusal Space freeand clear of any rights of Lessee to such First Refusal Space. If, however,Lessor has not leased the First Refusal Space to a third party as provided abovewithin one hundred twenty (120) days following the date Lessee waives its rightof first refusal or the date such right of first refusal lapses without Lesseehaving timely exercised such right, then Lessee's right of first refusal shallrevive automatically.

 

6. **Option to Extend.** Lessor hereby grants to Lessee theoption to extend the Lease Term for one (1) additional period of five (5) years(the "Extended Term"), on the following terms and conditions:

 

A. Lessee shall five Lessor written notice of its exercise of  the option to extend the Lease Term for the Extended Term no sooner than nine  (9) and no later than six (6) months before the date the Lease Term would end  but for said exercise. Time is of the essence.

B. Lessee may not extend the Lease Term pursuant to this  Paragraph 6 if Lessee is in default in the performance of any of the material  terms and conditions of this Lease beyond any applicable cure or grace period  at the time of Lessee's notice of exercise of this option. If Lessee is in  material default under this Lease beyond any applicable cure or grace period  on the date that the Extended Term is to commence, then Lessor may elect to  terminate this Lease notwithstanding any notice given by Lessee of the  exercise of its option to extend.

C. All terms and conditions of this Lease shall apply during the  Extended Term, except that the monthly Base Rent for the Extended Term shall  be determined in accordance with Paragraph 7 below.

D. Upon the extension of the Lease Term pursuant to this  Paragraph 6, the term "Lease Term" as used in this Lease shall  thereafter include that Extended Term and the expiration date of the Lease  shall be the expiration date of the Extended Term.

 

7. **Monthly Base Rent During Extended Term.** If Lessee electsto extend the Lease Term pursuant to Paragraph 6 above, the monthly Base Rentfor the Extended Term shall be an amount equal to ninety-five percent (95%) ofthe fair market rental value of the Premises in relation to market conditions asof the beginning date of the Extended Term (including, but not limited to,rental rates for comparable space with comparable tenant improvements (excludingtenant improvements paid for solely by Lessee) and taking into considerationany adjustments to rent based upon direct costs (operating expenses) and taxes,and/or cost of living or other rental adjustments; the size of the space; andany other factors which affect market rental values at the time of extension).The monthly Base Rent for the Extended Term shall be determined as follows:

 

A. Mutual Agreement. After timely receipt by Lessor of  Lessee's notice of exercise of the option to extend the Lease Term, Lessor  and Lessee shall have a period of thirty (30) days in which to agree on the  monthly Base Rent for the Extended Term. If Lessor and Lessee agree on said  monthly Base Rent during that period, they shall immediately execute an  amendment to this Lease stating the monthly Base Rent for the Extended Term.  If Lessor and Lessee are unable to agree on the monthly Base Rent for the  Extended Term as aforesaid, the provisions of Paragraph 7B below shall apply.

 

81

B. Appraisal. Within ten (10) days after the expiration  of the thirty (30) day period described in Paragraph 7A above, each party, at  its cost and by giving notice to the other party, shall appoint a licensed,  commercial real estate broker with at least ten (10) years commercial  brokerage experience in the County in which the Premises is located, to  determine the fair market rental value of the Premises. If a party does not  appoint such a broker within ten (10) days after the other party has given  notice of the name of its broker, the single broker appointed shall be the  sold broker and shall set the fair market rental value. The cost of such sole  broker shall be borne equally by the parties. If two brokers are appointed by  the parties as provided in this Paragraph 7B, the two brokers shall each separately  determine the fair market rental value of the Premises within twenty (20)  days of the date the last of such two brokers is selected. In addition,  during such twenty day period, the two brokers shall select a third broker  meeting the qualifications above who will be required to determine which of  the fair market rental valuations determined by the two original brokers is  closer to the fair market rental value of the Premises as determined by the  third broker. If the parties cannot agree on the third broker within such  twenty (20) day period, then either of the parties to this Lease, by giving  ten (10) days notice to the other party, may apply to the presiding judge of  the Superior Court of the County in which the Premises is located for the  selection of a third broker who meets the qualifications stated above. The  two original brokers shall submit their respective valuations to the third  broker within ten (10) days following the date the third broker is selected.  Once the third broker has been selected as provided above, then, as soon as  practicable but in any case within twenty (20) days thereafter, the third  broker shall select one of the two fair market rental valuations submitted by  the two original brokers selected by the parties, which valuaton shall be the  one that is closer to the fair market rental value as determined by the third  broker. The third broker's selection shall be rendered in writing to both  Lessor and Lessee and shall be final and binding upon them and shall not be  subject to appeal. The party whose valuation is not chosen by the third  broker shall pay the costs of the third broker.

