<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: June 29, 1997
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 June 29, 1997, was
13,488,705.
1
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INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June
29, 1997, and December 30, 1996 3
Consolidated Statements of Income for
the Six Months Ended June 29, 1997,
and June 29, 1996 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 29,
1997, and June 29, 1996 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, INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 29, 1997, and December 29, 1996
<TABLE>
<CAPTION>
(in thousands except share amounts) JUNE 29, 1997 DEC. 29, 1996
---------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 16,435 $ 20,251
Short-term investments 18,833 10,211
Accounts receivable, net of allowance for doubtful 20,571 18,279
accounts of $156 and $156 for 1997 and 1996,
respectively
Inventories 17,476 9,990
Deferred income tax benefits 2,182 2,504
Prepaid expenses 2,152 2,351
---------------- ---------------
Total current assets 77,649 63,586
Property and equipment, net 27,324 23,676
Long-term investments 9,550 12,440
Foundry deposits 8,000 8,000
Other assets 4,227 4,400
---------------- ---------------
Total assets $126,750 $112,102
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 1,089 $ 1,129
Accounts payable 8,838 4,778
Accrued payroll costs 2,578 1,985
Income taxes payable 3,016 1,338
Other accrued liabilities 2,858 3,485
---------------- ---------------
Total current liabilities 18,379 12,715
Capital lease obligations, less current portion 2,667 3,194
Deferred lease expense 544 612
---------------- ---------------
Total liabilities 21,590 16,521
Shareholders' Equity:
Common Stock, no par value 84,974 83,203
Authorized - 105,000,000 shares
Outstanding - 13,488,705 and 13,116,227
shares for 1997 and 1996, respectively
Unrealized gain on available-for-sale
securities, net of tax 12 12
Retained earnings 20,174 12,366
---------------- ---------------
Total shareholders' equity 105,160 95,581
---------------- ---------------
Total liabilities and shareholders' equity $126,750 $112,102
================ ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
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LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- ---------------------------------
June 29, 1997 June 29, 1996 June 29, 1997 June 29, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $32,642 $27,479 $62,749 $55,021
Cost of sales 13,566 11,521 26,466 23,109
------- ------- ------- -------
Gross margin 19,076 15,958 36,283 31,912
Research & development 6,738 5,739 13,079 11,414
Sales & marketing 4,754 3,989 9,053 7,990
General & administrative 2,221 1,765 4,023 3,531
------- ------- ------- -------
Total operating expenses 13,713 11,493 26,155 22,935
------- ------- ------- -------
Operating income 5,363 4,465 10,128 8,977
Interest and other income, net 492 349 858 741
------- ------- ------- -------
Income before provision for income taxes 5,855 4,814 10,986 9,718
Provision for income taxes 1,932 1,590 3,605 3,208
------- ------- ------- -------
Net income $ 3,923 $ 3,224 $ 7,381 $ 6,510
======= ======= ======= =======
Earnings per Share $ 0.28 $ 0.24 $ 0.52 $ 0.48
======= ======= ======= =======
Weighted Average Common
Shares Outstanding 14,261 13,681 14,185 13,684
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
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LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
FOR SIX MONTHS ENDED
-----------------------------------
(in thousands) JUNE 29, 1997 JUNE 29, 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,380 $ 6,510
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,516 3,277
Changes in assets and liabilities:
Accounts receivable (2,292) 1,814
Inventories (7,486) 2,035
Deferred tax assets 322 390
Prepaid expenses 199 365
Accounts payable and accrued liabilities 5,704 (5,060)
Deferred liabilities 0 (134)
Deferred lease expense (68) (85)
-------- -------
Net cash provided by operating activities 8,275 9,112
-------- -------
Cash flows from investing activities:
Purchase of short-term investments (30,341) (1,400)
Proceeds from sales and maturities of short-term
investments 21,719 7,915
Purchase of long-term investments (7,740) (20)
Proceeds from sales and maturities of long-term
investments 10,630 0
Capital expenditures (7,888) (1,955)
Payments for related party notes receivable 0 (1,025)
Payments for foundry deposits and other assets (103) (5,782)
-------- -------
Net cash provided by (used in) investing activities (13,723) (2,267)
-------- -------
Cash flows from financing activities:
Net principal payments under capital lease obligations (567) (532)
Proceeds from issuance of stock, net of
repurchases and costs of issuance 2,199 1,825
-------- -------
Net cash provided by (used in) financing activities 1,632 1,293
-------- -------
Net increase (decrease) in cash and cash equivalents (3,816) 8,138
Cash and cash equivalents at beginning of period 20,251 21,627
-------- -------
Cash and cash equivalents at end of period $ 16,435 $29,765
======== =======
SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH TRANSACTIONS
Cash payments for:
Interest 295 179
Income taxes 80 2,052
</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 six-month period ended June 29, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 28, 1997. 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 29, 1996, and subsequent filings with the Securities and
Exchange Commission.
