FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period ended March 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-22068
LEVEL ONE COMMUNICATIONS, INCORPORATED
State: California I.R.S. Employer ID No.: 33-0128224
Address: 9750 Goethe Road, Sacramento, CA 95827
Telephone: (916) 855-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such
filing requirements for the past 90 days.
Yes X No _______
The number of Common Shares of the registrant outstanding on May 11, 1998, was
31,012,591.
<PAGE>
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March
29, 1998, and December 28,
1997
3
Consolidated Statements of Income
for the Three Months Ended March 29,
1998, and March 30,
1997 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 29,
1998, and March 30,
1997 5
Notes to Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of
Operations
8
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings 14
Item 2. Changes in
Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures S-1
<PAGE>
LEVEL ONE COMMUNICATIONS,
INC.
CONSOLIDATED BALANCE
SHEETS
March 29, 1998, and December
28, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 29, 1998 December 28, 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $
20,879 $ 25,234
Short-term investments
103,164 112,560
Trade Accounts receivable, net of allowance
for doubtful accounts of $493 and $343
for 1998 and 1997, respectively
32,549 30,079
Other
receivables
1,084 2,473
Inventories
28,487 26,118
Other current
assets
6,906 6,552
Total current
assets
193,069 203,016
Property and equipment, net
34,811 31,795
Long-term investments
38,186 21,559
Foundry
deposits
16,781 14,000
Other
assets
5,496 7,327
Total assets
$ 288,343 $ 277,697
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $
1,205 $ 1,201
Accounts
payable
20,692 20,614
Accrued payroll
costs
3,791 4,591
Other accrued
liabilities
13,213 10,371
Total current
liabilities
38,901 36,777
Convertible subordinated notes
115,000 115,000
Capital lease obligations, less current portion
1,903 2,175
Deferred lease
expense
259 300
Total
liabilities
156,063 154,252
Shareholders' Equity:
Common Stock, no par value
93,220 91,897
Authorized - 236,250,000 shares
Outstanding - 30,924,472 and 30,750,701
shares for 1998 and 1997, respectively
Retained
earnings
39,060 31,548
Total shareholders' equity
132,280 123,445
Total liabilities and shareholders' equity $
288,343 $ 277,697
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
STATEMENTS.
<PAGE>
LEVEL ONE COMMUNICATIONS,
INC.
CONSOLIDATED STATEMENTS OF
INCOME
March 29, 1998, and March 30,
1997
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
MARCH 29,
1998 MARCH 30, 1997
Revenues $
56,607 $ 30,107
Cost of sales
23,491 12,900
Gross margin
33,116 17,207
Research & development
10,542 6,341
Sales & marketing
8,701 4,299
General & administrative
3,462 1,802
Total operating expenses
22,705 12,442
Operating income
10,411 4,765
Interest
income
2,123 478
Interest (expense)
(1,347) (162)
Other
income
23 50
Income before provision for income taxes
11,210 5,131
Provision for income taxes
3,699 1,674
Net income
$ 7,511 $ 3,457
Basic earnings per share $
0.24 $ 0.12
Diluted earnings per share $
0.22 $ 0.11
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
LEVEL ONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
For Three Months Ended
(IN THOUSANDS) March 29,
1998 March 30, 1997
Cash flows from operating activities:
Net income $
7,511 $ 3,457
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
3,439 2,153
Changes in assets and liabilities:
Trade receivables
(2,470) (1,759)
Other receivables
1,389 0
Inventories
(2,369) (221)
Deferred income tax benefit
- - -
Prepaid expenses
(433) 322
Accounts payable and accrued liabilities
2,120 2,659
Deferred lease expense
(41) -
Net cash provided by operating activities
9,146 6,611
Cash flows from investing activities:
Purchase of short-term investments
(19,726) (19,410)
Proceeds from sales and maturities of short term investments
29,122 10,948
Purchase of long-term investments
(20,511) (5,940)
Proceeds from sales and maturities of long term investments
3,884 7,170
Capital expenditures
(6,123) (4,132)
Payments for related party notes receivable
- - -
Payments for foundry deposits and other assets
(1,203) (32)
Net cash provided by (used in) investing
activities
(14,557) (11,396)
Cash flows from financing activities:
Net principal payments under capital lease obligations
(268) (292)
Proceeds from issuance of stock, net of
repurchases and costs of issuance
1,324 1,236
