<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
LEVEL ONE COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
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Notes:
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JULY 17, 1997
The Annual Meeting of the Shareholders of LEVEL ONE COMMUNICATIONS,
INCORPORATED ("Level One" or the "Company") will be held at the Company's
facilities at 9800 Old Placerville Road, Sacramento, California, on Thursday,
July 17, 1997, at 9 A.M. for the following purposes:
1. To elect Directors of the Company.
2. To ratify the selection of Arthur Andersen LLP as the Company's
certified public accountants.
3. To consider and act upon such other matters as may properly come
before the meeting.
Only shareholders of record at the close of business on May 29, 1997, are
eligible to vote in person or by proxy at the Annual Meeting or any
adjournment.
Regardless of whether you presently plan to attend the meeting in person,
the Board of Directors urges you to date, sign, and promptly return the
enclosed proxy. Even if you give a proxy, you are entitled to vote in person
if you attend the meeting. A postage-prepaid envelope is enclosed for your
convenience in returning the signed proxy.
Your early attention to the proxy will be appreciated.
By Order of the Board of Directors
Robert S. Pepper, Ph.D.
Chairman of the Board
Sacramento, California
Dated: May 29, 1997
A COPY OF THE COMPANY'S ANNUAL REPORT FOR FISCAL YEAR 1996 AND A PROXY
STATEMENT ACCOMPANY THIS NOTICE.
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
----------------
PROXY STATEMENT
----------------
This proxy statement contains information related to the solicitation of
proxies for use at the Annual Meeting of Shareholders of LEVEL ONE
COMMUNICATIONS, INCORPORATED to be held on Thursday, July 17, 1997, at 9 A.M.
at the Company's facilities at 9800 Old Placerville Road, Sacramento. Enclosed
in this mailing is a form of proxy solicited by the Company's Board of
Directors. The solicitation cost will be borne by the Company. In addition to
solicitation by mail, the Company's officers and employees may solicit proxies
personally or by telephone or facsimile, without additional compensation.
Except as described above, the Company does not currently intend to solicit
proxies other than by mail.
This proxy statement is being sent to shareholders on or about June 19,
1997.
Only shareholders of record as of the close of business on May 29, 1997, are
entitled to vote at the meeting or at any adjournment. The Company's
outstanding stock on May 29, 1997, consisted of 13,484,954 shares of common
stock.
Shareholders are entitled to one vote per share. For the election of
directors, shareholders are entitled to one vote per share for each director
position. A shareholder may use cumulative voting for directors by notifying
the Secretary of the Company before voting begins. With cumulative voting, the
shareholder will have votes equal to the number of shares held, multiplied by
the number of director positions to be filled (six), and may cast those votes
for a single candidate or among any or all of the candidates in such
proportions as the shareholder sees fit. If no request is made to cumulate
votes, each voting shareholder shall be deemed to cast one vote per share for
each director.
If a shareholder abstains from voting on any matter, or if a broker returns
a "non-vote" proxy on any matter, those shares will be deemed present at the
meeting for purposes of determining a quorum but will not be counted for
purposes of calculating the vote. Because shareholder approval under
California law requires the affirmative vote of at least a majority of the
shares needed to constitute a quorum, an abstention or a broker non-vote may
have the same effect as a negative vote.
All shares represented by valid proxies received by the Company prior to the
meeting will be voted as specified in the proxy. Unless the shareholder
specifies otherwise, the shares will be voted FOR the election of nominees and
FOR the ratification of the appointment of auditors. A shareholder may revoke
a proxy any time prior to its exercise, by delivering to the Secretary of the
Company a written revocation or a duly executed proxy bearing a later date, or
by attending the meeting and voting the shares in person.
1
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Six positions are to be voted upon at the Annual Meeting, for directors to
serve until the 1998 annual meeting or until their successors have been duly
elected and qualified. All six nominees currently serve as members of the
Board of Directors.
The Company's directors are Dr. Robert S. Pepper, Chairman of the Board and
President and Chief Executive Officer of the Company; Thomas J. Connors; Dr.
Paul R. Gray; Martin Jurick; Dr. Henry Kressel; and Joseph P. Landy.