NOTE 2 - EARNINGS 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). Effective
December 28, 1997, the Company is required to adopt Financial Accounting
Standards Board No. 128, Earnings per Share. Among other things, the new
standard will require replacement of primary EPS with basic EPS. Basic EPS
would be computed by dividing reported earnings available to common stockholders
by weighted average shares outstanding. No dilution for any potentially
dilutive securities would be included. Fully diluted EPS, now called diluted
EPS, would still be required. The Company has not quantified the effect of
applying the new standard.
6
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NOTE 3 - INVENTORIES
Inventories, stated at the lower of cost (first in, first out) or market,
consist of:
<TABLE>
<CAPTION>
--------------------------------------------------------
(in thousands) June 29, 1997 December 30, 1996
--------------------------------------------------------
<S> <C> <C>
Raw materials $ 5,421 $ 32
Work-in-process 9,928 7,948
Finished goods 2,127 2,010
-------- --------
$ 17,476 $ 9,990
======== ========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
(in thousands) June 29, 1997 December 30, 1996
--------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 26,762 $ 25,254
Furniture and fixtures 18,436 11,899
Leasehold improvements 3,327 3,485
-------- --------
$ 48,525 $ 40,638
Less - accumulated depreciation (21,201) (16,962)
-------- --------
$ 27,324 $ 23,676
======== ========
</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 31, 1997.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements as a result of the factors set
forth in "Factors that May Affect Future Results" and elsewhere in this Report.
REVENUES
Revenues increased 18.8% to $32.6 million in the second quarter of 1997 compared
to $27.5 million for the same quarter of 1996. Revenues increased 14% to $62.7
million in the first six months of 1997 compared to $55.0 million for the first
six months of 1996. The increases during the second quarter and first six months
of 1997 reflect 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 $10.8 million or 33.1% and $11.1 million or 40.4% of
sales, respectively, for the second quarter of 1997 and 1996, and $21.6 million
or 34% and $21.3 million or 39% of sales, respectively, for the first six months
of 1997 and 1996. All sales are denominated in U.S. dollars, thereby
eliminating the impact of foreign currency exchange rate fluctuations on
revenues.
GROSS MARGIN
Gross margin is affected by several factors, including average selling prices,
the mix between older and newer products, test equipment utilization, foundry
manufacturing yields, timing of cost reductions and the mix between direct and
distributor sales. Margin on domestic and international sales is similar. Gross
margin as a percentage of revenues in the second quarter of 1997 was 58.4%
versus 58.1% in the second quarter of 1996 and 57.2% in the first quarter of
1997. Gross margin as a percentage of revenues in the first six months of 1997
was 57.8% versus 58.0% in the first six months of 1996.
RESEARCH AND DEVELOPMENT
8
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Research and development expenses were $6.7 million or 20.6% of revenues in the
second quarter of 1997 versus $5.7 million, or 20.9% of revenues in the second
quarter of 1996. Research and development expenses were $13.1 million or 20.8%
of revenues in the first six months of 1997 versus $11.4 million, or 20.7% of
revenues in the first six months of 1996. The research and development expense
increase in each period in 1997 is due to additions to the Company's design
engineering staff and related new product design expenses.
SALES AND MARKETING
Sales and marketing expenses were $4.7 million or 14.6% of revenues in the
second quarter of 1997 versus $4.0 million or 14.5% of revenues in the second
quarter of 1996. Sales and marketing expenses were $9.1 million or 14% of
revenues in the first six months of 1997 versus $8.0 million or 14.5% of
revenues in the first six months of 1996. The increased dollar expenditures in
each period in 1997 are attributable to sales commissions associated with
increased revenues, and the expansion of the Company's sales and marketing
staffs.
GENERAL AND ADMINISTRATIVE
In the second quarter of 1997, general and administrative expenses were $2.2
million or 6.8% of revenues versus $1.8 million or 6.4% of revenues in the same
period of 1996. In the first six months of 1997, general and administrative
expenses were $4.0 million or 6.4% of revenues versus $3.5 million or 6.4% of
revenues in the same period of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity as of June 29, 1997, consisted of
$35.3 million of cash, cash equivalents and short-term investments, and $10
million available under the Company's revolving line of credit. At June 29,
1997, the Company had no outstanding balance under this line of credit. Working
capital as of June 29, 1997, was $59.3 million.