 

8. **Lessor's Early Termination Option**. Lessor may elect toterminate the Lease on or after the last day of the Original Term (the"Early Termination") in accordance with the provisions of thisParagraph 8.

 

A. In order to effect such Early Termination, Lessor shall  deliver to Lessee written notice (the "Early Termination Notice"),  specifying a date for early termination of the Lease, which date shall be on  or after the last day of the Original Term and which date shall be at least  six (6) months from delivery of the Early Termination Notice (the "Early  Termination Date"). Lessee shall deliver possession of the Premises to  Lessor on the Early Termination Date. Concurrent with Lessee's delivery of  possession of the Premises to Lessor, Lessor shall pay to Lessee the  unamortized cost of any Tenant Improvements or Alterations to the Premises  paid for by Lessee and approved by Lessor in accordance with Paragraph 7.3(b)  of the Lease. For purposes of this Paragraph 8A, the amortization period for  said Tenant Improvements or Alterations shall begin upon the date of  completion thereof by Lessee and shall end as of the last day of the Extended  Term of this Lease.

B. Lessor may affect Early Termination pursuant to this  Paragraph 8 solely for the purpose of allowing Lessor to occupy and expand  into the Premises.

C. IF LESSOR EXERCISES THE EARLY TERMINATION RIGHT BUT DOES NOT  OCCUPY THE PREMISES WITHIN NINE (9) MONTHS FOLLOWING SUCH EXERCISE (AND FOR  AT LEAST ONE (1) YEAR), THEN LESSOR SHALL VE IN DEFAULT HEREUNDER. IF LESSOR  IS IN DEFAULT OF THE IMMEDIATELY PRECEDING SENTECE, LESSOR SHALL PAY  LIQUIDATED DAMAGES TO LESSEE IN THE AMOUNT OF $100,000.00. THE PARTIES  ACKNOWLEDGE THAT LESSEE'S ACTUAL DAMAGES IN THE EVENT OF A DEFAULT BY LESSOR  UNDER THIS PARAGRAPH 8 WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO  DETERMINE. THEREFORE, BY PLACING THEIR SIGNATURES BELOW, THE PARTIES  ACKNOWLEDGE THAT THE SUM OF $100,000.00 HAS BEEN AGREED UPON, AFTER  NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF LESSEE'S DAMAGES AND AS  LESSEE'S EXCLUSIVE REMEDY AGAINST LESSOR IN THE EVENT LESSOR DEFAULTS UNDER  THE PROVISIONS OF THIS PARAGRAPH 8C.

D. The right to terminate this Lease early pursuant to the terms  of this Paragraph 8 is personal to Star One Credit Union (and cannot be  assigned or transferred) and any exercise of such right by any person or  entity other than Star One Credit Union shall be void and of no force or  effect.

 

 

LOGIC DEVICES, INC.,

STAR ONE CREDIT UNION,

a California corporation

a California credit union

 

By: /s/ K. Lauris, CFO

By: /s/ Gary Rodrigues, EVP

By:

By: /s/ Rick Heldebrandt, President

** **

****82

**Exhibit A**

**395 Java Drive, Sunnyvale**

 

Tenant Improvements provided by Landlord

1. Add +/- 12' x 24' conference room. Sheetrock 12' wall, 24' wallto be glass panels.

2. Add +/- 12' x 24' conference room. Glass panel walls on bothsides.

3. Cut in open window area and add counter.

4. Add approximately 6' double glass doors.

5. This room is included in the premises.

6. Fully demise and secure the premises to code.

7. Replace all damaged ceiling tiles.

8. Construct, on a concrete slab, a 4' x 24', 8' high cyclonefence with wood slats at the rear

exterior of the premises. Exact location to be determined.

9. Provide a minimum 600 amp, 277/480 volt electrical service.

 

Drawings Not Exact/Not To Scale - Drawing of the Premises - Notincluded in Form 10-K filing.

 

 

 
**Exhibit B**
 

Drawing of the Project - Not included in Form 10-K filing.