Information on each director is set out in the section "Directors and Officers
of the Company".
Each nominee has consented to be named in this proxy statement and to serve
as a director if elected. The Company believes all nominees will be available
to serve. If any nominee becomes unable or unwilling to serve, proxies will be
voted for such other person as the Board of Directors may recommend, in place
of the unavailable nominee.
The six nominees receiving the most affirmative votes shall be elected at
the Annual Meeting. Shares represented at the Annual Meeting and not voting
shall not be counted as affirmative votes.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE SLATE
OF DIRECTORS PROPOSED BY THE BOARD OF DIRECTORS.
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has reappointed Arthur Andersen LLP as the Company's
independent certified public accountants. Arthur Andersen LLP has served as
the Company's certified public accountants since the fall of 1990.
Although not required to do so by California law, the Company has requested
shareholder ratification of the appointment of the Company's auditors at each
annual meeting. Ratification requires the affirmative vote of a majority of
the outstanding shares of the Company's common stock represented and entitled
to vote at the Annual Meeting. Shares represented at the Annual Meeting and
not voting shall not be counted as affirmative votes. In the event the
necessary vote is not obtained, the matter will be returned to the Board of
Directors for consideration of alternatives.
Representatives of Arthur Andersen LLP are expected to be in attendance at
the Annual Meeting, with the opportunity to make a statement if they so desire
and to be available to answer appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
AUDITORS.
2
<PAGE>
DIRECTORS AND OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of May
29, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Robert S. Pepper, Ph.D................. 61 President, Chief Executive
Officer and
Chairman of the Board of
Directors
John Kehoe............................. 51 Vice President, Chief Financial
Officer, Secretary
Daniel S. Koellen...................... 39 Vice President, Quality and
Reliability
George A. Papa......................... 49 Vice President, Worldwide Sales
Manuel D. Yuen......................... 56 Vice President, Operations
Thomas J. Connors(1)(2)................ 67 Director
Paul Gray, Ph.D........................ 54 Director
Martin Jurick(2)....................... 59 Director
Henry Kressel, Ph.D.(2)................ 63 Director
Joseph P. Landy(1)..................... 35 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Dr. Pepper joined the Company in July 1986 as President, Chief Executive
Officer and a director. He became Chairman of the Board of Directors in
January 1993. From 1979 until 1984, Dr. Pepper was Vice President and General
Manager of the Solid State division of RCA Corporation. Prior to joining RCA,
Dr. Pepper had spent over 15 years in the semiconductor industry, including
positions as Vice President and General Manager of the Semiconductor Division
at Analog Devices, Inc. Dr. Pepper holds B.S., M.S. and Ph.D. degrees in
Electrical Engineering from the University of California at Berkeley.
Mr. Kehoe joined the Company in October 1995 as Vice President and Chief
Financial Officer. Immediately prior to joining the Company Mr. Kehoe served
as Senior Vice President and Chief Financial Officer for Focus Surgery, Inc.,
a medical device manufacturer. From 1992 to 1993 he served as Vice President,
Finance and Chief Financial Officer for Celeritek, Inc., a microwave systems
company. From 1989 to 1992 he served as Vice President, Finance and Chief
Financial Officer of Poqet Computer Corp., a computer manufacturer. Prior to
1989 he worked in various financial and CFO positions for approximately 14
years with high technology companies, including Texas Instruments. Mr. Kehoe
holds an MBA from Fordham University and a BBA from Manhattan College.
Mr. Koellen has been responsible for the Quality and Reliability function
since he joined the Company in January 1989, serving as Manager until January
1992, then as Director until January 1993 when he was promoted to Vice
President of Quality and Reliability. From 1985 to 1989, Mr. Koellen was Lead
Failure Analysis Engineer for the Denver Aerospace Division of Martin Marietta
Corp. Prior to joining Martin Marietta, Mr. Koellen managed the surface
analysis laboratory for Mostek Corporation, a supplier of dynamic random
access memory integrated circuits. Mr. Koellen holds an M.S. in Engineering
and Applied Science from Southern Methodist University and a B.S. in Applied
Mathematics, Engineering and Physics from the University of Wisconsin.
