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, 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
March 30, 1997, was 13,417,289.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 30,1997, and December 30, 1996 3
Consolidated Statements of Income for the
Three Months Ended March 30, 1997,
and March 30, 1996 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 30, 1997,
and March 30, 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
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LEVEL ONE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS) March 30, 1997 Dec. 29, 1996
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $16,410 $20,251
Short-term investments 18,673 10,211
Accounts receivable, net of
allowance for doubtful accounts 20,038 18,279
of $156 and $156 for 1997 and 1996,
respectively
Inventories 10,211 9,990
Deferred income tax benefits 2,504 2,504
Prepaid expenses 2,029 2,351
Total current assets 69,865 63,586
Property and equipment, net 25,792 23,676
Long-term investments 11,210 12,440
Foundry deposits 8,000 8,000
Other assets 4,295 4,400
Total assets $119,162 $112,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of
capital lease obligations $1,126 $1,129
Accounts payable 6,470 4,778
Accrued payroll costs 2,027 1,985
Income taxes payable 2,107 1,338
Other accrued liabilities 3,641 3,485
Total current liabilities 15,371 12,715
Capital lease obligations,
less current portion 2,932 3,194
Deferred lease expense 585 612
Total liabilities 18,888 16,521
Shareholders' Equity:
Common stock, no par value 84,466 83,203
Authorized - 105,000,000 shares
Outstanding - 13,416,936 and 13,116,227
shares for 1997 and 1996, respectively
Unrealized gain on available-for-sale
securities, net of tax 12 12
Retained earnings 15,796 12,366
Total shareholders' equity 100,274 95,581
Total liabilities and
shareholders' equity $119,162 $112,102
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
STATEMENTS.
3
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LEVEL ONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(IN THOUSANDS EXCEPT EARNINGS PER SHARE) Three months ended
MARCH 30, 1997 March 30, 1996
Revenues $30,107 $27,542
Cost of sales 12,900 11,588
Gross margin 17,207 15,954
Research & development 6,341 5,675
Sales & marketing 4,299 4,001
General & administrative 1,802 1,766
Total operating expenses 12,442 11,442
Operating income 4,765 4,512
Interest and other income, net 366 392
Income before provision
for income taxes 5,131 4,904
Provision for income taxes 1,674 1,618
Net income $3,457 $3,286
Earnings per Share $0.25 $0.24
Weighted Average Common
Shares Outstanding 14,108 13,686
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
STATEMENTS.
4
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LEVEL ONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For three months ended
(IN THOUSANDS) March 30, 1997 March 30, 1996
Cash flows from operating activities:
Net income $3,457 $3,286
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 2,153 1,584
Purchased research &
development expenses 0 0
Changes in assets and liabilities:
Accounts receivable (1,759) 944
Inventories (221) (992)
Deferred tax assets 0 0
Prepaid expenses 322 9
Accounts payable and
accrued liabilities 2,659 (248)
Deferred revenues 0 (36)
Net cash provided by
operating activities 6,611 4,547
Cash flows from investing activities:
Purchase of short-term investments (19,410) (1,400)
Proceeds from sales and
maturities of short term
investments 10,948 4,732
Purchase of long-term investments (5,940) (20)
Proceeds from sales and
maturities of long term
investments 7,170 0
Capital expenditures (4,132) (1,427)
Payments for related
party notes receivable 0 (450)
Payments for foundry deposits
and other assets (32) (5,779)
Net cash provided by (used in)
investing activities (11,396) (4,344)
Cash flows from financing activities:
Net principal payments under
capital lease obligations (292) (264)
Proceeds from issuance of stock, net of
repurchases and costs of issuance 1,236 639
Net cash provided by (used in)
financing activities 944 375
Net increase (decrease) in cash
and cash equivalents (3,841) 578
Cash and cash equivalents at
beginning of period 20,251 21,628
Cash and cash equivalents at
end of period $16,410 $22,206
Supplementary disclosure of cash and noncash transactions
Cash payments for:
Interest 162 91
Income taxes 905 301
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, 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:
(IN THOUSANDS) March 30, December 30,
1997 1996
Raw materials $ 2 $ 32
Work-in-process 8,746 7,948
Finished goods 2,010
1,463
$ 10,211 $ 9,990
Note 4 - Property and Equipment
Property and equipment, net is comprised of the following:
(IN THOUSANDS) March 30, December
1997 30, 1996
Machinery and $25,235 $25,254
equipment
Furniture and 16,103 11,899
fixtures
Leasehold 3,432 3,485
improvements
$44,770 $40,638
Less - accumulated (18,978) (16,962)
depreciation
$25,792 $23,676
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, 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 9% to $30.1 million in the first quarter of
1997 compared to $27.5 million for the same quarter of 1996.