 

83

**EXHIBIT 10.3**

 

 

 

 

 

 
THE LOGIC DEVICES INCORPORATED
 
AMENDED AND RESTATED
 
1998 DIRECTOR STOCK INCENTIVE PLAN
 

**(Amended and restated as ofMay 20, 2002)**

 

 

84

 

 

TABLE OF CONTENTS

 

 

Purpose of the Plan

3

Definitions

3

Administration of the Plan

3

Shares Subject to the Plan

4

Stock Options

4

Amendment or Termination of the Plan

5

Term of Plan

6

Rights as Shareholder

6

Merger or Consolidation

6

Changes in Capital and Corporate Structure

6

Service

6

Withholding of Tax

6

Delivery and Registration of Stock

7

 

 

85

**THE LOGIC DEVICESINCORPORATED**

**AMENDED AND RESTATED 1998DIRECTOR STOCK INCENTIVE PLAN**

 

 

1.
Purpose of the Plan
 

The  **LOGIC Devices Incorporated 1998 Director Stock Incentive Plan**  (hereinafter referred to as the "Plan") is intended to provide a  means whereby directors of **LOGIC Devices Incorporated** and its Related  Corporations may sustain a sense of proprietorship and personal involvement  in the continued development and financial success of the Company, and to  encourage them to remain with and devote their best efforts to the business  of the Company, thereby advancing the interests of the Company and its  shareholders. Accordingly, the Company may permit certain directors to  acquire Shares or otherwise participate in the financial success of the Company,  on the terms and conditions established therein.

 

2.
Definitions
 

The  following terms shall be defined as set forth below:

 

 

a.   Board.  Shall mean the Board of Directors of the Company.

 

b.   Code.  Shall mean the Internal Revenue Code of 1986, and any amendments thereto.

 

c.   Company.  Shall mean LOGIC Devices Incorporated and its Related Corporations.

 

d.   ERISA.  Shall mean the Employee Retirement Income Security Act of 1974, and any  amendment thereto.

 

e.   Non-Qualified  Options. Shall mean an award under the Plan that is not an Incentive  Stock Option within the meaning of Code section 422.

 

f.   Related  Corporation. Shall mean a corporation which would be a parent or  subsidiary corporation with respect to the Company as defined in section  424(e) or (f), respectively, of the Code.

 

g.   Rule  16b-3. Shall mean Rule 16b-3 of the '34 Act, and any amendments thereto.

 

h.   Shares.  Shall mean shares of common stock of the Company.

 

i.   '33  Act. Shall mean the Securities Act of 1933, and any amendments thereto.

 

j.  ' '34  Act. Shall mean the Securities Exchange Act of 1934, and any amendments  thereto.

 

3.
Administration of the Plan
 

The  Plan shall be administered by the Board. The Board shall have sole authority  to:

 

 

i.   establish  the conditions of each such option;

 

ii.  prescribe  any legend to be affixed to certificates representing such option;

 

iii. interpret  the Plan; and

 

iv. adopt  such rules, regulations, forms and agreements, not inconsistent with the  provisions of the Plan, as it may deem advisable to carry out the Plan.

 

86

4.
Shares Subject to the Plan
 

The  aggregate number of Shares that may be obtained by directors under the Plan  shall be 550,000 Shares. Any Shares that remain unissued at the termination  of the Plan shall cease to be subject to the Plan, however, if during the  term of the Plan, any options not exercised expire, are canceled or are  forfeited, surrendered, or returned, the Shares with respect to such options  shall be available for subsequent option grants under the Plan. If the total  number of Shares at the time of the grant is not sufficient to provide for  the automatic grants to non-employee directors under Section 5(c) below, then  the available shares shall be allocated proportionately among the automatic  grants to be made at that time.

 

5.
Stock Options
 

 

a.  Type  of Options. The Company may issue options that constitute Non-Qualified  Options to directors under the Plan. The grant of each option shall be  confirmed by a stock option agreement that shall be executed by the Company  and the optionee as soon as practicable after such grant. The stock option  agreement shall expressly state or incorporate by reference the provisions of  the Plan and state that the option is a Non-Qualified Option.