During the first six months of 1997, the Company generated $8.3 million of cash
from operating activities, as compared to $9.1 million in the same period in
1996. In both years, net cash generated from operations during the period was
primarily due to net income before depreciation and amortization expense.
Disparities in such line items as accounts receivable, accounts payable, capital
expenditures or foundry deposits reported in the first half of 1997 and 1996
reflect differences in timing, and not material changes in the Company's
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors may have an impact on the Company's business:
9
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Manufacturing Risks
The Company does not manufacture the wafers used for its products. The
Company's wafers are manufactured by foundries located in the United States,
Europe and Asia. The Company depends upon these suppliers to produce wafers at
acceptable yields and to deliver them 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 can
fluctuate 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. The Company's operating results depend in
substantial part on its ability to maintain or increase the capacity available
from its existing or new foundries. In prior years, the Company has
experienced increased costs and delays in customer shipments as a result of a
foundry reducing shipments to the Company without prior notice, requiring the
Company to transfer products to a new foundry. Although the Company believes
that it has planned to meet customer demand, there can be no assurances that
unforeseen demand, current supplier interruptions or other changes will not
have a material impact on the Company's business.
Manufacturing process technologies are subject to rapid change. Other
companies in the industry have experienced difficulty in migrating to new
manufacturing processes, and, consequently, have suffered reduced yields,
delays in product deliveries and increased expense levels. The Company's
business, financial condition and results of operations could be materially
adversely affected if any such transition is substantially delayed or
inefficiently implemented.
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 may
sustain an adverse financial impact from problems with the cost, timeliness,
yield and quality of product deliveries from these suppliers.
Factors Affecting Annual and 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, semiconductor industry environment, changes in
average selling prices, the timing of new product introductions (by the
Company and its customers), use of new technologies, the ability to safeguard
patents and intellectual property, and rapid change 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 rapidity of
their onset may make prediction of and reaction to such events difficult. Due
to the foregoing and other factors, past results, such as those described in
this Offering Circular, may not be predictive of future performance.
10
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Dependence on New Products
The Company's future success depends on its ability to timely develop and
introduce new products which compete effectively. Because of the complexity of
its products, the Company may experience delays in completing development and
introduction of new products, and, as a result, not achieve the market share
anticipated for such products. The Company's strategy is to develop products
for the fastest growing segments of the communications market. The Company
conducts its own analysis of market trends and reviews forecasts and
information provided by industry analysts. Market conditions may change
rapidly as technology, economic, or user-preference conditions cause different
communications technologies to experience growth other than that forecast by
the Company or others. 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 tends to decrease over the product's life. To
offset such price 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 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.
Management of Growth; Dependence on Key Personnel
The Company is currently experiencing a period of significant growth which
has placed, and could continue to place, a significant strain on the Company's
personnel and other resources. The Company's ability to manage its growth
effectively will require continued expansion and refinement of the Company's
operational, financial and management and control systems as well as a
significant increase in the Company's development, testing, quality control,
marketing, logistics and service capabilities, any of which could place a
significant strain on the Company's resources. The Company's success also
depends to a significant extent upon the continued services of its key
personnel and its ability to attract and retain key technical, sales and
management personnel in the future. Competition for such personnel is intense
and there can be no assurance that the Company will be able to attract and
retain key technical, sales and management personnel in the future. If the
Company's management is unable to manage growth effectively, maintain the
quality and marketability of the Company's products and retain, hire and
integrate key personnel, the Company's business, financial condition and
results of operations could be materially 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 or will not be
invalidated, circumvented or challenged. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources for the
Company. Any infringement claim or other litigation against or by the Company
could have a material effect on the Company's financial condition and results
of operations. In November 1995 the Company commenced infringement litigation
against a competitor.
Semiconductor Industry
The semiconductor industry has historically been cyclical and subject to
significant economic downturns at various times. The Company may experience
substantial period-to-period fluctuations in 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, factors
which may affect the market price of the Company's Common Stock. As is common
in the semiconductor industry, the Company frequently ships more product in
the third month
11
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of a quarter than in the other months. 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 order wafers and build inventory in advance of product
shipments. There is risk that the Company could produce excess or insufficient
inventories of particular products because the Company's markets are volatile
and subject to rapid technology and price changes. 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.
