UNITED STATES

SECURITIES ANDEXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-K**

 

[X] Annual ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

**For the FiscalYear Ended September 30, 2007**

 

or

 

[   ]Transition Report Pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934

For the TransitionPeriod ______ to ______

 

Commission FileNumber

**0-17187**

 

**LOGIC DEVICESINCORPORATED**

(Exact name of registrant as specified in its charter)

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

 

**1375 Geneva Drive, Sunnyvale, CA 94089**

(Address of principal executive offices, including ZipCode)

 

**(408) 542-5400**

(Registrant's telephone number, including Area Code)

 

Securities registeredpursuant to 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, nopar value**

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes [   ] No [X]

 

Indicate by check mark if the registrant is not required tofile report pursuant to Section 13 or Section 15(d) of the Act. 

Yes [   ]  No [X]

 

Indicate by check mark whether the registrant (1) has filedall 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[   ]

 

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. [   ] CHECK IF APPLICABLE

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2). Yes[   ]  No [X]

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Exchange Act Rule 12b-2). Yes [   ]  No[X]

 

State the aggregate market value of the voting andnon-voting common stock held by non-affiliates computed by reference to theclosing price of the common stock as of March 31, 2007, the last day of theregistrant's most recently completed second quarter: $9,241,800.

 

As of December21, 2007, the Registrant had 6,814,438 sharesof its common stock issued and outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE** (See Part III)

----

**LOGIC DEVICESINCORPORATED**

** **

**ANNUAL REPORT ONFORM 10-K**

** **

**INDEX**

 
| **PART I** | Item 1.

BUSINESS

2

Item 1A.

RISK FACTORS

6

Item 1B.

UNRESOLVED STAFF COMMENTS

10

Item 2.

PROPERTIES

10

Item 3.

LEGAL PROCEEDINGS

10

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS

10

**PART II**

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED SHAREHOLDER MATTTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

11

Item 6.

SELECTED FINANCIAL DATA

12

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

12

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK

18

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY  DATA

19

Item 9.

CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

36

Item 9A.

CONTROLS AND PROCEDURES

36

Item 9B.

OTHER INFORMATION

37

**PART III**

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT

37

Item 11.

EXECUTIVE COMPENSATION

37

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

37

Item 13.

CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS

37

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

37

**PART IV**

Item 15.

EXHIBITS AND FINANCIAL STATEMENT  SCHEDULES

37

SIGNATURES

39

 

1

***CAUTIONARY STATEMENT***

* *

*This Annual Report on Form 10-K containsforward-looking statements which include, but are not limited to, statementsconcerning projected revenues, expenses, gross margin, net income, marketacceptance of our products, the competitive nature of and anticipated growth inour markets, our ability to achieve further product integration, the status ofevolving technologies and their growth potential, the timing and acceptance ofnew product introductions, the adoption of future industry standards, ourproduction capacity, our ability to migrate to smaller process geometries, andthe need for additional capital. These forward-looking statements are based onour current expectations, estimates, and projections about our industry,management's beliefs, and certain assumptions made by it. Words such as"anticipates, appears, expects, intends, plans, believes, seeks, estimates,may, will," and variations of these words or similar expressions are intendedto identify forward-looking statements. In addition, any statements that referto expectations, projections, or other characterizations of future events orcircumstances, including any underlying assumptions, are forward-lookingstatements. These statements are not guarantees of future performance and aresubject to risks, uncertainties, and assumptions that are difficult to predict.Therefore, actual results could differ materially and adversely from thoseresults expressed in any forward-looking statements, as a result of variousfactors, some of which are listed under the section, "Item 1A - Risk Factors,"of this Annual Report on Form 10-K. We undertake no obligation to revise orupdate publicly any forward-looking statements for any reason.*

 

**PART I**

 

Item 1. BUSINESS

 

***General Development of the Business***

 

LOGIC Devices Incorporated develops and markets high-speeddigital integrated circuits that perform high-density storage and signal/imageprocessing functions. Our products enable high definition video display,transport, editing, composition, and special effects. We also provide solutionsfor digital filtering in television broadcast stations and image enhancement inmedical diagnostic scanning and imaging equipment.

 

Our products are used in the broadcast, medical, militaryand consumer electronics markets. Our products address storage and digitalsignal processing (DSP) requirements that involve high-performance arithmeticcomputation. We focus on developing proprietary catalog products to addressspecific functional application needs or performance levels that are nototherwise commercially available. We seek to provide related groups of circuitsthat original equipment manufacturers (OEMs) incorporate into high-performanceelectronic systems.

 

We rely on third-party silicon foundries to process siliconwafers, each wafer having up to several hundred integrated circuits of a givenLOGIC design, from which finished products are then assembled. Our strategy isto avoid the substantial investment in capital equipment required to establisha wafer fabrication facility, by outsourcing wafer processing to third-partyfoundry specialists to take advantage of their expertise. See "Business -Background." We currently have two primary wafer suppliers. We continue toexplore additional foundry relationships to reduce our dependence on any singlewafer foundry.

 

We market our products worldwide through a combination of adirect sales force, sales representatives, and 20 international distributors.In fiscal 2007, approximately 27 percent of net revenues were fromdistributors. We adjust our sales structure to address appropriate marketrequirements. We include the following as some of our customers: TexasInstruments, BAE Systems, Harmonic, GE Medical, Lockheed Martin, Qualcomm, andRaytheon. Fiscal 2007 net revenues derived from foreign sales approximate 33percent.

 

LOGIC Devices was incorporated under the laws of the Stateof California in April 1983. Our headquarters are located at 1375 Geneva Drive, Sunnyvale, California 94089, and our telephone number is 408-542-5400.

 

***Available Information***

 

Our annual report on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or Section 15(d) of the Securities ExchangeAct of 1934 are available free of charge on our website, www.logicdevices.com,as soon as reasonably practicable after we electronically file such materialwith or furnish such material to the Securities and Exchange Commission.

 

2

 

***Background***

 

Continuing advances in fabricating semiconductors aredriving a global revolution in electronics. With these ongoing advances, theability to economically compute, communicate, and control seems to be limitedonly by the creativity required to implement ever more complex electronicsystems. It is increasingly common to implement entire electronic systems on asingle small sliver of silicon. The challenges to the industry haveincreasingly turned toward innovative product definition, timely productdevelopment, technical customer support, and heavy capital investments inadvanced semiconductor wafer fabrication facilities. The rapid advances in chipfabrication technology have resulted in a specialization of skills within theindustry. In addition to the specialization of materials processing skillsrequired to fabricate semiconductor wafers, the industry increasingly requiresand values system architecture development, interoperability standards, signalprocessing algorithms, and circuit design expertise as essential skills fordeveloping financially successful products. Many opportunities have thusemerged for semiconductor companies that focus on product definition, advanceddesign techniques, and technical application support, and that rely on thirdparties for wafer fabrication. We focus our resources on defining anddeveloping high-performance integrated circuit components for growing markets,which require demanding computational throughput.

 

The semiconductor industry is intensely competitive, highlycyclical, and characterized by rapid technological change, productobsolescence, wide fluctuations in both demand and capacity, and steep priceerosion. These factors can obsolete processes and products currently utilizedor produced by us. In such cases, we are required to develop products utilizingnew processes and to either integrate such products into our existing foundryprocesses, or seek new foundry sources.