 

b.  One-Time  Grants. Upon approval of the Plan by the shareholders of the Company, two  non-employee directors, Mr. Howard Farkas and Mr. Burton Kanter, shall each  be automatically awarded Non-Qualified Options to purchase 75,000 Shares, and  Mr. William Volz, an employee director, shall be automatically awarded a  Non-Qualified Option to purchase 200,000 Shares. Upon joining the Board on  September 15, 1999, Mr. Fredric Harris shall be automatically awarded a  Non-Qualified Option to purchase 25,000 Shares. On April 2, 2002, Mr. William  Volz surrendered, returned, and relinquished the options included in the  foregoing award to Mr. Volz. In addition, on May 20, 2002, each of the  Company's non-employee directors on such date, Mr. Howard Farkas, Mr. Albert  Morrison, Mr. Joel Kanter and Mr. Fredric Harris, shall each be automatically  awarded a Non-Qualified Option to purchase 50,000 Shares.

 

c.  Annual  Grants. Upon approval of the Plan by the shareholders of the Company,  each individual who is re-elected as a non-employee member of the Board  shall, each time such individual is re-elected, receive a Non-Qualified  Option to purchase 10,000 Shares, such annual grants to commence with the  1998 Annual Shareholders meeting and continuing in effect for each subsequent  Annual Meeting of the Company's shareholders.

 

d.  Terms  of Options. Except as provided in Subparagraphs (e) and (f) below, each  option granted under the Plan shall be subject to the terms and conditions  set forth by the Board in the stock option agreement including, but not  limited to, option price (which price shall be no less than the Fair Market  Value of the Shares as of the date of grant) and option term.

 

 

e.  Additional  Terms Applicable to All Options. Each option shall be subject to the  following terms and conditions:

 

 

 

i.   Written  Notice. An option may be exercised only by giving written notice to the  Company specifying the number of Shares to be purchased.

 

ii.  Method  of Exercise. The aggregate option price shall be paid in any one or a  combination of cash, personal check, by offsetting any other amounts owed to  the optionee of the Company, Shares already owned (valued at Fair Market  Value on the date of exercise) or Plan awards which the optionee has an  immediate right to exercise (i.e., on a "net issuance" basis).

 

iii. Term  of Option. No option may be exercised more than five (5) years after the  date of grant.

 

iv.  Disability  or Death of Optionee. In an optionee terminates membership on the Board  due to disability or death prior to exercise in full of any options, he or  she or his or her beneficiary, executor, administrator or personal  representative shall have the right to exercise the options within the five  (5) years from the date of grant.

 

v.   Transferability.  Subject to applicable securities laws, there shall be no limits on transferability;  provided however, that the Board may elect to make certain options  non-transferable or limit transferability to transfers under the laws of  descent and distribution and/or intra-family transfers for estate planning  purposes or pursuant to a Qualified Domestic Relations Order.

 

 

87

 

f.  Valuation.  For purposes of establishing the option price and for all other valuation  purposes under the Plan, the Fair Market Value per share of the common stock  of the Company on any relevant date shall be determined according to the  following rules:

 

 

 

i.   If the common stock is not at the  time listed or admitted to trading on any stock exchange but is traded on the  NASDAQ National Market, then the fair market value will be deemed equal to  the closing selling price per share of common stock on the NASDAQ National  Market on the date in question.

 

ii.  If  the common stock is at the time listed or admitted to trading on any national  securities exchange, then the fair market value will be the closing selling  price per share of common stock on the date in question on the securities  exchange serving as the primary market for the common stock, as such price is  officially quoted on such exchange.

 

6.
Amendment or Termination of the Plan
 

The  Board may amend, suspend or terminate the Plan or any portion thereof at any  time, but (except as provided in Paragraph 10 hereof) no amendment shall be  made without approval of the shareholders of the Company which shall: (i)  materially increase the aggregate number of Shares with respect to which  awards may be made under the Plan; or (ii) change the class of persons  eligible to participate in the Plan; provided, however, that no such  amendment, suspension or termination shall impair the rights of any  individual, without his or her consent, in any award theretofore made  pursuant to the Plan.

 

7.
Term of Plan
 

The  Plan shall be effective upon the date of its approval by the shareholders of  the Company. Unless sooner terminated under the provisions of Paragraph 6,  options shall not be granted under the Plan after June 16, 2008.

 

8.
Rights as Shareholder
 

Upon  delivery of any Share to a director, such director shall have all of the  rights of a shareholder of the Company with respect to such Share, including  the right to vote such Share and to receive all dividends or other  distributions paid with respect to such Share.