Mr. Papa joined the Company in February 1997 as Vice President, Worldwide
Sales. Prior to joining the Company, he had been employed since 1991 as Vice
President of Sales for North America by Siemens Components Corporation, a
division of Siemens. Previously Mr. Papa was employed in other management and
sales positions with Siemens Components Corporation, LSI Logic Corporation,
Intel Corporation, and Tektronix. Mr. Papa holds a B.S.E.E. from Northeastern
University.
3
<PAGE>
Mr. Yuen was Director of Operations from the time he joined the Company in
February 1991 until January 1992, when he became Vice President of Operations.
Prior to joining the Company, Mr. Yuen was employed more than 20 years at
National Semiconductor Corporation, serving as Director of its Santa Clara
foundry from 1986 to 1987 and as Vice President--Military Aerospace Division
from 1987 to 1989. Mr. Yuen holds a B.S. and an M.S. in Electrical Engineering
from the University of California at Berkeley.
Mr. Connors has been a director of the Company since April 1991. Since 1980,
Mr. Connors has been the principal of TJC Investments, an independent
consulting firm that works with companies in the semiconductor and related
industries. Previously, Mr. Connors was employed by Motorola, Inc., where he
last served as Vice President and General Manager of the Semiconductor
Division. Mr. Connors is also a member of the Board of Directors of Zilog,
Inc., Open Vision Technologies, Inc., and SGS-Thomson Microelectronics, Inc.,
a wholly-owned subsidiary of SGS-N.V.
Dr. Gray has been a director since April 1994. Dr. Gray is the Dean of the
College of Engineering at the University of California, Berkeley. From 1990 to
1993, he served as Chairman of the Electrical Engineering and Computer
Sciences Department, and as Vice Chairman of the Department from 1988 to 1990.
He served as a director of Microlinear Corporation from 1988 to 1991. He has
published more than 100 papers in the electrical engineering field, has served
on numerous industry committees, and holds 10 patents.
Mr. Jurick has been a director of the Company since April 1991. Since 1984,
Mr. Jurick has been a Senior Vice President of Silicon Systems, Inc. ("SSI"),
a semiconductor manufacturing company, which until 1996 was a wholly owned
subsidiary of TDK Corporation, and in 1996 became a division of Texas
Instruments Inc. Mr. Jurick also serves as a director of Microsemi Corp.
Dr. Kressel has been a director of the Company since August 1987. Since
1985, Dr. Kressel has been a Managing Director at E.M. Warburg, Pincus & Co.,
Inc. ("EMW"), an investment firm, where he has been employed since 1983. Prior
to joining EMW, Dr. Kressel spent 20 years at RCA Laboratories, where he
became a Staff Vice President. Dr. Kressel is also a member of the Board of
Directors of Zilog, Inc., Maxis, Inc., and Trescom International.
Mr. Landy has been a director of the Company since January 1991. Since
January 1994, Mr. Landy has served as a Managing Director at E.M. Warburg,
Pincus & Co., Inc. ("EMW"), an investment firm, where he has been employed
since 1985. Prior to joining EMW, Mr. Landy was employed by Dean Witter
Realty, Inc., the real estate investment banking affiliate of Dean Witter
Reynolds, Inc., as a financial analyst. He also serves as a director of NOVA
Information Systems and CN Biosciences, Inc.
Directors are elected by the shareholders at each annual meeting to serve
until the next annual meeting of shareholders or until their successors are
duly elected and qualified. Officers are elected to serve, subject to the
discretion of the Board of Directors, until they resign or their successors
are appointed. There are no family relationships between any directors or
executive officers. There are no agreements or other arrangements or
understandings pursuant to which any director will be selected as a director
or nominee.
Non-employee, non-affiliated directors receive $1,800 per day for each day
devoted to Company Board or committee meetings. The Company reimburses each
director for reasonable expenses of attending Board or Board committee
meetings. Non-affiliated non-employee directors receive a 2,000-share annual
automatic option grant at the end of each year.
