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 28, 1997
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 March 1, 1998, was $885,726,998.
The number of shares outstanding of the Registrant's only class of
common stock as of March 1, 1998, was 20,576,916 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 product (''ASSP'') integrated circuits 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 telephone 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 telecom market.
NETWORKING PRODUCTS
Level One's networking products address the rapid evolution of the LAN
networking connectivity markets. For these markets, Level One produces Ethernet
and Fast Ethernet transceivers, single chip quad Ethernet repeaters, managed
Ethernet repeaters, and integrated transceiver solutions.
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. During
1997, Level One introduced the LXT970 Fast Ethernet 10/100 transceiver, and
shipped in excess of 4 million units.
As the LAN market experiences 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 products service these evolving market needs.
TELECOM PRODUCTS
Level One's telecom 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.
Intranets and WANs 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 WANs.
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.
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. Since 1996 the Company has shipped
Subrate HDSL or 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 T1/E1 quad receivers, which are
incorporated into telephone company maintenance and performance monitoring
equipment. Level One's LXT360, LXT361, LXT350 and LXT351 integrated T1/E1
transceivers are 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.
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.
During 1997, Level One and its strategic partners were instrumental in
the development of the standards for two new technologies: HDSL-2, which is
repeaterless T1 transmission on a single pair of copper wires, and Gigabit
Ethernet on copper wire for the networking market. Both standards have
received preliminary approval by their respective standards bodies.
Level One has from time to time entered into investment, development or
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 maintains six regional sales offices in the United States.
In addition, there are 23 sales representatives or distributors of the
Company's products. Internationally, Level One has six sales offices along
with 30 sales representatives or distributors operating in 46 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 28, 1997, Level
One had 124 full-time employees engaged in research and development. The
Company currently anticipates that it will increase research and development
staffing levels in 1998. Expenditures for research and development in 1997,
1996, and 1995 were approximately $30.4 million, $22.0 million, and $17.1
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 six new products during 1997, consisting of three
networking products and three telecom 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 primary 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. At December 28, 1997, the Company had provided an aggregate of $20.6
million in capital equipment financing and/or cash deposits to these foundries
to obtain committed foundry capacity. During the first quarter of 1998, the
Company paid an aggregate $1.3 million in additional deposits per its
agreements. There are no additional deposits due under the Company's existing
foundry 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 negative 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 28, 1997, the Company's total backlog scheduled to be
shipped was approximately $70.9 million, as compared to backlog of
approximately $32.6 million at December 29, 1996. 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
The Company's competition consists of semiconductor companies and semiconductor
divisions of vertically integrated companies. In the telecom market, the
Company's principal competitors are Brooktree Corporation (a subsidiary of
Rockwell International, Inc.), Crystal Semiconductor, Inc. (a subsidiary of
Cirrus Logic, Inc.) ("Crystal"), Dallas Semiconductor, Inc., Lucent
Technologies Inc. ("Lucent"), PMC-Sierra Inc. and Siemens A.G. In the
networking market, the Company's principal competitors are Advanced Micro
Devices, Inc., Broadcom Corporation, Crystal, Integrated Circuit Systems, Inc.,
Lucent, Micro Linear Corp., National Semiconductor Corporation, Quality
Semiconductor, Inc., Seeq Technologies, Inc. and Texas Instruments,
Incorporated.
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 28 United States patents that expire from 2009 to 2017, 30
pending U.S. patent applications, 10 pending international patent applications,
and two issued international patents. All of Level One's products are covered
by at least one Level One patent. The Company has 31 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 28, 1997, the Company had 559 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:
MANUFACTURING RISKS
The Company does not manufacture the wafers used for its products. The
Company's wafers are manufactured by foundries located in the United States,
Europe and Asia. The Company depends upon these suppliers to produce wafers at
acceptable yields and to deliver them in a timely manner at competitive prices.
The Company may sustain an adverse impact on operating results from problems
with the cost, timeliness, yield and quality of wafer deliveries from
suppliers. From time to time, the available industry-wide foundry capacity can
fluctuate significantly. During periods of constrained supply, the Company may
experience difficulty in securing an adequate supply of wafers, and/or its
suppliers may increase wafer prices. The Company's operating results depend in
substantial part on its ability to maintain or increase the capacity available
from its existing or new foundries. In prior years, the Company has experienced
increased costs and delays in customer shipments as a result of a foundry
reducing shipments to the Company without prior notice, requiring the Company
to transfer products to a new foundry. Although the Company believes that it
has planned to meet customer demand, there can be no assurances that unforeseen
demand, current supplier interruptions or other changes will not have a
material impact on the Company's business.
