<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-22068
LEVEL ONE COMMUNICATIONS, INCORPORATED
State: California I.R.S. Employer ID No.: 33-0128224
Address: 9750 Goethe Road, Sacramento, CA 95827
Telephone: (916) 855-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of Common Shares of the registrant outstanding on April 22, 1996, was
12,921,327.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 30, 1996,
and December 30, 1995....................................... 3
Consolidated Statements of Operations for the
Three Months Ended March 30, 1996, and April 1, 1995........ 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 30, 1996, and April 1, 1995........ 5
Notes to Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
PART II. OTHER INFORMATION
Item 1. Litigation.................................................... 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
Signatures.................................................... S-1
</TABLE>
2
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LEVEL ONE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
March 30, 1996, and December 30, 1995
(in thousands)
<TABLE>
<CAPTION>
MARCH 30, 1996 DECEMBER 30, 1995
-------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,206 $ 21,628
Short-term investments 4,890 8,223
Accounts receivable, net of allowance
for doubtful accounts of $375 and $90
for 1996 and 1995, respectively 14,446 15,390
Inventories 16,764 15,772
Deferred income tax benefit 4,289 4,289
Prepaid expenses 2,896 2,905
-------- --------
Total current assets 65,491 68,207
-------- --------
Property and equipment, net 20,382 20,438
Long-term investments 4,674 4,695
Related party note receivable 1,675 1,225
Other assets 11,913 6,236
-------- --------
Total assets $104,135 $100,801
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease
obligations $ 1,068 $ 1,059
Accounts payable 7,105 9,541
Accrued payroll costs 2,193 1,762
Income taxes payable 1,351 -
Deferred revenue 185 133
Other accrued liabilities 5,205 4,878
-------- --------
Total current liabilities 17,107 17,373
Capital lease obligations, less current
portion 3,542 3,814
Deferred lease expense 640 649
-------- --------
Total liabilities 21,289 21,836
-------- --------
Shareholders' equity:
Common Stock 78,436 77,839
Retained earnings 4,410 1,126
-------- --------
Total shareholders' equity 82,846 78,965
-------- --------
Total liabilities and shareholders'
equity $104,135 $100,801
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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LEVEL ONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER AND YEAR TO DATE ENDED
----------------------------------------------------
MARCH 30, 1996 APRIL 1, 1995
-------------- -------------
<S> <C> <C>
Revenues $27,542 $13,219
Cost of sales 11,588 5,600
------- -------
Gross margin 15,954 7,619
Research & development 5,675 2,896
Sales & marketing 4,001 2,247
General & administrative 1,766 1,084
------- -------
Total operating expenses 11,442 6,227
------- -------
Operating income 4,512 1,392
Other income, net 392 512
------- -------
Income before provsion for
income taxes 4,904 1,904
Provision for income taxes 1,618 381
------- -------
Net income $ 3,286 $ 1,523
======= =======
Net income per share (Note 2) $ 0.24 $ 0.12
======= =======
Weighted average common shares
and equivalents 13,686 13,224
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
LEVEL ONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
MARCH 30, 1996 APRIL 1, 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,286 $ 1,523
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,584 1,359
(Increase) decrease in accounts receivable 944 (1,036)
Increase in inventories (992) (560)
(Increase) decrease in prepaid expenses 9 (2,105)
Increase (decrease) in accounts payable and
accrued liabilities (248) 4,674
Decrease in deferred liabilities (36) (21)
------- --------
Total adjustments 1,261 2,311
------- --------
Net cash provided by operating activities 4,547 3,834
------- --------
Cash flows from investing activities:
Purchase of short-term investments (1,400) (12,201)
Proceeds from sales and maturities of short-
term investments 4,732 11,026
Purchase of long-term investments - (2,425)
Proceeds from sales and amturities of long-term
investments (20) --
Capital expenditures (1,427) (4,187)
Payments for related party notes receivable (450) -
Payments for other assets (5,779) (31)
------- --------
Net cash used in investing activities (4,344) (7,818)
------- --------
Cash flows from financing activities:
Principal payments under capital lease
obligations (264) (122)
Proceeds from issuance of preferred and common
stock, net 639 177
------- --------
Net cash provided by financing activities 375 55
------- --------
Net increase (decrease) in cash and cash
equivalents 578 (3,929)
Cash and cash equivalents, beginning of period 21,628 9,260
------- --------
Cash and cash equivalents, end of period $22,206 $ 5,331
======= ========
SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH
TRANSACTIONS
Cash payments for:
Interest $ 91 $ 13
======= ========
Income taxes $ 301 $ 16
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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LEVEL ONE COMMUNICATIONS, INCORPORATED
___________
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 30, 1996, are not
necessarily indicative of the results that may be expected for the year ending
December 28, 1996. The information, reported in this Form 10-Q should be read
in conjunction with the financial statements and footnotes contained in the
Company's Form 10-K filed with the Securities and Exchange Commission for the
year ended December 30, 1995.