 

***Markets and Product Development Strategies***

 

We have historically derived a significant portion of ourrevenues from sales to television broadcast equipment manufacturers and todefense contractors providing systems that perform computationally intensiveimage processing. Our products were among the first to provide economical,high-speed, yet low power, computational solutions for common imagemanipulation and storage problems encountered in implementing these systems.Applications of our products also overlap into medical diagnostic imagingequipment, digital cinema systems, and in-flight entertainment systems. In thelate 1990's, we jointly defined with our customers, a family of digital imagefiltering applications that address the filtering requirements of HDTV studioproduction systems. Sales of these systems lagged market forecasts as a resultof repeated delays in the conversion to HDTV. As a result, the magnitude of oursales of these products was affected. Sales that we had expected to generateover a five-year period have extended at a slower rate for over a ten-yearperiod.

 

As a result of our work on high-speed, low power imageprocessing circuits that are very computationally demanding, we have developedexpertise in circuit design and implementation that is not readily available tomany OEMs, and within the semiconductor industry, only available within some ofthe very largest companies which, due to their size, are compelled to pursuevery large markets. Our capabilities and size provide opportunities to servicetechnically-demanding industrial and military markets that are not serviced bythose larger companies.

 

The same advances in semiconductor technology that haveenabled the advancements in high definition broadcast video production anddistribution have driven a rapid increase in the ability to transmit vastamounts of data. Communications in all forms with increasing portability andbandwidth are proliferating worldwide. Much of this new communicationcapability will be utilized to transport video streams. We believe that manyopportunities exist to utilize our capabilities in low power, high speedcomputation and storage to address the requirements of these communications andvideo systems. The convergence of communications and ubiquitous imageprocessing is an opportunity that is well suited to our capabilities and farexceeds our abilities to address completely.

 

We seek to identify markets that require the application ourexpertise; that are stable, long-lived markets that are not extremelycost-sensitive; that offer potential for substantial revenue growth; and thatare not served by larger competitors with substantially more resources.Currently the semiconductor industry is challenged by several factors. First,the cost of developing high complexity products is escalating nearly as fast asthe capability of the technology itself is increasing. Second, the disciplinesrequired to develop complex, systems-on-chips (SOCs) requires a rapidlyincreasing breadth of technical skills. Consumer-related products areexperiencing ever shrinking life cycles as new products are quickly supplantedby even newer products.

 

3

 

To identify market opportunities, we attempt to obtainsubstantial input from our existing customers in defining new products. We seekto identify new product opportunities that leverage our technical strengths.Lastly, we seek the markets for such products that can provide increasingrevenue opportunities without exceeding our capital resources. In the nearterm, we believe products that leverage our high-speed memory capabilities fitthese criteria for both our exiting video customer base and for additionalcommunications applications. Large SOCs are increasingly dominated by highspeed memory. Currently, most SOCs are internally 70 percent or more embeddedmemory. Projections anticipate that embedded memory will comprise in excess of90 percent of future SOCs. Consequently, our capabilities are a key footholdfor leveraging into many applications. Combined with our experience in imagemanipulation, a rapidly growing area, and communications, also growing verydynamically, our opportunities are only limited by our ability to executeproduct development. Worldwide, there is a critical shortage of skills in thisarea and a company's success generally depends on its ability to both developand hire skilled personnel. In that regard, we recognize the need to continueto increase the technical skill levels of our technical team and have worked tobuild internally as well as hire increasingly stronger experts. Andconsequently, much of our market directions are established by the capabilitiesof our core team.

 

***Wafer Fabrication Technology***

 

LOGIC Devices is a fabless manufacturer. We rely uponthird-party foundry suppliers to produce processed wafers from mask patternsdesigned by us. Through these wafer suppliers, we have access to advancedhigh-speed, high-density complimentary metal oxide semiconductor (CMOS) processtechnology, without the significant investment in capital equipment andfacilities required to establish a wafer fabrication factory. Coupled with ourstructured custom design methodology and experience with high-speed circuitdesign, this CMOS technology has allowed us to produce products that offer highcomputational speeds, high reliability, high levels of circuit integration(complexity), and low power consumption.

 

We are primarily dependent upon two wafer suppliers and donot have a guarantee of minimum supplies. Therefore, there can be no assurancethat such relationships will continue to be on terms satisfactory to us. Theinability to obtain adequate quantities of processed wafers could limit ourrevenues. As a result of this risk, we carry a large inventory of unassembledwafers that can be packaged into a variety of carrier styles to supportcustomer requirements.

 

***Production, Assembly, and Test***

 

Our production operations consist of functional andparametric testing, hot and cold testing, final inspection, quality inspection,and shipment. As is customary in the industry, high-volume assemblysubcontractors assemble our devices. Thereafter, the assembled devices arereturned to us for final testing and shipment to customers. We continue to testmaterials and products at various stages in the manufacturing process,utilizing automated test equipment.

 

We have historically maintained, and expect to continue tomaintain, high levels of inventory. For some product types, we must purchaseall of our anticipated inventory needs for the life of the product (often tenor more years) in a short period of time. Our high inventory levels heightenthe risk of inventory obsolescence and write-offs.

 

***Marketing, Sales, and Customers***

 

We market our products worldwide to a broad range ofcustomers through our own direct sales force, sales representative partners,and  20 international electronics distributors. We concentrate ourdirect marketing efforts on high-performance segments of the medical imaging,broadcast equipment, and telecommunications markets, in applications where highspeed is critical. Among our OEM customers are Texas Instruments, BAE Systems,Harmonic, GE Medical, Lockheed Martin, Qualcomm, and Raytheon.

 

International distributors purchase our products for resale,generally to a broad base of small- to medium-sized customers. As is customaryin the industry, our distributors receive certain price protection and limitedstock rotation rights. However, our distributors are required to simultaneouslyorder an amount equal to or greater than any rotation items returned. Duringfiscal 2007 and 2006, sales through international distributors accounted forapproximately 27% and 38% of net revenues, respectively. During fiscal 2005, wealso had a domestic distributor, Jan Devices, Inc., which we terminated in May2005. Sales to the international distributors and this domestic distributoraccounted for approximately 68% of net revenues for fiscal 2005.

 

4

 

In fiscal 2007 and 2006, no distributors generated more than10% of net revenues; however, Benchmark (manufacturer for Texas Instruments)comprised 43% and 23% of net revenues in fiscal 2007 and 2006, respectively. Inaddition, BAE Systems comprised 12% of net revenues in fiscal 2006. In fiscal2005, three international distributors, MCM Japan Ltd., Zwinz TechnicalConsulting, and 3D Industrial Electronics PTE, comprised approximately 12%,11%, and 11% of net revenues, respectively.

 

Our distributors are not exclusive and they may also marketproducts competitive with our products. We warrant our products against defectsin materials and workmanship for a period of 12 months from the date ofshipment. Warranty expenses to date have been nominal.

