UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission File Number: 0-22068
Exact name of registrant as specified in its charter:
LEVEL ONE COMMUNICATIONS,
INCORPORATED
STATE OR OTHER JURISDICTION OF IRS EMPLOYER
INCORPORATION OR ORGANIZATION: IDENTIFICATION NO.
California 33-0128224
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
9750 Goethe Road, Sacramento, California 95827
TELEPHONE NO.:
(916) 855-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
Common Stock,
no par value per share
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 period 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
nonaffiliates as of February 28, 1997, was $280,564,948.
The number of shares outstanding of the Registrant's only class of
common stock as of February 28, 1997, was 13,405,475 shares of no par value
common stock.
PART I
ITEM 1. BUSINESS
Level One Communications, Incorporated (''Level One'' or ''the
Company'') was incorporated in 1985 under the laws of the state of
California. The Company has operations in the United States, Europe and
Asia.
Level One designs, develops and markets mixed-signal application
specific standard integrated circuit products (''ASSPs'') for high-speed
digital signal transmission and networking connectivity to systems that
transport information, within an office or around the world. Such systems
connect to local area networks ("LANs"), wide area networks ("WANs") and
public telephone transmission networks. LANs, WANs, and telephone
transmission networks make possible such activities as the use of intra-
enterprise networking ("intranets") and the use of the Internet and World
Wide Web.
Level One ASSPs transmit, regenerate and receive digitized voice,
data, and video signals using a wide variety of protocols. Because these
products both transmit and receive signals, they are called "transceivers".
All networks, LAN, WAN, and transmission, require transceivers. Level One
combines its strengths in analog and digital circuit design with its
communications systems expertise to produce mixed-signal solutions with
increased functionality and greater reliability, resulting in lower total
system cost.
As the volume of transmitted digital information continues to grow,
communications original equipment manufacturers (''OEMs'') that supply
products and systems to the transmission and networking markets face a
fundamental challenge of providing greater data throughput on a cost-
effective basis. Level One addresses the needs of leading communications
OEMs by providing high performance mixed-signal ASSPs that optimize the
allocation of analog and digital signal processing functions. The Company's
proprietary simulation software and sophisticated design and testing
methodology accelerate the product design cycle to improve time to market.
A key challenge for Level One's OEM customers and their end users is
the creation of access technologies that maximize the use of the large
installed base of twisted-pair copper telephone lines to transport
information. With more than 1.3 billion miles in place in the United
States, copper telephone wire is expected to remain the primary medium for
local connectivity to the ''electronic superhighway'' transport media that
handle long-distance data transmissions. Such long-distance transport media
include copper telephone lines, coaxial cable, fiber optic cable, wireless
and satellite transmission. Copper telephone wire, which was originally
designed to transmit relatively slow analog voice signals, requires special
signal conditioning circuits to enable transmission of high-speed digital
signals.
PRODUCTS AND APPLICATIONS
Level One develops and sells advanced ASSPs and custom derivatives
that provide silicon connectivity solutions and achieve improved
integration of functions. The Company's current products address the needs
of two primary segments of the communications connectivity market: the
networking market and the transmission market.
NETWORKING PRODUCTS
Level One's networking products address the rapid evolution and the
growing convergence of the LAN and WAN networking connectivity markets.
For these markets, Level One produces Ethernet transceivers, single chip
quad Ethernet repeaters, managed Ethernet repeaters, and integrated
transceiver solutions for Frame Relay, Switched 56/DDS and T1/E1 access
products.
Local Area Networks address the need to share information among
individuals and workgroups within a building or campus environment. The
dominant networking standard in the LAN environment is Ethernet, commonly
implemented over a twisted pair copper wire environment utilizing a 10
megabits per second transmission standard. Fast Ethernet products enable
transmissions of up to 100 megabits per second over twisted pair copper
wiring. Emerging 1-Gigabit per second Ethernet standards are aimed at the
same copper infrastructure as the Fast Ethernet products. These high
speed LANs are expected to be catalysts for a variety of new graphics,
video, multimedia, and network management applications.
Level One's transceivers incorporate analog and digital functions into
single chip solutions. Level One products in this category are used in
computer/workstation, server, portable computing, network printing, and
Ethernet switch applications. To provide Level One customers with cost
effective, high performance intranet and LAN solutions, these transceivers
incorporate features such as patented on-chip transmit filters, full duplex
support, multichannels, 3.3 volt performance, and the smallest form factor
package available.
Level One repeater and network management products include cascadeable
quad repeater hub chips, with integrated, filter technology. These chips
allow development of low cost, multiport managed and unmanaged Ethernet
repeater hub systems. Level One also produces a family of remote network
management devices which incorporate a Media Access Controller and support
for Simple Network Management Protocol ("SNMP") and Remote Monitoring
("RMON"). The Company also has a single chip solution optimized for hybrid
switching systems.
Intranets and Wide Area Networks connect individuals and workgroups
over longer distances than LANs, using telephone company transmission lines
rather than intraoffice wiring. WAN system products that incorporate Level
One devices include routers, digital modems, multichannel Access
Multiplexers, lottery and point-of-sale terminals. The rapid growth of
high bandwidth, low cost digital access services has increased the demand
for business and consumer use of Wide Area Networks. Along with the growth
of the Internet and on-line services, WAN equipment markets have
experienced significant growth in recent years.
The company's transceivers targeted at WAN equipment segments
incorporate analog and digital functions into single chip solutions. Level
One products are used in routers, digital modems, and a variety of other
customer premise equipment applications. Service offerings such as Frame
Relay, Switched 56, and DDS have helped drive demand for Level One's
products such as the LXT441, a single chip 56kbs digital access modem.
As the LAN and WAN markets experience broad based growth, there is
increased demand for compatible protocols and standards to allow LAN/WAN
interoperability and management as well as for silicon technology
addressing the convergence of the two markets. Level One networking
products service these evolving market needs.
TRANSMISSION PRODUCTS
Level One's transmission products service the growing demand for high-
speed digital signal transmission utilizing the industry-wide
specifications referred to as ''T1'' in North America, and ''E1'' in
Europe, Asia and much of the rest of the world. T1 systems transmit 1.544
million bits per second and E1 systems transmit 2.048 million bits per
second. Level One's products also address the transmission service known as
''Fractional T1,'' in which users can access multiple 64kbs sub-channel
rates of T1.
Level One produces fully integrated single chip T1 and E1 transceivers
to meet the requirements of its customers. Short-haul transceivers, which
process signals travelling within buildings, are incorporated into customer
premise equipment and into products sold to network service providers such
as telephone companies. Short-haul transceivers are typically used for
transmissions of 600 feet to 700 feet. Long-haul transceivers, which
transmit to approximately 6,000 feet, are incorporated into products such
as PBXs, channel service units, routers and multiplexers, which provide
connectivity between customer premise devices and the telephone company
network. Long-haul transceivers are also used in base stations for mobile
communication systems.
Repeaters are installed along telephone company transmission lines to
receive and regenerate signals at intervals of 6,000 feet, preventing the
deterioration of the signal. To reduce service costs, telephone companies
use ''smart'' repeaters that enable the system operator to quickly locate a
faulty repeater. Level One's products are used in these ''smart'' repeater
applications.
High-bit-rate digital subscriber line (''HDSL'') products produced by
the Company are designed to transmit up to 12,000 feet at the T1 rate on
two sets of twisted-pair copper wire or at the E1 rate on two or three sets
of twisted pair wire, reducing or eliminating the need for repeaters in
long-haul T1/E1 transmission. HDSL permits the transmission of data at 784
kilobits per second or 1,168 kilobits per second on any twisted-pair copper
wire used for subscriber loops. The Company's HDSL solution is a two-chip
chipset.
The Company expects that HDSL, together with successor and derivative
technologies, will continue to play an important role in the communications
infrastructure. Emerging DSL technologies ("xDSL") include high speed
Internet access and residential broadband. The Company plans to address
these markets with current and future DSL products. During 1996 the
Company shipped Subrate HDSL Multi-Rate Digital Subscriber Line ("MDSL")
chipsets to selected customers, and formally announced the product in
February 1997. MDSL is currently used for Internet access and digital pair
gain, primarily for commercial customers. In the future MDSL is expected
to also be used for wireless base stations and video conferencing.
Level One produces fully integrated quadruple T1/E1 receivers, which
are incorporated into telephone company maintenance and performance
monitoring equipment. In 1996 Level One introduced the LXT360, LXT361,
LXT350 and LXT351 integrated T1/E1 transceivers aimed at
developers of Sonet/SDH multiplexers, digital loop carriers, and
residential broadband access systems. These products permit OEM customers
to develop a single board design that meets both T1 and E1 standards. The
chips are designed to operate over poor quality or "noisy" lines.
Clock rate adapters (CLADs) adapt signals generated at the host
system's internal clock rates for T1/E1 transmission. CLADs are used to
generate internal timing systems for channel banks, digital loop carriers,
multiplexers, timing generators and other E1/T1 equipment, eliminating the
need for expensive discrete crystal oscillators.
BUSINESS AND TECHNOLOGY TRANSACTIONS
In December 1996, the Company acquired Silicon Design Experts, Inc., a
design and consulting company located in New Jersey. The acquisition
provides the Company with research and development personnel and digital
signal processing ("DSP") technology that will accelerate the Company's
product development of 1 Gigabit Ethernet, Asynchronous Transfer Mode
("ATM"), and other high speed DSP applications. The Company incurred a
one-time charge to earnings of $2.5 million during the fourth quarter of
1996 for purchased research and development related to the acquisition.
During the third quarter of 1996, in connection with a third-party
financing transaction for Maker Communications, Inc. ("Maker"), the Company
sold a portion of its minority interest in Maker for an aggregate of
approximately $675,000. This sale was accounted for as a one-time gain
which was reported as other income. The Company continues to hold a
minority interest in Maker and to license certain Maker technology. Other
contractual rights and obligations, including the Company's obligation to
provide certain loan financing to Maker, were terminated in the
transaction. Following the transaction, Maker repaid the Company
approximately $2.9 million, the total balance under an outstanding note.
TECHNOLOGY
The Company's proprietary technology includes systems simulation and
testing software and an extensive circuit cell library. Level One believes
that a key competitive factor in its success is its ability to use this
technology, in conjunction with industry standard design tools, to rapidly
design and introduce new products. The Company continuously reviews new
opportunities in emerging technologies such as xDSL, Switched Ethernet,
Fast and Gigabit Ethernet, infrared, ATM, wireless, frame relay and cable
transmission.
STRATEGIC RELATIONSHIPS
Level One's relationships and strategic development arrangements with
industry leaders help the Company identify and develop new products that
meet industry needs. Through the involvement of key customers in alpha
stage development, the Company's objective is to bring to market products
that are positioned to become market leaders. Level One is an active
member of several important standards committees throughout the world.
Level One has from time to time entered into development and license
agreements with third parties to broaden the Company's product and
technology offerings. Level One has also in the past entered into
strategic alliances with consortia of industry leaders to develop
communications products, such as the Company's HDSL chipsets. The Company
may in the future enter into such arrangements when appropriate
opportunities arise.
SALES AND MARKETING
Level One's sales and marketing strategy is to achieve design wins by
developing products with superior mixed-signal processing functions that
are designed into equipment offered by industry leaders. Level One has a
direct sales force and a worldwide network of independent distributors and
sales representatives. These independent sales organizations are selected
for their ability to provide effective field sales and technical support to
customers. The Company has a direct order fulfillment service for its
customers ordering smaller quantities of parts with lead times shorter than
the Company's standard lead times.
The Company maintains seven regional sales offices in the United
States. In addition, there are 25 sales representatives or distributors
of the Company's products. Internationally, Level One has six sales
offices along with 22 sales representatives or distributors operating in 37
countries.
RESEARCH AND DEVELOPMENT
The Company believes that the continued introduction of new products
in its target markets is essential to its growth. As of December 29, 1996,
Level One had 104 full-time employees engaged in research and development.
The Company currently anticipates that it will increase research and
development staffing levels in 1997. Expenditures for research and
development in 1996, 1995 and 1994 were approximately $22.0 million, $17.1
million, and $10.0 million, respectively. These expenditures exclude one-
time charges for purchased research and development of $2,500,000 and
$750,000 related to acquisitions in 1996 and 1995, respectively.
The Company released 12 new products during 1996, consisting of four
networking products and eight transmission products. A portion of the
Company's research and development resources may be used to enhance
existing products and to move to smaller geometries on larger wafers to
improve product costs.
MANUFACTURING
FOUNDRIES
Level One uses independent silicon foundries to fabricate its wafers.
This approach enables the Company to concentrate its resources on design
and test and allowing it to eliminate the cost associated with owning and
operating a fabrication facility.
The Company's wafer needs are supplied by six foundries; however, the
Company may, from time to time, qualify other foundries. Except where the
Company has contracted for long-term wafer supplies, the Company's
suppliers generally are not obligated to supply, nor is the Company
obligated to purchase, any minimum amount of wafers. Such suppliers
generally agree on production schedules based on purchase orders and
forecasts. During 1995, the Company entered into five-year agreements with
three of its suppliers for committed foundry capacity in consideration of
equipment financing or cash deposits. During 1995 and 1996, the Company
provided an aggregate of $14.6 million in equipment financing and/or cash
deposits to these three foundries in connection with such agreements.
From time to time, foundries supplying the Company may experience
wafer yield problems or capacity constraints which can result in wafer
delivery delays, and the Company may need to locate an alternative source
of supply for wafers. 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, forcing the Company to transfer products
to a new foundry. Although the Company believes it can meet customer
demand, there can be no assurances that unforeseen demand or supply
disruptions will not have a material impact on the Company's business.
ASSEMBLY
Once the subcontracted wafers have been tested and accepted by the
Company, the die are assembled into packages by subcontractors located
worldwide. The Company utilizes multiple assembly subcontractors for its
products. While the Company has not experienced any material disruption in
supply from assembly subcontractors, there can be no assurance that
assembly problems will not occur.
QUALITY AND RELIABILITY ASSURANCE
The Company qualifies each assembly and foundry subcontractor before
that vendor manufactures products for the Company. Such qualification
includes an audit and analysis of the subcontractor's quality system and
manufacturing capabilities. The Company continuously monitors
subcontractors' quality and reliability on an ongoing basis. Level One's
objective is to control the quality of finished goods as thoroughly as if
it internally operated every step of the manufacturing process. The
Company and its customers thereby realize the economic efficiencies of
"fabless" production combined with tight quality control.
Effective January 30, 1997, Level One was registered by Underwriters
Laboratory as complying with the requirements of ISO 9001.
BACKLOG
As of December 29, 1996, the Company's total backlog scheduled to be
shipped was approximately $32.6 million, as compared to backlog of
approximately $29.2 million at December 30, 1995. A portion of the orders
constituting the Company's backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without
significant penalty. The Company limits its reported backlog to those
orders expected to ship within the next six months.
COMPETITION
Level One's competition consists of other semiconductor companies and
semiconductor divisions of vertically integrated companies. In the
transmission market, the Company's principal competitors are Lucent,
Brooktree Corporation (a subsidiary of Rockwell International, Inc.),
Crystal Semiconductor, Inc. (a subsidiary of Cirrus Logic, Inc.), Siemens,
Dallas Semiconductor, Inc. and Sierra Semiconductor Corporation. In the
networking market, the Company's principal competitors are Advanced Micro
Devices, Inc., Crystal, Lucent, Seeq Technologies, Inc., Texas Instruments,
Incorporated, and National Semiconductor Corporation. Many of these
competitors have substantially greater financial and other resources than
the Company.
Level One believes that its competitive strengths include efficient
distribution channels, highly experienced digital and mixed-signal circuit
designers, proprietary design and development tools, and its library of
analog and digital blocks and cells.
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 its 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. Although the Company believes that it competes favorably, there
is no assurance that the Company will be able to compete successfully in
the future.
PATENTS AND LICENSES
Level One has 23 United States patents that expire from 2009 to 2014,
16 pending U.S. patent applications and 14 pending international patent
applications. All of Level One's products are covered by at least one
Level One patent. The Company has 24 U.S. mask work registrations on its
products. Level One owns seven registered trademarks or servicemarks. The
Company has initiated a patent infringement suit against one of its
competitors relating to two of the Company's patents. See "Legal
Proceedings".
Level One has entered into various license agreements for product or
technology exchanges. In general, these licenses are to provide second
sources for standard products or to convey or receive rights to certain
proprietary or patented cores, cells or other technology.
EMPLOYEES
As of December 29, 1996, the Company had 410 full-time employees. The
Company's employees are not represented by any collective bargaining
agreement, and the Company has never experienced a work stoppage. The
Company believes its employee relations are good.
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 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 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.
ITEM 2. PROPERTIES
PROPERTIES
The Company's principal facilities are in two separately leased
buildings in an office park in Sacramento, California. The two leases
relate to buildings with 87,000 square feet of space and 51,000 square feet
of space, respectively, and expire in 2004 and 2006, respectively. The
Company also leases approximately 11,000 square feet for the operations of
San Francisco Telecom under a lease that is scheduled to expire in 2000.
The Company believes these facilities are adequate for its current and
immediately foreseeable level of operations.
The Company also leases small office facilities for the operation of
its New Jersey design center and for its domestic and international sales
offices.
ITEM 3. 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 Ethernet
products, and 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the 1996 fiscal
year to a vote of security holders, through the solicitation of proxies or
otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the NASDAQ National
Market System under the symbol LEVL since its initial public offering on
August 19, 1993 at $11{3}/{8} per share (rounded to the nearest {1}/{16}).
The following table sets forth, for the fiscal quarters indicated, the high
and low closing sale prices of the Common Stock as reported by NASDAQ
National Market System (rounded to the nearest {1}/{16}). The Company's
fiscal year ends on the Sunday nearest to the calendar year end in each
year.