The Board of Directors met nine times during the fiscal year ended December
29, 1996. The Board of Directors has an Audit Committee and a Compensation
Committee. During the fiscal year ended December 29, 1996 each director
attended or participated in 75% or more of the aggregate of (i) all Board
meetings during the period in which such director served and (ii) all meetings
of Board committees on which the director served.
The Audit Committee of the Board of Directors consists of Directors Connors
and Landy. The Audit Committee recommends the engagement of independent
auditors, consults with the independent auditors regarding the scope of annual
audits and reviews the Company's system of internal accounting controls. The
Audit Committee met twice during the fiscal year ended December 29, 1996.
4
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Directors
Connors, Jurick, and Kressel. The Compensation Committee reviews and approves
the compensation policies for the Company's executive officers. The
Compensation Committee administers the Company's stock option plans. During
1996, stock option grants were administered by a Stock Option Committee
consisting of Directors Landy and Kressel. The Compensation Committee met
three times during 1996. Mr. Connors was paid $129,600 during 1996 for
consulting services rendered under an agreement with the Company.
In connection with securing a loan from Warburg Pincus Capital Company, L.P.
("WPCC") in 1992, the Company issued a warrant to WPCC to purchase 202,746
shares of its common stock at an exercise price of $1.54 per share. The
warrant was exercised January 16, 1997, for 192,754 shares, and the balance
was surrendered, on a net appreciation basis, in an amount equal to the
exercise price. Directors Kressel and Landy, each of whom is an affiliate of
the entity controlling WPCC, disclaim beneficial ownership, for purposes of
Section 16 of the Securities Exchange Act of 1934, as amended, and otherwise,
of such common stock.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the four other highest paid executive officers,
plus one officer who resigned, whose compensation for the 1996 fiscal year was
in excess of $100,000 (collectively the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION($)(2)
--------------------------- ---- ----------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D... 1996 296,923 185,382 60,000 6,276
President, Chief
Executive Officer and 1995 220,000 97,172 -- 4,280
Chairman of the Board 1994 196,794 50,000 120,000 78,632
John Kehoe............... 1996 153,182 81,508 20,000 1,800
Vice President and
Chief Financial
Officer 1995 27,115 12,500 70,000 --
J. Francois Crepin(3).... 1996 137,271 14,625 27,000 4,594
Vice President,
Business Development 1995 129,126 16,323 35,500 4,284
1994 124,650 9,500 -- 8,530
Manuel D. Yuen........... 1996 142,654 28,028 25,300 2,811
Vice President,
Operations 1995 119,674 16,846 33,000 2,443
1994 110,778 10,000 -- 2,853
Daniel S. Koellen........ 1996 120,042 30,726 31,500 3,282
Vice President, Quality
& Reliability 1995 106,292 15,227 23,100 3,120
1994 98,566 11,000 -- 2,869
George B. Holmes(4)...... 1996 115,033 82,914 25,000 4,166
Vice President
Worldwide Sales 1995 126,538 182,902 60,000 4,205
1994 41,556 51,251 -- 433
</TABLE>
- --------
(1) Annual compensation amounts include amounts deferred at the election of
the Named Officer pursuant to the Company's 401(k) plan.
(2) Other annual compensation represents the Company's 401(k) matching
contributions.
(3) Mr. Crepin served as Vice President of Business Development until May
1997, and currently continues as a consultant to the Company.
(4) Mr. Holmes served as Vice President of Worldwide Sales until October 1996.