 

International sales are conducted by sales representativesand distributors located throughout Europe and Asia. During fiscal 2007, 2006,and 2005, our export sales were approximately 33%, 40%, and 62% of netrevenues, respectively (see Note 7 in "Notes to Financial Statements"contained in Item 8). Our international sales are billed in United States dollars, and therefore, settlements are not directly subject to currency exchangefluctuations. However, changes in the relative value of the dollar may createpricing pressures for our products. Although our international sales aresubject to certain export restrictions, including the Export AdministrationAmendments Act of 1985 and the regulations promulgated thereunder, we have notexperienced any material difficulties resulting from these restrictions todate.

 

***Backlog***

 

As of December 2, 2007 and 2006, our backlog wasapproximately $147,000 and $838,200, respectively. This backlog includes allreleased purchase orders shippable within the following 12 months, includingorders from distributors. Our backlog, although useful for schedulingproduction, does not represent actual sales and should not be used as a measureof future sales or revenues at any particular time. In accordance with acceptedindustry practice, all orders on the backlog that are not "last-timebuys" of obsolete products are subject to cancellation without penalty atthe option of the purchaser at any time prior to shipment. In addition, thebacklog does not reflect changes in delivery schedules and price adjustmentsthat may be passed on to distributors and credits for returned products. Weproduce catalog products that may be shipped from inventory within a short timeafter receipt of a purchase order. The business for our catalog products, likethe businesses of other companies in the semiconductor industry, ischaracterized by short-term orders and shipment schedules rather than by volumepurchase contracts. Our shipments are generally concentrated toward the end ofthe third month of each quarter, making it difficult to predict our revenuesand results of operations for any fiscal period. For these reasons, our backlogas of any particular date is not representative of actual sales for anysucceeding period and we believe that our backlog is not a good indicator offuture revenues.

 

***Research and Development***

 

As we have not introduced sufficient new products in a fewyears, we view new product development as the most important factor affectingrevenue growth; therefore, we continue our commitment to research anddevelopment. Research and development expenditures were 38%, 21%, 21% of netrevenues in fiscal 2007, 2006, and 2005, respectively. However, the fiscal 2007figure includes a write-off of $400,200 of capitalized software developmentcosts.  See "Selected Financial Data," "Management's Discussionand Analysis of Financial Condition and Results of Operations," and"Statements of Operations," contained in Items 6, 7, and 8,respectively.

 

***Competition***

 

The semiconductor industry is intensely competitive andcharacterized by rapid technological change and rates of product obsolescence,price erosion, periodic shortage of materials, variations in manufacturingyields and efficiencies, and increasing foreign competition. The industry includesmany major domestic and international companies that have substantially greaterfinancial, technical, manufacturing, and marketing resources than LOGIC. Weface competition from other manufacturers of high-performance integratedcircuits, many of which have advanced technological capabilities and internalwafer production capabilities. Our ability to compete in this rapidly evolvingenvironment depends on elements both in and outside our control. These elementsinclude our ability to develop new products in a timely manner, the costeffectiveness of our manufacturing, the acceptance of new products bycustomers, the speed at which customers incorporate our products into theirsystems, the continued access to advanced semiconductor foundries, the numberand capabilities of our competitors, and general economic conditions.

 

5

 

***Patents and Copyrights***

 

Because of the rapidly changing technology in thesemiconductor industry, we rely primarily upon our design know-how, rather thanpatents and copyrights, to develop and maintain our competitive position. Weattempt to protect our 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 our interests.

 

We are of the opinion that patent and maskwork protection isof less significance in our business than other factors, such as the experienceand innovative skill of our personnel and the abilities of our management.There can be no assurance that others will not develop or patent technologysimilar to our technology, or copy or otherwise duplicate our products. We ownfive patents awarded by the United States Patent and Trademark Office.

 

Sinceothers have obtained patents covering various semiconductor designs andprocesses, certain of our present or future designs or processes may be claimedto infringe upon the patents of third parties. We have previously received, andmay in the future receive, claims that one or more aspects or uses of ourproducts infringe on patent or other intellectual property rights of thirdparties. See Item 3 - "Legal Proceedings." We do not believe that we infringeupon any known patents at this time. If any such infringements exist or arisein the future, we may be liable for damages and may, like many companies in thesemiconductor industry, find it necessary or desirable to obtain licensesrelating to one or more of our current or future products. Based on industrypractice, we expect that any necessary licenses or rights under patents couldbe obtained on conditions that would not have a material adverse effect. Therecan be no assurance, however, that licenses could, in fact, be obtained oncommercially reasonable terms, or at all, or that litigation would not occur.Our inability to obtain such licenses on economically reasonable terms or theoccurrence of litigation could adversely affect us.

 

***Employees***

 

As ofSeptember 30, 2007, we had 21 employees, consultants, and part-time employees,of which 20 were full-time employees. We have been careful to retain employeesthat are important to maintain our ongoing development efforts. Our ability toattract and retain qualified personnel is an important factor in our continuedsuccess. None of our employees are represented by a collective bargainingagreement, and we have never experienced any work stoppage. We believe that ouremployee relations are good.

 

***Regulations***

 

Federal,state, and local regulations impose various environmental controls on thedischarge of chemicals and gases in connection with the wafer manufacturingprocess. Since we rely on third party manufacturers and our activities do notinvolve utilization of hazardous substances generally associated withsemiconductor processing, we believe such regulations are unlikely to have amaterial affect on our business or operations.

 

Item 1A. RISK FACTORS

 

Set forth below are some of the risks and uncertaintiesthat, if they were to occur, could materially adversely affect our business orthat could cause our actual results to differ materially from the resultscontemplated by the forward-looking statements contained in this report andother public statements we make.

 

*We have a history of losses and our future operatingresults could be harmed due to semiconductor industry business cycles.*

 

We have sustained substantial net losses during the pastfive fiscal years, other than fiscal 2006. These net losses are attributableprincipally to delays in the television broadcast industry's transition to highdefinition digital broadcasting from current analog standards, a downturn inthe semiconductor industry, and lack of new product introductions. Many factorswill affect our ability to become profitable or sustain profitability, such ascontinued demand for our products by our customers, lack of price erosion,efficiency of our manufacturing subcontractors, continued product innovationand design wins, and our continued ability to manage operating expenses.

We produceand sell semiconductors and our operations are therefore impacted by therepeated and severe business cycles that have historically been experienced bythe semiconductor industry. Our financial performance has been negativelyimpacted by significant downturns in the semiconductor industry as a result of:

 

6

 
-  general reductions in inventory levels by customers;excess production capacity;the cyclical nature of the demand for products of     semiconductor customers; andaccelerated declines in average product selling prices.
When these or other conditions in the industry occur, ouroperating results could be adversely impacted.

 

*We are a small company with very limited resourcescompared to our current and potential competitors and we may not be able tocompete effectively in our highly competitive industry.*

 

Thesemiconductor industry is highly competitive and many of our direct andindirect competitors and potential competitors have substantially greaterfinancial, technological, manufacturing, and sales resources. If we are unableto compete successfully in this environment, our operating results could beharmed.

 

Thecurrent level of competition is high and may increase as our market expands. Wecompete directly with companies that have developed similar products. We alsocompete indirectly with numerous semiconductor companies that offer productsand solutions based on alternative technologies. These direct and indirectcompetitors are established multinational semiconductor companies, as well asemerging companies. In addition, we may experience additional competition fromforeign companies in the future.