<TABLE>
<CAPTION>
Year High Low
<S> <C> <C>
1996
Fourth Quarter $37 1/2 $26{13}/{16}
Third Quarter $29 1/2 $16 1/4
Second Quarter $30 1/2 $19 1/4
First Quarter $36 1/4 $16 3/4
1995
Fourth Quarter $26 $17
Third Quarter $27 1/4 $20 1/2
Second Quarter $22 3/4 $14 1/2
First Quarter $18 3/4 $12
</TABLE>
On February 28, 1997, the closing sale price for the Company's Common
Stock was $32.875 per share. As of February 28, 1997, there were
approximately 156 holders of record of the Company's Common Stock.
On December 11, 1996, the Company issued a total of 86,730 shares of
common stock to the shareholders of Silicon Design Experts, Inc. ("SDE"),
in connection with the Company's acquisition of SDE. On February 2, 1996,
the Company issued a warrant to purchase up to 17,000 shares of common
stock at an exercise price of $21.00 per share in connection with an
incentive agreement with an independent sales representative company. In
each case, the issuance of the securities was privately negotiated in a
transaction not involving a public offering in reliance on the exemptions
contained in Section 4 of the Securities Act of 1933.
The Company has never paid dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. The Company's
bank line of credit agreement prohibits the payment of dividends on its
capital stock (other than dividends payable solely in the Company's stock)
without the prior written consent of the bank. The Company intends to
retain its earnings for the operation of its business.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994 1993 1992
DATA)
<CAPTION>
<CAPTION>
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Revenues $111,987 $ 78,018 $ 46,825 $ 25,984 $ 14,076
Cost of sales 48,477 33,300 18,785 9,782 5,603
Gross margin 63,510 44,718 28,040 16,202 8,473
Operating expenses:
Research and development 24,505 17,857 9,956 5,934 3,067
(1)
Sales and marketing 16,589 11,372 6,772 4,102 2,400
General and administrative 6,741 5,752 3,424 1,936 933
Total operating 47,835 34,981 20,152 11,972 6,400
expenses
Operating income 15,675 9,737 7,888 4,230 2,073
Net interest and other income
(expense) (2) 2,293 2,064 1,440 12 (46)
Provision for income taxes 6,755 1,543 1,323 503 243
Net income $11,213 $10,258 $ 8,005 $ 3,739 $ 1,784
Earnings per share $ 0.82 $ 0.76 $ 0.60 $ 0.35 $ 0.18
Weighted average common
shares and equivalents 13,756 13,465 13,291 10,750 9,800
</TABLE>
(1)Includes one-time charges for research and development relating to the
acquisitions of Silicon Design Experts, Inc., in 1996 of $2.5 million, and San
Francisco Telecom, Inc., in 1995 of $750,000.
(2)A one-time gain relating to the sale of a portion of a minority interest in
Maker Communications, Inc., of $675,000, is included in 1996.
<TABLE>
<CAPTION>
AS OF FISCAL YEAR END
<CAPTION>
(IN THOUSANDS) 1996 1995 1994 1993 1992
<CAPTION>
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 20,251 $ 21,628 $ 9,260 $15,141 $ 3,325
Working capital 50,871 50,834 48,231 21,605 2,821
Total assets 112,102 100,801 71,628 33,060 9,009
Long-term obligations (less
current portion) 3,806 4,463 361 2,431 806
Shareholders' equity 95,581 78,965 63,309 23,910 3,774
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA
FISCAL 1996 QUARTERS FISCAL 1995 QUARTERS
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
STATEMENT OF INCOME DATA: FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $27,542 $27,479 $27,363 $29,603 $13,219 $16,605 $21,680 $26,514
Cost of sales 11,588 11,521 11,756 13,612 5,600 6,882 9,459 11,359
Gross margin 15,954 15,958 15,607 15,991 7,619 9,723 12,221 15,155
Operating expenses:
Research and development 5,675 5,739 5,249 7,842 2,896 4,741 4,604 5,616
Sales and marketing 4,001 3,989 4,219 4,380 2,247 2,492 3,146 3,487
General and administrative 1,766 1,765 1,595 1,615 1,084 1,337 1,403 1,928
Total operating expenses 11,442 11,493 11,063 13,837 6,227 8,570 9,153 11,031
Operating income 4,512 4,465 4,544 2,154 1,392 1,153 3,068 4,124
Net interest and other income
(expense) 392 349 1,084 468 512 557 511 484
Provision/(benefit) for income 1,618 1,590 1,857 1,690 381 477 1,086 (401)
tax
Net income $3,286 $3,224 $3,771 $ 932 $1,523 $1,233 $2,493 $5,009
Earnings per share $0.24 $0.24 $0.27 $0.25 $0.10 $0.09 $0.18 $0.37
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception, the Company has designed, developed
and marketed application specific standard integrated circuit
products ("ASSPs") and custom derivatives for the
transmission and networking markets. Volume shipments of its
initial ASSPs began in 1989. Since that time, the Company
has experienced significant increases in sales as its mixed-
signal integrated circuits have gained market acceptance.
The Company's annual revenue compound growth rate has been
80% since 1989. The Company first achieved profitable
operations in the quarter ended March 28, 1992 and has been
profitable in each subsequent quarter.
The Company derives revenues principally from product
sales. In addition, the Company has received non-recurring
engineering and licensing revenue from strategic partners and
customers in connection with product development projects.
As a result of those and other transactions, the Company
receives royalties and license fees.
The Company's cost of sales includes the costs of wafer
fabrication and assembly performed by third party vendors,
and costs associated with the procurement, scheduling,
testing and quality assurance functions performed by the
Company. Research and development expenses associated with
non-recurring engineering contracts are expensed as incurred,
while the related revenue is recognized only as contract
milestones are completed.
This document includes forward-looking statements which
involve risks and uncertainties. Actual results of the
Company's activities may differ significantly from the
potential results discussed in such forward-looking
statements. Risk factors that might cause such differences
include, but are not limited to, those factors identified
below and under the caption "Factors That May Affect Future
Results".
RESULTS OF OPERATIONS
REVENUES: Revenues for 1996 increased to $112.0 million
from $78.0 million in 1995 and $46.8 million in 1994. The
continued growth in revenues is due to the successful
introduction of new products and increased sales of existing
products to customers in the Company's two target market
segments - transmission and networking. In 1996, sales to
Hewlett-Packard were 11.2% of total sales. In 1995 and 1994,
no single customer accounted for more than 10% of revenues.
Export sales, primarily consisting of sales to Canada,
Europe, and Asia, were 39% of revenues in 1996, 33% in 1995
and 22% in 1994. All sales were in U.S. dollars, thereby
eliminating any foreign currency impact on revenues and net
income. The increase in international sales is attributable
to increased sales to foreign manufacturing facilities and
subcontractors of domestic customers and the Company's
increased international marketing and sales efforts,
including establishment of sales and sales support personnel
in foreign countries.
ROYALTIES, LICENSES AND NON-RECURRING ENGINEERING
REVENUE: The Company has entered into development agreements
with certain customers relating to customer-specific
applications, as well as, license agreements with certain
semiconductor manufacturers. Revenue is not recognized for
non-recurring engineering ("NRE") contracts until contract
milestones are met, although expenditures associated with the
contract are expensed as incurred. During 1996, the Company
had $398,000 in revenues from NRE contracts versus $289,000
in 1995 and $1,400,000 in 1994. In 1996, the Company
received royalties of $198,000 from products sold by
licensees. In 1995 and 1994, royalties were $312,000 and
$321,000, respectively.
The Company believes future revenue growth will depend
on the success and timing of new products along with
continued sales growth of existing products. New products
are generally incorporated into a customer's product or
system at the design stage. However, design wins may precede
volume sales by a year or more. No assurance can be given
that any design win will result in future revenues.
GROSS MARGIN: The following table sets forth the
Company's product sales and product gross margin:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
Product Sales $111,392 $77,417 $45,104
<ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis>.
Cost of product sales<ellipsis><ellipsis> 48,477 33,300 18,785
<ellipsis><ellipsis><ellipsis>.
Gross margin $62,915 $44,117 $26,319
Gross margin % product sales<ellipsis><ellipsis>.. 56.5% 57.0% 58.4%
</TABLE>
Product 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. Margins on domestic
and international sales are similar. Beginning in 1996,
certain engineering costs associated with product cost
reduction efforts were more appropriately allocated to cost
of product sales rather than research and development. This
caused margins to decline by approximately 2.0 percentage
points in 1996, while reducing research and development
expense a similar amount. There was no net impact on
operating profit.
RESEARCH AND DEVELOPMENT: Research and development
("R&D") expenses were $24.5 million in 1996, $17.9 million in
1995 and $10.0 million in 1994. As a percent of revenues,
R&D expenses were 21.9%, 22.9% and 21.3% in 1996, 1995 and
1994, respectively. In 1996, R&D expense included a one-time
charge for purchased research and development of $2.5 million
related to the acquisition of Silicon Design Experts, Inc.
In 1995, R&D expense included a one-time charge for
purchased research and development of $750,000 associated
with the acquisition of San Francisco Telecom, Inc.
Excluding one time charges, R&D expense as percent of
revenues was 19.6% and 21.9% for 1996 and 1995, respectively.
As previously stated in the gross margin section, in 1996 the
Company began accounting for engineering costs associated
with product cost reduction efforts in cost of product sales,
rather than R&D. In 1996, these costs were approximately 2%
of revenues.
SALES AND MARKETING: Sales and marketing expenses were
$16.6 million in 1996, $11.4 million in 1995 and $6.8 million
in 1994. As a percent of revenue, sales and marketing
expenses were 14.8%, 14.6% and 14.5% in 1996, 1995 and 1994,
respectively.
GENERAL AND ADMINISTRATIVE: General and administrative
expenses increased to $6.7 million in 1996 from $5.8 million
in 1995 and $3.4 million in 1994. As a percentage of
revenue, expenses decreased to 6.0% in 1996, from 7.4% and
7.3% in 1995 and 1994, respectively. The expense increases
in dollars are primarily attributable to additional headcount
and associated expenses due to the Company's growth.
INTEREST AND OTHER INCOME: The Company earns interest
on its cash and investments and incurs interest expense on
lease obligations used to finance certain capital equipment.
Income for 1996 was $2.3 million versus $2.1 million in 1995
and $1.4 million in 1994. In 1996, other income included a
one-time gain of $675,000 from the sale of a portion of the
Company's investment in Maker Communications.
PROVISION FOR INCOME TAXES: The Company's effective
income tax rate was 37.6% for 1996. In 1995 and 1994, the
effective rate was 13.1% and 14.2%. For a reconciliation of
the Company's effective tax rate to the statutory federal tax
rate, see Note 5 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended 1996, 1995 and 1994, the Company
financed its operations primarily through cash flows from
operations and existing cash and investment balances.
Working capital as of December 29, 1996, was $50.9 million.
The Company's principal sources of liquidity as of
December 29, 1996, consisted of $30.5 million in cash and
short-term investments and $10.0 million available under the
Company's line of credit. As of December 29, 1996, the
Company had no outstanding balance under this line of credit.
During 1996, the Company generated $22.5 million of cash
from its operating activities as compared to $7.5 million in
1995 and $4.3 million in 1994. In 1996, accounts receivable
increased by $2.9 million due to increased sales levels.
Inventories decreased by $5.8 million to $10.0 million at the
end of 1996, bringing days of inventory on hand down to 66
days from 125 days in 1995. Accounts payable and accrued
liabilities decreased $3.4 million from year end 1995 to
1996.
During 1996, 1995, and 1994, total expenditures for
capital equipment were $9.8 million, $10.0 million, and $10.6
million, respectively. The expenditures in each year
consisted primarily of equipment used for designing and
testing products. Of the total capital expenditures, $0.6
million in 1996, $4.8 million in 1995, and $1.1 million 1994,
were financed by capital leases.
The Company's current wafer requirements are supplied
primarily by six foundries. During 1995, the Company entered
into five-year agreements with three of its suppliers for
committed foundry capacity in consideration of equipment
financing or cash deposits. During 1995 and 1996, the
Company provided an aggregate of $14.6 million in capital
equipment financing and/or cash deposits to these three
foundries in connection with such activities. The Company has
remaining funding commitments not to exceed $18,000,000.
The Company expects to finance its 1997 capital
equipment requirements using a combination of cash and
equipment leasing. The Company believes that its existing
cash resources, combined with cash generated from operations,
equipment lease management, and its line of credit will be
sufficient to meet the Company's cash requirements through
the end of 1997. However, the Company may from time to time
seek additional equity or debt financing as a result of the
capital intensive nature of the semiconductor industry.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's financial statements included with this
Form 10-K are set forth under Item 14 hereof.
ITEM 9.DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change of accountants nor any
disagreements with accountants on any matter of accounting
principles or practices or financial statement disclosure
required to be reported under this Item.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and
their ages as of February 28, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Robert S. Pepper, Ph.D. 61 President, Chief Executive Officer
and Chairman of the Board of
Directors
J. Fran<c,>ois Crepin 50 Vice President, Business Development
John Kehoe 51 Vice President, Finance and
Administration and Chief Financial
Officer
Daniel S. Koellen 39 Vice President, Quality and
Reliability
George A. Papa 49 Vice President, Worldwide Sales
Manuel D. Yuen 56 Vice President, Operations
Thomas J. Connors(1)(2) 67 Director
Paul Gray, Ph.D. 54 Director
Martin Jurick(2) 59 Director
Henry Kressel, Ph.D.(2) 63 Director
Joseph P. Landy(1) 35 Director
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Dr. Pepper joined the Company in July 1986 as President,
Chief Executive Officer and a director. He became Chairman of
the Board of Directors in January 1993. From 1979 until
1984, Dr. Pepper was Vice President and General Manager of
the Solid State division of RCA Corporation. Prior to joining
RCA, Dr. Pepper had spent over 15 years in the semiconductor
industry, including positions as Vice President and General
Manager of the Semiconductor Division at Analog Devices, Inc.
Dr. Pepper holds B.S., M.S. and Ph.D. degrees in Electrical
Engineering from the University of California at Berkeley.
Mr. Crepin joined the Company in December 1986 as Vice
President, Marketing and Sales, and has held different
positions within the Company prior to becoming Vice President
of Business Development in 1994. Mr. Crepin served as
Director of Strategic Planning for Information Communications
for LSI Logic Corporation prior to joining Level One. Prior
to joining LSI, Mr. Crepin served for 17 years at National
Semiconductor Corporation, the last four of which he was
Director of Worldwide Telecom Marketing. Mr. Crepin holds an
M.B.A. from the University of Paris and a B.S. in Mathematics
and Science from Grenoble University.
Mr. Kehoe joined the Company in October 1995 as Vice
President and Chief Financial Officer. Immediately prior to
joining the Company Mr. Kehoe served as Senior Vice President
and Chief Financial Officer for Focus Surgery, Inc., a
medical device manufacturer. From 1992 to 1993 he served as
Vice President, Finance and Chief Financial Officer for
Celeritek, Inc., a microwave systems company. From 1989 to
1992 he served as Vice President, Finance and Chief Financial
Officer of Poqet Computer Corp., a computer manufacturer.
Prior to 1989 he worked in various financial and CFO
positions for approximately 14 years with high technology
companies, including Texas Instruments. Mr. Kehoe holds an
MBA from Fordham University and a BBA from Manhattan College.
Mr. Koellen has been responsible for the Quality and
Reliability function since he joined the Company in January
1989, serving as Manager until January 1992, then as Director
until January 1993 when he was promoted to Vice President of
Quality and Reliability. From 1985 to 1989, Mr. Koellen was
Lead Failure Analysis Engineer for the Denver Aerospace
Division of Martin Marietta Corp. Prior to joining Martin
Marietta, Mr. Koellen managed the surface analysis laboratory
for Mostek Corporation, a supplier of dynamic random access
memory integrated circuits. Mr. Koellen holds an M.S. in
Engineering and Applied Science from Southern Methodist
University and a B.S. in Applied Mathematics, Engineering and
Physics from the University of Wisconsin.
Mr. Papa joined the Company in February 1997 as Vice
President, Worldwide Sales. Prior to joining the Company, he
had been employed since 1991 as Vice President of Sales for
North America by Siemens Components Corporation, a division
of Siemens. Previously Mr. Papa was employed in other
management and sales positions with Siemens Components
Corporation, LSI Logic Corporation, Intel Corporation, and
Tektronix. Mr. Papa holds a B.S.E.E. from Northeastern
University
Mr. Yuen was Director of Operations from the time he
joined the Company in February 1991 until January 1992, when
he was promoted to Vice President of Operations. Prior to
joining the Company, Mr. Yuen spent over 20 years at National
Semiconductor Corporation, a semiconductor manufacturer, as
Director of its Santa Clara foundry from 1986 to 1987 and as
Vice President-Military Aerospace Division from 1987 to 1989.
Mr. Yuen holds a B.S. and an M.S. in Electrical Engineering
from the University of California at Berkeley.
Mr. Connors has been a director of the Company since
April 1991. Since 1980, Mr. Connors has been the principal of
TJC Investments, an independent consulting firm that works
with companies in the semiconductor and related industries.
Previously, Mr. Connors was employed by Motorola, Inc., where
he last served as Vice President and General Manager of the
Semiconductor Division. Mr. Connors is also a member of the
Board of Directors of Zilog, Inc., Open Vision Technologies,
Inc., and SGS-Thomson Microelectronics, Inc., a wholly-owned
subsidiary of SGS-N.V.
Dr. Gray has been a director since April 1994. Dr. Gray
is the Dean of the College of Engineering at the University
of California, Berkeley. From 1990 to 1993, he served as
Chairman of the Electrical Engineering and Computer Sciences
Department, and as Vice Chairman of the Department from 1988
to 1990. He served as a director of Microlinear Corporation
from 1988 to 1991. He has published more than 100 papers in
the electrical engineering field, has served on numerous
industry committees, and holds 10 patents.