Net cash provided by (used in) financing
activities
1,056 944
Net increase (decrease) in cash and cash equivalents
(4,355) (3,841)
Cash and cash equivalents at beginning of period
25,234 20,251
Cash and cash equivalents at end of period $ 20,879
$ 16,410
Supplementary disclosure of cash and noncash transactions
Cash payments for:
Interest
$ 70 $ 162
Income taxes
435 905
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in
accordance with generally accepted accounting principles for interim
financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation
S-X. Accordingly, they do not include all of the information and
footnotes
required by generally accepted accounting principles for complete
financial
statements. In the opinion of management, all adjustments (consisting
of
normal recurring accruals) considered necessary for a fair presentation
have
been included. Operating results for the three month period ended March
29,
1998, are not necessarily indicative of the results that may be expected
for
the year ending December 27, 1998. The information reported in this Form
10-Q
should be read in conjunction with the financial statements and
footnotes
contained in the Company's Form 10-K filed with the Securities and
Exchange
Commission for the year ended December 28, 1997, and subsequent filings
with
the Securities and Exchange Commission.
All share and per share numbers in this Report reflect the effect of a
3-for-2
stock split effective on March 30, 1998.
NOTE 2 - COMPREHENSIVE INCOME
On December 29, 1997, the Company adopted Statement of Financial
Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This
statement
establishes standards for the reporting and display of comprehensive income
and
its components in the financial statements. Comprehensive income is defined
as
the change in equity of a business enterprise during a period from
transactions
and other events and circumstances from nonowner sources. For the
Company,
comprehensive income includes net income reported on the income statement
and
changes in the fair value of its available-for-sale securities reported as
a
separate component of shareholders' equity. The Company's total
comprehensive
income for the period was $7,530 million and $3,469 million as of March
29,
1998 and March 30, 1997, respectively.
NOTE 3 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued
SFAS 128, "Earnings Per Share," which establishes standards for computing
and
presenting earnings per share ("EPS"). It replaces the presentation of
primary
EPS with a presentation of basic EPS. It also requires dual presentation
of
basic and diluted EPS on the face of the income statement for all entities
with
complex capital structures and requires reconciliation of the numerator
and
denominator of the basic EPS computation to the numerator and denominator
of
the diluted EPS computation. The statement is effective for
financial
statements issued for periods ending after December 15, 1997, and
requires
restatement for all periods presented.
<PAGE>
<TABLE>
<CAPTION>
PER SHARE AMOUNT
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
INCOME SHARES
<S> <C> <C> <C>
<C> <C> <C> <C>
Net income
March 29, 1998 $ 7,511
March 30, 1997 3,457
BASIC EPS: income available to
common shareholders
March 29, 1998 $
7,511 30,817 $ 0.24
March 30, 1997
3,457 29,984 0.12
Effect of dilutive securities:
Convertible debentures:
March 29, 1998 $
854 4,313
March 30, 1997
- - -
Options:
March 29,
1998 2,213
-
March 30,
1997 1,760
-
DILUTED EPS: income available to common
stockholders plus assumed conversions
March 29, 1998 $
8,365 37,343 $ 0.22
March 30, 1997
3,457 31,744 0.11
</TABLE>
NOTE 4 - 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
March 29, 1998 and December 28, 1997 consist of:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
<C> <C>
(IN THOUSANDS) MARCH 29, 1998
DECEMBER
28, 1997
Raw materials $
15,390 $ 8,829
Work-in-process
7,032 13,135
Finished goods
6,065 4,154
Total inventories $
28,487 $ 26,118
</TABLE>
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation is provided on a
straight-line basis, they are comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 29, 1998
DECEMBER 28, 1997
<S> <C> <C> <C>
<C> <C>
Machinery and equipment $
37,112 $ 36,222
Furniture and fixtures
23,020 18,066
Leasehold improvements
3,662 3,383
63,794 57,671
Less-Accumulated depreciation
(28,983) (25,876)
$
34,811 $ 31,795
</TABLE>
NOTE 6 - LONG-TERM DEBT
The Company sold $115 million of 4% convertible subordinated notes during
1997.