 

*We depend on a limited number of customers for a majorityof our sales and our sales orders are typically concentrated in the last monthof every quarter, making our financial results particularly susceptible to theloss of a key customer and making sales in a quarter difficult to predict.*

 

We anticipate that the concentration of our sales amongrelatively few customers will continue in the future. We do not have long-termpurchase commitments from any of our customers. Therefore, these customerscould cease purchasing our products with limited notice and with no penalty.

 

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

 

In addition, we ship more products during the third month ofeach quarter than in the first two months of the quarter. Moreover, shipmentsin the third month are generally higher toward the end of the month. Our salesare therefore concentrated in the latter part of each quarter, making itdifficult to predict our revenues and results of operations for any fiscalquarter or other fiscal period.

 

We*depend on third parties to fabricate silicon wafers and to assemble and testour products, which exposes us to a risk of production disruption oruncontrolled price changes.*

 

We do not manufacture silicon wafers. We rely upon two wafersuppliers, each of which is the sole source for certain of our products, andtwo assembly/test subcontractors. These suppliers do not have a contractualobligation or commitment to supply such wafers or services in the future. Ifthe suppliers are unable or unwilling to supply wafers or services, ouroperating results could be harmed. We may not be able to find sufficientsuppliers at a reasonable price or at all if such disruptions occur. As aresult of our reliance on third parties, we face significant risks, including:
-  reduced control over delivery schedules and quality; 
-  longer lead times;the potential lack of adequate capacity during periods of     excess industry demand;difficulties selecting and integrating new subcontractors;limited warranties on products supplied to us;potential increases in prices due to capacity shortages;     andpotential misappropriation of our intellectual property.
If we fail to deliver our products on time or ifthe costs of our products increase, then our profitability and customerrelationships could be harmed.

 

7

 

*Our international operations subject us to risks notpresent in solely domestic operations.*

 

Our primary silicon wafer supplier and assemblysubcontractors are located outside the United States. Financial difficulties,government actions or restrictions, prolonged work stoppages, or any otherdifficulties experienced by our suppliers could harm future operating results.

We also have many overseas customers. Our exportsales are affected by unique risks frequently associated with foreigneconomics, including:

 
-  governmental controls and trade restrictions;export license requirements and restrictions on the export     of technology;changes in local economic conditions;political instability;changes in tax rates, tariffs, or freight rates;interruptions in air traffic; anddifficulties in staffing and managing foreign sales     offices.
Significant changes in the economic climate in the foreigncountries from which we derive our export sales could harm future operatingresults.

 

*The complex nature of semiconductors makes us highlysusceptible to manufacturing problems and these problems could have a negativeimpact on future operating results.*

 

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

 

*Wedepend on third parties to deliver our products.*

 

We rely on independent carriers and freight haulers totransport our products between manufacturing locations and to deliver productsto our customers. Any transport or delivery problems because of their errors,or because of unforeseen interruptions, such as strikes, political instability,terrorism, natural disasters and accidents, could harm future operatingresults.

 

*Earthquakes, other natural disasters, and power shortagesmay damage our business.*

 

Our California facility and some of our suppliers are located near earthquake faults that haveexperienced major earthquakes in the past. In the event of a major earthquakeor other natural disaster near our facility or a sustained loss of power at ourfacility, our operations could be harmed. Similarly, a major earthquake orother natural disaster near one or more of our suppliers could disrupt theoperations of these suppliers, which could limit the supply of our products andharm our business.

 

*We maintain high levels of inventory that decrease ourliquidity and substantially increase the risk of write-offs.*

 

We havehistorically maintained and expect to continue to maintain high levels ofinventory of processed silicon wafers, packaging materials, and finished goods.For some product types, we must purchase all of our anticipated inventory needsfor the life of the product in a short period of time. We commit capital tomaintain these high inventory levels, which prevents us from using that capitalfor other purposes, such as research and development, and requires us toutilize more capital than might otherwise be required. Our high inventorylevels also heighten the risk of inventory obsolescence and write-offs.Further, we may forecast demand incorrectly and produce insufficient inventory,resulting in supply shortages.

 

8

 

*Wecurrently have no bank credit facility and must rely solely upon existing cashreserves and funds from existing operations to finance future operations.*

 

We rely upon cash reserves and available-for-salesecurities to fund our operations. If these resources should be insufficient,we would be forced to obtain additional funding through debt or equityfinancing. If we are able to obtain debt financing, which is not assured, theterms of such financing are unknown, since we do not presently have a creditfacility, and may be unfavorable to us. Similarly, there can be no assurancethat we would be able to sell capital stock on favorable terms or at all andany such sales may adversely affect our existing shareholders.

 

*Ouroperating success depends upon our ability to develop new products and accessnew technologies.*

 

The semiconductor industry is a dynamicenvironment marked by rapid product obsolescence. Our future success depends onour ability to introduce new or improved products that meet critical customerneeds, while achieving acceptable profit margins. If we fail to introduce thesenew products in a timely manner or these products fail to achieve marketacceptance, operating results would be harmed. The introduction of new productsin a dynamic market environment presents significant business challenges.Product development commitments and expenditures must be made well in advanceof product sales, while the success of new products depends on accurateforecasts of long-term market demand and future technology developments.

 

Future revenue growth is dependent on marketacceptance of new products and the continued market acceptance of existingproducts. The success of these products is dependent on a variety of specifictechnical factors, including:

 
-  successful product definition;timely and efficient completion of product design;timely design into customers' future products and     maintenance of close working relationships with customers;timely and efficient access to wafer manufacturing and     assembly processes; andproduct performance, quality and reliability.
If, due to these or other factors, new productsdo not achieve market acceptance, our operating results would be harmed.Furthermore, to develop new products and maintain the competitiveness ofexisting products, we need to migrate to more advanced wafer manufacturingprocesses that use larger wafer sizes and smaller geometries.

 

*The loss of key personnel or failure to hire and retainadditional qualified personnel could impair our ability to develop and marketour products.*

 

Our future success greatly depends on theability to attract and retain highly qualified technical and managementpersonnel. As a small company, we are particularly dependent on a relativelysmall group of employees. Competition for skilled technical and managementemployees is intense in the semiconductor industry. As a result, we may beunable to retain our existing key technical and management employees, orattract additional qualified personnel, which could harm operating results. Wedo not have employment agreements with any of our employees.

 

*Our failure to protect our proprietary rights, or thecosts of protecting these rights, may harm our ability to compete.*

 

We own several patents but rely primarily on our designknow-how and continued access to advanced wafer process technology to developand maintain our competitive position. We attempt to protect our trade secretsand other proprietary information through confidentiality agreements withemployees, consultants, suppliers and customers. However, competitors maydevelop, patent or gain access to similar know-how and technology, or reverseengineer our products. Our inability to adequately protect these proprietary rightscould result in our competitors offering similar products, potentially causingus to lose a competitive advantage and leading to decreased revenue. We may notobtain an adequate remedy in the event our confidentiality agreements arebreached or any remedy if our trade secrets are independently developed byothers. Despite our efforts to protect our proprietary rights, existingintellectual property laws afford only limited protection, especially under thelaws of some foreign countries. Litigation may be necessary in the future toenforce our intellectual property rights, to protect our trade secrets or todetermine the validity and scope of the proprietary rights of others. Thislitigation could result in substantial costs and diversion of resources.