5
<PAGE>
Option Grants in Last Fiscal Year and Year-End Option Values
The following table sets forth certain information concerning grants of
stock options to each of the Named Officers during the fiscal year ended
December 29, 1996. The options listed were granted under the 1993 Stock Option
Plan and vest pro rata over four years. In accordance with the rules of the
Securities and Exchange Commission, also shown is the potential realizable
value based on the assumed rates of stock price appreciation of 5% and 10%,
compounded annually, from the date the option was granted over the full option
term. These amounts represent certain assumed rates of appreciation only and
do not represent the Company's estimate of future stock price. Actual gains,
if any, on stock option exercises are dependent on the future performance of
the Common Stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ----------- ----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D.. 60,000 6.3 18.25 1/20/06 688,878 1,745,890
J. Francois Crepin...... 22,000 2.3 18.25 1/20/06 252,598 640,160
5,000 .5 16.75 7/26/06 52,688 133,533
John Kehoe.............. 20,000 2.1 18.25 1/20/06 229,626 581,963
Manuel D. Yuen.......... 11,300 1.1 18.25 1/20/06 129,739 328,809
14,000 1.5 16.75 7/26/06 147,527 373,891
Daniel S. Koellen....... 21,500 2.3 18.25 1/20/06 246,848 625,610
10,000 1.1 16.75 7/26/06 105,376 267,065
George B. Holmes........ 20,000 2.1 18.25 1/31/97 18,865 37,760
5,000 .5 16.75 7/26/06 52,688 133,532
</TABLE>
- --------
(1) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the option term will be at the assumed 5% and 10% levels
or at any other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
The following table provides information with respect to the Named Officers
concerning the exercise of options during the last fiscal year and unexercised
options held as of December 29, 1996:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR END(1) ($)
ACQUIRED VALUE ---------------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ----------- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D.. 10,000 347,917 140,356 180,000 $4,893,786 3,570,000
John Kehoe.............. 0 0 14,000 76,000 175,000 1,040,000
J. Francois Crepin...... 9,000 147,717 10,000 57,000 251,233 1,029,000
George B. Holmes........ 0 0 24,000 61,000 459,000 1,121,000
Manuel D. Yuen.......... 0 0 51,000 67,300 1,778,200 1,383,650
Daniel S. Koellen....... 0 0 28,200 61,500 968,735 1,238,710
</TABLE>
- --------
(1) Based upon the market price of $35.75 per share, which was the closing
price per share on the NASDAQ National Market System on the last day of
the 1996 fiscal year, less the option exercise price payable per share.
6
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors reviews and approves
the compensation policies for the Company's executive officers. These policies
are intended to link executive officer compensation to both Company and
individual performance through base salary, bonuses and long-term
compensation. During 1996, the benefits for executives were generally similar
to those offered to all Company employees, including participation in the
Company's 401(k) plan, employee stock purchase plan, and profit sharing plan.
The goals of the Company's executive compensation policies are:
. To align the interests of management and shareholders to build
shareholder value by encouraging consistent, long-term Company growth.
. To attract and retain key executive officers essential to the Company's
long-term success.
. To reward executive officers for long-term corporate success through
stock ownership.
. To link compensation to the Company's achievement of annual and long-
term goals.
. To emphasize and reward performance at the individual and corporate
level.
Base salary, bonus and long-term compensation amounts are established
following evaluation of compensation surveys for the technology industry and
other published data on executive compensation on companies competitive with
Level One. These comparisons include, but are not limited to, the group of
companies whose cumulative stock performance is shown in the "Performance
Graph" section.
BASE SALARY
The base salary for each executive officer is determined on the basis of
individual performance, the functions performed by the executive officer and
the scope of the executive officer's ongoing responsibilities, and the salary
for comparable positions shown in the comparative data described above. The
weight given to each factor varies by individual. Base salary is set near or
above the midpoint of the salary levels for comparable positions surveyed.
Each executive officer's base salary is reviewed annually to ensure
appropriateness, and increases to base salary are made to reflect competitive
market increases and individual factors. Company performance does not play a
significant role in the determination of base salary.
CASH BONUS
Executive officers other than Robert S. Pepper and George Holmes earned cash
bonuses for the 1996 fiscal year pursuant to the Company's executive bonus
plan. Under the plan, executive officers earned a bonus based on the Company's
revenue and profit performance against targets established at the start of the
year. Mr. Holmes, Vice President of Worldwide Sales, was awarded a bonus under
a separate incentive plan based predominantly on the Company's revenue
performance. Dr. Pepper's bonus is described under the heading "Chief
Executive Officer Compensation" below.
The Company's profit sharing plan provided a quarterly bonus equal to a
percentage of base pay, based on the Company's achievement against revenue and
profitability targets.
LONG-TERM INCENTIVES
Long-term incentives are provided through stock option grants. Option grants
are intended to motivate the executive officers to manage the Company for
long-term performance. The size of each option grant is based upon the
compensation surveys described above, an assessment of the option grants of
comparable companies, and each officer's expected individual contribution.