The notes will mature on September 1, 2004. Unless previously redeemed
or
repurchased, the notes are convertible at any time through the close
of
business on the final maturity date of the notes, into common stock of
the
Company, at a conversion price of $26.67 per share. Interest on the notes
is
payable semi-annually, commencing March 1, 1998. Total interest accrued on
the
convertible subordinated notes at March 29, 1998 was approximately $353,000.
After September 2000, the notes are redeemable at the option of
the
Company, in whole or in part. The notes may be redeemed for either cash
or
common stock at a repurchase price of 105% of the principal amount of the
notes
to be repurchased plus accrued and unpaid interest to the repurchase date.
The notes are unsecured obligations of the Company and
are
subordinated to all existing and future senior indebtedness of the
Company.
The indenture contains no limitations on the incurrence of
additional
indebtedness or other liabilities by the Company.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS.
The following information should be read in conjunction with the
unaudited
interim financial statements and the notes thereto included in Item 1 of
this
Quarterly Report on Form 10-Q, the Management's Discussion and Analysis
of
Financial Condition and Results of Operations contained in the Company's
Form
10-K for the period ended December 28, 1997 filed with the Securities
and
Exchange Commission on March 27, 1998, and any subsequent filings with
the
Securities and Exchange Commission.
This report contains forward-looking statements that involve risks
and
uncertainties. The statements contained in this report that are not
purely
historical are forward-looking statements within the meaning of Section 27A
of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of
1934, including without limitation statements regarding the
Company's
expectations, beliefs, intentions or strategies regarding the future.
All
forward-looking statements included in this document are based on
information
available to the Company on the date hereof, and the Company assumes
no
obligation to update any such forward-looking statements. The Company's
actual
results could differ materially from those anticipated in these
forward-looking
statements. See "Factors that May Affect Future Results".
REVENUES
Revenues increased 88% to $56.6 million in the first quarter of 1998
compared
to revenues of $30.1 million for the same quarter of 1997.
Sequentially,
revenues increased by 11% from $51.1 million in the fourth quarter of
1997.
During the quarter, no single customer represented 10% of revenues.
The
increased revenues reflect the substantial unit sales growth due to
the
continued market acceptance of the Company's products in both the
networking
and transmission markets, along with increases in the Company's customer base.
International revenues were $21.2 million or 37.5% and $10.8 million or
36.0%
of revenues, respectively, for the first quarter of 1998 and
1997,
respectively. All sales are denominated in U.S. dollars, thereby
eliminating
the impact of foreign currency exchange rate fluctuations on revenues.
GROSS MARGIN
Product gross margin is affected by several factors, including average
selling
prices, the mix between older and newer products, test equipment
utilization,
manufacturing yields, timing of cost reductions and the mix between direct
and
distributor sales. Margins on domestic and international sales are
similar.
At 58.5%, gross product margins for the first quarter of 1998 were flat to
the
fourth quarter of 1997 and up from 57.1% for the first quarter of 1997.
The
margin increases from the first quarter of 1997 are due to the impact of
cost
reductions that were implemented during 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses were $10.5 million or 18.6% of revenues
in
the first quarter of 1998 versus $6.3 million or 21.1% of revenues in
the
first quarter of 1997. The dollar increase in research and development
expense
is due to additions to the Company's design engineering staff and related
new
product design expenses.