NOTE 2 - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares of
common stock outstanding, and the dilutive common equivalent shares outstanding
from stock options and warrants (using the treasury stock method).
6
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LEVEL ONE COMMUNICATIONS, INCORPORATED
__________
NOTE 3 - INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consist of:
<TABLE>
<CAPTION>
(In thousands) March 30, 1996 December 30, 1995
-------------- -----------------
<S> <C> <C>
Raw Materials $ 28 $ 26
Work in Process 14,588 14,281
Finished Goods 2,148 1,465
-------- --------
$ 16,764 $ 15,772
======== ========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
(In thousands) March 30, 1996 December 30, 1995
-------------- -----------------
<S> <C> <C>
Machinery & Equipment $ 22,025 $ 22,557
Furniture & Fixtures 10,203 8,244
-------- --------
$ 32,228 $ 30,801
Accumulated Depreciation (11,846) (10,363)
-------- --------
Total $ 20,382 $ 20,438
======== ========
</TABLE>
7
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LEVEL ONE COMMUNICATIONS, INCORPORATED
_____
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following information should be read in conjunction with the unaudited
interim financial statements and the notes thereto included in Item 1 of this
Quarterly Report on Form 10-Q and the Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Form
10-K filed with the Securities and Exchange Commission on March 29, 1996.
REVENUES
Revenues increased 108% to $27.5 million in the first quarter of 1996 compared
to revenues of $13.2 million in the same quarter of 1995.
Networking revenues were $12.3 million and $4.9 million for the first quarter of
1996 and 1995, respectively. Transmission product revenues were $15.2 million
and $8.3 million for the first quarter of 1996 and 1995, respectively. The
increase during the first quarter of 1996 reflects the substantial unit sales
growth due to the continued market acceptance of the Company's products in both
the networking and transmission markets, and the broadening of the Company's
customer base.
International sales were $10.2 million or 37% and $3.8 million or 29% of sales
for the first quarter of 1996 and 1995, respectively. The increase in
international sales in the first quarter of 1996 over the first quarter of 1995
is attributable to the Company's increased international marketing efforts,
including its program to establish direct sales support in foreign countries,
and to international production of equipment incorporating the Company's
products. All sales are denominated in U.S. dollars, thereby reducing the impact
of foreign currency exchange rate fluctuations on revenues. The Company's
profit margin on international sales is not materially different from that
realized on its sales in the United States.
GROSS MARGIN
The Company's cost of sales includes the cost of wafer fabrication, packaging
and assembly performed by third party vendors, and costs associated with the
procurement, scheduling, product engineering, testing and quality assurance
functions performed by the Company. Gross margin as a percentage of revenues in
the first quarter of 1996 was 57.9% versus 57.6% in the first quarter of 1995.
During any period, the Company's gross margin is affected by several factors,
including the mix of products, test equipment utilization, foundry and assembly
manufacturing yields, declining selling prices, and the cost benefits achieved
through die size reductions.