Manufacturing process technologies are subject to rapid change. Other
companies in the industry have experienced difficulty in migrating to new
manufacturing processes, and, consequently, have suffered reduced yields,
delays in product deliveries and increased expense levels. The Company's
business, financial condition and results of operations could be materially
adversely affected if any such transition is substantially delayed or
inefficiently implemented.
The Company is also dependent upon third-party assembly companies that
package 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 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.
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 Brooktree Corporation (a subsidiary of Rockwell International,
Inc.), Crystal Semiconductor, Inc. (a subsidiary of Cirrus Logic, Inc.)
("Crystal"), Dallas Semiconductor, Inc., Lucent Technologies Inc. ("Lucent"),
PMC-Sierra Inc. and Siemens A.G. In the networking market, the Company's
principal competitors are Advanced Micro Devices, Inc., Broadcom Corporation,
Crystal, Integrated Circuit Systems, Inc., Lucent, Micro Linear Corp., National
Semiconductor Corporation, Quality Semiconductor, Inc., Seeq Technologies, Inc.
and Texas Instruments, Incorporated. Many of these competitors have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial and other resources than the Company with
which to pursue engineering, manufacturing, marketing and distribution of
products.
The ability of the Company to compete successfully in the rapidly evolving area
of high performance integrated circuit technology depends on factors both
within and outside of the Company's control. Such factors include, without
limitation, success in designing and manufacturing new products, implementing
new technologies, intellectual property programs, product quality, reliability,
price, efficiency of production, and general economic conditions. There is no
assurance that the Company will be able to compete successfully against current
and future competitors. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which may have a
material adverse effect on the Company's business, financial condition and
results of operations.
INTERNATIONAL OPERATIONS
Due to its reliance on international sales and foreign third-party
manufacturing and assembly operations, the Company is subject to the risks of
conducting business outside of the United States including government
regulatory risks, political, social and economic instability, potential
hostilities and changes in diplomatic and trade relationships. There can be no
assurance that one or more of the foregoing factors will not have a material
adverse effect on the Company's business, financial condition or operating
results. 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 48.8%, at December 28, 1997. As a result of this increased leverage,
the Company's interest obligations will increase substantially. The degree to
which the Company will be leveraged could adversely affect the Company's
ability to obtain additional financing for working capital, acquisitions or
other purposes and could make it more vulnerable to economic downturns and
competitive pressures. The Company's increased leverage could also adversely
affect its liquidity, as a substantial portion of available cash from
operations may have to be applied to meet debt service requirements and, in the
event of a cash shortfall, the Company could be forced to reduce other
expenditures and forego potential acquisitions to be able to meet such
requirements.
VOLATILITY OF NOTES AND STOCK PRICE
Economic and other external factors, many of which are beyond the control of
the Company, may have a significant impact on the Company's business and on the
market price of its Notes and the Common Stock. Such factors include, without
limitation, fluctuations in product revenue and net income of the Company or
its competitors, shortfalls in the Company's operating results from levels
forecast by securities analysts, announcements concerning the Company, its
competitors or customers, announcements of technological innovations by the
Company, its competitors or its customers, the introduction of new products or
changes in product pricing policies by the Company, its competitors or its
customers, market conditions in the industry and the general state of the
securities market. In addition, the stock prices of many technology companies
fluctuate significantly for reasons that may be unrelated or disproportionate
to operating results. These fluctuations, as well as general economic,
political and market conditions such as recession or international instability,
may adversely affect the market price of the Notes and the Common Stock.
ITEM 2. 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, and
expire in 2008 and 2006, respectively. The Company has entered into leases for
additional space currently under construction. These leases relate to
buildings with 24,100 square feet of space and 139,500 square feet of space,
respectively, and terminate in 2013.
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 also leases small office facilities for the operation of
its design centers and for its domestic and international sales offices.
The Company believes these facilities are adequate for its current and
immediately foreseeable level of operations.
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 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.
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 1997 fiscal year
to a vote of security holders, through the solicitation of proxies or
otherwise.
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 $7{9}/{16} 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.