Mr. Jurick has been a director of the Company since
April 1991. Since 1984, Mr. Jurick has been a Senior Vice
President of Silicon Systems, Inc. ("SSI"), a semiconductor
manufacturing company, which until 1996 was a wholly owned
subsidiary of TDK Corporation, and in 1996 became a division
of Texas Instruments Inc. Mr. Jurick also serves as a
director of Microsemi Corp.
Dr. Kressel has been a director of the Company since
August 1987. Since 1985, Dr. Kressel has been a Managing
Director at E.M. Warburg, Pincus & Co., Inc. (''EMW''), an
investment firm, where he has been employed since 1983. Prior
to joining EMW, Dr. Kressel spent 20 years at RCA
Laboratories, where he became a Staff Vice President. Dr.
Kressel is also a member of the Board of Directors of Zilog,
Inc., Maxis, Inc., and Trescom International.
Mr. Landy has been a director of the Company since
January 1991 and was appointed Secretary of the Company in
July 1993. Since January 1994, Mr. Landy has served as a
Managing Director at E.M. Warburg, Pincus & Co., Inc.
(''EMW''), an investment firm, where he has been employed
since 1985. Prior to joining EMW, Mr. Landy was employed by
Dean Witter Realty, Inc., the real estate investment banking
affiliate of Dean Witter Reynolds, Inc., as a financial
analyst. He also serves as a director of NOVA Information
Systems and CN Biosciences, Inc.
Directors are elected by the shareholders at each annual
meeting to serve until the next annual meeting of
shareholders or until their successors are duly elected and
qualified. Officers are elected to serve, subject to the
discretion of the Board of Directors, until their successors
are appointed. There are no family relationships between any
directors or executive officers. There are no agreements or
other arrangements or understandings pursuant to which any
director of the Company will be selected as a director or
nominee.
Non-employee, non-affiliated Directors of the Company
receive $1,800 per day for each day devoted to Company Board
or committee meetings. The Company reimburses each director
for reasonable expenses of attending meetings of the Board of
Directors and any committees thereof. Non-affiliated non-
employee directors receive an annual automatic option grant
of 2,000 shares at the end of each year.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, based solely on its review
of the copies of such reports furnished to the Company and
written representations that no other reports were required,
all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial
owners were complied with during the fiscal year ended
December 29, 1996, with the exception of one report for one
transaction which was untimely filed for each of Messrs.
Pepper, Kehoe, Holmes, Koellen and Yuen.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other
highest paid executive officers, plus one officer who
resigned, whose compensation for the 1995 fiscal year was in
excess of $100,000 (collectively the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
<S> <C> <C> <C> <C> <C>
COMPENSATION ALL
</TABLE>
<TABLE>
<CAPTION>
ANNUAL SECURITIES OTHER
<S> <C> <C> <C> <C>
COMPENSATION (1) UNDERLYING COMPENSATION
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)(2)
<S> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D. 1996 296,923 185,382 60,000 6,276
President, Chief 1995 220,000 97,172 --- 4,280
Executive
Officer and Chairman of 1994 196,794 50,000 120,000 78,632
the
Board
John Kehoe 1996 153,182 81,508 20,000 1,800
Vice President and 1995 27,115 12,500 70,000 ---
Chief Financial Officer
J. Fran<c,>ois Crepin 1996 137,271 14,625 27,000 4,594
Vice President, Business 1995 129,126 16,323 35,500 4,284
Development 1994 124,650 9,500 --- 8,530
Manuel D. Yuen 1996 142,654 28,028 25,300 2,811
Vice President, 1995 119,674 16,846 33,000 2,443
Operations
1994 110,778 10,000 --- 2,853
Daniel S. Koellen 1996 120,042 30,726 31,500 3,282
Vice President, Quality & 1995 106,292 15,227 23,100 3,120
Reliability 1994 98,566 11,000 --- 2,869
George B. Holmes (3) 1996 115,033 82,914 25,000 4,166
Vice President Worldwide 1995 126,538 182,902 60,000 4,205
Sales 1994 41,556 51,251 --- 433
</TABLE>
(1) Annual compensation amounts include amounts deferred at the election of the
Named Officer pursuant to the Company's 401(k) plan.
(2) Other annual compensation represents the Company's 401(k) matching
contributions.
(3) Mr. Holmes served as Vice President of Worldwide Sales until October 1996.
OPTION GRANTS IN LAST FISCAL YEAR AND YEAR-END OPTION
VALUES
The following table sets forth certain information
concerning grants of stock options to each of the Named
Officers during the fiscal year ended December 29, 1996. The
options listed were granted under the 1993 Option Plan. In
accordance with the rules of the Securities and Exchange
Commission, also shown is the potential realizable value
based on the assumed rates of stock price appreciation of 5%
and 10%, compounded annually, from the date the option was
granted over the full option term. These amounts represent
certain assumed rates of appreciation only and do not
represent the Company's estimate of future stock price.
Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS Potential Realizable
<CAPTION>
Value at Assumed
<S> <C> <C> <C> <C> <C>
Number of % of Total Annual Rates of
Securities Options Stock Price
Underlying Granted to Exercise Appreciation for
Options Employees in Price Expiration OPTION TERM (1)
<CAPTION>
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D. 60,000 6.3 18.25 1/20/06 688,878 1,745,890
J. Fran<c,>ois Crepin 22,000 2.3 18.25 1/20/06 252,598 640,160
5,000 .5 16.75 7/26/06 52,688 133,533
John Kehoe 20,000 2.1 18.25 1/20/06 229,626 581,963
Manuel D. Yuen 11,300 1.1 18.25 1/20/06 129,739 328,809
14,000 1.5 16.75 7/26/06 147,527 373,891
Daniel S. Koellen 21,500 2.3 18.25 1/20/06 246,848 625,610
10,000 1.1 16.75 7/26/06 105,376 267,065
George B. Holmes 20,000 2.1 18.25 1/31/97 18,865 37,760
5,000 .5 16.75 7/26/06 52,688 133,532
</TABLE>
(1) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over the
5-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to the
executive officers.
The following table provides information with respect to
the Named Officers concerning the exercise of options during
the last fiscal year and unexercised options held as of
December 29, 1996:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
<S> <C> <C> <C> <C>
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR END At Fiscal Year End ($)(1)
(#)
<CAPTION>
ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D. 10,000 347,917 140,356 180,000 $4,893,786 3,570,000
John Kehoe 0 0 14,000 76,000 175,000 1,040,000
J. Fran<c,>ois Crepin 9,000 147,717 10,000 57,000 251,233 1,029,000
George B. Holmes 0 0 24,000 61,000 459,000 1,121,000
Manuel D. Yuen 0 0 51,000 67,300 1,778,200 1,383,650
Daniel S. Koellen 0 0 28,200 61,500 968,735 1,238,710
</TABLE>
(1) Based upon the market price of $35.75 per share, which was the closing
price per share on the NASDAQ National Market System on the last day of the
1996 fiscal year, less the option exercise price payable per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information
regarding beneficial ownership of the Company's Common
Stock as of February 28, 1997, by (i) each person (or
group of affiliated persons) known by the Company to
own beneficially more than 5% of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each
Named Officer, and (iv) the Company's directors and
executive officers as a group. Except as indicated in
the footnotes to this table, the persons named herein,
based on information provided by such persons, have
sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by
them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
<S> <C>
DIRECTORS, NAMED OFFICERS AND 5% SHAREHOLDERS OWNED
<CAPTION>
NUMBER PERCENT (1)
<S> <C> <C>
Warburg, Pincus Capital Company, L.P. (2) 4,699,674 35.1%
466 Lexington Avenue
New York, New York 10017
Kopp Investment Advisors, Inc. (3) 2,315,944 17.3%
6600 France Avenue South, Suite 672
Edina, Minnesota 55435
Robert S. Pepper, Ph.D. (4). 293,689 2.2%
Thomas J. Connors (5) 44,000 *
Paul Gray (6) 16,000 *
Martin Jurick (7) 14,000 *
Henry Kressel, Ph.D. (2)(8) 4,699,674 35.1%
Joseph P. Landy (2)(8) 4,699,674 35.1%
John Kehoe (9) 19,000 *
J. Fran<c,>ois Crepin (10) 40,670 *
Daniel S. Koellen (11) 54,586 *
Manuel D. Yuen (12) 80,817 *
George B. Holmes (13) 6,000 *
All Named Officers and Directors as a group (11 persons) (14) 5,268,436 38.2%
</TABLE>
(1) Percent ownership is based on 13,405,475 shares of Common Stock outstanding
as of February 28, 1997, plus shares issuable pursuant to options or warrants
held by the person or class in question that are exercisable within 60 days
after February 28, 1997.
(2) The shares listed are owned of record by Warburg, Pincus Capital
Company, L.P., a Delaware limited partnership ("WPCC"), and beneficial
ownership may be attributed to E.M. Warburg, Pincus & Co., LLC, a New York
Limited Liability Company ("EMW LLC"), the successor to Warburg, Pincus
Ventures, Inc., a Delaware corporation; and to Warburg, Pincus & Co., a New
York general partnership ("WP"). WP, the sole general partner of WPCC, has a
20% interest in the profits of WPCC. Lionel I. Pincus is the managing partner
of WP and the managing member of EMW LLC and may be deemed to control both WP
and EMW LLC. The members of EMW LLC are substantially the same as the partners
of WP. Henry Kressel and Joseph P. Landy, each a director of the Company, is a
Managing Director and a member of EMW LLC and a general partner of WP. As
such, each of Messrs. Kressel and Landy may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 of the Securities Exchange
Act of 1934, as amended) in an indeterminate portion of the common shares
beneficially owned by WPCC and WP. Each of Messrs. Kressel and Landy disclaims
beneficial ownership, for purposes of Section 16 of the Act and otherwise, of
such common shares.
(3) Includes 2,231,944 shares over which Kopp Investment Advisors, Inc.
exercises investment discretion, but for which it is not the record holder;
10,000 shares which Kopp Investment Advisors, Inc., owns directly; 4,000 shares
owned by Kopp Investment Advisors, Inc., Profit Sharing Plan; 50,000 shares
owned by LeRoy C. Kopp Individual Retirement Plan; and 20,000 shares owned by
Kopp Family Foundation.
(4) Includes 8,000 shares held of record by the Robert S. and Star Pepper
Charitable Trust, and 195,356 shares issuable under stock options held by Dr.
Pepper exercisable within 60 days of February 28, 1997.
(5) Includes 20,000 shares issuable under stock options held by Mr. Connors
exercisable within 60 days of February 28, 1997.
(6) Includes 16,000 shares issuable under stock options held by Dr. Gray
exercisable within 60 days of February 28, 1997.
(7) Includes 4,000 shares issuable under stock options held by Mr. Jurick
exercisable within 60 days of February 28, 1997.
(8) Shares held of record by Warburg. Both Dr. Kressel and Mr. Landy are
managing directors of EMW and general partners of WPC. All of the shares
indicated as owned by both Dr. Kressel and Mr. Landy are owned directly by
Warburg and are included because of their affiliation with Warburg. Both Dr.
Kressel and Mr. Landy disclaim beneficial ownership of such shares.
(9) Includes 19,000 shares issuable under stock options held by Mr. Kehoe
exercisable within 60 days of February 28, 1997.
(10) Includes 25,500 shares issuable under stock options held by Mr. Crepin
exercisable within 60 days of February 28, 1997.
(11) Includes 43,575 shares issuable under stock options held by Mr. Koellen
exercisable within 60 days of February 28, 1997.
(12) Includes 67,825 shares issuable under stock options held by Mr. Yuen
exercisable within 60 days of February 28, 1997.
(13) Includes 6,000 shares issuable under stock options held by Mr. Holmes
exercisable within 60 days of February 28, 1997.
(14) Includes an aggregate of 397,256 shares issuable upon exercise of stock
options held by Named Officers and Directors exercisable within 60 days of
February 28, 1997. See footnotes (2), (4), (5), (6), (7),(8), (9), (10), (11),
(12) and (13) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with securing a loan from WPCC in 1992,
the Company issued a warrant to purchase 202,746 shares of
its common stock at an exercise price of $1.54 per share.
The warrant was exercised January 16, 1997, for 192,754
shares, and the balance was surrendered, on a net
appreciation basis, in an amount equal to the exercise price.
Directors Kressel and Landy, each of whom is an affiliate of
the entity controlling WPCC, disclaims beneficial ownership,
for purposes of Section 16 of the Act and otherwise, of such
common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee currently consists
of directors Connors, Jurick and Kressel. The Compensation
Committee reviews and approves the compensation of the
Company's executive officers. The compensation of the Chief
Executive Officer is subject to approval by the Board of
Directors.
Mr. Connors was paid $129,600 during 1996 for consulting
services rendered under an agreement with the Company.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON
FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
<TABLE>
<CAPTION>
FORM 10-K
PAGE NO.
<S> <C>
1. Financial Statements:
Report of Independent Public Accountants 32
Consolidated Balance Sheets as of December 29, 1996 and December 30, 1995 33
Consolidated Statements of Income for fiscal years ended
December 29, 1996, December 30, 1995, and December 31, 1994 35
Consolidated Statements of Shareholders' Equity for fiscal years ended
December 29, 1996, December 30, 1995, and December 31, 1994 37
Consolidated Statements of Cash Flows for fiscal years ended December 29, 1996,
December 30, 1995, and December 31, 1994 39
Notes to Financial Statements 41
2. FINANCIAL STATEMENT SCHEDULES:
II-Valuation and Qualifying Accounts 53
</TABLE>
ALL OTHER SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE OR
THE REQUIRED INFORMATION IS SHOWN IN THE FINANCIAL STATEMENTS OR NOTES
THERETO.
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
3.1(1) Amended and Restated Articles of Incorporation of the Company.
3.2(1) Bylaws of the Company, as amended.
3.3(1) Amended and Restated Articles of Incorporation filed August 31, 1994.
3.4(2) Certificate of Amendment to the Company's Amended and Restated Articles of
Incorporation, filed December 30, 1994.
4.1 Reference Exhibit 3.1.
4.2(1) Investor Rights Agreement dated as of October 19, 1990, as amended.
4.3(1) Stock Purchase Agreement dated as of April 24, 1991 between the Company and
Silicon
Systems, Inc.
10.1<circumflex><circumflex>(1) 1985 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase
Plan, as amended.
10.2<circumflex><circumflex>* 1993 Stock Option Plan, as amended and restated.
10.3<circumflex><circumflex>(1) Amended and Restated Employee Stock Purchase Plan.
10.4<circumflex><circumflex>(2) Employment Agreement between the Company and Robert S. Pepper dated as of July 14,
1986, as amended.
10.5<circumflex><circumflex>(2) Employment Agreement between the Company and Daniel S. Koellen dated as of
February
11, 1989, as amended.
10.6(1) Warrant to Purchase Common Stock dated February 24, 1993 issued to Warburg, Pincus
Capital Company, L.P.
10.7(1) Warrant Agreement between the Company and Equitec Leasing Company dated March 7,
1986, as amended.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
10.8(1) Warrant Agreement between the Company and Equitec Leasing Company dated October
13, 1987, as amended.
10.9(1) Warrant Agreement between the Company and Equitec Leasing Company dated October
30, 1987, as amended.
10.10(1) Business Loan Agreement dated as of October 21, 1991 between the Company and
Silicon
Valley Bank.
10.11(1) Master Equipment Lease dated as of April 15, 1993 between the Company and Phoenix
Leasing Incorporated.
10.12(1) Leastec Master Lease Agreement dated as of January 24, 1991 between the Company
and
Leastec Corporation.
10.13(1) Master Equipment Lease dated as of April 15, 1994 between the Company and Phoenix
Leasing Incorporated.
10.14<circumflex>(1) Foundry Agreement dated as of March 25, 1993 between the Company and Austria
Mikro Systems International GmbH.
10.15<circumflex>(1) Joint Development and License Agreement dated February 14, 1991 between the
Company and Fujitsu Limited.
10.16<circumflex>(1) License Agreement dated April 24, 1991 between the Company and Silicon Systems
Inc.,
as amended.
10.17<circumflex>(1) License Agreement dated April 13, 1994 between the Company and Silicon Systems
Inc.
10.18<circumflex>(1) License Agreement dated September 26, 1989 between the Company and Asahi Chemical
Industry Co., Ltd.
10.19<circumflex>(1) Light Industrial Lease dated as of December 3, 1985 between the Company and Sparks
Properties, Inc. for premises at 195 Lake Forest Way, as amended.
10.20<circumflex>(1) Development Agreement for a General DataComm Customer - Specific Line Interface
Transceiver dated October 1, 1990.
10.21(1) Form of Participation Agreement to a High Speed Digital Subscriber Line Interface
Circuit Development Consortium.
10.22<circumflex>(1) Development and Supply Agreement for Integrated Circuits dated as of September 28,
1993 between the Company and Northern Telecom, Inc.
10.23<circumflex><circumflex>(1) Form of Directors' Indemnification Agreement.
10.24(2) Form of Custody and Escrow Agreement for Selling Shareholders.
10.25(2) Form of Selling Shareholder's Irrevocable Power of Attorney.
10.26<circumflex><circumflex>(2) Consulting Agreement with Thomas J. Connors, as amended.
10.27(1) Real Property Lease with Evergreen/Bradville IV dated July 16, 1994.
10.28(1) Real Property Lease with EI Dorado Savings Bank dated July 28, 1994.
10.29(2) Amendment to Real Property Lease with Evergreen/Bradville IV, dated November 5,
1994.
10.30(2) Amendment to Form of Participation Agreement to a High Speed Digital Subscriber
Line
Interface Circuit Development Consortium.
10.31(2) Settlement Agreement between the Company and Fujitsu Limited, dated November 11,
1994.
10.32<circumflex><circumflex>(3) Consulting Agreement with Paul Gray
10.33<circumflex>(4) Foundry Agreement
10.34<circumflex>(5) Agreement and Plan of Reorganization (Maker Communications, Inc.)
10.35<circumflex>(5) Agreement and Plan of Reorganization (San Francisco Telecom, Inc.)