 

9

 

*We could be harmed by litigation involving patents andother intellectual property rights.*

 

As a general matter, the semiconductor and relatedindustries are characterized by substantial litigation regarding patent andother intellectual property rights. We have been and in the future may beaccused of infringing the intellectual property rights of third parties.Furthermore, we may have certain indemnification obligations to customers withrespect to the infringement of third-party intellectual property rights by ourproducts. Infringement claims by third parties or claims for indemnification bycustomers or end-users of our products resulting from infringement claims maybe asserted in the future and such assertions, if proven to be true, may harmour business.

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

 

*The price of our common stock may continue to be volatileand our trading volume may continue to be relatively low.*

 

The market price of our common stock has fluctuatedsignificantly to date. In the future, the market price of the common stockcould be subject to significant fluctuations due to general market conditionsand in response to quarter-to-quarter variations in:

 
-  our anticipated or actual operating results;announcements or introductions of new products;technological innovations or setbacks by us or our     competitors;conditions in the semiconductor markets;the commencement of litigation; andgeneral economic and market conditions.
Item 1B. UNRESOLVED STAFF COMMENTS

 

This itemsis not applicable as we are not an accelerated filer as defined in Exchange ActRule 12b-2.

 

Item 2. PROPERTIES

 

Ourexecutive offices, as well as our inventories and research and developmentfacilities, are located in approximately 17,200 square feet, in Sunnyvale, California, with a lease expiring August 31, 2014. We believe our facilitieswill be adequate to meet our reasonably foreseeable needs and, if necessary,alternative facilities will be available on acceptable terms, so as to meet ourrequirements.

 

Item 3. LEGAL PROCEEDINGS

 

From timeto time, we receive demands from various parties asserting patent or otherclaims in the ordinary course of business. These demands are often not based onany specific knowledge of our products or operations. Because of theuncertainties inherent in litigation, the outcome of any such claim, includingsimply the cost of a successful defense against such a claim, could have amaterial adverse impact on us.

 

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

 

No matterswere submitted to a vote of our security holders during the last quarter offiscal 2007.

 

10

 

**PART II**

 

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATEDSHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our CommonStock trades under the ticker symbol, LOGC, on The Nasdaq Capital Market. Thefollowing tables sets forth, for the period indicated, the high and low closingsales prices for our Common Stock, as reported by Nasdaq during the followingcalendar quarters:

 

Calendar  Year

High

Low

2005

    Fourth  quarter

$1.20

$0.93

2006

    First  quarter

$1.40

$0.98

    Second  quarter

$1.70

$1.15

    Third  quarter

$2.72

$1.27

    Fourth  quarter

$3.02

$2.12

2007

    First  quarter

$2.77

$1.85

    Second  quarter

$2.34

$1.76

    Third  quarter

$3.18

$1.92

 

*Holders*

 

As ofDecember 21, 2007, there were approximately 1,900 holders of record of ourCommon Stock.

 

*Dividends*

 

We havenot paid any dividends on our Common Stock since our incorporation

 

*SecuritiesAuthorized for Issuance Under Equity Compensation Plans*

 

Thefollowing table sets forth the position of our equity compensation plans as ofSeptember 30, 2007:

 

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)

Equity  compensation plans approved by

    security  holders

290,500

$1.623

165,000

Equity  compensation plans not approved

    by  security holders

-

-

    Total

290,500

$1.623

165,000

 

11

 

 Item 6.SELECTED FINANCIAL DATA

 

 

 

OnDecember 15, 2003, we elected to change our calendar business year to a fiscalyear ending September 30. Previously, our fiscal years were comprised of 52weeks of seven days, each beginning on Monday and ending on Sunday, with fiscal2003 ending September 28, 2003. As a result of this change, our 2004 fiscalyear ended September 30, 2004 rather than September 26, 2004. The additionalfour days were included in our first quarter for fiscal 2004, which endedDecember 31, 2003.

 

Thefollowing table sets forth selected financial data for our last five fiscalyears. This information is derived from our audited financial statements,unless otherwise stated. This data should be read in conjunction with thefinancial statements, related notes, and other financial information includedelsewhere in this report.

 

(In thousands, except per share amounts)

Fiscal Years Ended:

September 30,

September 30,

September 30,

September 30,

September 28,

2007

2006

2005

2004

2003

Net revenues

$

4,686 

$

4,641 

$

3,509 

$

4,415 

$

5,009 

Research and development

$

1,812 

$

982 

$

730 

$

1,364 

$

1,785 

Net (loss) income

$

(1,488)

$

129 

$

(1,363)

$

(1,472)

$

(2,461)

Basic (loss) earnings per

common share

$

(0.22)

$

0.02 

$

(0.20)

$

(0.22)

$

(0.37)

Basic weighted-average

common shares outstanding

6,797

6,754

6,750

6,715

6,652

Working capital

$

6,957 

$

7,897 

$

7,589 

$

9,583 

$

11,084 

Property and equipment, net

$

1,039 

$

1,101 

$

1,163 

$

862 

$

857 

Total assets

$

8,263 

$

9,717 

$

9,547 

$

10,836 

$

12,248 

Shareholders' equity

$

8,016 

$

9,397 

$

9,238 

$

10,590 

$

11,943 

 

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

Reportedfinancial results may not be indicative of the financial results of futureperiods. All non-historical information contained in the following discussionconstitutes forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.These statements are not guarantees of future performance and involve a numberof risks and uncertainties, including those identified in "Item 1A - RiskFactors" of this Annual Report on Form 10-K. We undertake no obligation torevise or update these forward-looking statements to reflect events orcircumstances after the date of this report.

 

12

 

***Overview***

 

LOGIC Devices Incorporated develops and markets high-speeddigital integrated circuits that perform high-density storage and signal/imageprocessing functions. Our products enable high definition video display,transport, editing, composition, and special effects. We also provide solutionsfor digital filtering in television broadcast stations and image enhancement inmedical diagnostic scanning and imaging equipment.

 

Our products are used in the broadcast, medical, militaryand consumer electronics markets. Our products address storage and digitalsignal processing (DSP) requirements that involve high-performance arithmeticcomputation. We focus on developing proprietary catalog products to addressspecific functional application needs or performance levels that are nototherwise commercially available. We seek to provide related groups of circuitsthat original equipment manufacturers (OEMs) incorporate into high-performanceelectronic systems.

 

***Liquidityand Capital Resources***

 

Despitehaving a net loss of $1,487,700 for fiscal 2007, our operations produced netcash of $272,600. During fiscal 2007, we wrote-off $555,600 of inventories,$400,200 of capitalized test software, and $142,600 of property and equipmentno longer in use, all of which increased the net loss but did not affect cashflows from operations. During the year, we also increased our inventory valuation allowance by$402,700, while writing off $1,551,000 of inventories against this valuationallowance. We also continue to purchase additional available-for-salesecurities as a means to increase the return on our cash and cash equivalentsbalances, with purchases of $554,900 in fiscal 2007. Capital expenditures of$391,100 included leasehold improvements for our new facilities into which wemoved on September 1, 2007.