SALES AND MARKETING
Sales and marketing expenses were $8.7 million or 15.4% of revenues in
the
first quarter of 1998 versus $4.3 million or 14.3% of revenues in the
first
quarter of 1997. The increased expenditures are primarily attributable
to
increased sales commissions along with the expansion of the Company's sales
and
marketing staffs and their related costs.
GENERAL AND ADMINISTRATIVE
In the first quarter of 1998, general and administrative expenses were
$3.5
million or 6.1% of revenues versus $1.8 million or 6.0% of revenues in the
same
period of 1997. The increased expenses are primarily attributable to
additional
staffing associated with the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity as of March 29, 1998, consisted
of
$124.0 million of cash, cash equivalents and short-term investments, and
$10
million available under the Company's revolving line of credit. At March
29,
1998, the Company had no outstanding balance under this line of
credit.
Working capital as of March 29, 1998, was $154.2 million.
During the first three months of 1998, the Company generated $9.1 million
of
cash from operating activities, as compared to $6.6 million in the same
period
in 1997. In both years, net cash generated from operations during the
period
was primarily due to net income before depreciation and amortization
expense.
This cash generated was offset by the net changes during the period
for
inventories, accounts receivable, and accounts payable These changes are
due
primarily to expansion of the Company's business, and do not reflect
material
changes in the way the Company conducts operations. The Company spent
$6.1
million for capital expenditures during the first three months of 1998
as
compared to $4.1 million for the same period of 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors may have an impact on the Company's business:
MANUFACTURING RISKS
The Company does not manufacture the silicon 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 1994 and 1995, the Company
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, supplier interruptions or other changes will not have a material
impact
on the Company's business.
Manufacturing process technologies are subject to rapid change. Other
companies
in the industry have experienced difficulty in migrating to new
manufacturing
processes, and, consequently, have suffered reduced yields, delays in
product
deliveries and increased expense levels. The Company's business,
financial
condition and results of operations could be materially adversely affected
if
any such transition is substantially delayed or inefficiently implemented.
The Company is also dependent upon third-party assembly companies that
package
or test the Company's devices. 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 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.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL
The Company is currently experiencing a period of significant growth which
has
placed, and could continue to place, a significant strain on the
Company's
personnel and other resources. The Company's ability to manage its
growth
effectively will require continued expansion and refinement of the
Company's
operational, financial, management and control systems, as well as
a
significant increase in the Company's development, testing, quality
control,
marketing, logistics and service capabilities, any of which could place
a
significant strain on the Company's resources. The Company's success
also
depends to a significant extent upon its ability to retain and attract
key
personnel. Competition for such personnel is intense and there can be
no
assurance that the Company will be able to retain and attract key personnel.
If
the Company's management is unable to manage growth effectively, maintain
the
quality and marketability of the Company's products and retain, hire
and
integrate key personnel, the Company's business, financial condition
and
results of operations could be materially adversely affected.
INTELLECTUAL PROPERTY
The Company relies upon patent, trademark, trade secret and copyright law
to
protect its intellectual property. There can be no assurance that
such
intellectual property rights can be successfully asserted or will not
be
invalidated, circumvented or challenged. Litigation, regardless of its
outcome,
could result in substantial cost and diversion of resources for the
Company.
Any infringement claim or other litigation against or by the Company could
have
a material effect on the Company's financial condition and results
of
operations. In November 1995 the Company commenced infringement
litigation
against a competitor. 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, factors which may
affect
the market price of the Company's Common Stock. As is common in
the
semiconductor industry, the Company frequently ships more product in the
third
month of a quarter than in the other months. If a disruption in the
Company's
production or shipping occurs near the end of a quarter, the Company's
revenues
for that quarter could be adversely affected.
The Company must order wafers and build inventory in advance of
product
shipments. There is risk that the Company could produce excess or
insufficient
inventories of particular products because the Company's markets are
volatile
and subject to rapid technology and price changes. This inventory risk
is
heightened because certain of the Company's customers place orders with
long
lead times which may be subject to cancellation or rescheduling by
that
customer. To the extent the Company produces excess or insufficient
inventories
of particular products, the Company's revenues and earnings could be
adversely
affected.