 

9.
Merger or Consolidation
 

In  the event the Company is merged or consolidated with another corporation and  the Company is not the surviving corporation, the surviving corporation may  agree to exchange options issued under the Plan for options (with the same  aggregate option price) to acquire and participate in the number of shares in  the surviving corporation that have a fair market value equal to the fair  market value (determined on the date of such merger or consolidation) of  Shares that the grantee is entitled to acquire and participate in under this  Plan on the date of such merger or consolidated.

 

 

88

10.
Changes in Capital and Corporate Structure
 

In  the event any change is made to the common stock issuable under the Plan by  reason of any stock split, stock dividend, combination of shares, exchange of  shares or other change in the corporate structure of the Company effected  without receipt of consideration, appropriate adjustments will be made to (i)  the aggregate number and/or class of shares of common stock available for  issuance under the Plan, (ii) the number of shares of common stock to be made  the subject of each subsequent automatic grant and (iii) the number and/or  class of shares of common stock purchasable under each outstanding option and  the exercise price payable per share so that no dilution or enlargement of  benefits will occur under such option.

 

11.
Service
 

An  individual shall be considered to be in the service of the Company or a  Related Corporation as long as he or she remains a director of the Company or  such Related Corporation. Nothing herein shall confer on any individual the  right to continued service with the Company or a Related Corporation or affect  the right of the Company or such Related Corporation to terminate such  service.

 

12.
Withholding of Tax
 

To  the extent the award, issuance or exercise of Shares results in the receipt  of compensation by a director of the Company, the Company is authorized to  withhold from any other cash compensation then or thereafter payable to such  director any tax required to by withheld by reason of the receipt of the  compensation. Alternatively, the director may tender a personal check in the  amount of tax required to be withheld.

 

13.
Delivery and Registration of Stock
 

The  Company's obligation to deliver Shares with respect to an award shall, if the  Board so requests, be conditioned upon the receipt of a representation as to  the investment intention of the individual to whom such Shares are to be  delivered, in such form as the Board shall determine to be necessary or  advisable to comply with the provisions of the '33 Act or any other federal,  state or local securities legislation or regulation. It may be provided that  any representation requirement shall become inoperative upon a registration  of the Shares or other action eliminating the necessity of such  representation under securities legislation. The Company shall not be  required to deliver any Shares under the Plan prior to (i) the admission of  such Shares to listing on any automated system or stock exchange on which  Shares may then be listed, and (ii) the completion of such registration or,  other qualification or exemption of such Shares under any state or federal  law, rule or regulation, as the Board shall determine to be necessary or  advisable.

 

89

 

**EXHIBIT 23.1**

 

 

 

**Independent Auditors' Consent**

 

We consent to the incorporation by reference inRegistration Statement No. 333-32819 of LOGIC Devices Incorporated on Form S-8and Registration Statement No. 333-16591 of LOGIC Devices Incorporated on FormS-3, of our report dated November 6, 2002, appearing in this Annual Report onForm 10-K of LOGIC Devices Incorporated for the years ended September 29, 2002and September 30, 2001.

 

 

  /s/  Hood & StrongLLP          

Hood and Strong LLP

 

 

Menlo Park, California

December 9, 2002

 

 

90

**EXHIBIT 23.2**

 

 

 

**Consent of Independent Certified Public Accountants**

 

We hereby consent to the incorporation by reference in theRegistration Statements on Form S-3 (No. 333-16591) and Form S-8 (No.333-32819) of LOGIC Devices Incorporated of our report dated November 7, 2000,relating to the consolidated financial statements and schedule as of and forthe year ended October 1, 2000, which appears in this Form 10-K.

 

 

  /s/  BDO Seidman,LLP          

BDO Seidman, LLP

 

 

San Francisco, California

December 9, 2002

 

91

 

 

**EXHIBIT 99.1**

 

 

**Certification of Principal Executive Officer and ChiefFinancial Officer**

 

We, William J. Volz, President and Principal ExecutiveOfficer, and Kimiko Milheim, Chief Financial Officer, of LOGIC DevicesIncorporated (the Company), do hereby certify in accordance with 18 U.S.C.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,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 annual report fairly  presents, in all material respects, the financial condition and results of  operations of the Company.

 

 

Dated: December 10, 2002

By:   /s/  William J.  Volz                        

 

 

William J. Volz, President and

Principal Executive Officer

 

 

 

Dated: December 10, 2002

By:   /s/  Kimiko  Milheim                       

 

 

Kimiko Milheim,

Chief Financial Officer

 

 

 

92