Increased 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 on a timely basis and affect
the Company's margins. Additionally, the Company believes that during periods
of strong demand and/or restricted semiconductor capacity, customers will
over-order to assure an adequate supply. Certain of the Company's customers
may cancel or postpone orders without notice if product becomes available
elsewhere.
Shortages of components from other suppliers could cause the Company's
customers to cancel or delay programs incorporating the Company's products,
resulting in the cancellation or delay of orders for the Company's products.
Intense Competition
The semiconductor industry is intensely competitive. The Company's
competition consists of semiconductor companies and semiconductor divisions of
vertically integrated companies. In the transmission market, the Company's
principal competitors are Brooktree Corporation (a subsidiary of Rockwell
International, Inc.), Crystal Semiconductor, Inc. (a subsidiary of Cirrus
Logic, Inc.) ("Crystal"), Dallas Semiconductor, Inc., Lucent Technologies Inc.
("Lucent"), PMC-Sierra Inc. and Siemens A.G. In the networking market, the
Company's principal competitors are Advanced Micro Devices, Inc., Crystal,
Integrated Circuit Systems, Inc., Lucent, Micro Linear Corp., National
Semiconductor Corporation, Quality Semiconductor, Inc., Seeq Technologies,
Inc. and Texas Instruments, Incorporated. Many of these competitors have
longer operating histories, greater name recognition, access to larger
customer bases and significantly greater financial and other resources than
the Company with which to pursue engineering, manufacturing, marketing and
distribution of products.
The ability of the Company to compete successfully in the rapidly evolving
area of high performance integrated circuit technology depends on factors both
within and outside of the Company's control. Such factors include, without
limitation, success in designing and manufacturing new products, implementing
new technologies, intellectual property programs, product quality,
reliability, price, efficiency of production, and general economic conditions.
There is no assurance that the Company will be able to compete successfully
against current and future competitors. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
may have a material adverse effect on the Company's business, financial
condition and results of operations.
International Operations
Due to its reliance on international sales and foreign third-party
manufacturing and assembly operations, the Company is subject to the risks of
conducting business outside of the United States including government
regulatory risks, political, social and economic instability, potential
hostilities and changes in diplomatic and trade relationships. There can be no
assurance that one or more of the foregoing factors will not have a material
adverse effect on the Company's business, financial condition or operating
results.
12
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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 system
products. The suit seeks damages and injunctive relief. Seeq has denied the
allegations and may file a counter claim against the Company. 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 That May Affect Future
Results".
In the course of business the Company is from time to time party to other
litigation. In the opinion of the Company, any such litigation currently
pending is not likely to have a material impact on the Company's business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits - 10.41 - Amendment to Deposit Agreement (confidential
treatment requested)
27.1 --Financial Data Schedule, June 29, 1997
(b) Reports on Form 8-K - None.
13
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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: August 12, 1997 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: August 12, 1997 By: /s/ John Kehoe
---------------
John Kehoe
Vice President and Chief Financial
Officer
(Principal Financial Officer)
S-1
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EXHIBIT 10.41
AMENDMENT AGREEMENT (NO. 1)
THIS AMENDMENT AGREEMENT (NO. 1) is made the __________ day of ______________
1997, by and between:-
(1) [*]; and
(2) LEVEL ONE COMMUNICATIONS INCORPORATED, a company incorporated in California
and having its place of business at 9750 Goethe Road, Sacramento, CA 95827,
United States of America ("Customer").
WHEREAS
(A) [*] and Customer had entered into a Deposit Agreement dated 9 November 1995
(the "Deposit Agreement") for the purpose of Customer depositing certain
funds with [*] and to procure [*] to make available to Customer certain
wafer manufacturing capacity.
(B) [*] and Customer hereto are entering into this Amendment Agreement to vary
the Deposit Agreement with effect from the date hereof.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the parties agree as follows:
1. INTERPRETATION
All terms and references used in the Deposit Agreement and which are
defined or construed in the Deposit Agreement but are not defined or
construed in this Amendment Agreement shall have the same meaning and
construction in this Amendment Agreement.