7
<PAGE>
Each option allows the executive officer to acquire Company stock in the
future at a fixed price per share. The Company grants options with exercise
prices equal to the market price of the shares on the grant date. The option's
value increases only if the market price of the Company's shares increases,
aligning a substantial part of the executive officer's compensation package
with the return realized by the shareholders. Options granted to executive
officers during 1996 were not immediately exercisable. The options become
exercisable in four annual installments, contingent upon the executive
officer's continued employment by the Company.
In amending the Company's 1993 stock option plan, the Board adopted, and the
shareholders approved, provisions intended to exclude stock option income from
the $1 million deductibility limitations of Internal Revenue Code Section
162(m).
CHIEF EXECUTIVE OFFICER (CEO) COMPENSATION
In setting the compensation payable to the Chief Executive Officer, Robert
S. Pepper, Ph.D., the goal is to provide compensation competitive with other
companies in the industry while at the same time making a significant
percentage of his compensation subject to consistent, positive, long-term
Company performance. During 1996, the base salary of Dr. Pepper was increased
by approximately 33% over the base salary paid in 1995, to reward performance
in 1995 and to be more competitive with CEO salaries of other companies with
growth and revenue profiles similar to those of Level One. In general, the
factors utilized in determining Dr. Pepper's compensation were similar to
those applied to the other executive officers in the manner described in the
preceding paragraphs. In addition to the factors in the executive bonus plan,
Dr. Pepper's bonus for 1996 was based on achievement of specified objectives
related to Company operations, as established by the Compensation Committee.
As a result of Dr. Pepper's performance against these goals, his bonus for
1996 was $170,000. The long-term component of Dr. Pepper's compensation
consisted of a stock option grant of 60,000 shares.
COMPENSATION COMMITTEE MEMBERS:
Thomas J. Connors
Martin Jurick
Henry Kressel, Ph.D.
8
<PAGE>
PERFORMANCE GRAPH
Set forth below is a graph indicating cumulative annual total return
(assuming reinvestment of dividends) for the fiscal year ended December 29,
1996 on $100 invested alternatively in the Company's common stock, the index
for NASDAQ United States issuers prepared by the Center for Research in
Security Prices, and a "peer group" of companies engaged in semiconductor
manufacture for the communications industry selected by the Company. The index
level for all series was set to $100 on August 19, 1993, the date of the
Company's initial public offering of its common stock. Each line represents a
monthly index level derived from compounded daily returns including all
dividends.
The companies selected for the peer group were Analog Devices, Inc., Cirrus
Logic, Inc., Exar Corp., Microchip Technology, Inc., Sierra Semiconductor
Corp., Brooktree Corp., Dallas Semiconductor Corp., Linear Technology Corp.,
Maxim Integrated Products, Inc., and Zilog, Inc. Following the 1996 acquisition
of Brooktree Corp. by Rockwell International, Inc., the Company deleted
Brooktree from the peer group calculations. The returns of each issuer in the
peer group are reweighted daily, using the stock market capitalization for the
prior day.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG LEVEL ONE COMMUNICATIONS, INC.