The increases during the first quarter 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 36% and $10.2 million
or 37% of sales, respectively, for the first quarter 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 first quarter
of 1997 was 57.2% versus 57.9% in the first quarter of 1996
and 54.0% in the fourth quarter of 1996. Gross margin in the first
quarter of 1997 improved over the fourth
quarter of 1996 due to increased overhead absorption,
acceleration of cost reduction programs and die shrinks, and
wafer price reductions.
RESEARCH AND DEVELOPMENT
Research and development expenses were $6.3 million or 20.9% of
revenues in the first quarter of 1997 versus $5.7 million, or
20.6% of revenues in the first quarter of 1996. The research
and development expense increase 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 $4.3 million or 14.3% of
revenues in the first quarter of 1997 versus $4.0 million or
14.5% of revenues in the first quarter of 1996. The increased
expenditures 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 first quarter of 1997, general and administrative
expenses were $1.8 million or 6.0% of revenues versus $1.8
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 March 30,
1997, consisted of $35.1 million of cash, cash equivalents and
short-term investments, and $10 million available under the
Company's revolving line of credit. At March 30, 1997, the
Company had no outstanding balance under this line of credit.
Working capital as of March 30, 1997, was $54.5 million.
During the first three months of 1997, the Company generated
$6.6 million of cash from operating activities, as compared to
$4.5 million in the same period in 1996. In both years, net
cash generated from operations in the first quarter 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 quarter 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:
DEPENDENCE UPON INDEPENDENT MANUFACTURERS
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 or other changes will
not have a material impact on the Company's business.
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 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 report, may not be predictive of future
performance.
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.
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. See "Legal Proceedings".
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, a factor 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 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.
Because the foregoing factors may affect results, historical
results or trends may not be predictive of future results or
trends.
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. 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".
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, 1997
(b)Reports on Form 8-K - None.
8
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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 13, 1997 BY:
Robert S. Pepper, Ph.D.
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13_, 1997 By: John Kehoe
Vice President and Chief Financial Officer
(Principal Financial Officer)
S-1
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[DATE]
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
<PERIOD-
TYPE> 3-
MOS
[FISCAL-YEAR-END] DEC-30-1996
[PERIOD-END]
MAR-30-1997
[CASH] 16,410
[SECURITIES]
18,673
[RECEIVABLES] 20,114
[ALLOWANCES] 156
[INVENTORY]
10,211
[CURRENT-ASSETS] 69,865
[PP&E] 44,770
[DEPRECIATION] 18,978
[TOTAL-ASSETS] 119,162
[CURRENT-LIABILITIES] 15,371
[BONDS] 0
0
[PREFERRED]
0
[COMMON] 84,466
[OTHER-SE] 15,808
[TOTAL-LIABILITY-AND-EQUITY]
119,162
[SALES] 30,107
[TOTAL-REVENUES] 30,107
[CGS] 12,900
[TOTAL-COSTS] 12,900
[OTHER-EXPENSES] 12,442
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 162
[INCOME-PRETAX] 5,131
[INCOME-TAX] 1,674
[INCOME-CONTINUING] 3,457
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 3,457
[EPS-PRIMARY] ---
[EPS-DILUTED] .25
</TABLE>
S-1
