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: September 28, 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 <radical> No _______
The number of Common Shares of the registrant outstanding on September 28,
1997, was 20,294,318.
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INDEX
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PAGE
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Part I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Balance Sheets as of
September 28, 1997, and December
29, 1996 . . . . . . . . . . 3
. . .
Consolidated Statements of
Operations for the Three and Nine
Months Ended September 28, 1997,
and September 29, 1996 . . . . . . . . . . 4
. . .
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 28, 1997, and September
29, 1996 . . . . . . . . . . 5
. . .
Notes to Financial Statements . . . . . . . . . . 6
. . .
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Item 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations . 8
. . . . . . . . . .
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PART II. OTHER INFORMATION
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Item 1. Litigation . . . . . . . . . . 14
. . .
Item 2. Changes in Securities . . . . . . . . . . 14
. . .
Item 4. Submission of Matters to a Vote of
Shareholders . . . . . . . . . . 14
. . .
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 15
. . .
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Signatures S-1
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LEVEL ONE COMMUNICATIONS, INCORPORATED
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CONSOLIDATED BALANCE SHEETS
September 28, 1997, and December 29, 1996
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(IN THOUSANDS, EXCEPT SHARE AMOUNTS) Sept. 28, 1997 Dec. 29, 1996
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(unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents $ 117,849 $ 20,251
$20,251
Short-term investments 21,053 10,211
Accounts receivable, net of allowance for doubtful 28,991 18,279
accounts
of $256 and $156 for 1997 and 1996, respectively
Inventories 23,115 9,990
Deferred income tax benefits 2,990 2,504
Prepaid expenses 2,293 2,351
Total current assets 196,291 63,586
Property and equipment, net 30,379 23,676
Long-term investments 10,897 12,440
Note acquisition costs 3,120 ---
Foundry deposits 14,000 8,000
Other assets 4,169 4,400
Total assets $ 258,856 $ 112,102
$258,856
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 1,199 $ 1,129
Accounts payable 14,882 4,778
14,882
Accrued payroll costs 2,772 1,985
Income taxes payable 2,240 1,338
Deferred distributor revenue 1,687 864
Other accrued liabilities 5,400 2,621
Total current liabilities 28,180 12,715
Long-term debt 115,000 ---
Capital lease obligations, less current portion 2,444 3,194
Deferred lease expense 340 612
Total liabilities 145,964 16,521
Shareholders' Equity:
Common Stock, no par value 85,780 83,203
Authorized - 157,500,000 shares
Outstanding - 20,356,030 and 19,674,341
shares for 1997 and 1996,
respectively
Unrealized gain on available-for-sale
securities, net of tax 12 12
Retained earnings 27,100 12,366
Total shareholders' equity 112,892 95,581
Total liabilities and shareholders' equity $258,856 $112,102
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LEVEL ONE COMMUNICATIONS, INCORPORATED
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CONSOLIDATED STATEMENTS OF INCOME
SEPTEMBER 28, 1997, AND SEPTEMBER 29, 1996
(unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
SEPT. 28, 1997 SEPT. 29, 1996 SEPT. 28, 1997 SEPT. 29, 1996
Revenues $ 42,437 $ 27,363 $ 105,187 $ 82,384
Cost of sales 17,653 11,756 44,120 34,865
Gross margin 24,784 15,607 61,067 47,519
Research & development 8,135 5,249 21,214 16,663
Sales & marketing 6,470 4,219 15,523 12,209
General & administrative 2,826 1,595 6,849 5,126
Total operating expenses 17,431 11,063 43,586 33,998
Operating income 7,353 4,544 17,481 13,521
Interest income 1,129 363 2,082 1,228
Interest expense (514) (127) (685) (318)
Other income, net 93 848 169 915
Income before provision for income taxes
8,061 5,628 19,047 15,346
Provision for income taxes 2,660 1,857 6,266 5,065
Net income $ 5,401 $ 3,771 $ 12,781 $ 10,281
Earnings per Share $ .25 $ 0.18 $ 0.60 $ 0.50
Weighted average common
shares outstanding 21,819 20,705 21,458 20,585
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LEVEL ONE COMMUNICATIONS, INCORPORATED
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended
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(IN THOUSANDS) Sept. 28, 1997 Sept. 29, 1996