Increased demand for semiconductor products may result in a reduction in
the
availability of wafers from foundries. Such capacity limitations may
adversely
affect the Company's ability to deliver products on a timely basis and
affect
the Company's margins. Additionally, the Company believes that during
periods
of strong demand and/or restricted semiconductor capacity, customers will
over-
order to assure an adequate supply. Certain of the Company's customers
may
cancel or postpone orders without notice if product becomes
available
elsewhere.
Shortages of components from other suppliers could cause the
Company's
customers to cancel or delay programs incorporating the Company's
products,
resulting in the cancellation or delay of orders for the Company's products.
INTENSE COMPETITION
The semiconductor industry is intensely competitive. The Company's
competition
consists of semiconductor companies and semiconductor divisions of
vertically
integrated companies. In the telecom market, the Company's
principal
competitors are Rockwell International, Inc., Crystal Semiconductor, Inc.
(a
subsidiary of Cirrus Logic, Inc.) ("Crystal"), Dallas Semiconductor,
Inc.,
Lucent Technologies Inc. ("Lucent"), PMC-Sierra Inc. and Siemens A.G. In
the
networking market, the Company's principal competitors are Advanced
Micro
Devices, Inc., Broadcom Corporation, Crystal, Integrated Circuit Systems,
Inc.,
Lucent, Micro Linear Corp., National Semiconductor Corporation,
Quality
Semiconductor, Inc., Seeq Technologies, Inc. and Texas
Instruments,
Incorporated. Many of these competitors have longer operating
histories,
greater name recognition, access to larger customer bases and
significantly
greater financial and other resources than the Company with which to
pursue
engineering, manufacturing, marketing and distribution of products.
The ability of the Company to compete successfully in the rapidly evolving
area
of high performance integrated circuit technology depends on factors
both
within and outside of the Company's control. Such factors include,
without
limitation, success in designing and manufacturing new products,
implementing
new technologies, intellectual property programs, product quality,
reliability,
price, efficiency of production, and general economic conditions. There is
no
assurance that the Company will be able to compete successfully against
current
and future competitors. Increased competition may result in price
erosion,
reduced gross margins and loss of market share, any of which may have
a
material adverse effect on the Company's business, financial condition
and
results of operations.
INTERNATIONAL OPERATIONS
Due to its reliance on international sales and foreign
third-party
manufacturing and assembly operations, the Company is subject to the risks
of
conducting business outside of the United States including
government
regulatory risks, political, social and economic instability,
potential
hostilities and changes in diplomatic and trade relationships. There can be
no
assurance that one or more of the foregoing factors will not have a
material
adverse effect on the Company's business, financial condition or
operating
results. The recent economic downturn in several Asian countries has
not
affected the Company in a material way, but there can be no assurances
that
continued economic problems in Asia or any other region of the world will
not
affect the Company.
INCREASED LEVERAGE
As a result of the Company's sale in August and September 1997 of its
4%
Convertible Subordinated Notes due 2004 (the "Notes"), the Company has
incurred
approximately $115.0 million in additional indebtedness which increases
the
ratio of its long-term debt to its total capitalization from 3.0%, at June
29,
1997, to 47.0%, at March 29, 1998. This increased leverage will increase
the
Company's interest expense substantially. The degree to which the Company
will
be leveraged could adversely affect the Company's ability to obtain
additional
financing for working capital, acquisitions or other purposes and could make
it
more vulnerable to economic downturns and competitive pressures. The
Company's
increased leverage could also adversely affect its liquidity, as a
substantial
portion of available cash from operations may have to be applied to meet
debt
service requirements and, in the event of a cash shortfall, the Company
could
be forced to reduce other expenditures and/or forego potential acquisitions
to
be able to meet such requirements.