2. AMENDMENT TO THE DEPOSIT AGREEMENT
The Parties agree that with effect from the date of this Amendment
Agreement, the Deposit Agreement shall be amended as follows:-
2.1 CLAUSE 1.3 (THE DEPOSIT)
------------------------
The entire Clause 1.3 shall be deleted in its entirety and replaced
with the following:-
"1.3 Upon the expiry of the term of this Agreement or the earlier
termination thereof in accordance with Clause 5 or Clause 6.2, [*]
[*] Confidential treatment has been requested with respect to the information
contained within the "[*]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
1
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will return to Customer the Deposit, without interest and subject to
any deductions [*] pursuant to the terms of this Agreement."
2.2 CLAUSE 2 ([*] SUPPLY COMMITMENT)
--------------------------------
i) The words "second calendar quarter of 1996" appearing in the fifth
line of Clause 2.1 shall be deleted and the words "first calendar
quarter of 1997" substituted therefor.
ii) The word "Clause 8.6" appearing at the third line of Clause 2.4 shall
be deleted and the word "Clause 7.6" substituted therefor.
2.3 CLAUSE 3.3 (CUSTOMER LOADING COMMITMENT)
----------------------------------------
Clause 3.3 shall be deleted in its entirety.
2.4 [*]
2.5 CLAUSE 5 (SET OFF AND MAINTENANCE OF DEPOSIT)
---------------------------------------------
The provisions of Clause 5 shall be amended as follows:-
i) by renumbering the heading "5." as "4.".
ii) by deleting Clause 5.2 in its entirety and replacing it with the
following new Clause 4.1:-
"4.1 [*] shall be entitled to deduct from and set-off against the
Deposit, any payment falling due and remaining unpaid by Customer
under the Foundry Agreement."
iii) by deleting Clause 5.1 in its entirety and replacing it with the
following new Clause 4.2:-
"4.2 At the end of each calendar quarter, [*] shall issue a written
notice to Customer stating the amount of the
[*] Confidential treatment has been requested with respect to the information
contained within the "[*]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
2
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overdue payments and Customer shall pay the relevant sum to [*]
within 30 days of the date of such notice, so as to maintain the
Deposit at [*].
(iv) by renumbering Clause 5.3 as Clause "4.3"; by deleting the word
"Clause 5.2" appearing in the first line and substituting the word
"Clause 4.2" therefor; and by deleting the words [*] appearing in the
second line.
(v) by inserting the following new Clause 4.4:-
(a)
[*]
"A" means such quantity of the aggregate Customer Actual
Loading for the calendar year which is less than or
equal to 50% of the aggregate Customer Loading
Commitment for the calendar year.
"C" means the aggregate Customer Loading Commitment for the
calendar year.
[*] Confidential treatment has been requested with respect to the information
contained within the "[*]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
3
<PAGE>
(b) [*]
"A" means such quantity of the aggregate Customer Actual
Loading for the calendar year if Customer exceeds 50%
of the aggregate Customer Loading Commitment for the
calendar year.
"HC" means 50% of the aggregate Customer Loading Commitment
for the calendar year
"C" means the aggregate Customer Loading Commitment for the
calendar year.
[*]
2.6 CLAUSE 6 (TERM AND TERMINATION)
-------------------------------
The provisions of Clause 6 shall be amended as follows:-
i) By renumbering the heading "6." as "5.".
ii) By renumbering Clause "6.1" as Clause "5.1".
iii) By deleting sub-clause 6.1(a) in its entirety and replacing it
with the following new sub-clause 6.1(a):-
"(a) At the option of [*], in the event that the amount of the
Deposit falls below 50% of [*] and Customer fails to make
payment of the shortfall to [*] within the period set out in
Clause 4.1."
iv) By renumbering Clause "6.1" as Clause "5.2"; and by deleting the
word "Clause 6.1" appearing in the first line and substituting
the word "Clause 5.1" therefor.
2.7 CLAUSE 7 (FORCE MAJEURE)
------------------------
i) The heading "7." and Clause "7.1" shall be renumbered as "6." and
Clause "6.1" respectively.
ii) Clause "7.2" shall be renumbered as Clause "6.2"; and the word
"Clause 7" appearing in the first line shall be deleted and the
word "Clause 6" substituted therefor.
2.8 CLAUSE 8 (WARRANTY AND INDEMNITY)
---------------------------------
[*] Confidential treatment has been requested with respect to the information
contained within the "[*]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
4
<PAGE>
i) The heading "8." shall be renumbered as "7.".
ii) Clauses "8.1", "8.2", "8.3", "8.4", "8.5" and "8.6" shall be
renumbered as Clauses "7.1", "7.2", "7.3", "7.4", "7.5" and "7.6"
respectively.