8
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During the first quarter of 1996, the Company received benefits from product
enhancement costs that had been incurred in 1995. The benefits of these
enhancements resulted in slightly higher margins on certain products. These
higher margins were offset to some extent by the cost of ongoing product
enhancements.
RESEARCH AND DEVELOPMENT
Research and development expenses were $5.7 million or 20.6% of revenues in the
first quarter of 1996 versus $2.9 million, or 21.9% of revenues in the first
quarter of 1995. The increases in expenses in 1996 are due primarily to
additions to the Company's design engineering staffs and their associated costs.
The markets for the Company's products are characterized by continuing
technological change, evolving industry standards, and frequent new product
introductions. The Company believes that the continued introduction of new
products is essential to its success and is committed to continued substantial
investment in new product research and development. The Company anticipates
increased investment in research and development in absolute dollars in future
years, although research and development costs as a percentage of revenues may
decline over time.
SALES AND MARKETING
Sales and marketing expenses were $4.0 million or 14.5% of revenues in the first
quarter of 1996 versus $2.2 million or 17.0% of revenues in the first quarter
of 1995. The increases in expenditures are primarily attributable to the
continued expansion of the Company's international sales efforts, higher sales
commissions associated with increased revenues, and the expansion of the
Company's domestic sales and marketing staffs.
The Company anticipates that sales and marketing expenses will continue to
increase as revenues grow and it opens and maintains sales support offices in
Europe and in the Far East during 1996. The Company also plans to add additional
application engineering personnel.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.8 million or 6.4% of revenues in
the first quarter of 1996 versus $1.1 million or 8.2% of revenues in the first
quarter of 1995. The increases in expenses are primarily attributable to
additional headcount associated with the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity as of March 30, 1996, consisted of
$27.1 million of cash, cash equivalents and short-term investments, and $10
million available under the Company's working capital line of credit. At March
30, 1996, the Company had no outstanding balance under this line of credit.
Working capital as of March 30, 1996, was $48.4 million.
During the first three months of 1996, the Company generated $4.5 million of
cash from operating activities as compared to $3.8 million in the same period in
1995. Net cash generated from operations in the first quarter of both 1996 and
1995 was primarily due to increased profitability.
9
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During the first three months of 1996, financing activities provided net cash of
$376,000 versus $55,000 in 1995. The primary source of cash in both periods was
from the issuance of common stock from options exercised.
During the first three months of 1996, the Company used net cash of $4.3 million
in investing activities. The Company generated net cash of $3.3 million from
the maturity of short-term investments and used $7.6 million for the purchase of
capital equipment and other assets, including a deposit with a third party
semiconductor foundry. During the first three months of 1995, the Company used
net cash of $7.8 million in investing activities, primarily for the purchase of
short-term and long-term investments for $3.6 million and the purchase of
capital equipment for $4.2 million.
During 1995, the Company entered into five-year agreements with three of its
suppliers for committed foundry capacity in consideration of equipment financing
or a cash deposit. Under one of these agreements, the Company is subject to a
penalty if it fails to purchase specified minimum quantities of wafers. Over
1996, 1997 and 1998, these arrangements provide for additional expenditures
aggregating $18 million, which the Company expects to pay using cash generated
from operations.