VOLATILITY OF NOTES AND STOCK PRICE
Economic and other external factors, many of which are beyond the control
of
the Company, may have a significant impact on the Company's business and on
the
market price of its Notes and the Common Stock. Such factors include,
without
limitation, fluctuations in product revenues and net income of the Company
or
its competitors, shortfalls in the Company's operating results from
levels
forecast by securities analysts, announcements concerning the Company,
its
competitors or customers, announcements of technological innovations by
the
Company, its competitors or its customers, the introduction of new products
or
changes in product pricing policies by the Company, its competitors or
its
customers, market conditions in the industry and the general state of
the
securities market. In addition, the stock prices of many technology
companies
fluctuate significantly for reasons that may be unrelated or
disproportionate
to operating results. These fluctuations, as well as general
economic,
political and market conditions such as recession or international
instability,
may adversely affect the market price of the Company's Notes and the
Common
Stock.
YEAR 2000 COMPLIANCE
The Company has reviewed its exposure to risks that could be caused if
internal
computer systems do not correctly recognize date information when the
year
changes to 2000. Management believes that the likelihood of a material
adverse
impact due to problems with internal systems or products sold to customers
is
remote and expects that the cost of remedying internal systems that
currently
cannot process the date change will not have a material effect on the
Company's
financial position or overall trends in results of operations. The Company
is
also contacting critical suppliers of products and services to determine
that
the supplier's operations and the products and services they provide are
year
2000 compliant. There can be no assurance that another company's failure
to
ensure year 2000 capability would not have an adverse effect on the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 28, 1995, the Company initiated a patent infringement suit
against
Seeq Technologies, Inc. in United States District Court for the
Northern
District of California. The suit relates to two Level One patents,
No.
5,267,269 and No. 5,249,183, and to certain Seeq products used in
Ethernet
system products. The suit seeks damages and injunctive relief. Seeq has
denied
the allegations. On January 21, 1998, the Court denied Seeq's motion to
declare
claims of the Level One patents invalid. The Court also permitted Seeq
to
amend its counterclaim to include a claim that certain of the
Company's
products infringe Seeq's U.S. Patent 5,504,738; the Company has denied
these
allegations. Trial is set for August 1998. 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.
<PAGE>
ITEM 2. CHANGES IN SECURITIES
On March 3, 1998, the Company's Certificate of Incorporation was amended
to
effect a 3-for-2 stock split to shareholders of record on March 9, 1998.
The
split was effective March 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits - 27.1--Financial Data Schedule, March 29, 1998
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEVEL ONE COMMUNICATIONS, INCORPORATED
Date: May 10, 1998 By: /S/ ROBERT S. PEPPER
Robert S. Pepper, Ph.D.
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 1998 By: /S/ JOHN KEHOE John Kehoe
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
S-1
<PAGE>
[DATE]
[ARTICLE] 5
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 29, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[MULTIPLIER] 1,000
[CAPTION]
[PERIOD-TYPE] 3-MOS
[CAPTION]
[FISCAL-YEAR-END] DEC-29,1997
[CAPTION]
[PERIOD-END] MAR-29-1998
[CASH] 20,879
[SECURITIES] 103,164
[RECEIVABLES] 33,042
[ALLOWANCES] 493
[INVENTORY] 28,487
[CURRENT-ASSETS] 193,069
[PP&E] 34,811
[DEPRECIATION] 28,983
[TOTAL-ASSETS] 288,343
[CURRENT-LIABILITIES] 38,901
[BONDS] 115,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 93,220
[OTHER-SE] 39,060
[TOTAL-LIABILITY-AND-EQUITY] 288,343
[SALES] 56,607
[TOTAL-REVENUES] 56,607
[CGS] 23,491
[TOTAL-COSTS] 23,491
[OTHER-EXPENSES] 22,705
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1,347
[INCOME-PRETAX] 11,210
[INCOME-TAX] 3,669
[INCOME-CONTINUING] 7,511
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 7,511
[EPS-PRIMARY] ---
[EPS-DILUTED] .22