10.36<circumflex>(5) Equipment Lease Agreement
10.37<circumflex><circumflex><circumflex>(6) Foundry Agreement
10.38(7) Deposit Agreement
10.39(7) Real Property Lease Agreement with Evergreen/Bradville IV dated December 29, 1995
10.40*<circumflex><circumflex><circumflex> Agreement and Plan of Reorganization (Silicon Design Experts, Inc.)
22.1* Subsidiaries of Registrant. (see page S3)
24.1* Consent of Arthur Andersen & Co. (see page S4)
25.1* Powers of Attorney. (see page S1)
27.1* Financial Data Schedule, December 29, 1996
</TABLE>
(1) Incorporated by reference to Exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-65810), which was
declared effective August 19, 1994.
(2) Incorporated by reference to Exhibit filed with the Company's
Registration Statement-Form S-1 (File No. 33-74088), which was declared
effective February 8, 1995.
(3) Incorporated by reference to Exhibit filed with the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1994.
(4) Incorporated by reference to Exhibit filed with the Company's
Quarterly Report on Form 10-Q for the Period Ended April 1, 1995.
(5) Incorporated by reference to Exhibit filed with the Company's
Quarterly Report on Form 10-Q for the Period Ended July 1, 1995.
(6) Incorporated by reference to Exhibit filed with the Company's
Quarterly Report on Form 10-Q for the Period Ended September 29, 1995.
(7) Incorporated by reference to Exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995.
* Filed herewith.
<circumflex> Confidential treatment granted.
<circumflex><circumflex> Indicates management contract or compensatory
plan or arrangement.
<circumflex><circumflex><circumflex> Confidential treatment requested.
Upon written request to the Company, the Company will furnish
shareholders with a copy of any Exhibit upon payment of $.10 per page,
which represents the Company's reasonable expenses in furnishing such
Exhibits.
(b) On October 10, 1996, the Registrant filed a Current Report on Form
8-K relating to the September 27, 1996, determination to change the
Registrant's fiscal year, which now ends on the last Sunday nearest
calendar year end in a 52-53 week year.
<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Level One Communications, Incorporated:
We have audited the accompanying consolidated balance sheets
of LEVEL ONE COMMUNICATIONS, INCORPORATED (a California
corporation), and subsidiaries as of December 29, 1996 and
December 30, 1995, and the related statements of income,
shareholders' equity and cash flows for each of the three
fiscal years ended December 29, 1996, December 30, 1995 and
December 31, 1994. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Level One Communications, Incorporated, and
subsidiaries, as of December 29, 1996 and December 30, 1995,
and the results of their operations and their cash flows for
each of the three fiscal years ended December 29, 1996,
December 30, 1995 and December 31, 1994 in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The
schedule listed in the index of financial statements is
presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set
forth therein in relation to the basic financial statements
taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Sacramento, California
February 28, 1997
<PAGE>
<TABLE>
<CAPTION>
LEVEL ONE COMMUNICATIONS, INCORPORATED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS
December 29, 1996 and December 30, 1995
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE AMOUNTS) 1996 1995
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ $
20,251 21,628
Short-term investments 10,211 8,223
Accounts receivable, net of allowance 18,279 15,390
for doubtful accounts of $156 and $300
for 1996 and 1995, respectively
Inventories 9,990 15,772
Deferred income tax benefit 2,504 4,289
Prepaid expenses 2,351 2,905
Total current assets
63,586 68,207
Property and equipment, net 23,676 20,438
Long-term investments 12,440 4,695
Related party note receivable 1,225
-
Foundry deposits 8,000 2,000
Other assets 4,400 4,236
Total assets $ $
112,102 100,801
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ $
1,129 1,059
Accounts payable 4,778 9,541
Accrued payroll costs 1,985 1,762
Income taxes payable 1,338
-
Deferred revenue 133
-
Other accrued liabilities 3,485 4,878
Total current liabilities 12,715 17,373
Capital lease obligations, less current portion 3,194 3,814
Deferred lease expense 612 649
Total liabilities
16,521 21,836
Shareholders' Equity:
Common Stock, no par value 83,230 77,772
Authorized - 105,000,000 shares
Outstanding - 13,116,227 and 12,839,319
shares for 1996 and 1995,
respectively
Unrealized gain on available-for-sale
securities, net of tax 12 67
Retained earnings 12,339 1,126
Total shareholders' equity 95,581 78,965
Total liabilities and shareholders' equity $ $
112,102 100,801
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
LEVEL ONE COMMUNICATIONS, INCORPORATED
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME
For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Revenues $ $ $
111,987 78,018 46,825
Cost of sales 48,477 33,300 18,785
Gross margin 63,510 44,718 28,040
Research & development* 24,505 17,857 9,956
Sales & marketing 16,589 11,372 6,772
General & administrative 6,741 5,752 3,424
Total operating expenses 47,835 34,981 20,152
Operating income 15,675 9,737 7,888
Interest and other income, net 2,293 2,064 1,440
Income before provision
for income taxes 17,968 11,801 9,328
Provision for income taxes 6,755 1,543 1,323
Net income $ $ $
11,213 10,258 8,005
Earnings per Share $0.82 $0.76 $0.60
Weighted Average Common
Shares Outstanding 13,756 13,465 13,291
*Includes one-time charges for
acquisitions of $2,500 and $750 for 1996
and 1995,
respectively.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
LEVEL ONE COMMUNICATIONS, INCORPORATED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
</TABLE>
<TABLE>
<CAPTION>
Retained
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) Common Stock Deferred Unrealized Earnings
SHARES AMOUNT COMPENSATION GAIN (LOSS) (DEFICIT) TOTAL
Balance at January 1, 1994 $ 41,143 $ $ $(17,137) $ 23,910
10,874 (96) -
Issuance of common stock under
stock option and purchase 72 220
plans 220 - - -
Issuance of common stock upon
exercise
of warrants 31
6 31 - - -
Issuance of common stock 1,529 31,629 31,629
- - -
Stock issuance costs (581)
- (581) - - -
Amortization of deferred
compensation expense - - 95
- 95 -
Net income 8,005
- - - - 8,005
Balance at December 31, 1994 12,481 72,442
(1) - (9,132) 63,309
Issuance of common stock under
stock option and purchase plans
and purchase plans 219 431 - - - 431
Issuance of common stock upon
exercise
of warrants 19
4 19 - - -
Tax benefit of stock option 2,418 2,418
exercises - - - -
Stock issued in connection with 135 2,462 2,462
acquisitions - - -
Unrealized gain on available-for-
sale
investments, net of tax 67
- - - 67 -
Amortization of deferred
compensation expense - 1
- 1 - -
Net income 10,258
- - - - 10,258
Balance at December 30, 1995 12,839 77,772
- 67 1,126 78,965
Issuance of common stock under
stock option and purchase plans 188 1,243 1,243
- - -
Issuance of common stock upon
exercise
of warrants 10
2 10 - - -
Tax benefit of stock option 1,205 1,205
exercises - - - -
Stock issued in connection with 3,000 3,000
acquisitions 87 - - -
Unrealized loss on available-for-
sale
investments, net of tax (55)
- - - (55) -
Net income 11,213
- - - - 11,213
Balance at December 29, 1996 13,116 $ 83,230 $ $ $ 12,339 $ 95,581
- 12
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
LEVEL ONE COMMUNICATIONS, INCORPORATED
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,213 $ 10,258 $ 8,005
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,389 5,214 3,144
Purchased research & development 2,500 750
expenses -
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable (2,889) (9,021) (2,028)
Inventories 5,782 (9,268) (4,578)
Deferred tax assets 1,785 (977) (466)
Prepaid expenses 236 (1,481)
(1,192)
Accounts payable and accrued liabilities (3,427) 11,684 2,881
Deferred revenues (133) 97 (1,148)
Net cash provided by operating 22,456 7,545 4,329
activities
Cash flows from investing activities:
Purchase of short-term investments (12,754) (8,042) (35,108)
Proceeds from sales and maturities of short-term
investments 10,711 31,027 9,499
Purchase of long-term investments (11,780) (3,681) (2,000)
Proceeds from sales and maturities of long-term
investments 4,035 1,000
-
Net capital expenditures (9,837) (10,033) (10,597)
Payments (receipts) for related party notes 1,225 (1,225)
receivable -
Payments for foundry deposits and other assets
(6,136) (4,081) (139)
Net cash provided by (used in) (24,536) 4,965 (38,345)
investing activities
Cash flows from financing activities:
Net principal payments under capital lease (550) (569) (3,164)
obligations
Proceeds from issuance of stock, net of
repurchases and costs of issuance 1,253 427 31,299
Net cash provided by (used in) 703 (142) 28,135
financing activities
Net increase (decrease) in cash and cash equivalents (1,377) 12,368 (5,881)
Cash and cash equivalents at beginning of year 21,628 9,260 15,141
Cash and cash equivalents at end of year $ 20,251 $ 21,628 $
9,260
SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH TRANSACTIONS
Non-cash investing and financing activities:
Equipment purchased under capital leases $ $ 4,770 $
726 1,122
Tax benefit related to stock options 1,205
2,418 -
Unrealized gain (loss) on available-for-
sale investments (55)
67 -
Cash payments for:
Interest 351 142 222
Income taxes 2,564
1,268 766
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Level One Communications, Incorporated (the "Company")
was incorporated in California on November 26, 1985.
The Company designs, develops and markets mixed signal
application specific standard integrated circuit products
("ASSPs") for silicon connectivity solutions. The Company's
target customers are the worldwide original equipment
manufacturers of personal computers, workstations, network
access equipment, data transmission equipment and networking
equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Company prepares financial
statements based on a 52-53 week year. During the 3{rd}
Quarter of Fiscal 1996, the Company changed its fiscal year
end from the last Saturday nearest to the calendar year end
to the last Sunday nearest the calendar year end. The impact
of the change in fiscal year was immaterial to the Company's
results of operations.
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS. For purposes of the
consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Cash and cash equivalents consists of cash deposits with
banks, tax advantaged municipal bonds, and money market
instruments with insignificant interest rate risk.
INVESTMENTS. As of January 2, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). This statement requires that
investments be classified into one of three categories:
held-to-maturity, available-for-sale, or trading. It
requires that investments classified as held-to-maturity be
reported at amortized cost, that investments classified as
available for sale be reported at fair value with unrealized
gains and losses, net of related tax, reported as a separate
component of shareholders' equity, and that investments
classified as trading be reported at fair value with
unrealized gains and losses included in earnings. In July of
1995, certain of the Companies previously classified held-to-
maturity investments were sold, causing the investment
portfolio to be reclassified as being available-for-sale.
The unrealized gain at the time of the reclassification to
available-for-sale was immaterial to the financial
statements. As of December 29, 1996 and December 30, 1995,
all of the Company's investments are classified as available-
for-sale and are carried at fair value. As of December 29,
1996, and December 30, 1995, the Company's stockholders'
equity reflected an unrealized gain, net of applicable taxes,
of $12,000 and $67,000, respectively.
The amortized cost and market value of the Company's
investments available for sale as of December 29, 1996, were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
AMORTIZED COST GAINS LOSSES MARKET
(IN THOUSANDS) VALUE
<S> <C> <C> <C> <C>
Municipal Bonds $ 20,531 $ 29 $ 3 $ 20,557
Corporate Debt and Equity Securities 2,100 -- 6 2,094
$ 22,631 $ 29 $ 9 $ 22,651
</TABLE>
The amortized cost and market value of the Company's
investments available for sale as of December 30, 1995, were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
AMORTIZED COST GAINS LOSSES MARKET VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal Bonds $ 12,287 $ 107 $ -- $ 12,394
Corporate Debt and Equity Securities 518 6 -- 524
$ 12,805 $ 113 $ -- $ 12,918
</TABLE>
The amortized cost and market value of the Company's
investments, by maturity, at December 29, 1996, were as
follows:
<TABLE>
<CAPTION>
<S> <C>
(IN THOUSANDS) AVAILABLE-FOR-SALE
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 29, 1996 Amortized Cost Market Value
<S> <C> <C>
Due in one year or less $ 10,212 $ 10,211
Due after one year through five years 12,419 12,440
$22,631 $ 22,651
</TABLE>
Proceeds from the sale of available-for-sale investments
during fiscal 1996 and 1995 were $14.7 million and $1.0
million, respectively. The cost basis used in determining
realized gains and loses is specific identification. Gross
gains of $1,000 and gross losses of $31,000, and gross gains
of $9,000, with no losses, were realized on those sales in
1996 and 1995, respectively.
<PAGE>
FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair
value disclosures for financial instruments: For cash and
cash equivalents, accounts receivable, trade accounts
payable, and related party notes receivable, the carrying
value is a reasonable estimate of fair value. For
investments, fair values are based on quoted market prices or
dealer quotes.
INVENTORIES. Inventories are stated at the lower of
cost (first-in, first-out) or market and include materials,
labor and manufacturing overhead costs.
Inventories as of December 29, 1996, and December 30,
1995, consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
<S> <C> <C>
Raw materials $ 32 $ 26
Work-in-process 7,948 14,281
Finished goods 2,010 1,465
$ 9,990 $15,772
</TABLE>
PROPERTY AND EQUIPMENT. Property and equipment are
recorded at cost. Depreciation is provided on a straight-
line basis over the following estimated useful lives:
Machinery and equipment 3-5 years
Furniture and fixtures 3-5 years
Leasehold improvements 6-10 years
Property and equipment, net is comprised of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
<S> <C> <C>
Machinery and equipment $25,254 $22,557
Furniture and fixtures 11,899 6,059
Leasehold improvements 3,485 2,185
40,638 30,801
Less-Accumulated depreciation (16,962) (10,363)
$ 23,676 $ 20,438
</TABLE>
DEFERRED LEASE EXPENSE. Lease payments are
recognized as expense on a straight-line basis over
the term of the lease.
PATENT COSTS. Patent costs include direct
costs of obtaining the patents. Upon patent
approval, patent costs are amortized over the
estimated useful life of the patent using the
straight-line method.
REVENUE RECOGNITION. Product sales are
generally recognized upon shipment of product.
However, the Company defers recognition of revenues
and gross margin from sales to stocking
distributors until such distributors resell the
related products to their customers. The Company
has deferred recognition of gross margin amounting
to $864,000, $1,300,000, and $255,000 as of
December 29, 1996, December 30, 1995, and December
31, 1994, respectively. For 1996, sales to
Hewlett-Packard were 11.2% of total sales. For
1995 and 1994, no single customer accounted for
more than 10% of revenues.
Export sales as a percentage of revenues were
39%, 33%, and 22% for 1996, 1995, and 1994,
respectively.
The Company from time to time enters into
development and license agreements with certain
customers related to customer-specific
applications. Related costs are expensed as
incurred and are included in research and
development expenses, while revenue for non-
recurring engineering contracts is deferred until
contract milestones are met. During 1996, 1995,
and 1994, the Company recognized revenues of
$220,000, $155,000, and $1.4 million, respectively,
in accordance with the contract milestones in the
Company's agreements.
The Company earns royalty income from products
sold by licensees and recognizes that income in the
period that income is earned.
Revenues are comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
Product sales $111,392 $77,417 $45,104
Royalties, licenses and non-
recurring engineering revenue 595 601 1,721
Total revenues $111,987 $78,018 $46,825
</TABLE>
INCOME TAXES. The Company accounts for income
taxes pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). This statement provides for a
liability approach under which deferred income
taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes
become payable.
EARNINGS PER SHARE. Earnings per share is
based on the weighted average common shares
outstanding and dilutive common equivalent shares.
Common equivalent shares include dilutive stock
options and warrants when appropriate. Dual
presentation of primary and fully diluted earnings
per share is not shown on the face of the
statements of income because the differences are
insignificant.
RECLASSIFICATIONS. Certain prior year amounts
on the Consolidated Financial Statements have been
reclassified to conform to the fiscal 1996
presentation.
3. SHORT-TERM BORROWINGS
The Company has a $10 million revolving line
of credit with a bank. The Company compensates the
bank for credit facilities by paying annual
administrative fees. The balance of the Company's
short-term borrowings as of December 29, 1996, and
December 30, 1995, was zero.
4. LEASES
The Company conducts its operations using
leased facilities and equipment under both capital
and operating leases. Minimum future lease
payments as of December 29, 1996, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
<S> <C> <C>
YEAR ENDING
1997 $ 1,415 $ 7,791
1998 1,284 6,982
1999 1,252 6,587
2000 974 6,175
2001 74 3,316
Thereafter -- 7,205
$ 4,999 $ 36,056
Less-Interest portion (7.38% to 12%) (676)
Capital lease obligations 4,323
Less-Current portion (1,129)
Long-term portion $ 3,194
</TABLE>
Rent expense for operating leases was
approximately $7.4 million, $3.5 million, and $1.6
million for the years ended December 29, 1996,
December 30, 1995, and December 31, 1994.
<PAGE>
5. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
Current provision for income taxes
State $ 361 $ 1,353 $ 1,337
Federal 4,609 2,660 452
Deferred provision (benefits)
State 696 (675) (466)
Federal 1,089 (1,795) --
Total tax provision $ 6,755 $ 1,543 $ 1,323
</TABLE>
The tax benefits associated with nonqualified
stock options reduced taxes currently payable by
$1,205,000 and $2,418,000 in 1996 and 1995,
respectively. Such benefits were recorded as an
increase to common stock.
Deferred tax assets and liabilities are
determined based on the differences between the
financial reporting and tax basis of assets and
liabilities. They are measured by applying the
enacted tax rates and laws in effect for the years
in which such differences are expected to reverse.