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Cash flows from operating activities:
Net income $ 12,781 $ 10,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,976 4,805
Changes in assets and liabilities:
Accounts receivable (10,712) (1,614)
Inventories (13,125) 3,583
Deferred tax assets (486) ---
Prepaid expenses 58 186
Accounts payable and accrued liabilities 15,395 (3,298)
Deferred liabilities --- 1,652
Deferred lease expense (272) (280)
Net cash provided by operating activities 10,515 15,315
Cash flows from investing activities:
Purchase of short-term investments (46,793) (10,325)
Proceeds from sales and maturities of short term
investments 35,953 2,340
Purchase of long-term investments (19,024) (8,670)
Proceeds from sales and maturities of long term
investments 20,567 3,026
Capital expenditures (13,269) (4,288)
Payments for related party notes receivable --- (1,600)
Payments for foundry deposits and other assets (6,078) (5,593)
Net cash used in investing activities (28,644) (25,110)
Cash flows from financing activities:
Net principal payments under capital lease (680) ---
obligations
Proceeds from issuance of convertible subordinated
notes, net of issuance costs 111,880 ---
Proceeds from issuance of stock, net of
repurchases and costs of issuance 4,529 1,915
Net cash provided by financing 115,729 1,915
activities
Net increase (decrease) in cash and cash equivalents 97,600 (7,880)
Cash and cash equivalents at beginning of period 20,251 21,628
Cash and cash equivalents at end of period $ 117,851 $ 13,748
SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH TRANSACTIONS
Cash payments for:
Interest 248
300
Income taxes
42 2,103
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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 and nine month periods ended
September 28, 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.
All shares and per share numbers in this Report reflect the effect of a 3-for-2
stock split to shareholders of record on August 5, 1997, effective on August
26, 1997.
NOTE 2 - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares of
common stock outstanding, and the dilutive common equivalent shares outstanding
from stock options and warrants (using the treasury stock method) and
convertible subordinated notes. 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 would be called diluted EPS under the new standard
and would still be required. Additional disclosure will be required by
Statement 128, but the Company does not expect the effect of Statement 128 to
be material.
LEVEL ONE COMMUNICATIONS, INCORPORATED
__________
NOTE 3 - INVENTORIES
Inventories, stated at the lower of cost (first in, first out) or market,
consist of:
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(IN THOUSANDS) September 28, 1997 December 29, 1996
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Raw materials $ 6,414 $ 32
Work-in-process 13,555 7,948
Finished goods 3,146 2,010
$23,115 $ 9,990
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NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following:
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(IN THOUSANDS) September 28, 1997 December 29, 1996
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Machinery & equipment $28,686 $25,254
Furniture & fixtures 21,838 11,899
Leasehold improvements 3,383 3,485
$53,907 $40,638
Less - accumulated depreciation (23,528) (16,962)
$30,379 $23,676
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NOTE 5 - LONG-TERM DEBT
During the third quarter of 1997 the Company raised $115 million (less
discounts, commissions and expenses of approximately $3.1 million) from a
private placement to qualified investors of subordinated convertible notes due
2004 with a 4% coupon (the "Notes"). The Notes are convertible to shares of
the Company's Common Stock at a price of $40 per share.
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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, and
subsequent filings with the Securities and Exchange Commission.
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 55% to $42.4 million in the third quarter of 1997 compared
to revenues of $27.4 million for the same quarter of 1996. Revenues increased
28% to $105.2 million in the first nine months of 1997 compared to $82.4
million for the first nine months of 1996. The increases during the third
quarter and first nine months of 1997 reflect the substantial unit sales growth
due to the continued market acceptance of the Company's products in both the
networking and transmission markets, and increases in the Company's customer
base.