2.9 CLAUSE 9 (CONFIDENTIALITY)
--------------------------
The heading "9." and Clauses "9.1", "9.2" and "9.3" shall be
renumbered as "8.", and Clauses "8.1", "8.2" and "8.3" respectively.
2.10 CLAUSE 10 (NOTICES)
-------------------
By amending Clause 10 as follows:-
i) By renumbering the heading "10." as "9.".
ii) By renumbering Clause "10.1" as Clause "9.1" and by deleting the
address and facsimile number for [*] in its entirety and
replacing it with the following:-
[*]
---
iii) By renumbering Clause "10.2" as Clause "9.2".
2.11 CLAUSE 11 (WAIVER AND REMEDIES)
-------------------------------
The heading "11." and Clauses "11.1", and "11.2" shall be renumbered
as "10.", Clauses "10.1" and "10.2" respectively.
2.12 CLAUSE 12 (SEVERANCE)
---------------------
The heading "12." shall be renumbered as "11.".
2.13 CLAUSE 13 (ENTIRE AGREEMENT)
----------------------------
The heading "13." shall be renumbered as "12.".
2.14 CLAUSE 14 (GOVERNING LAW)
-------------------------
The heading "14." shall be renumbered as "13.".
2.15 ANNEX A (PAYMENT SCHEDULE)
--------------------------
[*] Confidential treatment has been requested with respect to the information
contained within the "[*]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
5
<PAGE>
Item 3. Of Annex A shall be deleted in its entirety and replaced with the
following:-
"3. Upon signing of the
Amendment Agreement
(No. 1) to Deposit Agreement [*]
2.16 ANNEX B ([*]
------------
The entire Annex B shall be deleted in its entirety and replaced with
the following:-
"ANNEX B
[*]
---
Number of 8-inch silicon wafers (based on 15 mask level)
(A) [*]
<TABLE>
<CAPTION>
Quarterly
================================================================================
2Q96 3Q96 4Q96 1Q97 2Q97 3Q97 4Q97
through
4Q2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
[ * ]
================================================================================
</TABLE>
(B) THRESHOLD
<TABLE>
<CAPTION>
================================================================================
1997 1998 1999 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
[ * ]
================================================================================
</TABLE>
3. SAVING AND INCORPORATION
3.1 Save as expressly amended by this Amendment Agreement, the terms and
conditions of the Deposit Agreement shall continue to be in full force and
effect in all other respects.
3.2 The Deposit Agreement and this Amendment Agreement shall be construed as
one document and this Amendment Agreement shall be deemed to be part of the
Deposit Agreement. Where the context so permits, references in the Deposit
Agreement and in this Amendment Agreement to "the Deposit Agreement" or
[*] Confidential treatment has been requested with respect to the information
contained within the "[*]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
6
<PAGE>
"this Agreement" shall be read and construed as references to the Deposit
Agreement as amended and supplemented by this Amendment Agreement.
4. GOVERNING LAW
This Amendment Agreement shall be governed by and construed in accordance
with the laws of [*]. The parties hereto irrevocably submit to the non-
exclusive jurisdiction of the courts of [*].
IN WITNESS WHEREOF the Parties have hereunto entered into this Agreement the
date first above written.
[*]
Signed by John Kehoe, V.P. and CFO )
LEVEL ONE COMMUNICATIONS )
INCORPORATED )
in the presence of:- ) /s/ John Kehoe
------------------------------
/s/ Bruce Dravis
- ----------------------------------
Name: Bruce Dravis
General Counsel
[*] Confidential treatment has been requested with respect to the information
contained within the "[*]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and
Exchange Commission.
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 29, 1997, 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-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 16,435
<SECURITIES> 18,833
<RECEIVABLES> 20,727
<ALLOWANCES> 156
<INVENTORY> 17,476
<CURRENT-ASSETS> 77,649
<PP&E> 48,525
<DEPRECIATION> 21,201
<TOTAL-ASSETS> 126,750
<CURRENT-LIABILITIES> 18,379
<BONDS> 0
0
0
<COMMON> 84,974
<OTHER-SE> 20,174
<TOTAL-LIABILITY-AND-EQUITY> 126,750
<SALES> 32,642
<TOTAL-REVENUES> 32,642
<CGS> 13,566
<TOTAL-COSTS> 13,566
<OTHER-EXPENSES> 13,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 295
<INCOME-PRETAX> 5,855
<INCOME-TAX> 1,932
<INCOME-CONTINUING> 3,923
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,923
<EPS-PRIMARY> 0
<EPS-DILUTED> .28
</TABLE>