The Company expects to fund its 1996 capital equipment requirements using a
combination of cash and equipment leasing. The Company believes that its
existing cash resources combined with cash generated from operations, equipment
lease arrangements and its line of credit will be sufficient to meet the
Company's cash requirements through the end of 1996. However, the Company may
from time to time seek additional equity or debt financing as a result of the
capital intensive nature of the semiconductor industry.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors may be associated with the outlook for the Company's
business:
DEPENDENCE UPON INDEPENDENT MANUFACTURERS
The Company does not manufacture the wafers used for its products. To date, the
Company's wafers have been manufactured by foundries located in the United
States, Europe, and the Far East. The Company depends upon these suppliers to
produce wafers at acceptable yields and to deliver them to the Company in a
timely manner at competitive prices. The Company may sustain an adverse impact
on operating results from problems with the cost, timeliness, yield and quality
of wafer deliveries from suppliers. From time to time, the available industry-
wide foundry capacity fluctuates significantly. During periods of constrained
supply, the Company may experience difficulty in securing an adequate supply of
wafers, and/or its suppliers may increase wafer prices which must be paid by the
Company. The Company's operating results depend in substantial part on its
ability to maintain and to increase the capacity available to it from its
existing or new foundries.
The Company is also dependent upon third-party assembly companies that package
the semiconductor die. The Company depends upon these suppliers to produce
products in a timely manner and at competitive prices. The Company has in the
past, and may in the future, sustained
10
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financial impact from problems with the cost, timeliness, yield and quality of
product deliveries from these suppliers.
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
The semiconductor industry is characterized by rapid technological change,
intense competitive pressure and cyclical market patterns. The Company's
results of operations are affected by a wide variety of factors, including
general economic conditions, conditions specific to the semiconductor industry,
decreases in average selling price, the timing of new product introduction (both
by the Company and its competitors), use of new manufacturing technologies, the
ability to safeguard patents and intellectual property, and rapid escalation or
decline of demand for products. The level of net revenues in any specific
quarter can also be affected by the level of orders placed during that quarter.
The Company attempts to respond to changes in market conditions as soon as
possible; however, the suddenness of their onset can make the prediction of and
reaction to such events difficult. Due to the foregoing and other factors, past
results, such as those described in this report, may not be predictive of future
performance.
DEPENDENCE ON NEW PRODUCTS
The Company's future success depends on its ability to develop and introduce new
products on a timely basis. These new products need to compete effectively on
the basis of price, performance and customer requirements. During the first
quarter of 1996, the Company introduced two new products. Because of the
complexity of its products, the Company may experience delays from time to time
in completing development and introduction of new products, and, as a result,
may not achieve the market share anticipated for such products. There can be no
assurance that the Company will successfully identify new product opportunities
and bring new products to market in a timely manner, that products or
technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive, or that the Company's products will be
selected for design into the products of its targeted customers. In addition,
the average selling price for any particular product may decrease rapidly over
the product's life. To offset such decreases, the Company relies primarily on
obtaining yield improvements and corresponding cost reductions in the
manufacture of existing products and on introducing new products which
incorporate advanced features and other price/performance factors such that
higher average selling prices and higher margins are achievable relative to
existing product lines. To the extent that such cost reductions and new product
introductions with higher margins do not occur in a timely manner, or the
Company's products do not achieve market acceptance, the Company's operating
results could be adversely affected.
INTELLECTUAL PROPERTY
The Company relies upon patent, trademark, trade secret and copyright law to
protect its intellectual property. There can be no assurance that such
intellectual property rights can be successfully asserted in the future or will
not be invalidated, circumvented or challenged. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. Any infringement claim or other litigation against or by the Company
could have a material adverse effect on the Company's financial condition and
results of operations. In November 1995 the Company commenced infringement
litigation against a competitor. See Part II, Item 1, "Litigation".
11
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SEMICONDUCTOR INDUSTRY
The semiconductor industry has historically been cyclical and subject to
significant economic downturns at various times, characterized by diminished
product demand, accelerated erosion of average selling prices and overcapacity.
The Company may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions, overall
economic conditions or other factors.
In addition, the securities of many high technology companies have historically
been subject to extreme price and volume fluctuations, a factor which may
adversely affect the market price of the Company's Common Stock. As is common
in the semiconductor industry, the Company frequently receives bookings for and
ships more product in the third month of each quarter than in either of the
first two months of the quarter.