<PAGE>
The significant components of the Company's
deferred tax assets and liabilities as of December
29, 1996, and December 30, 1995, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
<S> <C> <C>
Deferred tax assets:
Inventory reserves $ 397 $ 415
Deferred income on shipments to distributors 374 532
Accounts receivable reserve 83 145
Deferred lease expense 265 345
Inventory Unicap adjustment 345 303
Accrued vacation 256 204
AMT credit carryforwards 365 497
Capitalized R&D 537 1,780
Other 275 187
Total deferred taxes $ 2,897 $ 4,408
Deferred tax liabilities:
Accelerated depreciation $ (393) $ (119)
Net deferred income tax assets $ 2,504 $ 4,289
</TABLE>
The reconciliation of the federal tax rate to
the effective tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
Reversal of valuation allowance -- (21.0) --
Net operating loss deduction -- -- (29.1)
Foreign taxes & foreign sales corporation (4.7) (3.0) .3
State taxes 3.3 5.7 9.0
Non-deductible acquisition costs 5.5 2.2 --
Other (.5) (4.8) --
Effective income tax rate 37.6% 13.1% 14.2%
</TABLE>
6. STOCK OPTION AND PURCHASE PLANS
The Company has three stock option plans, the
1985 Stock Option Plan (the "1985 Plan"), the 1993
Stock Option Plan (the "1993 Plan"), the San
Francisco Telecom Stock Option Plan (the "SFT
Plan"), and an employee stock purchase plan (the
"ESPP"). No further options may be granted under
either the 1985 Plan or the SFT Plan, and 400,242
options previously granted under these plans remain
outstanding. The Company applies Accounting
Principles Board Opinion No. 25 and related
interpretations in accounting for its plans.
Accordingly, no compensation cost has been
recognized for its stock option plans. Had
compensation cost for these plans been determined
consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), the Company's net income
and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995
<S> <C> <C>
Net income
As reported $ 11,213 $ 10,258
Pro forma $ 9,325 $ 9,549
Earnings per share
As reported $ 0.82 $ 0.76
Pro forma $ 0.72 $ 0.75
</TABLE>
The fair value of each option grant has been
estimated on the date of the grant using the Black-
Scholes option-pricing model with the following
assumptions used for grants in 1996 and 1995. In
calculating compensation cost: risk-free interest
rates of 6.15 and 5.90 percent, respectively, and
expected stock price volatility of 70%, an expected
life of six years and no dividend payments for both
1996 and 1995.
Because the SFAS 123 method of accounting has not
been applied to options granted prior to January 1,
1995, and due to the nature and timing of option
grants, the resulting pro forma compensation cost
may not be representative of that to be expected in
future years.
The Company has authorized the issuance of up to
450,000 shares of stock to its full-time employees
under the ESPP. The Company has sold 22,137 shares
and 15,079 shares as of December 29, 1996, and
December 30, 1995, respectively, and has sold a
total of 44,961 shares through December 29, 1996.
The company sells shares in two six-month offering
periods per year. The price is 85% of the market
price of the stock on the start date or end date of
each offering period, whichever is lower.
The Company may grant options for up to 3,050,000
shares under the 1993 Plan. The Company has
granted options on 1,777,850 shares through
December 29, 1996. Under the 1993 Plan the option
exercise price equals the stock's closing market
price on date of grant.
<PAGE>
The following table presents the aggregate options
granted, forfeited, and exercised under the 1985
Plan, 1993 Plan and SFT Plan for the years ended
December 29, 1996, December 30, 1995, and December
31, 1994, at their respective weighted average
exercise prices.
<TABLE>
<CAPTION>
(SHARES IN THOUSANDS) 1996 1995 1994
<CAPTION>
Wtd. Avg. Wtd. Avg. Wtd. Avg.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHRS EXER. PRICE SHRS EXER. PRICE SHRS EXER. PRICE
Outstanding, beginning
of period 1,489 $ 11.41 1,090 $ 5.16 941 $ 1.67
Granted
Price = Fair Value 722 21.59 690 17.97 272 15.85
Price < Fair Value -- -- 25 .67 4 3.86
Exercised (174) 5.55 (217) 1.41 (74) 1.90
Canceled (135) 20.16 (99) 7.50 (53) 2.72
Outstanding, end of 1,902 $ 15.19 1,489 $11.41 1,090 $ 5.15
period
Exercisable, end of 482 367 334
period
</TABLE>
The following table summarizes information about
options outstanding under the 1985 Plan, 1993 Plan
and SFT Plan at December 29, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
<CAPTION>
(SHARES IN THOUSANDS) Shares Outstanding Weighted Avg. Shares
As of 12/29/96 Remaining Weighted Avg. Exercisable As of Weighted Avg.
Range of Exercise Prices Contractual Life Exercise Price 12/29/96 Exercise Price
<CAPTION>
$ 0.38 $ 0.67 390 5.96 $ 0.40 344 $ 0.39
<S> <C> <C> <C> <C> <C> <C>
1.00 16.50 559 8.00 15.52 70 15.01
16.75 19.75 480 8.67 17.57 31 17.85
19.75 36.00 473 9.13 24.58 37 22.22
$ 0.38 $ 36.00 1,902 8.03 $ 15.19 482 $ 5.29
</TABLE>
Options for all plans are exercisable in
installments at intervals determined by the Board
of Directors, not to exceed ten years and one day.
7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Tax Deferred Savings
Plan (the "401(k) Plan") under which eligible
employees may elect to have a portion of their
salary deferred and contributed to their accounts
under the 401(k) Plan. Under the 401(k) Plan, the
Company will contribute a minimum of 1% and up to a
maximum of 3% of an eligible employee's annual
gross salary to the employee's account under the
401(k) Plan. For the fiscal years ended December
29, 1996, December 30, 1995, and December 31, 1994,
the Company has contributed $420,000, $315,000, and
$184,000, respectively, to the 401(k) Plan.
<PAGE>
8. INCENTIVE PLANS
The Company has reserved 90,000 shares of
Common Stock for issuance to employees pursuant to
a stock bonus plan to be agreed upon by the Board
of Directors. As of December 29, 1996, no shares
had been issued.
Beginning in January 1994, the Company
implemented an incentive compensation plan. The
Company's incentive compensation plan provides for
incentive compensation for substantially all
employees of the Company based upon the achievement
of specified operating and performance results.
Incentive compensation totaled $1,791,000,
$833,000, and $497,000 for 1996, 1995 and 1994,
respectively.
9. STOCK WARRANTS
The Company has issued warrants to independent
sales representatives to purchase up to 43,879
shares of its Common Stock with exercise prices
ranging from $2.33 to $21.00 per share. As of
December 29, 1996, an aggregate of 13,208 shares
has been issued upon exercise of warrants.
In connection with securing a loan from
investors in 1992, the Company issued a warrant to
purchase 202,746 shares of Common Stock at an
exercise price of $1.54 per share. The warrant was
exercised January 16, 1997, for 192,754 shares, and
the balance was surrendered, on a net appreciation
basis, in an amount equal to the exercise price.
10. PREFERRED STOCK
No shares of Preferred Stock are currently
outstanding, although the Company's Board of
Directors is authorized to issue up to 10,000,000
shares of Preferred Stock.
11. RELATED PARTY TRANSACTIONS
During 1996, 1995 and 1994, the Company paid
fees of approximately $129,600, $130,363, and
$140,000 respectively, to members of the Board of
Directors for consulting services. Services
performed included the development of marketing and
sales strategies and services relating to
engineering matters.
During the third quarter of 1996, in
connection with a third-party financing for Maker
Communications, Inc. ("Maker"), the Company sold a
portion of its minority interest in Maker for an
aggregate of approximately $675,000. This sale
resulted in a one-time gain recorded as "Other
Income" in the accompanying Consolidated Statements
of Income. The Company continues to hold a
minority interest in Maker and to license certain
Maker technology. Other contractual rights and
obligations, including the Company's obligation to
provide certain loan financing to Maker, were
terminated in the transaction. Following the
transaction, Maker repaid the Company approximately
$2.9 million, the total balance under an
outstanding note.
12. BUSINESS AND TECHNOLOGY ACQUISITIONS
During December 1996, the Company acquired
Silicon Design Experts, Inc. (SDE). In connection
with the transaction, the Company issued an
aggregate of 86,730 shares of its common stock
valued at $3,000,000 to SDE's shareholders, and
agreed to issue additional shares of Common Stock
in the future to SDE's shareholders and employees,
with the amount to be contingent upon the extent of
sales of products developed by SDE and Level One's
stock price. The total purchase price of
$3,000,000 was allocated as follows: $500,000 to
goodwill, and $2,500,000 for purchased research and
development. The purchased research and
development of $2,500,000 was reported as a one-
time charge. The transaction was accounted for
under the purchase method of accounting.
Accordingly, SDE's operating results after the date
of the acquisition are included in the Consolidated
Statements of Income.
On June 6, 1995, the Company acquired San
Francisco Telecom, Inc. ("SFT"). SFT operates as a
wholly-owned subsidiary of the Company. In
connection with the transaction, the Company issued
an aggregate 135,360 shares of its common stock to
SFT's shareholders, assumed existing SFT stock
options, which will be exercisable for a total of
24,951 shares of Common Stock, and agreed to issue
additional shares of Common Stock in the future to
SFT's shareholders and employees, with the amount
to be contingent upon the extent of sales of
products developed by SFT. The transaction was
accounted for under the purchase method of
accounting. Accordingly, SFT's operating results
after the date of the acquisition are included in
the Consolidated Statements of Income.
13. RISK FACTORS
The Company does not manufacture the wafers
used for its products. To date, the Company's
wafers have been manufactured by foundries located
in the United States, Europe, and Asia. The
Company depends upon these suppliers to produce
wafers at acceptable yields and to deliver them to
the Company in a timely manner at competitive
prices. The Company may sustain an adverse impact
on operating results from problems with the cost,
timeliness, yield and quality of wafer deliveries
from suppliers. From time to time, the available
industry-wide foundry capacity fluctuates
significantly. During periods of constrained
supply, the Company may experience difficulty in
securing an adequate supply of wafers, and/or its
suppliers may increase wafer prices which must be
paid by the Company. The Company's operating
results depend in substantial part on its ability
to maintain and to increase the capacity available
to it from existing or new foundries. Although the
Company believes that it has planned appropriately
to meet customer demand, there can be no assurances
that unforeseen demand or unforeseen changes in the
conditions under which the Company does business
with its foundries will not have a material impact
on the Company's business in the future.
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 adverse
financial impact from problems with the cost,
timeliness, yield and quality of product deliveries
from these suppliers.
The Company relies upon patent, trademark,
trade secret and copyright law to protect its
intellectual property. There can be no assurance
that such intellectual property rights can be
successfully asserted in the future or will not be
invalidated, circumvented or challenged.
Litigation, regardless of its outcome, could result
in substantial cost and diversion of resources of
the Company. Any infringement claim or other
litigation against or by the Company could have a
material effect on the Company's financial
condition and results of operations. In November
1995 the Company commenced infringement litigation
against a competitor. 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.
14. FOUNDRY COMMITMENTS
The Company's current wafer requirements are
supplied primarily by six foundries. During 1995,
the Company entered into five-year agreements with
three of its suppliers for committed foundry
capacity in consideration of equipment financing or
a cash deposit. During 1995 and 1996, the Company
provided an aggregate of $14.6 million in capital
equipment financing and/or cash deposits to these
three foundries in connection with such activities.
The Company has remaining funding commitments not
to exceed $18,000,000.
<PAGE>
SCHEDULE II
LEVEL ONE COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
<S> <C> <C> <C> <C>
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
YEAR ENDED DECEMBER 29, 1996:
Allowance for doubtful accounts 300 --- 144 156
YEAR ENDED DECEMBER 30, 1995:
Allowance for doubtful accounts 90 210 --- 300
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful accounts 85 5 --- 90
</TABLE>
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR
15(D) 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, IN THE COUNTY OF SACRAMENTO, STATE OF
CALIFORNIA, ON THE 29TH DAY OF MARCH, 1996.
LEVEL ONE COMMUNICATIONS, INCORPORATED
By: /S/ ROBERT S. PEPPER
Robert S. Pepper
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each of the officers and directors of Level
One Communications, Incorporated whose signature
appears below hereby constitutes and appoints
Robert S. Pepper and John Kehoe, and each of them,
their true and lawful attorneys-in-fact and agents,
with full power of substitution, each with power to
act alone, to sign and execute on behalf of the
undersigned any amendment or amendments to this
Annual Report, and does hereby ratify and confirm
all that said attorneys-in-fact and agents shall do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES
EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED
BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED.
Dated: March 29, 1996
/S/ ROBERT S. PEPPER
Robert S. Pepper,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
AND CHAIRMAN OF THE BOARD OF DIRECTORS
Dated: March 29, 1996
/S/ THOMAS J. CONNORS
Thomas J. Connors,
DIRECTOR
Dated: March 29, 1996
Paul Gray,
DIRECTOR
Dated: March 29, 1996
/S/ MARTIN JURICK
Martin Jurick,
DIRECTOR
Dated: March 29, 1996
/S/ HENRY KRESSEL
Henry Kressel,
DIRECTOR
Dated: March 29, 1996
/S/ JOSEPH P. LANDY
Joseph P. Landy,
DIRECTOR
Dated: March 29, 1996
/S/ JOHN KEHOE
John Kehoe,
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
(PRINCIPAL ACCOUNTING OFFICER)
S1
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
Registrant has four wholly-owned subsidiaries,
Level One Communications International,
Incorporated, which is incorporated in Barbados,
and which does business under the name Level One
Communications International, Incorporated; San
Francisco Telecom, Inc., which is incorporated in
California, and which does business under the name
San Francisco Telecom, Inc.; Silicon Design
Experts, Inc. California, which is incorporated in
California and does business under the name Level
One Communications, Incorporated; and Level One
Communications Europe SARL, which is incorporated
in France and does business under the name Level
One Communications Europe.
S2
<PAGE>
EXHIBIT 24.1
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby
consent to the incorporation of our report included
in this Form 10-K, into the Company's previously
filed Registration Statements File Nos. 33-65810,
33-72398, 33-93360, 33-95590 and 333-06300.
/S/ ARTHUR ANDERSEN LLP
Sacramento, California
March 28, 1997
S3
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION IS MADE THIS ____ DAY OF
DECEMBER, 1996, BY AND AMONG SILICON DESIGN EXPERTS, INC., a New Jersey
corporation ("SDE"), LEVEL ONE COMMUNICATIONS, INCORPORATED, a California
corporation ("LOC"), SILICON DESIGN EXPERTS, CALIFORNIA, a California
corporation formed by LOC ("NEWCO"), and Sailesh Rao and Juan Jover,
comprising shareholders of one hundred percent (100%) of the issued and
outstanding shares of SDE ("Shareholders").
W I T N E S S E T H:
WHEREAS, SDE desires to merge with NEWCO and NEWCO desires to merge with
SDE in a transaction (the "Merger") pursuant to which the outstanding common
stock of SDE (the "SDE Common") shall be automatically converted into shares
of the Common Stock, no par value, of LOC (the "LOC Common") in the numbers
set forth herein, all in a transaction which is intended to qualify as a
reorganization under sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, on the basis of the respective representations and
warranties set forth in this Agreement and of the covenants and agreements
contained therein, the parties agree as follows:
1. MERGER.
(a) EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement and the Agreement of Merger by and among SDE, LOC and NEWCO in
substantially the form attached hereto as Exhibit 1(a) (the "Merger
Agreement"), the Merger Agreement, together with required related
certificates, shall be filed in accordance with each of the California General
Corporation Law and the New Jersey Business Corporations Act as soon as
practicable on or after the Closing Date (as defined in Section 2(a) of this
Agreement). The Merger shall become effective upon the filing of the Merger
Agreement and such certificates with each of the California Secretary of State
and the New Jersey Secretary of State in accordance with the provisions of
applicable law at the Effective Time (as defined in Section 2(b) of this
Agreement).
(b) EFFECTS OF THE MERGER. At the Effective Time, (i) the separate
existence of SDE shall cease and SDE shall be merged with and into NEWCO as
the surviving corporation (the "Surviving Corporation"); (ii) the Articles of
Incorporation of NEWCO shall be the Articles of Incorporation of the Surviving
Corporation; (iii) the Bylaws of NEWCO shall be the Bylaws of the Surviving
Corporation; (iv) the directors and officers of the Surviving Corporation
shall be as set forth in Schedule 1(b) attached hereto; and (v) the merger
shall, from and after the Effective Time, have all the effects provided by
applicable law.
(c) EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of the
issued and outstanding shares of SDE Common:
(i) CAPITAL STOCK OF NEWCO. All issued and outstanding shares of capital
stock of NEWCO shall continue to be issued and shall be converted into 1,000
shares of Common Stock of the Surviving Corporation. Each stock certificate
of NEWCO evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(ii) CONVERSION OF SDE COMMON. Other than fractional shares as provided
in Section 1(c)(iii) below, each share and fractional share of SDE Common
issued and outstanding immediately prior to the Effective Time shall be
converted, without any action on the part of the holders thereof, into that
number of shares of LOC Common to be determined by dividing the number of
Deliverable LOC Shares (as determined pursuant to Section 1(g) below) by the
number of shares of SDE Common outstanding at the Effective Time (hereinafter
the "Stock Exchange Ratio").
(iii) FRACTIONAL SHARES. No fractional shares of LOC Common shall be
issued, but in lieu thereof each holder of SDE Common who would otherwise be
entitled to receive a fraction of a share of LOC Common (after aggregating all
fractional shares of LOC Common to be received by such holder) shall receive
from LOC an amount of cash (rounded up to the nearest whole cent) equal to the
product of (1) the fraction of a share of LOC Common to which such holder
would otherwise be entitled, times (2) the Trading Price, as defined in
Section 1(g) below.
(d) EXCHANGE OF CERTIFICATES.
(i) LOC TO PROVIDE COMMON STOCK. Promptly after the Effective Time, LOC
shall make available, in accordance with this Section 1 and the Merger
Agreement, through such reasonable procedures as LOC may adopt, the shares of
LOC Common issuable pursuant to Section 1 and the Merger Agreement in exchange
for outstanding shares of SDE Common.