 

Whileproducing a net income of $129,400 during fiscal 2006, our operations producednet cash of $977,700. During the year, we increased the inventory valuationallowance by $1,036,900 and wrote-off $200,000 of capitalized test software,both of which reduced net income but not cash flows. In addition, LOGICcollected $45,000 from a property tax refund and had increases in its accruedpayroll and vacation and other accrued expenses totaling $81,200 due to thetiming of these expenses. Capital expenditures of $196,700 for fiscal 2006 weresubstantially less than fiscal 2005, which totaled $540,700.

 

Despite anet loss of $1,362,900 for fiscal 2005, our operations produced net cash of$367,100, which is mainly the result of a reduction of inventories of $810,700,the collection of a sales tax refund of $47,600, and an increase in accountspayable of $69,800 at year-end. The increase in accounts payable was from thetiming of purchases and invoices being received but not yet due at year-end. Wemaintain prompt payment terms with our vendors. The 28 percent decrease in ournet cash balance from $1,788,900 in fiscal 2004 to $1,292,900 at September 30,2005 was the result of a substantial increase in capital expenditures totaling$540,700 (including a one-time purchase of $437,500 of engineering designsoftware) and capitalized software development costs of $333,400.

 

Ourcurrent working capital requirements are greatly reduced due to our past costcutting. We believe that these cost cutting actions and our continued focus onhigher-margin products should result in after-tax cash earnings beingsufficient to support our working capital and capital expenditure requirementsfor the next 12 months. Based on the fact that, as of December 21, 2007, wehold approximately $1.9 million in cash reserves and available-for-salesecurities and our cash usage for operations is approximately equal to or lessthan our current revenue rate, we believe we can cover our cash operatingexpenses using future revenues, while saving current cash reserves for futurecapital expenditures, such as mask tooling for new products.

 

*WorkingCapital*

 

Ourinvestment in inventories has been significant and will continue to besignificant in the future. However, during the past few years, we have beenable to reduce our levels of inventories as we shift from more competitivesecond source products to proprietary sole source products. We seek to furtherstreamline our inventories as we continue to shift to sole source proprietaryproducts. 

 

We rely onthird party suppliers for our raw materials, particularly our processed wafers,for which we currently rely primarily on two suppliers, and as a result,maintain substantial inventory levels to protect against disruption insupplies. We have periodically experienced disruptions in obtaining wafers. Aswe continue to shift towards higher margin proprietary products, we expect tobe able to reduce inventory levels by streamlining our product offerings.

 

13

 

Periodically, we review inventory to determinerecoverability of items on-hand using the lower-of-cost-or-market (LOCOM) andexcess methods. We group and evaluate our products based on their underlyingdie or wafer type (our raw materials, silicon wafers, can generally be used tomake multiple products), to determine the total quantity on-hand and averageunit costs. Management uses judgment in comparing historical sales quantitiesto the quantity on-hand at the end of the fiscal year. If the quantity on-handexceeds the sales quantities, we provide a valuation allowance for thepotentially obsolete or slow-moving items. For the LOCOM analysis, we comparethe average historical sales price to the average unit cost of inventories atthe end of the fiscal year. If the average unit cost exceeds the average salesprice, we provide a valuation allowance.

 

With continuing low revenue levels, management felt itnecessary to also review our raw materials and work-in-process. Our productsgenerally exhibit an active sales product life cycle of ten or more years.However, due to rapid changes in process technology, we are generally unable toobtain wafers for our products for as long a period as their life cycles. As aresult, early in a product's life, we are often required to estimate the salesexpectations for the entire life cycle and purchase materials upfront. On someoccasions, our expectations become lower and we provide a reserve for potentialexcess materials. In fiscal 2007 and 2006, we increased our inventory valuationallowance by $402,700 and $1,036,900, respectively, for potential excessmaterials. During fiscal 2007, we wrote-off $1,551,000 of inventory against thepreviously established allowance. In addition, during fiscal 2007 and 2006, wescrapped other inventory of $555,600 and $272,100, respectively. We believe ourcurrent inventory valuation allowance of $1,573,700 provides a reasonableestimate of the recoverability of inventories at the end of fiscal 2007.

 

Althoughcurrent levels of inventory impact our liquidity, we believe that this is aless costly alternative to owning a wafer fabrication facility or continuously redesigningour products to newer process technologies, which would divert limitedengineering resources from new product development. We continue to evaluatealternative suppliers to diversify our risk of supply disruption. However, thisrequires a significant investment in product development to tool masks with newsuppliers. Such efforts compete for our limited product development resources.We seek to achieve on-going reductions in inventory, although there can be noassurance we will be successful. In the event economic conditions remain slow,we may consider identifying additional portions of inventory to write-off at afuture date.

 

Historically,due to customer order scheduling, up to 70% of our quarterly revenues wereoften shipped in the last month of the quarter, so a large portion of theshipments included in year-end accounts receivable were not yet due per our net30-day terms. This results in year-end accounts receivable balances being attheir highest point for the respective period. 

 

*Financing*

 

While wewill continue to evaluate future debt and equity financing opportunities, webelieve the cost reductions implemented in the past few years have resulted inthe cash flow generated from operations providing an adequate base of liquidityto fund future operating and capital needs. Based on the fact that, as ofDecember 21, 2007, we hold approximately $1.9 million in cash reserves andavailable-for-sale securities and our anticipated cash usage for operations isapproximately equal to or less than our current revenue rate, we believe we cancover our cash operating expenses using future revenues, while saving currentcash reserves for future capital expenditures, such as mask tooling for newproducts.

 

*ContractualObligations*

 

Our onlycontractual obligation is our facility operating lease. The following tablesummarizes the future fixed payments under this lease as of September 30, 2007.Payment timing may be subject to change.

 

Payments due by period:

Total

Within 1 year

1-3 years

After 3 years

Building

1,657,300 

214,900 

694,300 

748,200 

 

*Off-BalanceSheet Arrangements*

 

We have nooff-balance sheet arrangements.

 

14

 

***Resultsof Operations***

 

*Comparisonof Fiscal Years Ended September 30, 2007 and 2006*

 

Netrevenues for fiscal 2007 increased one percent from $4,640,600 in fiscal 2006to $4,686,400. This slight increase is the result of one customer increasingits order rate to an amount that offset decreases in older product sales.

 

Cost ofrevenues for fiscal 2007 increased 32 percent from $2,153,700 in fiscal 2006 to$2,846,700, mainly the result of write-offs of inventory totaling $555,600 anda decrease in sales of products previously written down to zero-value (15% infiscal 2007 compared to 26% in fiscal 2006).

 

Researchand development expenses increased 85 percent from $981,700 in fiscal 2006 to$1,811,800. While this increase includes the write-off of $400,200 ofcapitalized test software development costs, the remaining increase is theresult of our continued commitment to expand our product development team, inboth numbers and expertise. While the expenses, net of the write-off ofcapitalized test software development costs, are outside our goal of 20 to 25percent of net revenues (30%), we believe we must continue at this currentlevel as new product development is the key to our future growth and success.Future new product introductions will result in future revenue increases thatwill begin to offset these expenditures down to our goal level.