This concentration of shipments in the last month of the quarter, which is
common in the semiconductor industry, may cause the Company's quarterly results
of operations to be more difficult to predict. Moreover, if a disruption in the
Company's production or shipping occurs near the end of a quarter, the Company's
revenues for that quarter could be adversely affected.
The Company must often order wafers and build inventory well in advance of
product shipments. There is risk that the Company will forecast incorrectly and
produce excess or insufficient inventories of particular products because the
Company's markets are volatile and subject to rapid technology and price
changes, which could affect shipments.
This inventory risk is heightened because certain of the Company's customers
place orders with long lead times which may be subject to cancellation or
rescheduling by that customer. To the extent the Company produces excess or
insufficient inventories of particular products, the Company's revenues and
earnings could be adversely affected.
Increases in the general demand for semiconductor products may result in a
reduction in the availability of wafers from foundries. Such capacity
limitations may adversely affect the Company's ability to deliver products to
its customers on a timely basis, and may also adversely impact the Company's
margins. Additionally, the Company believes that during periods of strong
demand and/or restricted semiconductor capacity, customers will order multiples
of their actual needs in order to attempt to assure a supply from multiple
sources to avoid encountering a parts delay from any single source.
Accordingly, certain of the Company's customers may cancel or postpone orders
without notice if parts become available from other vendors. These
characteristics may result in volatility in the Company's backlog.
Even if the Company has products available for sale to its customers, many of
the Company's products, particularly those products developed for the computer
networking market, could be affected in the event the Company's customers
encounter shortages in other parts necessary to build and ship computers.
Shortages of components from other suppliers could cause the Company's customers
to cancel or delay programs incorporating the Company's parts, resulting in the
cancellation or delay of orders of the Company's products.
Because of the foregoing factors that may affect future results, investors
should not use historical trends to anticipate results or trends in future
periods. In addition, the Company participates in a
12
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highly dynamic industry that may result in significant volatility of the
Company's common stock price.
13
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 28, 1995, the Company initiated a patent infringement suit
against Seeq Technologies, Inc. in United States District Court for the Northern
District of California. The suit relates to two Level One patents, No.
5,267,269 and No. 5,249,183, and to certain Seeq products used in Ethernet
products. The suit seeks damages and injunctive relief. Seeq has denied the
allegations. Although the Company does not believe such litigation will have a
material impact on the Company, litigation, regardless of its outcome, could
result in substantial cost and diversion of resources of the Company. See
"Factors Affecting Quarterly Operating Results".
There are no other material pending legal proceedings, other than routine
litigation incidental to the Company's business, to which the Company is a party
or of which any of its property is the subject.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27.1--Financial Data Schedule, March 30, 1996
(b) Reports on Form 8-K - None
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEVEL ONE COMMUNICATIONS, INCORPORATED
Date: May 10, 1996 By: /s/ Robert S. Pepper
-----------------------------------
Robert S. Pepper, Ph.D.
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 1996 By: /s/ John Kehoe
------------------------------------
John Kehoe
Vice President and Chief Financial
Officer
(Principal Financial Officer)
S-1
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> MAR-30-1996
<CASH> 22,206
<SECURITIES> 4,890
<RECEIVABLES> 14,821
<ALLOWANCES> 375
<INVENTORY> 16,764
<CURRENT-ASSETS> 65,491
<PP&E> 32,228
<DEPRECIATION> 11,846
<TOTAL-ASSETS> 104,135
<CURRENT-LIABILITIES> 17,107
<BONDS> 0
0
0
<COMMON> 78,436
<OTHER-SE> 4,410
<TOTAL-LIABILITY-AND-EQUITY> 104,135
<SALES> 27,542
<TOTAL-REVENUES> 27,542
<CGS> 11,588
<TOTAL-COSTS> 11,588
<OTHER-EXPENSES> 11,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 4,904
<INCOME-TAX> 1,618
<INCOME-CONTINUING> 3,286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,286
<EPS-PRIMARY> 0
<EPS-DILUTED> .24
</TABLE>