International sales were $14.4 million or 34% and $9.7 million or 35.4% of
sales, respectively, for the third quarter of 1997 and 1996, and $36.1 million
or 34.5% and $31.0 million or 37.6% of sales for the first nine months of 1997
and 1996, respectively. 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 third quarter of 1997 was
58.4% versus 57.0% in the third quarter of 1996 and 58.4% in the second
quarter of 1997. Gross margin as a percentage of revenues in the first nine
months of 1997 was 58.1% versus 57.7% in the first nine months of 1996.
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RESEARCH AND DEVELOPMENT
Research and development expenses were $8.1 million or 19.2% of revenues in the
third quarter of 1997 versus $5.2 million, or 19.2% of revenues in the third
quarter of 1996. For the first nine months of 1997, research and development
expenses were $21.2 million or 20.2% of revenues versus $16.7 million or 20.2%
of revenues in the same period 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 $6.5 million or 15.2% of revenues in the
third quarter of 1997 versus $4.2 million or 15.4% of revenues in the third
quarter of 1996. For the first nine months of 1997, sales and marketing
expenses were $15.5 million or 14.8% of revenues compared to $12.2 million or
14.8% of revenues in the first nine months of 1996. The increased
expenditures are primarily attributable to sales commissions associated with
increased revenues and the expansion of the Company's sales and marketing
staffs.
GENERAL AND ADMINISTRATIVE
In the third quarter of 1997, general and administrative expenses were $2.8
million or 6.7% of revenues versus $1.6 million or 5.8% of revenues in the same
period of 1996. For the first nine months general and administrative expenses
were $6.8 million or 6.5% of revenues in 1997 versus $5.1 million or 6.2% of
revenues in 1996. The increased expenses are primarily attributable to
additional headcount associated with the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity as of September 28, 1997,
consisted of $138.9 million of cash, cash equivalents and short-term
investments, and $10 million available under the Company's revolving line of
credit. At September 28, 1997, the Company had no outstanding balance under
this line of credit. Working capital as of September 28, 1997, was $168.2
million.
During the first nine months of 1997, the Company generated $10.5 million of
cash from operating activities, as compared to $15.3 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.
In the first nine months of 1997, cash generated from net income before
depreciation and amortization was $19.8 million. This cash generated was
offset by $8.4 million due to the net changes during the period for
inventories, accounts receivable, and accounts payable. The changes in accounts
receivable, accounts payable, and inventories are due to expansion of the
Company's business, and do not reflect material changes in the way the Company
conducts operations.
During the third quarter of 1997, the Company raised $115 million from a
private placement to qualified investors of subordinated convertible notes due
2004 with a 4% coupon (the "Notes"). The company expects that the net proceeds
from the sale of the Notes, together with existing sources of liquidity, will
provide the Company with capital required for its continued expansion in the
rapidly growing segments of the telecom and networking markets.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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
Prospectus, 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.
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.
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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 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 telecom 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., Broadcom Corporation,
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.
INCREASED LEVERAGE
In connection with the sale of the Notes, the Company has incurred
approximately $115.0 million in additional indebtedness which increases the
ratio of its long-term debt to its total capitalization from 3.0%, at June 29,
1997, to 51.1%, as of September 28, 1997. As a result of this increased
leverage, the Company's interest obligations will increase substantially. The
degree to which the Company will be leveraged could adversely affect the
Company's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make it more vulnerable to economic
downturns and competitive pressures. The Company's increased leverage could
also adversely affect its liquidity, as a substantial portion of available cash
from operations may have to be applied to meet debt service requirements and,
in the event of a cash shortfall, the Company could be forced to reduce other
expenditures and forego potential acquisitions to be able to meet such
requirements.
VOLATILITY OF NOTES AND STOCK PRICE
Economic and other external factors, many of which are beyond the control of
the Company, may have a significant impact on the Company's business and on the
market price of the Notes and the Common Stock into which the Notes are
convertible. Such factors include, without limitation, fluctuations in product
revenue and net income of the Company or its competitors, shortfalls in the
Company's operating results from levels forecast by securities analysts,
announcements concerning the Company, its competitors or customers,
announcements of technological innovations by the Company, its competitors or
its customers, the introduction of new products or changes in product pricing
policies by the Company, its competitors or its customers, market conditions in
the industry and the general state of the securities market. In addition, the
stock prices of many technology companies fluctuate significantly for reasons
that may be unrelated or disproportionate to operating results. These
fluctuations, as well as general economic, political and market conditions such
as recession or international instability, may adversely affect the market
price of the Notes and the Common Stock.