MARKET INDEX AND PEER INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
" Date " " Company" " Market" " Peer"
" " " Index " " Index " " Index"
---------- ---------- --------- ---------
<S> <C> <C> <C>
"08/19/93", 100.000, 100.000, 100.000,
"12/29/93", 119.298, 105.467, 108.035,
"12/29/94", 84.211, 103.989, 133.241,
"12/29/95", 94.737, 147.476, 207.558,
"12/27/96", 185.526, 181.590, 239.907,
</TABLE>
9
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 29, 1997, by (i) each person
(or group of affiliated persons) known by the Company to own beneficially more
than 5% of the Company's Common Stock, (ii) each of the Company's directors,
(iii) each Named Officer, and (iv) the Company's directors and executive
officers as a group. Except as indicated in the footnotes to this table, the
persons named herein, based on information provided by such persons, have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
--------------------
DIRECTORS, NAMED OFFICERS AND 5% SHAREHOLDERS NUMBER PERCENT(1)
--------------------------------------------- --------- ----------
<S> <C> <C>
Warburg, Pincus Capital Company, L.P.(2)................. 3,671,551 27.2%
466 Lexington Avenue
New York, New York 10017
Kopp Investment Advisors, Inc.(3)........................ 2,315,944 17.2%
6600 France Avenue South, Suite 672
Edina, Minnesota 55435
Robert S. Pepper, Ph.D.(4)............................... 255,689 1.9%
Thomas J. Connors(5)..................................... 44,000 *
Paul Gray(6)............................................. 16,000 *
Martin Jurick(7)......................................... 14,000 *
Henry Kressel, Ph.D.(2)(8)............................... 3,673,826 27.2%
Joseph P. Landy(2)(9).................................... 3,673,301 27.2%
John Kehoe(10)........................................... 16,000 *
J. Francois Crepin(11)................................... 40,670 *
Daniel S. Koellen(12).................................... 54,586 *
Manuel D. Yuen(13)....................................... 80,817 *
George B. Holmes......................................... 0 *
All Executive Officers and Directors as a group (10
persons)(14)............................................ 4,156,668 30.8%
</TABLE>
- --------
(1) Percent ownership is based on 13,484,954 shares of Common Stock
outstanding as of May 29, 1997, plus shares issuable pursuant to options
or warrants held by the person or class in question that are exercisable
within 60 days after May 29, 1997.
(2) The shares listed are owned of record by Warburg, Pincus Capital Company,
L.P., a Delaware limited partnership ("WPCC"), and beneficial ownership
may be attributed to E.M. Warburg, Pincus & Co., LLC, a New York Limited
Liability Company ("EMW LLC"), the successor to Warburg, Pincus Ventures,
Inc., a Delaware corporation; and to Warburg, Pincus & Co., a New York
general partnership ("WP"). WP, the sole general partner of WPCC, has a
20% interest in the profits of WPCC. Lionel I. Pincus is the managing
partner of WP and the managing member of EMW LLC and may be deemed to
control both WP and EMW LLC. The members of EMW LLC are substantially the
same as the partners of WP. Henry Kressel and Joseph P. Landy, each a
director of the Company, is a Managing Director and a member of EMW LLC
and a general partner of WP. As such, each of Messrs. Kressel and Landy
may be deemed to have an indirect pecuniary interest (within the meaning
of Rule 16a-1 of the Securities Exchange Act of 1934, as amended) in an
indeterminate portion of the common shares beneficially owned by WPCC and
WP. Each of Messrs. Kressel and Landy disclaims beneficial ownership, for
purposes of Section 16 of the Act and otherwise, of such common shares.
10
<PAGE>
(3) Includes 2,231,944 shares over which Kopp Investment Advisors, Inc.
exercises investment discretion, but for which it is not the record
holder; 10,000 shares which Kopp Investment Advisors, Inc., owns
directly; 4,000 shares owned by Kopp Investment Advisors, Inc., Profit
Sharing Plan; 50,000 shares owned by LeRoy C. Kopp Individual Retirement
Plan; and 20,000 shares owned by Kopp Family Foundation.
(4) Includes 165,356 shares issuable under stock options held by Dr. Pepper
exercisable within 60 days of May 29, 1997.
(5) Includes 20,000 shares issuable under stock options held by Mr. Connors
exercisable within 60 days of May 29, 1997.
(6) Includes 16,000 shares issuable under stock options held by Dr. Gray
exercisable within 60 days of May 29, 1997.
(7) Includes 4,000 shares issuable under stock options held by Mr. Jurick
exercisable within 60 days of May 29, 1997.
(8) Includes 3,671,551 shares held of record by WPCC for which Dr. Kressel
disclaims beneficial ownership, and 2,275 shares Dr. Kressel owns
directly.
(9) Includes 3,671,551 shares held of record by WPCC for which Mr. Landy
disclaims beneficial ownership, and 1,750 shares Mr. Landy owns directly.
(10) Includes 16,000 shares issuable under stock options held by Mr. Kehoe
exercisable within 60 days of May 29, 1997.
(11) Includes 15,500 shares issuable under stock options held by Mr. Crepin
exercisable within 60 days of May 29, 1997.