 

Selling,general, and administrative expenses increased nine percent from $1,421,900 infiscal 2006 to $1,546,400. While we attempted to identify areas forcost-cutting during the fiscal year, the need for outside consultants and theexpensing of certain prepaid expenses whose useful life had expired early inthe normal course of business resulted in the total increase.

 

Interestincome increased 101 percent from $37,800 in fiscal 2006 to $75,900. Theincrease is the result of more funds being invested in available-for-salessecurities during fiscal 2007 and from the fact that the investments existedfor the full fiscal year compared to only four months of fiscal 2006.

 

As aresult of the foregoing, we had a net loss of $1,487,700 for fiscal 2007,compared to net income of $129,400 in fiscal 2006.

 

*Comparisonof Fiscal Years Ended September 30, 2006 and 2005*

 

Netrevenues for fiscal 2006 increased 32 percent from $3,508,800 in fiscal 2005 to$4,640,600. These increases are due to increases in certain customers' orderquantity rates and from certain customers returning to their past orderquantity rates after a slowdown in fiscal 2005. In addition, we experienced arenewed interest in fiscal 2006 in military-grade products that had beenpreviously written down to zero-value.

 

While netrevenues increased 32 percent, cost of revenues decreased by 25 percent, from$2,861,600 in fiscal 2005 to $2,153,700 in fiscal 2006. This is the result of26 percent of fiscal 2006 net revenues coming from items previously writtendown to zero-value compared to 12 percent in fiscal 2005, and the recognitionof favorable standard cost variances from jobs in process at September 30, 2005that were completed in the current year. This increase in profitability waspartially offset by increases in the inventory reserve totaling $1,036,900. Ourproducts generally exhibit an active sales product life cycle of ten or moreyears. However, due to rapid changes in process technology, we are generallyunable to obtain wafers for our products for as long a period as their lifecycles. As a result, early in a product's life, we are often required toestimate the sales expectations for the entire life cycle and purchasematerials upfront. On some occasions, our expectations become lower and weprovide a reserve for or write-down potential excess materials.

 

Recognizingthe need to increase new product development, we expanded our research anddevelopment team, which resulted in a 34 percent increase in expenses, from$729,800 in fiscal 2005 to $981,700 in fiscal 2006. However, this amountremains within our goal of being between 20 to 25 percent of net revenues (21percent in fiscal 2006).

 

Selling,general, and administrative expenses increased nine percent from $1,298,700 infiscal 2005 to $1,421,900 in fiscal 2006. We are making various changes to ouradministrative and sales structure, which we believe will increase ourvisibility to customers, and in turn, increase revenues.

 

15

 

Interestincome increased 103 percent from $18,600 in fiscal 2005 to $37,800 in fiscal2006, mainly as a result of increases in our cash balances and investments inhigher yield available-for-sale securities. Other income increased from $600 infiscal 2005 to $9,100 in fiscal 2006, as a result of the sale of previouslywritten-off fixed assets.

 

As aresult of the foregoing, we had net income of $129,400 in fiscal 2006, comparedto a net loss of $1,362,900 in fiscal 2005.

 

***CriticalAccounting Policies***

 

Management'sdiscussion and analysis of our financial condition and the results ofoperations are based upon the financial statements included in this report andthe data used to prepare them. The financial statements have been prepared inaccordance with the accounting principles generally accepted in the United States of America and we are required to make judgments, estimates, and assumptionsin the course of such preparation. The Summary of Accounting Policies includedwith the financial statements describes the significant accounting policies andmethods used in the preparation of the financial statements. On an ongoingbasis, we reevaluate our judgments, estimates, and assumptions, including thoserelated to revenue recognition, allowance for doubtful accounts, valuation ofinventories, and valuation of long-lived assets. We base our judgments and estimateson historical experience, knowledge of current conditions, and our beliefs ofwhat could occur in the future considering available information. Actualresults may differ from these estimates under different assumptions orconditions. The following are the critical accounting policies we believe areaffected by significant judgments, estimates, and assumptions used in thepreparation of the financial statements.

 

*RevenueRecognition*

 

Revenue isgenerally recognized upon shipment of product. Sales to distributors are madepursuant to agreements that provide the distributors certain rights of returnand 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. While distributors are allowed to returnitems for stock rotation, they are required to place an order of equal orgreater value at the same time. Therefore, no allowance for returns isrecorded. Because we generally do not change the pricing of our products morethan once a year, there have not been any pricing issues in the past severalyears; therefore, there is no allowance for price protection recorded.

 

*Allowancefor Doubtful Accounts*

 

Weestablish a general allowance for doubtful accounts based on analyzinghistorical bad debts, specific customer creditworthiness, and current economicconditions. Historically, we have not experienced significant losses related toreceivables.

 

*Inventories*

 

We writedown our inventories for lower of cost or market reserves, aged inventoryreserves, and obsolescence reserves. As a result of production requirements andconstraints, we are often required to estimate the sales expectations for theentire life cycle of a product (which can be ten or more years) and purchasematerials upfront. If actual product demand or selling prices are lessfavorable than estimated, additional inventory write-downs may be required inthe future. Conversely, if demand increases for product types that have beenfully reserved, future margins may be higher.

 

*Long-LivedAssets*

 

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, we use undiscounted future cash flows without interestcharges compared to the carrying value of the assets.

 

16

 

*DeferredIncome Taxes*

 

Income taxes are accounted forusing the asset and liability method. Deferred income tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Deferred income tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred income tax assets and liabilities of a change in tax ratesis recognized in income in the period that includes the enactment date. Futuretax benefits are subject to a valuation allowance when we are unable toconclude that our deferred income tax assets will more likely than not berealized from the results of operations. We have recorded a valuation allowanceto reflect the estimated amount of deferred income tax assets that may not berealized. The ultimate realization of deferred income tax assets is dependentupon generation of future taxable income during the periods in which thosetemporary differences become deductible. We consider projected future taxableincome and tax planning strategies in making this assessment.

 

Based on the historical taxableincome and projections for future taxable income over the periods in which thedeferred tax assets become deductible, management believes it more likely thannot that we will not realize benefits of these deductible differences as ofSeptember 30, 2007. Accordingly, we have established a valuation allowanceagainst our net deferred income tax assets as of September 30, 2007.

 

*Impactof New Financial Accounting Standards*

 

In June 2006, the FinancialAccounting Standards Board (FASB)  issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, an interpretation of Statement ofFinancial Accounting Standards (SFAS) No. 109, *Accounting for Income Taxes*.The interpretation contains a two-step approach to recognizing and measuringuncertain tax positions accounted for in accordance with SFAS No. 109. Theprovisions are effective for the Company as of October 1, 2007. We arecurrently evaluating the impact this statement will have on our financialstatements, if any.

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*,which provides guidance for using fair value to measure assets and liabilities.The pronouncement clarifies (1) the extent to which companies measure assetsand liabilities at fair value; (2) the information used to measure fair value;and (3) the effect that fair value measurements have on earnings. SFAS No. 157will apply whenever another standard requires (or permits) assets orliabilities to be measured at fair value. SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007. We are currently evaluating the impactthis statement will have on our financial statements, if any.