(ii) EXCHANGE PROCEDURES. On the Closing Date, each Shareholder of a
certificate or certificates which immediately prior to the Effective Time
represents outstanding shares of SDE Common (the "Certificates") whose shares
are being converted into LOC Common pursuant to Section 1 and the Merger
Agreement, shall surrender the Certificates, to be exchanged for LOC Common
after the Effective Time. Upon surrender of a Certificate for cancellation to
LOC, the holder of such Certificate shall be entitled to receive in exchange
therefor certificates representing the number of shares of LOC Common and
payments in lieu of fractional shares to which the holder of SDE Common is
entitled pursuant to Section 1 and the Merger Agreement and which are
represented by the Certificate so surrendered. The Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of SDE
Common which is not registered in the transfer records of SDE, the stock
certificates representing shares of LOC Common may be delivered to a
transferee if the Certificate representing the right to receive such LOC
Common is presented to LOC and accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. LOC shall follow the same procedure with
respect to lost, stolen or mutilated Certificates as it follows with respect
to lost, stolen or mutilated certificates representing other LOC common stock.
Unless and until any such Certificate shall be so surrendered, or such
procedures respecting lost, stolen or mutilated Certificates are followed, the
holders of the Certificate shall not be entitled to receive certificates for
the LOC Common or cash for any fractional share of LOC Common and any
dividends paid or other distributions made to holders of record of LOC Common
after the Effective Time shall be paid to and retained by LOC and paid over to
such holder when such Certificate is surrendered or such procedures are
implemented in accordance with this Section 1(d)(ii).
(e) NO FURTHER OWNERSHIP RIGHTS IN SDE COMMON. All LOC Common delivered
upon the surrender for exchange of shares of SDE Common in accordance with the
terms hereof shall be deemed to have been delivered in full satisfaction of
all rights pertaining to such shares of SDE Common. There shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of SDE Common which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Section 1.
(f) TAX TREATMENT. The parties intend that the Merger will be a tax-free
reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code.
(g) PAYMENT.
(1) The "Deliverable LOC Shares" shall be that number of shares of LOC
Common that is the nearest whole number of shares of LOC Common that is
determined by dividing the calendar thirty (30) day average of the last sale
price of LOC common stock on the NASDAQ National Market preceding the date
this Agreement is executed (the "Trading Price") into $3,000,000 with the
value of any fractional shares payable in cash at the Closing as provided in
Section 1(c)(iii) above.
(2) If necessary, on the second anniversary from the Effective Time, LOC
shall be obligated to make an additional payment to the Shareholders (the
AMatrix Payment@) [ * ]. If, at any point during the two years following the
closing, [*] LOC shall not be obligated to make a Matrix Payment. LOC shall
issue additional shares of LOC common stock in accordance with the matrix, and
subject to the conditions, set forth in Schedule 1(g)(2) hereto.
(h) EMPLOYMENT OF SHAREHOLDERS. Following the Effective Time, each of the
Shareholders shall be engaged as an employee of LOC pursuant to an employment
agreement substantially in the form of Exhibit 1(h)(the AEmployment
Agreement@) hereto.
2. CLOSING.
(a) CLOSING DATE. The Closing under this Agreement (the "Closing") shall
be held not more than two (2) business days following the later of (i) the
approval of the Merger by the shareholders of SDE and (ii) satisfaction of all
other conditions precedent to the Merger specified in this Agreement, unless
duly waived by the party entitled to satisfaction thereof. Such date on which
the Closing is to be held is herein referred to as the "Closing Date." The
Closing shall be held at the offices of LOC at 10:00 A.M. on the Closing Date,
or at such other date as the parties may agree upon in writing.
(b) EFFECTIVE TIME. Subject to the provisions of this Agreement and the
Merger Agreement, on the Closing Date or the soonest practicable day following
the Closing Date, a fully executed and acknowledged copy of the Merger
Agreement, along with required related certificates of SDE and Surviving
Corporation meeting the requirements of the California General Corporation Law
and the New Jersey Business Corporations Act, shall be filed with each of the
California Secretary of State and the New Jersey Secretary of State, all in
accordance with the provisions of the Merger Agreement and shall become
effective upon such filing (the "Effective Time").
3. REPRESENTATIONS AND WARRANTIES.
(a) SDE AND SHAREHOLDERS. Except as set forth in the Schedules delivered
pursuant to this Section 3, SDE and each of the Shareholders, severally and
not jointly, represents and warrants that:
(i) ORGANIZATION AND GOOD STANDING. SDE is a corporation duly organized,
validly existing and in good standing under the laws of the State of New
Jersey and has corporate power to carry on its business as it is now being
conducted. Certified copies of SDE's Articles of Incorporation and Bylaws
have been delivered to LOC and NEWCO and are complete and correct as of the
date of this Agreement. SDE's minute books contain a complete and accurate
record of all meetings and other corporate action of its shareholders and
Board of Directors.
(ii) CAPITALIZATION. SDE's authorized capital stock consists of 2,500
shares of common stock, no par value, of which 134 shares are issued and
outstanding. No shares are held in SDE's treasury. All of the outstanding
shares of common stock of SDE are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 3(a)(ii) hereto, there are no
outstanding options, agreements, contracts, calls or commitments of any
character which would require the issuance by SDE of any capital stock.
(iii) SUBSIDIARIES. SDE has no subsidiaries.
(iv) FINANCIAL STATEMENTS. SDE has delivered to NEWCO copies of its
balance sheets and statements of operations from inception to the most recent
practicable date (the "Financial Statements"), all of which have been prepared
in accordance with generally accepted accounting principles consistently
applied through the periods indicated therein.
(v) ABSENCE OF UNDISCLOSED LIABILITIES. Except with respect to matters
referred to in Schedule 3(a)(v) hereto, SDE does not have any liabilities or
obligations, secured or unsecured (whether accrued, absolute, contingent or
otherwise), of a nature that would be reflected or reserved against in a
corporate balance sheet or disclosed in the notes thereto, prepared in
accordance with the generally accepted accounting principles applied in the
preparation of such financial statements, that are not reflected or reserved
against in the most recent balance sheet include in the Financial Statements.
(vi) ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
3(a)(vi) to this Agreement, there have not been since November 1, 1996, any
changes of the following nature:
(1) BUSINESS, PROPERTIES AND FINANCIAL CONDITION. Any material adverse
change in SDE's properties, business, supply of raw materials, or markets
for its products (including, but not limited to, damage or destruction of
property by fire or other casualty, whether or not covered by insurance,
or any material adverse change in the financial condition or results of
operations of SDE taken as a whole). For purposes of this Agreement,
technological changes, price changes and other changes affecting the
industry generally and any diminution of orders per se shall not be
deemed to be material adverse changes.
(2) CAPITAL STOCK; OPTIONS DIVIDENDS, ETC. Any change in the
authorized, issued, or outstanding capital stock of SDE, any granting of
any stock option or right to purchase shares of capital stock or any
issuance of any security convertible into shares of capital stock of SDE,
any purchase, redemption, retirement or other acquisition of any shares
of capital stock by SDE, or any agreement to do any of the foregoing, or
any declaration, setting aside, or payment of any dividend or other
distribution in respect of the capital stock of SDE.
(3) SALES, LEASES, BORROWINGS, ETC. Any sale or lease of SDE's property
or assets (other than inventory sold in the ordinary course of business)
with an original cost in excess of $5,000 for any single item or any
mortgage or pledge of any properties or assets of SDE, any borrowing
incurred, assumed or guaranteed by SDE maturing more than one (1) year
from the date thereof, or any other borrowing made or guaranteed by SDE
other than in the ordinary course of business.
(4) EMPLOYEE BENEFIT PLANS AND CERTAIN SALARIES. Any employment
contract, bonus, stock option, profit sharing, pension, retirement,
incentive or similar arrangement or plan instituted, agreed to or
amended.
(vii) LITIGATION, ETC. Except as set forth in Schedule 3(a)(vii) to this
Agreement, there is no material litigation, proceeding or governmental
investigation pending or, to the knowledge of SDE, threatened against or
relating to SDE, its properties or business, or the transactions contemplated
by this Agreement; nor, to SDE's knowledge, is there any reasonable basis for
any such actions or for any claims (including, without limitation, claims
based upon alleged product liability, pollution of air, water or land, or
violations of federal or state antitrust or securities laws); and SDE is not a
party to or subject to the provisions of any judicial decree or judgment or
any order of any governmental agency.
(viii) LISTS OF PROPERTIES, CONTRACTS, ETC. Schedule 3(a)(viii) to this
Agreement sets forth lists, each of which is complete and accurate in all
material respects as of the date set out therein, of the following:
(1) REAL PROPERTY. All real property owned of record or beneficially or
leased by SDE.
(2) OTHER PROPERTY. Inventories and tangible fixed assets as shown on
SDE's books, showing, with respect to inventories, the amounts of raw
materials, work in process and finished goods, and with respect to fixed
assets, the total of each of the following categories: leasehold
improvements, machinery and equipment, furniture and fixtures and
automotive equipment.
(3) AUTOMOBILES AND TRUCKS. All automobiles and trucks owned or leased
by SDE.
(4) INSURANCE POLICIES. All policies of insurance with respect to SDE's
properties, buildings, machinery, equipment, furniture, fixtures,
operations, and the lives of its directors, officers and employees.
(5) CERTAIN LEASES AND CONTRACTS. Each existing lease, contract, or
other commitment of SDE extending beyond twelve (12) months from the date
of this Agreement (whether or not terminable at the option of any party
to such lease, contract, or commitment at an earlier date) other than
(i) leases, contracts or commitments furnished pursuant to other
paragraphs of this Section 3, and (ii) contracts or other commitments of
SDE for the purchase or sale by it in the ordinary course of business of
materials and products which do not involve an aggregate payment by or to
SDE of more than $10,000 or extend beyond twelve (12) months from the
date of this Agreement; and all existing sales representative agreements.
(6) CERTAIN SALARIED EMPLOYEES. The names and annual salary rates as of
November 1, 1996, of SDE's directors, officers, employees and agents.
(7) LABOR CONTRACTS. Each existing labor contract to which SDE is a
party.
(8) PATENTS, TRADEMARKS, ETC. All of SDE's patents, trademarks, trade
names, copyrights, and registrations and applications therefor; all
patent, trademark or trade name licenses, assignments or royalty
agreements to which SDE is a party; and all contracts with employees or
others relating in whole or in part to disclosure, nondisclosure,
assignment, or patenting of inventions, discoveries, improvements,
processes, formulas, or other know-how.
(9) PROFIT-SHARING PLANS, ETC. All employment contracts, bonus, stock-
option, profit-sharing, pension, retirement, incentive or other
compensation or retirement plans or arrangements of SDE and all employee
fringe benefit plans maintained by SDE.
(10) BANKS. The name of each bank in which SDE has an account or safe-
deposit box, and the names of all persons authorized to draw thereon or
having access thereto.
(11) POWERS OF ATTORNEY. The names of all persons, if any, holding
powers of attorney from SDE.
(12) LOAN AND CREDIT AGREEMENTS, ETC. All mortgages, indentures,
promissory notes, deeds of trust, loan or credit agreements, or similar
instruments except for credit agreements or similar arrangements with
suppliers entered into in the ordinary course of business to which SDE is
a party, and all amendments or modifications of any of the above-
mentioned documents with a statement of any as to which there is any
existing default by SDE.
(13) EMPLOYEE STOCK OPTIONS. The names of all persons holding employee
stock options to purchase shares of capital stock of SDE and, with
respect to each, the date of grant or issue, the expiration date, the
number and class of shares subject to such options, and the price at
which shares may be purchased pursuant to such options.
(14) LITIGATION. Each lawsuit, administrative proceeding, or
arbitration to which SDE is a party (whether as plaintiff, defendant, or
otherwise), including the damages or relief sought therein, the name of
counsel for SDE in charge of such matter, and its current status.
(15) MATERIAL ASSETS. A list of every material asset used by SDE in the
conduct of its business that is not either owned by SDE or leased by or
licensed to it under an agreement listed under the foregoing.
(16) OTHER CONTRACTS AND COMMITMENTS. Every material contract and
commitment not listed above.
(ix) TITLE. With respect to the property listed in Schedule 3(a)(viii),
SDE has good and marketable title to the real property stated to be owned by
it, has good title to the leasehold interests in real property stated to be
held by it, and good title to all of the tangible property stated to be owned
by it, in each case free and clear of all liens and encumbrances, except for:
(1) liens and encumbrances disclosed in Schedule 3;
(2) the lien of current taxes not yet due and payable; and
(3) such liens by operation of law and such imperfections of title, and
other liens and encumbrances, if any, as are not substantial in
character, amount, or extent and do not interfere with the present or
future use by SDE of the properties subject thereto or affected thereby.
SDE has clear record title to the patents and patent applications,
trademark registrations and applications therefor and copyright registrations
listed in Schedule 3(a)(viii) and all trade secrets as owned by it, and has
not entered into any agreements, contracts or licenses that would impair free
and unencumbered use by Surviving Corporation of the patents and trademarks
enumerated in Schedule 3(a)(viii) or any of SDE's trade secrets. No third
party has asserted infringement by SDE of any patents, trademark, tradename,
trade secrets or copyright of another, and there are no grounds on which a
third party can successfully assert a claim that it is infringing a patent,
trademark, trade name, trade secrets or copyright of another. All patentable
inventions may be registered in any country in the world.
All employees, consultants, officers, directors and shareholders of SDE
are parties to a written agreement ("Proprietary Information and Inventions
Agreement"), under which each such person or entity (i) is obligated to
disclose and transfer to SDE, without the receipt by such person of any
additional value therefor (other than normal salary or fees for consulting
services), all inventions, developments and discoveries which, during the
period of employment with or performance of services for SDE, he makes or
conceives of either solely or jointly with others, that relate to any subject
matter with which his work for SDE may be concerned, or relate to or are
connected with the business, products or projects of SDE, or involve the use
of the time, material or facilities of SDE, and (ii) is obligated to maintain
the confidentiality of proprietary information of SDE. None of SDE's
employees, consultants, officers, directors or shareholders is obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would conflict with their obligation to use their
best efforts to promote the interests of SDE or that would conflict with SDE's
business as proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of SDE's business by its employees and
consultants, nor the conduct of SDE's business, will conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such persons or
entities are now obligated. It is currently not necessary nor will it be
necessary for SDE to utilize nor will SDE utilize any inventions of any of
such persons or entities (or people it currently intends to hire) made or
owned prior to their employment with or engagement by SDE, in violation of any
limitations or restrictions to which any such person or entity is a party or
to which any of such assets or rights may be subject. None of SDE's
employees, consultants, officers, directors or shareholders has taken, removed
or made use of any proprietary documentation, manuals, products, materials, or
any other tangible item from his or her previous employer relating to the
business as conducted of such previous employer which has resulted in SDE's
access to or use of such proprietary items, and SDE will not gain access to or
make use of any such proprietary items in the business of SDE. All actions
required to be taken to transfer interest in such Intellectual Property to SDE
have been taken, all notices required to be made in connection with such
transfer have been made, and all consents required to be secured in connection
with such transfer have been secured.
(x) TAX RETURNS. The provision for taxes reflected in the Financial
Statements is sufficient for the payment of all accrued and unpaid federal,
state, county, and local taxes of SDE (including any penalties or interest
payable in respect of such taxes), whether or not disputed, for the period
through the Closing Date, and for all periods prior thereto. There have been
no audits of prior year tax returns, all returns have been filed and are
complete, and all taxes owed by SDE for years prior to 1996 have been paid.
(xi) NO VIOLATION. The execution of this Agreement does not, and
performance thereof will not, violate the provisions of SDE's Articles of
Incorporation, Bylaws, any note of which SDE is the maker or any indenture,
agreement, or other instrument to which SDE is party, except insofar as any
such instrument may require consent by a lender, mortgagee, lessor, or other
party to such actions, whose consent SDE agrees to obtain before the Closing
Date of this Agreement. Any such parties are listed on Schedule 3(xi) hereof.
(xii) AUTHORIZATION. The execution, delivery and performance of this
Agreement have been duly authorized and approved by SDE's Board of Directors,
subject to approval by SDE's shareholders. Upon approval by the affirmative
vote of the holders of the requisite majority of the outstanding shares of
SDE's common stock, this Agreement and the consummation of the transactions
contemplated herein will have been duly and validly authorized by all
necessary corporate action on the part of SDE, and this Agreement will be
binding upon, and enforceable against, SDE in accordance with its terms.
(xiii) ACCOUNTS AND NOTES RECEIVABLE. SDE's accounts and notes
receivable as shown on the Financial Statements are collectible in the amounts
there shown.
(xiv) INVENTORIES. To the best knowledge of SDE, its inventories in the
amounts reflected on the Financial Statements and the inventories thereafter
acquired before the date of this Agreement consist of items of a quality and
quantity usable or salable in the normal course of its business and, if
salable, are in the aggregate salable, if sold in the normal course, at market
values not less than the book value thereof; the value of obsolete materials,
determined by formula, and of materials of below-standard quality has been
written down to realizable marketable value or adequate reserves provided
therefor; the values at which such inventories are carried reflect an
inventory valuation policy of stating inventory at the lower of first-in,
first-out or market and of valuing finished goods and work-in-process at
standard costs developed for individual items using current materials labor
and overhead costs at normal production levels; and an obsolescence formula
based on historical sales and backlog orders is applied to inventories of
finished goods in order to determine the maximum quantities to be valued at
each inventory date.
(xv) PLANT AND EQUIPMENT. All of SDE's plants, buildings, machinery and
equipment are in good operating condition and reasonable state of repair,
normal wear and tear and normal maintenance requirements excepted.