(12) Includes 43,575 shares issuable under stock options held by Mr. Koellen
exercisable within 60 days of May 29, 1997.
(13) Includes 67,825 shares issuable under stock options held by Mr. Yuen
exercisable within 60 days of May 29, 1997.
(14) Includes an aggregate of 332,755 shares issuable upon exercise of stock
options held by executive officers and Directors exercisable within 60
days of May 29, 1997. See footnotes (4), (5), (6), (7), (10), (12) and
(13) above.
COMPLIANCE WITH SECTION 16(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent (10%) of a registered class of the
Company's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than ten percent
beneficial owners are required by SEC regulation to furnish the Company with
copies of all reports they file under Section 16(a).
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners were
complied with during the fiscal year ended December 29, 1996, with the
exception of one report for one transaction which was untimely filed for each
of Messrs. Pepper, Kehoe, Holmes, Koellen and Yuen.
SUBMISSION OF SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Shareholders are advised that any proposal which a shareholder wishes to
have presented at the 1998 Annual Meeting and included in the Company's proxy
statement for such meeting must be received by the Company, at its principal
office, 9750 Goethe Road, Sacramento, California 95827, Attn.: Mr. John Kehoe,
no later than December 31, 1997. Such proposals may be included in next year's
proxy statement if they comply with certain regulations promulgated by the
SEC.
11
<PAGE>
OTHER MATTERS
The Company does not know of any matter other than those discussed in the
foregoing materials contemplated for action at the Annual Meeting. Should any
other matter be properly brought before the Meeting, the holders of the
proxies herein solicited will vote thereon in their discretion.
By Order of the Board of Directors
Robert S. Pepper
Chairman of the Board
Sacramento, California
Dated: May 29, 1997
12
<PAGE>
1218-PS-97
<PAGE>
PROXY
DETACH HERE LEV F
LEVEL ONE COMMUNICATIONS, INCORPORATED
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JULY 17, 1997
The undersigned security holder hereby appoints Robert Pepper, John Kehoe,
and Joseph P. Landy, and each of them, proxies, each with full power of
substitution to vote all stock of the undersigned at the annual meeting of
stockholders of LEVEL ONE COMMUNICATIONS, INCORPORATED to be held on July 17,
1997, at 9:00 A.M., at 9800 Old Placerville Road, Sacramento, California, and at
any adjournment thereof, in the manner indicated and in their discretion on any
other business which may properly come before said meeting, all in accordance
with and as more fully described in the Notice and accompanying Proxy Statement
for said meeting, receipt of which is hereby acknowledged.
The securities represented by this proxy will be voted as specified on the
reverse side, but if no direction is indicated, the shares represented will be
voted FOR the election of Directors nominated by management, and FOR the
ratification of management's selection of Arthur Andersen LLP as Independent
Public Accountants. This proxy is solicited by, and on behalf of, the Board of
Directors and may be revoked prior to its exercise.
-----------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
-----------
<PAGE>
DETACH HERE LEV F
[X] Please mark votes as in this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES LISTED
BELOW AS DIRECTORS, AND FOR THE RATIFICATION OF THE APPOINTMENT OF ARTHUR
ANDERSEN LLP AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS OF THE COMPANY.
1. To elect Directors.
Nominees: Robert S. Pepper, Thomas J. Connors, Paul R. Gray, Martin Jurick,
Henry Kressel, Joseph P. Landy
FOR WITHHELD
[_] [_]
[_] ____________________________________________________________________________
For all nominees except as noted above
2. To ratify the selection of Arthur Andersen LLP as independent certified
public accountants.
FOR AGAINST ABSTAIN
[_] [_] [_]
In their discretion, upon such other matters as may properly come before the
meeting.
MARK HERE MARK HERE
FOR ADDRESS IF YOU PLAN
CHANGE AND TO ATTEND
NOTE AT LEFT [_] THE MEETING [_]
Please sign exactly as name appears hereon. When signing as attorney,
executor, or in another representative capacity, please state title. If a
corporation, please sign in full corporate name by President or other
authorized person.
Signature:_________________ Date:______ Signature:_________________ Date:______