 

InSeptember 2006, the SEC staff published Staff Accounting Bulletin (SAB) No.108,  *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB No. 108 addressesquantifying the financial statement effects of misstatements and consideringthe effects of prior year uncorrected errors on the statements of operations aswell as the balance sheets. SAB No. 108 does not change the requirements underSAB No. 99 regarding qualitative considerations in assessing the materiality ofmisstatements. We adopted SAB No. 108 during the third quarter of fiscal year2007, and the adoption had no impact on its results of operations or financialcondition as of and for the fiscal year ended September 30, 2007.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities Including an Amendment of FASBStatement No. 115*. SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. This statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes forsimilar types of assets and liabilities. SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007. We are currently evaluating the impactthis statement will have on our financial statements, if any.

 

17

Item7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

TheCompany conducts all of its transactions, including those with foreignsuppliers and customers, in U.S. dollars. It is therefore not directly subjectto the risks of foreign currency fluctuations and does not hedge or otherwisedeal in currency instruments in an attempt to minimize such risks. Demand fromforeign customers and the ability or willingness of foreign suppliers toperform their obligations to the Company may be affected by the relative changein value of such customer or supplier's domestic currency to the value of theU.S. dollar. Furthermore, changes in the relative value of the U.S. dollar maychange the price of the Company's prices relative to the prices of its foreigncompetitors.

 

18

 

 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

***Index to Financial Statements and Financial StatementSchedules***

 

*FINANCIAL STATEMENTS:*

Page

Report of Independent Registered  Public Accounting Firm

20

Report of Independent Registered  Public Accounting Firm

21

Balance Sheets, September 30, 2007  and 2006

22

Statements of Operations, fiscal  years ended September 30, 2007, 2006, and 2005

23

Statement of Shareholders' Equity,  fiscal years ended September 30, 2007, 2006, and 2005

24

Statements of Cash Flows, fiscal  years ended September 30, 2007, 2006, and 2005

25

Summary of Accounting Policies

26

Notes to Financial Statements

30

Quarterly Financial Data  (unaudited), fiscal years ended September 30, 2007 and 2006

36

 

*FINANCIAL STATEMENT SCHEDULE*

Schedule II - Valuation and  Qualifying Accounts

38

 

 

19

 **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

The Shareholders

   and Board of Directors

LOGIC Devices Incorporated

Sunnyvale, California

 

We have audited the accompanyingbalance sheet of LOGIC Devices Incorporated (the "Company") as ofSeptember 30, 2007 and the related statements of operations, shareholders'equity, and cash flows for the fiscal year then ended. Our audit also includedthe financial statement schedule of the Company listed in Item 15. Thesefinancial statements and the financial statement schedule are the responsibilityof the Company's management. Our responsibility is to express an opinion onthese financial statements based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provided a reasonable basisfor our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of LOGIC Devices Incorporated as of September 30, 2007 andthe results of its operations and its cash flows for the fiscal year thenended, in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly, in all material respects, the information setforth therein.

 

/s/ Hein & Associates LLP

 

Irvine, California

December 21, 2007

 

20

 **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

The Shareholders

   and Board of Directors

LOGIC Devices Incorporated

Sunnyvale, California

 

We have audited the accompanyingbalance sheet of LOGIC Devices Incorporated (the "Company") as ofSeptember 30, 2006 and the related statements of operations, shareholders'equity, and cash flows for each of the two years in the two fiscal years thenended. Our audits also included the financial statement schedule of the Companylisted in Item 15 for the years ended September 30, 2006 and 2005. Thesefinancial statements and the financial statement schedule are the responsibilityof the Company's management. Our responsibility is to express an opinion onthese financial statements based on our audits.  

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provided a reasonable basisfor our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of LOGIC Devices Incorporated as of September 30, 2006 andthe results of its operations and its cash flows for each of the two years inthe two fiscal years then ended, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

 

/s/ Perry-Smith LLP

 

Sacramento, California

November 29, 2006

 

 

21

 

**LOGIC Devices Incorporated**

**Balance Sheets**

*September 30,*

* *

*September 30,*

*2007*

* *

*2006*

ASSETS

Current assets:

Cash and cash equivalents

$

884,000 

$

1,478,100 

Investment in available-for-sale securities

1,061,900 

507,000 

Accounts receivable

681,300 

830,900 

Inventories

4,388,700 

5,239,700 

Prepaid expenses and other current assets

186,500 

141,600 

Total current assets

7,202,400 

8,197,300 

Property and equipment, net

1,038,800 

1,100,700 

Other assets, net

22,100 

418,800 

$

8,263,300 

$

9,716,800 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

30,100 

$

146,900 

Accrued payroll, vacation and bonuses

119,900 

99,700 

Accrued commissions

25,000 

10,400 

Other accrued expenses

70,500 

43,000 

Total current liabilities

245,500 

300,000 

Deferred rent

2,100 

19,700 

Total liabilities

247,600 

319,700 

Commitments and contingencies  (Note 5)

Shareholders' equity:

Preferred stock, no par value; 1,000,000 shares authorized;

5,000 designated as Series A, 0 shares issued and outstanding

- 

- 

70,000 designated as Series B, 0 shares issued and outstanding

- 

- 

Common stock, no par value; 10,000,000 shares authorized;

6,812,938 and 6,763,188 shares issued and outstanding,  respectively

18,541,300 

18,458,500 

Additional paid-in capital

142,200 

118,700 

Accumulated deficit

(10,667,800)

(9,180,100)

Total shareholders' equity

8,015,700 

9,397,100 

$

8,263,300 

$

9,716,800 

*See accompanying Summary of Accounting Policies and Notes to Financial Statements.*

 

22

 

**LOGIC Devices Incorporated**

**Statements of Operations**

*For the fiscal years ended September 30,*

*2007*

* *

*2006*

* *

*2005*

Net revenues

$

4,686,400 

$

4,640,600 

$

3,508,800 

Cost of revenues

2,846,700 

2,153,700 

2,861,600 

Gross margin

1,839,700 

2,486,900 

647,200 

Operating expenses:

Research and development

1,811,800 

981,700 

729,800 

Selling, general and administrative

1,546,400 

1,421,900 

1,298,700 

Total operating expenses

3,358,200 

2,403,600 

2,028,500 

Operating (loss) income

(1,518,500)

83,300 

(1,381,300)

Other income, net:

Interest income

(75,900)

(37,800)

(18,600)

Other income, net

(100)

(9,100)

(600)

Total other income, net

(76,000)

(46,900)

(19,200)

(Loss) income before provision for income taxes

(1,442,500)

130,200 

(1,362,100)

Provision for income taxes

45,200 

800 

800 

Net (loss) income

$

(1,487,700)

$

129,400 

$

(1,362,900)

Basic (loss) earnings per common share

$

(0.22)

$

0.02 

$

(0.20)

Basic weighted average common shares outstanding

6,797,480 

6,754,021 

6,749,855 

Diluted (loss) earnings per common share

$

(0.22)

$

0.02 

$

(0.20)

Diluted weighted average common shares outstanding

6,797,480 

6,794,789 

6,749,855  |
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