(xvi) AUTHORITY. The execution and delivery of this Agreement by SDE, the
performance by SDE and Shareholders of their respective obligations hereunder
and the consummation by SDE and Shareholders of the transactions contemplated
hereby have been duly authorized by the Board of Directors and Shareholders
and no other act or proceeding on the part of or on behalf of SDE or its
Shareholders is necessary to approve the execution and delivery of this
Agreement, the performance by SDE or Shareholders of their respective
obligations hereunder and the consummation of the transactions contemplated
hereby. The signatory officers of SDE have the power and authority to execute
and deliver this Agreement and all of the other agreements and instruments to
be executed and delivered by SDE pursuant hereto, to consummate the
transactions hereby and thereby contemplated and to take all other actions
required to be taken by it pursuant to the provisions hereof and thereof.
(xvii) EXECUTION AND BINDING EFFECT ON SDE AND SHAREHOLDERS. This
Agreement has been duly and validly executed and delivered by SDE and
Shareholders and constitutes, and the other documents and instruments to be
executed and delivered by SDE or any Shareholder pursuant hereto, upon their
execution and delivery on or prior to the Closing Date will constitute legal,
valid and binding agreements of SDE and the Shareholders, respectively,
enforceable against SDE or Shareholder, respectively, in accordance with their
respective terms, except as they may be limited by bankruptcy, insolvency or
other similar laws affective the enforcement of creditors' rights in general.
Each shareholder owns his shares of SDE free and clear of any liens or
encumbrances.
(xviii) FULL DISCLOSURE. Each Shareholder hereby represents that he is not
aware of any facts pertaining to SDE which he believes affect adversely SDE or
which are likely in the future to affect adversely SDE which have not been
disclosed in this Agreement or the Schedules hereto. Neither this Agreement
nor any Exhibit, Schedule or Agreement being entered into or delivered
pursuant hereto nor any other material respecting SDE contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein contained not misleading.
(xix) NO DISTRIBUTION. There has not, since January 1, 1996, been a
distribution or dividend of assets to shareholders, other than payments of
salary and bonuses made in the normal course of business.
(b) LOC AND NEWCO. Each of LOC and NEWCO represents and warrants as
follows:
(i) ORGANIZATION AND GOOD STANDING. Each of LOC and NEWCO is duly
organized, validly existing and in good standing under the laws of the State
of California and has corporate power to carry on its business as it is now
being conducted.
(ii) LITIGATION. There is no pending litigation, proceeding,
governmental investigation or other action that, if successful, would prevent
either of LOC or NEWCO from performing its agreements and covenants and
fulfilling its obligations under this Agreement; and, to the knowledge of LOC
and NEWCO, there is no threat of or reasonable basis for any such litigation,
proceeding, governmental investigation or other action.
(iii) DISCLOSURE. To each of LOC's and NEWCO's knowledge, no
representation or warranty by it and no statement or certificate furnished or
to be furnished by it to SDE pursuant to the provisions of this Agreement
contains or will contain any untrue statement of a material fact, or omits or
will omit to provide the information required by the provisions of this
Agreement relating to such representation, warranty, statement or certificate.
(iv) NO VIOLATION. The execution of this Agreement by each of LOC and
NEWCO does not, and performance thereof will not, violate the provisions of
their respective Articles of Incorporation or Bylaws, or the provisions of any
indenture, agreement, or other instrument to which either LOC or NEWCO is a
party.
(v) AUTHORIZATION. The execution, delivery and performance of this
Agreement by each of LOC and NEWCO has been duly and validly authorized and
approved by all necessary corporate action.
(vi) CAPITALIZATION. LOC's authorized capital stock consists of
105,000,000 shares of common stock, no par value, of which 12,983,554 shares
were issued, outstanding, fully paid, and nonassessable as of September 30,
1996, and of 10,000,000 shares of preferred stock, of which none are issued or
outstanding. Upon consummation of the transactions contemplated hereby, the
LOC Common to be received by SDE will be validly issued, fully paid and
nonassessable.
4. COVENANTS.
(a) COVENANTS OF SDE. SDE agrees that prior to the Closing, its business
shall be conducted only in the ordinary course of business and that no
material transactions shall be entered into without the consent of the other
parties to this Agreement.
(b) COVENANTS OF LOC.
(i) SEC DOCUMENTS. LOC will furnish, or make available, to each of the
Shareholders, a true and complete copy of LOC's Form 10-K for the 1994 and
1995 fiscal years, and a Form 10-Q for the three (3) month period ended
September 29, 1996, and any other statement, report, registration statement or
definitive proxy statement filed by LOC with the Securities Exchange
Commission (the "SEC") since December 30, 1995 (the "LOC SEC Documents"). As
of their respective filing dates, the LOC SEC Documents comply in all material
respects with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), or the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and none of the LOC SEC Documents contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading, except to the
extent corrected by a subsequently filed LOC SEC Document.
LOC will use its best efforts to comply with the reporting requirements of
sections 13 and 15(d) of the Exchange Act to the extent it shall be required
to do so pursuant to such sections, and at all times while so required shall
use its best efforts to comply with all other public information reporting
requirements of the SEC from time to time in effect and relating to the
availability of an exemption from the Securities Act for the sale of any LOC
Common or the registration thereof under Form S-3. As of the date of this
Agreement, LOC qualifies as a registrant who is eligible to register
securities in a secondary offering on a Registration Statement on Form S-3.
LOC will also cooperate with each holder of any LOC Common being purchased
hereunder in supplying such information and documentation as may be reasonably
necessary for such holder to complete and file any informational reporting
forms presently or hereafter required by the SEC as a condition to the
availability of an exemption from the Securities Act for the sale of any such
LOC Common.
(ii) PUBLIC INFORMATION. LOC covenants and agrees that (1) it is in
compliance with and will use its best efforts to continue to comply with the
current public information requirements of Rule 144(c)(1) under the Securities
Act; (2) it will furnish each Shareholder upon request with all information
required for the preparation and filing of Form 144; and (3) it will on a
timely basis use its best efforts to file all reports required to be filed and
make all disclosures, including disclosures of material adverse information,
required to permit each Shareholder to make the required representations in
Form 144.
5. CONDITIONS PRECEDENT. The obligations of the parties are subject to the
fulfillment, prior to or on the Closing Date, as indicated below, of each of
the following conditions, all or any of which may be waived in whole or in
part by the parties as provided herein except as otherwise provided by law:
(a) SATISFACTORY DUE DILIGENCE. LOC shall conduct technical, financial
and legal due diligence regarding SDE prior to the Closing, and shall be
satisfied, in its reasonable judgment, that the representations and warranties
contained in this Agreement and the description of the technology proposed for
the SDE Products are correct and complete. SDE shall conduct such technical,
financial and legal due diligence regarding LOC prior to the Closing, and
shall be satisfied, in its reasonable judgment, that the representations and
warranties contained in this Agreement are correct and complete.
Notwithstanding such mutual due diligence reviews, the indemnification
provisions of Section 6 hereof shall apply to any inaccurate
representations and warranties by any party hereto.
(b) REPRESENTATIONS AND WARRANTIES OF LOC, SDE AND THE SHAREHOLDERS TO BE
TRUE.
(i) The representations and warranties of LOC, SDE and the Shareholders
contained in this Agreement shall be true and correct on the date hereof and
as of the Closing Date with the same effect as though such representations and
warranties had been made or given again at and as of the Closing Date, except
for any representation or warranty expressly stated to have been made or given
as of a specified date, which, at the Closing Date, shall be true and correct
as of the date expressly stated; and
(ii) Each of LOC, SDE and the Shareholders shall have performed and
complied with all of its or his agreements, covenants and conditions required
by this Agreement to be performed or complied with by it or him prior to or at
the Closing Date.
(c) CONSENTS. All notices to, and declarations, filings and
registrations with, and consents, approvals and waivers from, governmental and
regulatory agencies required to consummate the transactions contemplated
hereby and all consents, approvals and waivers from third parties required
under this Agreement to have been obtained prior to Closing, shall have been
obtained.
(d) NO PROCEEDING OR LITIGATION.
(i) No preliminary or permanent injunction or other order shall have been
issued by any court, whether Federal, state, local or foreign, or by any
governmental or regulatory body, whether federal, state, local or foreign, nor
shall any statute, rule, regulation or executive order be promulgated or
enacted by any governmental authority, whether Federal, state, local or
foreign, which prevents the consummation of the transactions contemplated in
this Agreement.
(ii) No suit, action, claim, proceeding or investigation before any
court, arbitrator or administrative, governmental or regulatory body, whether
Federal, state, local or foreign, shall have been commenced and be pending
against any of the parties to this Agreement or any of their respective
affiliates, associates, officers or directors seeking to prevent the
transaction contemplated hereunder.
(e) DOCUMENTS. All other documents to be delivered at the Closing and
all actions by each of the parties required by this Agreement or incidental
thereto, and all related matters shall be in the form and substance reasonably
satisfactory to the respective counsel of the parties.
(f) OPINION OF SDE COUNSEL. Purchaser shall have received an opinion from
SDE's counsel, dated the Closing Date, conforming in form and substance to
Exhibit 5(f).
(g) APPROVALS. LOC's Board of Directors shall have approved this
Agreement and the transactions contemplated herein. SDE's Board of Directors
and shareholders shall have approved this Agreement and the transactions
contemplated herein.
(h) EXECUTION AND DELIVERY OF OTHER AGREEMENTS AT CLOSING. At the
Closing, the parties shall have entered into the Merger Agreement and the
Employment Agreement.
6. INDEMNIFICATION.
(a) INDEMNIFICATION BY SDE AND THE SHAREHOLDERS.
(i) SDE, in the event the transactions contemplated hereby do not close,
and each Shareholder, subject to the limitations set forth in this Section 6,
severally and not jointly, after the Closing, agree to defend and indemnify
NEWCO and LOC (and, after the Closing, SDE), and their respective affiliates,
directors, officers and shareholders, and their respective successors and
assigns (collectively, "LOC Indemnitees"), against and hold each of them
harmless from any and all losses, liabilities, taxes, claims, suits,
proceedings, demands, judgments, damages, expenses and costs, including,
without limitation, reasonable counsel fees, costs and expenses incurred in
the investigation, defense or settlement of any claims covered by this
indemnity (net of any tax benefit and insurance recovery) (in this Section 6
collectively, the "Indemnifiable Damages") which any such indemnified person
may suffer or incur by reason of (1) the inaccuracy or breach of any of the
representations, warranties and covenants of SDE or the Shareholders contained
in this Agreement or any documents, certificate or agreement delivered
pursuant hereto; and (2) any claim made by any person relating to or arising
out of transactions, events, acts or omissions of or by SDE, prior to the
Effective Time that is not adequately accrued or otherwise reflected on SDE's
financial statements or that has not been otherwise disclosed in the schedules
and lists delivered to LOC by SDE at or prior to the Closing Date other than
any and all liabilities of SDE which are incurred after the date of such
balance sheet in the ordinary course of its business. SDE or the
Shareholders, as the case may be, are hereinafter referred to as "SDE
Indemnitor." The indemnity provided in this Section 6 shall be the sole and
exclusive remedy of the LOC Indemnitees and, after the Closing, SDE, for any
breach in or inaccuracy of any representation and warranty of SDE or the
Shareholders or any other matter relating to this Agreement or the
transactions contemplated by this Agreement; PROVIDED, however, that nothing
herein shall limit in any way LOC's remedies in the event of breach by the
Shareholders of any of their covenants or agreements hereunder which are not
also a representation or warranty for willful fraud or intentionally deceptive
material misrepresentation or omission by any of the Shareholders in
connection herewith or with the transactions contemplated hereby; and FURTHER
PROVIDED, in the event any representation and warranty of SDE and Shareholders
with respect to SDE=s intellectual property is untrue, and LOC and/or
Surviving Corporation sustains a loss or losses arising from or caused by such
breach of representation and warranty, or LOC and/or the Surviving Corporation
incurs the cost of any licenses or additional engineering required to avoid
infringement arising in such circumstance or to pay such third party with
respect to any prior infringement, LOC shall be entitled to set off such
amounts from any future payments otherwise due to any Shareholder.
(ii) The SDE Indemnitor waives any right to require LOC to (1) proceed
against any person or entity including any other Shareholder, (2) proceed
against or exhaust any collateral or security or any part thereof, or
(3) pursue any other remedy in its power, and waives any defense arising by
reason of any inability of any other obligor to pay or any defense based on
bankruptcy or insolvency or other similar limitations on creditors' remedies
with respect to any other person.
(iii) The indemnity referred to in Section 6(a) above shall only apply to
Indemnifiable Damages claimed by the party seeking indemnification prior to
the expiration of the Indemnification Period (as defined below). Any
indemnitee under this Agreement may not seek recovery under the indemnities
set forth herein unless and until the Indemnifiable Damages of such party are
greater than [*] in which case such indemnity shall apply to all Indemnifiable
Damages. In no event may Indemnifiable Damages indemnified by SDE and/or the
Shareholders exceed the aggregate of [*]. The Indemnification Period shall
begin on the Closing Date and shall continue until six (6) years from such
Closing Date.
(b) INDEMNIFICATION BY LOC AND NEWCO.
(i) LOC and NEWCO, in the event the transactions contemplated hereby do
not close, and LOC and Surviving Corporation, subject to the limitations set
forth in this Section 6, jointly and severally, after the Closing, agree to
defend and indemnify each Shareholder, and their respective affiliates,
directors, officers and shareholders, and their respective successors and
assigns (collectively, "SDE Indemnitees"), against and hold each of them
harmless from any and all losses, liabilities, taxes, claims, suits,
proceedings, demands, judgments, damages, expenses and costs, including,
without limitation, reasonable counsel fees, costs and expenses incurred in
the investigation, defense or settlement of any claims covered by this
indemnity (net of any insurance recovery) (in this Section 6 collectively, the
"Indemnifiable Damages") which any such indemnified person may suffer or incur
by reason of (1) the inaccuracy or breach of any of the representations,
warranties and covenants of NEWCO or LOC contained in this Agreement or any
documents, certificate or agreement delivered pursuant hereto; and (2) any
claim made by any person relating to or arising out of transactions, events,
acts or omissions of or by LOC or NEWCO, prior to the Effective Time that is
not adequately accrued or otherwise reflected on LOC's financial statements or
that has not been otherwise disclosed in the schedules and lists delivered to
SDE by LOC or NEWCO at or prior to the Closing Date other than any and all
liabilities of LOC or NEWCO which are incurred after the date of such balance
sheet in the ordinary course of its business. LOC or NEWCO, as the case may
be, are hereinafter referred to as "LOC Indemnitor." The indemnity provided
in this Section 6 shall be the sole and exclusive remedy of the SDE
Indemnitees for any breach in or inaccuracy of any representation and warranty
of LOC or NEWCO or any other matter relating to this Agreement or the
transactions contemplated by this Agreement; PROVIDED, however, that nothing
herein shall limit in any way the Shareholders' remedies in the event of
breach by LOC or NEWCO of any of their covenants or agreements hereunder which
are not also a representation or warranty for willful fraud or intentionally
deceptive material misrepresentation or omission by LOC or NEWCO in connection
herewith or with the transactions contemplated hereby.
(ii) The LOC Indemnitor waives any right to require the Shareholders or,
in the event the transactions contemplated hereby to not close, SDE, to
(1) proceed against any person or entity including any other party hereto,
(2) proceed against or exhaust any collateral or security or any part thereof,
or (3) pursue any other remedy in its power, and waives any defense arising by
reason of any inability of any other obligor to pay or any defense based on
bankruptcy or insolvency or other similar limitations on creditors' remedies
with respect to any other person.
(iii) The indemnity referred to in Section 6(b) above shall only apply to
Indemnifiable Damages claimed by the party seeking indemnification prior to
the expiration of the Indemnification Period.
(c) COLLECTION OF INDEMNIFIABLE DAMAGES. LOC, NEWCO and SDE agree to use
their reasonable efforts to collect any Indemnifiable Damages from any
available insurer or third party indemnitors before collecting from the
Shareholders, however, nothing in the foregoing clause shall preclude any
claiming party from filing a claim against the Shareholders from the outset.
7. GENERAL PROVISIONS.
(d) FURTHER ASSURANCES. The parties agree that, from time to time
hereafter, and upon request, each of them will execute, acknowledge and
deliver such other instruments as may be reasonably required to more
effectively carry out the intent of the parties to this Agreement or to
otherwise carry out this Agreement's terms and conditions.
(e) BENEFIT AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto. The rights of the parties under
this Agreement may not be assigned. In the event LOC merges with, or sells
substantially all of its assets to, another corporation and LOC is not the
surviving corporation, any successor corporation to LOC shall assume the
benefits and obligations of this Agreement and the other agreements referenced
herein, provided, however, that any obligation of a successor corporation to
make a payment to Shareholders denominated in LOC common stock shall be made
on economically equivalent terms.
(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(g) NOTICES. All notices, requests, demands and other communications
pursuant to this Agreement shall be in writing, and shall be deemed to have
been given if delivered or mailed, certified mail, first class, postage
prepaid, to SDE at:
Silicon Design Experts, Inc.
1116 Campus Drive West
Morganville, NJ 07751
Attn: Sailesh Rao
or if to NEWCO, at: Silicon Design Experts, California
c/o Level One Communications, Incorporated
9750 Goethe Road
Sacramento, CA 95827
Attn: Robert S. Pepper
or if to LOC, at: Level One Communications, Incorporated
9750 Goethe Road
Sacramento, CA 95827
Attn: Robert S. Pepper
with a copy to: Bruce F. Dravis
General Counsel
Level One Communications, Incorporated
9750 Goethe Road
Sacramento, CA 95827
(h) EXPENSE. Except as otherwise provided herein, any expenses in
connection with this Agreement or the transactions herein provided for shall
be paid for by the party incurring such expenses.
(i) COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(j) HEADINGS. All paragraph headings in this Agreement are inserted for
convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
(k) AMENDMENT, MODIFICATION AND WAIVER. This Agreement may be modified,
amended and supplemented by mutual written agreement of the respective Boards
of Directors of the parties hereto, or their respective officers authorized by
such Boards of Directors, at any time prior to the Closing, whether before or
after the approval of this Agreement by the stockholders of any of the
<PAGE>
parties. Each party may waive any condition intended to be for its benefit.