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".
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 2. CHANGES IN SECURITIES
On August 4, 1997, the Company's Certificate of Incorporation was amended to
effect a 3-for-2 stock split to shareholders of record on August 5, 1997. The
split was effective on August 26, 1997.
During the third quarter of 1997 the Company raised $115 million (less
discounts, commissions and expenses of approximately $3.1 million) from a
private placement to qualified investors of subordinated convertible notes due
2004 with a 4% coupon (the "Notes"). The Notes are convertible to shares of
the Company's Common Stock at a price of $40 per share.
On July 14, 1997, the Company issued an aggregate of 702 shares to employees
who are not "affiliates" (as that term is defined in SEC Rule 144) pursuant to
an employee benefit plan. The shares were issued without registration in
reliance on Section 4(1) of the Securities Act, as interpreted in Release 33-
6188 and Release 33-6281.
On July 15, 1997 and August 27, 1997, the Company issued an aggregate of
2,037 shares of Common Stock to independent sales representatives for aggregate
cash consideration of $4,384 pursuant to warrants issued in 1990. The shares
were issued without registration in reliance on SEC Rule 701.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 17, 1997, the Company held its annual meeting of shareholders, at
which the following matters were submitted to shareholder vote:
Election of Directors:
<TABLE>
<CAPTION>
Robert S. Pepper For: 12,676,163 Against: 16,417
<S> <C> <C> <C> <C>
Thomas J. Connors For: 12,684,763 Against: 7,817
Paul Gray For: 12,681,363 Against: 11,217
Martin Jurick For: 12,684,979 Against: 7,601
Henry Kressel For: 12,679,463 Against: 13,117
Joseph P. Landy For: 12,355,063 Against: 337,517
</TABLE>
Ratification of Appointment of Arthur Andersen LLP as auditor:
For:12,672,558
Against: 4,138
Abstain: 14,234
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits -
4.1 - Indenture dated as of August 15, 1997 between the Company and State
Street Bank and Trust Company of California (National Association) as Trustee.*
4.1 - Form of 4% Convertible Subordinated Note due 2004*
4.3 - Registration Rights Agreement*
27.1--Financial Data Schedule, September 28, 1997
*Incorporated by reference to Registrant's Registration Statement on Form S-3
filed October 15, 1997.
(b)Reports on Form 8-K - Announcement of Intention to Issue Notes, August 14,
1997
<PAGE>
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: November 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: November 12, 1997 By: /S/ JOHN KEHOE John Kehoe
Vice President and Chief Financial Officer
(Principal Financial Officer)
S-1
<PAGE>
[DATE]
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
<CAPTION>
[PERIOD-TYPE] 3-MOS
<CAPTION>
[FISCAL-YEAR-END] DEC-30-1996
<CAPTION>
[PERIOD-END] SEP-28-1997
[CASH] 117,849
[SECURITIES] 21,053
[RECEIVABLES] 28,991
[ALLOWANCES] 256
[INVENTORY] 23,115
[CURRENT-ASSETS] 196,291
[PP&E] 30,379
[DEPRECIATION] 23,528
[TOTAL-ASSETS] 258,856
[CURRENT-LIABILITIES] 28,180
[BONDS] 115,000
0
[PREFERRED]
0
[COMMON] 85,780
[OTHER-SE] 27,100
[TOTAL-LIABILITY-AND-EQUITY] 258,856
[SALES] 42,437
[TOTAL-REVENUES] 42,437
[CGS] 17,653
[TOTAL-COSTS] 17,653
[OTHER-EXPENSES] 17,431
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 514
[INCOME-PRETAX] 8,061
[INCOME-TAX] 2,660
[INCOME-CONTINUING] 5,401
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 5,401
[EPS-PRIMARY] ---
[EPS-DILUTED] .25
S-1
</TABLE>