Each amendment, modification, supplement or waiver shall be in writing and
signed by the parties to be charged.
(l) ENTIRE AGREEMENT. This Agreement and the Schedules and Exhibits
delivered with it and the other agreements specifically provided for under
this Agreement represent the parties' entire Agreement and no provision or
document of any kind shall be included in, or form a part of, this Agreement
unless it is in writing and is delivered to the other party by the party to be
charged.
(m) PRIOR NEGOTIATIONS. All prior negotiations and discussions by and
among the parties to this Agreement which are not reflected or set forth in
this Agreement or the Schedules or Exhibits delivered with it are merged into
this Agreement.
(n) TERMINATION. This Agreement may be terminated at any time before the
Closing Date as follows:
(i) By the consents of the Board of Directors of SDE, LOC and NEWCO;
(ii) By SDE if the conditions contained in this Agreement to which SDE's
obligations are subject have not been fulfilled by LOC or NEWCO;
(iii) By either of LOC or NEWCO if the conditions contained in this
Agreement to which their respective obligations are subject have not been
fulfilled by SDE.
(iv) This Agreement shall terminate without obligation of any party to
the others if the Closing contemplated by this Agreement does not occur on or
before _____________.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
ATTEST:SILICON DESIGN EXPERTS, INC.
By
Its
ATTEST:LEVEL ONE COMMUNICATIONS, INCORPORATED
By
Its
ATTEST:SILICON DESIGN EXPERTS, CALIFORNIA
By
Its
ATTEST:
Sailesh Rao
ATTEST:
Juan Jover
<PAGE>
SCHEDULE 1(B)
DIRECTOR OF SURVIVING CORPORATION
Robert S. Pepper
<PAGE>
SCHEDULE 1(G)
MATRIX PAYMENT
If necessary, on the second anniversary from the Effective Time, LOC shall
be obligated to make an additional payment to the Shareholders (the AMatrix
Payment@) if [*] If, at any point during the two years following the closing,
[*] LOC shall not be obligated to make a Matrix Payment. The parties shall
determine the amount of any Matrix Payment in accordance with the attached
matrix. [*] Any Matrix Payment shall be subject to the following conditions:
a. Any Matrix Payment LOC is otherwise obligated to make shall be reduced
by 25% in the event [* ]
b. Any Matrix Payment LOC is otherwise obligated to make shall be reduced
by 25% in the event [*]
c. No Matrix Payment shall be made to a Shareholder who has terminated
employment with LOC under the Employment Agreement for a reason other than
death or disability.
LOC shall notify Shareholder in writing at the time any of the foregoing
conditions has been achieved. [*]
All amounts set forth herein shall be adjusted in the event of any forward
or reverse stock splits, share dividends effecting a stock split, or like
transactions.
[*]
Schedule 1(g) MATRIXCLEVEL ONE/ SDE
Initial Shares ($3m / $34.59) 86730
[*]
<PAGE>
SCHEDULE 5(F)
FORM OF OPINION OF SELLER=S COUNSEL
SDE is a corporation duly organized, validly existing and in good standing
under the laws of the State of New Jersey and has corporate power to carry on
its business as it is now being conducted. Certified copies of SDE's Articles
of Incorporation and Bylaws delivered to LOC and NEWCO are complete and
correct as of the date of this Agreement. SDE's minute books contain a
complete and accurate record of all meetings and other corporate action of its
shareholders and Board of Directors.
SDE's authorized capital stock consists of 1000 shares of common stock, no par
value, of which 134 shares are issued and outstanding. No shares are held in
SDE's treasury. All of the outstanding shares of common stock of SDE are
validly issued, fully paid and nonassessable. Except as disclosed, there are
no outstanding options, agreements, contracts, calls or commitments of any
character which would require the issuance by SDE of any capital stock.
SDE has no subsidiaries.
Except as disclosed, there is no material litigation, proceeding or
governmental investigation pending or threatened against or relating to SDE,
its properties or business, or the transactions contemplated by this
Agreement.
The execution of the Agreement does not, and performance thereof will not,
violate the provisions of SDE's Articles of Incorporation, Bylaws, any note of
which SDE is the maker or any indenture, agreement, or other instrument to
which SDE is party, except insofar as any such instrument may require consent
by a lender, mortgagee, lessor, or other party to such actions, whose consent
SDE agrees to obtain before the Closing Date of the Agreement.
The execution and delivery of the Agreement by SDE, the performance by SDE and
Shareholders of their respective obligations thereunder and the consummation
by SDE and Shareholders of the transactions contemplated thereby have been
duly authorized by the Board of Directors and Shareholders and no other act or
proceeding on the part of or on behalf of SDE or its Shareholders is necessary
to approve the execution and delivery of the Agreement, the performance by SDE
or Shareholders of their respective obligations thereunder and the
consummation of the transactions contemplated thereby. The signatory officers
of SDE have the power and authority to execute and deliver the Agreement and
all of the other agreements and instruments to be executed and delivered by
SDE pursuant hereto, to consummate the transactions thereby contemplated and
to take all other actions required to be taken by it pursuant to the
provisions hereof and thereof.
The Agreement has been duly and validly executed and delivered by SDE and
Shareholders and constitutes, and the other documents and instruments to be
executed and delivered by SDE or any Shareholder pursuant thereto, constitute
legal, valid and binding agreements of SDE and the Shareholders, respectively,
enforceable against SDE or Shareholder, respectively, in accordance with their
respective terms, except as they may be limited by bankruptcy, insolvency or
other similar laws affective the enforcement of creditors' rights in general.
<PAGE>
Exhibit 1(h)
FORM OF
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT sets forth the basic terms and conditions of
employment of _______________ (AEmployee@) after the Effective Time (the
AEffective Time@) described in the Agreement and Plan of Reorganization among
SILICON DESIGN EXPERTS, INC. (ASDE@), LEVEL ONE COMMUNICATIONS, INCORPORATED
(ALOC@) and SILICON DESIGN EXPERTS, CALIFORNIA (@NEWCO@), dated ___________,
1996 (the AReorganization Agreement@).
WHEREAS, the continued exclusive employment of Employee by LOC and LOC=s
reliance on Employee to contribute to the successful and timely development of
certain products were material inducements to LOC in entering into the
Reorganization Agreement; and
WHEREAS, in addition to the payments to Employee as a Shareholder under
the Reorganization Agreement, the parties intend that Employee participate
financially in the profits of certain products developed by Employee; and
WHEREAS, LOC warrants that it is empowered under its Articles of
Incorporation and Bylaws to enter into this Agreement; Employee warrants that
he is under no employment contract, bond, confidentiality agreement, or any
other obligation which would violate or be in conflict with the terms and
conditions of this Agreement or encumber his performance of duties assigned to
him by LOC; and Employee further warrants that he has not signed or committed
to any employment or consultant duties or other obligations which would divert
his full attention from the duties assigned to him by LOC under this
Agreement;
NOW THEREFORE, the parties in consideration of the foregoing premises and
mutual agreements and the promises contained herein, do hereby agree as
follows:
1. DUTIES. LOC hereby employs Employee and Employee hereby accepts such
employment. Employee will execute LOC=s standard confidentiality and
assignment of invention agreements. Employee shall devote his full time,
ability, attention, energy, knowledge and skill solely and exclusively to
performing all duties of LOC as assigned or delegated to him by the directors
and officers of LOC. Employee=s duties will be as set forth in Exhibit 1
hereto. Such duties shall also include [*]
2. SALARY/OTHER COMPENSATION. In consideration for Employee=s services to
LOC during the time period in which this Agreement is effective, Employee
shall receive a base salary of ________ per annum to be paid in equal
installments every ___________, from which LOC shall withhold and deduct all
applicable federal and state income, social security and disability taxes as
required by applicable laws.
3. EMPLOYEE BENEFITS. Employee will be eligible for the Employee benefit,
vacation and similar plans set forth in Exhibit 3 hereto.
4. PARTICIPATION POOL. To provide Employee with the opportunity to
participate in the profits generated by certain of Employee=s developments for
LOC, and as compensation for performance of services hereunder and pursuant to
the provisions of the non-competition agreement contained herein, Employee
will be eligible to participate in the Employee Participation Pool described
in Exhibit 4 hereto on the terms and conditions set forth therein, including
any provisions relating to participation following termination of employment.
5. TERM OF EMPLOYMENT.
A. Employee=s employment with LOC shall be governed by the provisions of
this Section 5A for two years. Such employment shall be terminable on the
following terms:
(i) BY DEATH. Employee=s employment shall be terminated upon the death of
Employee. LOC=s total liability in such event shall be limited to payment of
Employee=s salary and benefits through the date of Employee=s death, plus any
amounts payable pursuant to the terms of the Employee Pool.
(ii) BY DISABILITY. If, in the sole opinion of LOC=s Board of Directors,
Employee shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than 90 days
in the aggregate in any twelve-month period, then, to the extent permitted by
law, his employment with LOC shall terminate. LOC=s total liability in the
event of disability termination shall be limited to payment of Employee=s
salary and benefits through the effective date of termination upon disability,
plus any amounts payable pursuant to the terms of the Employee Pool.
(iii) FOR CAUSE. LOC reserves the right to terminate Employee=s
employment immediately, at any time, if, in the reasonable opinion of LOC=s
Board of Directors: Employee commits any material act of dishonesty, fraud,
misrepresentation, or other act of moral turpitude; is guilty of gross
carelessness or misconduct; fails to obey the lawful direction of LOC=s Board
of Directors; or acts in any way that has a direct, substantial and adverse
effect on LOC=s reputation. LOC=s total liability to Employee in the event of
termination of Employee=s employment under this section shall be limited to
the payment of Employee=s salary and benefits through the effective date of
termination, plus any amounts payable pursuant to the terms of the Employee
Pool through the date of termination.
(iv) MUTUAL CONSENT. This Agreement shall be terminated upon mutual
written consent of LOC and Employee. LOC=s total liability to Employee in the
event of termination of employment under this subsection shall be limited to
the payment of Employee=s salary and benefits through the effective date of
termination, plus any amounts payable pursuant to the terms of the Employee
Pool through the date of termination.
B. Following the initial two years of employment with LOC, Employee shall
remain an Employee of LOC in accordance with LOC=s Aemployment at will@
employment policies, provided, however, that Employee shall continue to be
bound by the non-competition provisions of this Agreement and shall be
entitled to any amounts payable pursuant to the terms of the Employee Pool.
C. Upon termination of employment for any reason whatsoever, Employee
shall be deemed to have resigned from all offices and directorships then held
with LOC.
6. NON-COMPETITION AGREEMENT. Employee agrees to be bound by the non-
competition provisions set forth at Exhibit 6 hereof, and hereby acknowledges
and agrees that the consideration provided to Employee as described in this
Agreement is good and sufficient consideration to support the non-competition
covenant contained therein. Parties acknowledge that any breach of their
obligations under this non competition covenant shall cause irreparable harm
for which there is no adequate remedy at law. The parties therefore agree
that, if any obligation of this covenant is breached, the non-breaching party,
at is sole discretion, in addition to any other remedies, available to it, may
bring an action or actions for injunctive release, specific performance or
both, and have entered a temporary restraining order, preliminary or permanent
injunction or order compelling specific performance, and if successful,
recover costs and attorney fees from breaching party.
7. DISPUTE RESOLUTION PROCEDURE. The parties agree that any dispute
arising out of the employment relationship between them, including the
termination of that relationship, shall be resolved under the following
procedures.
A. The party claiming to be aggrieved shall furnish to the other party a
written statement of the grievance identifying any witnesses or documents that
support the grievance and the relief requested or proposed.
B. If the other party does not agree to furnish the relief requested or
proposed, or otherwise does not satisfy the demand of the party claiming to be
aggrieved, the parties shall submit the dispute to nonbinding mediation before
a mediator to be jointly selected by the parties. The parties will share
equally the cost of the mediation.
C. If the mediation does not produce a resolution of the dispute, any
controversy between LOC and Employee or between any employee of LOC and
Employee, including, but not limited to, claims of race, age, gender,
religious or national origin discrimination under Title VII of the Civil
Rights Act of 1964, as amended; the Age Discrimination in Employment Act of
1967, as amended; the Americans with Disabilities Act, as amended; the
California Fair Employment and Housing Act and any other federal, state or
local laws; and those involving the construction or application of any of the
terms, provisions of conditions of this Agreement or otherwise arising out of
or relating to this Agreement, shall be settled by arbitration in accordance
with the then current employment dispute resolution rules of the American
Arbitration Association, and judgment on the award rendered by the
arbitrator(s) may be rendered by any court having jurisdiction thereof. LOC
and Employee shall share the costs of the arbitrator equally but shall each
bear their own costs and legal fees associated with the arbitration. The
location of the arbitration shall be in Sacramento, California.
In the event of a breach by Employee of any of the covenants contained in
section 7 of this Agreement, it is recognized that LOC shall be entitled to
institute or prosecute proceedings in any court of competent jurisdiction,
either in law or in equity, to obtain damages for nay breach of this Agreement
or to sue for specific performance, or injunction against performance of any
acts or to seek any other available remedy.
8. GOVERNING LAW.
This Agreement and the rights and obligations hereunder shall be governed
by the laws of California, and the parties to this Agreement specifically
consent to the jurisdiction of the courts of California over any action
arising out of or related to this Agreement.
9. SEVERABILITY.
If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall, nevertheless, continue in full force and effect without being impaired
or invalidated in any way.
10. INTEGRATED AGREEMENT. This Agreement and the documents referenced
herein supersede any prior agreements, representations or promises of any
kind, whether written, oral, express or implied between the parties hereto
with respect to the subject matters herein, and constitute the full, complete
and exclusive agreement between Employee and LOC with respect to the subject
matters herein.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
LEVEL ONE COMMUNICATIONS,
INCORPORATED
By__________________________________
Its__________________________________
____________________________________
____________________________________
Employee
<PAGE>
EXHIBIT 4
EMPLOYEE PARTICIPATION POOL
[*]
If Employee terminates employment with LOC, he or she shall no longer be
eligible to participate in any future distributions from the Employee Pool and
any undistributed amounts to which such Employee might otherwise have been
entitled in any Fiscal Year shall be reallocated pro rata among the remaining
Employees, provided, however, that in the event Employee is terminated by LOC
without cause, or because of death or disability, such Employee shall be
entitled to participate in the Employees' Pool through the end of the Fiscal
Year of such termination and through the next Fiscal Year following such
termination. For purposes of this Agreement, a change in responsibilities for
any Employee will not be deemed to be a termination of such Employee.
In the event all of the Employees participating in the Employee Pool and
LOC agree, additional Employees may be permitted to participate in the
Employee Pool, in such percentages as may be agreed at the time of such
addition, with the percentage share of the Employee Pool of the then-
participating Employees adjusted pro rata.
LOC payments into the Employee Pool shall be subject to the following
conditions:
a. Any payment LOC is otherwise obligated to make shall be reduced by 25%
in the event [*]
b. Any payment LOC is otherwise obligated to make shall be reduced by 25%
in the event [*]
<PAGE>
EXHIBIT 6
NON-COMPETITION COVENANT
1. BUSINESS OF LOC AND SDE. Employee understands and acknowledges that
LOC (which, for purposes of this Agreement, shall hereinafter be deemed to
include LOC and all of its subsidiaries, including SDE following the Merger)
is primarily engaged in the design, development and marketing of mixed signal
application specific standard integrated circuit products for the
telecommunications industry (the "Business").
2. COMPETITION. Employee covenants and agrees that for three years from
the date hereof (the "Contract Period"), he will refrain, in the United
States, or elsewhere, from:
(a) directly or indirectly (as a director, officer, employee, manager,
consultant, independent contractor, advisor or otherwise) engaging in
competition with LOC, or owning any interest in, performing any services for,
or participating in any business or organization which competes with LOC or
with any portion of the Business which the Employee knew prior to his
termination of employment LOC planned to commence within the twelve (12)
months following such termination of employment, in the United States or in
any geographical area where the Business is conducted by LOC during Employee's
term of employment with LOC; PROVIDED, HOWEVER, that the provisions of this
paragraph shall not prohibit such Employee's ownership of not more than five
percent (5%) of the total shares of all classes of stock outstanding of any
company with a class of securities registered under the Securities Exchange
Act of 1934;
(b) inducing or encouraging any Employee or consultant or group of
Employees or consultants who are then employed or retained by LOC to leave the
faithful employment of or consulting with LOC; or
(c) discussing with any existing client of LOC, or with any entity whose
business Employee knows LOC is actively soliciting (a "potential client"), the
present or future availability of services or products by a business, if such
Employee has, or has the right to acquire, a proprietary interest in such
business or is, or within six months of such Employee's termination of
employment with LOC becomes, an Employee, officer or director of such
business, where such services or products are competitive with the Business.
For purposes of this Agreement, (i) a "proprietary interest" in a business
shall mean ownership, whether through direct or indirect stock holdings or
otherwise, of five percent (5%) or more of such business; and (ii) the words
"compete", "competitor", "competition", "competitive" and words of like
derivation, when used in relation to LOC and the Business, shall encompass
businesses which compete with the Business which is engaged in by LOC as of
the date hereof or which the Employee knew prior to his termination of
employment LOC planned to commence within the twelve (12) months following
such termination of employment.
If the non-competition provisions contained herein shall be deemed to
exceed the time or geographic limits or any other limitation imposed by
applicable law in any jurisdiction, then such provision shall be deemed
reformed in such jurisdiction to the maximum extent permitted by applicable
law.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 29, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 20251
<SECURITIES> 10211
<RECEIVABLES> 18435
<ALLOWANCES> 156
<INVENTORY> 9990
<CURRENT-ASSETS> 63586
<PP&E> 40638
<DEPRECIATION> 16962
<TOTAL-ASSETS> 112102
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0
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