In July 1997, the Board of Directors authorized a 3 for 2 stock split, which
was effective on August 26, 1997. All common stock amounts and per share
amounts have been retroactively adjusted to reflect the stock split. On
February 23, 1998, the Company announced that it had approved a 3-for-2 stock
split effective March 30, 1998, to shareholders of record on March 9, 1998.
Common stock amounts and per share data included in the Company's reports filed
prior to March 30, 1998 do not reflect the effect of this split.
<TABLE>
<CAPTION>
Year High Low
<S> <C> <C>
1997
Fourth Quarter $47 $25{7}/{8}
Third Quarter $39{3}/{8} $24 1/2
Second Quarter $26{11}/{16} $14{11}/{16}
First Quarter $24 1/2 $19
1996
Fourth Quarter $25 $17{7}/{8}
Third Quarter $19{ 11}/{16} $10{13}/{16}
Second Quarter $20{5}/{16} $12{13}/{16}
First Quarter $24{3}/{16} $11{3}/{16}
</TABLE>
On March 1, 1998, the closing sale price for the Company's Common Stock
was $44{15}/{16} per share. As of March 1, 1998, there were approximately 178
holders of record of the Company's Common Stock.
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>
<S> <C> <C> <C> <C> <C>
AS OF FISCAL YEAR END
(IN THOUSANDS) 1997 1996 1995 1994 1993
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 25,234 $ 20,251 $ 21,628 $ 9,260
$15,141
Working capital 166,239 50,871 50,834 48,231 21,605
Total assets 277,697 112,102 100,801 71,628 33,060
Long-term obligations (less
current portion) 117,475 3,806 4,463 361 2,431
Shareholders' equity 123,445 95,581 78,965 63,309
23,910
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE 1997 1996 1995 1994
1993
DATA)
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Revenues $156,262 $111,987 $ 78,018 $ 46,825 $
25,984
Cost of sales 65,299 48,477 33,300 18,785 9,782
Gross margin 90,963 63,510 44,718 28,040 16,202
Operating expenses:
Research and development (1) 30,398 24,505 17,857 9,956
5,934
Sales and marketing 23,978 16,589 11,372 6,772 4,102
General and administrative 10,212 6,741 5,752 3,424
1,936
Total operating expenses 64,588 47,835 34,981 20,152
11,972
Operating income 26,375 15,675 9,737 7,888 4,230
Net interest and other income (2) 2,263 2,293 2,064 1,440 12
Provision for income taxes 9,447 6,755 1,543 1,323 503
Net income $ 19,191 $11,213 $10,258 $ 8,005 $ 3,739
Basic earnings per share $ 0.95 $ 0.58 $ 0.54 $ 0.43 $ 0.25
Diluted earnings per share $ 0.89 $ 0.55 $ 0.51 $ 0.40 $ 0.23
</TABLE>
(1)Includes one-time charges for research and development relating to the
acquisitions of Silicon Design Experts, Inc., in 1996 of $2,500,000, 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.
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal 1997 Quarters Fiscal 1996 Quarters
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA: FIRST SECOND THIRD FOURTH
FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
Revenues $30,107 $32,642 $42,438 $51,075 $27,542 $27,479
$27,363 $29,603
Cost of sales 12,900 13,566 17,653 21,180 11,588 11,521
11,756 13,612
Gross margin 17,207 19,076 24,785 29,895 15,954 15,958
15,607 15,991
Operating expenses:
Research and development 6,341 6,738 8,135 9,184 5,675 5,739
5,249 7,842
Sales and marketing 4,299 4,754 6,470 8,455 4,001 3,989
4,219 4,380
General and administrative 1,802 2,221 2,826 3,363 1,766 1,765
1,595 1,615
Total operating expenses 12,442 13,713 17,431 21,002 11,442 11,493
11,063 13,837
Operating income 4,765 5,363 7,354 8,893 4,512 4,465
4,544 2,154
Net interest and other income 366 492 708 697 392 349
1,084 468
Provision for income taxes 1,674 1,932 2,661 3,180 1,618 1,590
1,857 1,690
Net income $ 3,457 $ 3,923 $ 5,401 $ 6,410 $3,286 $3,224
$3,771 $ 932
Basic earnings per share $ 0.17 $ 0.19 $ 0.27 $ 0.31 $ 0.17 $ 0.17 $
0.19 $ 0.05
Diluted earnings per share $ 0.17 $ 0.18 $ 0.25 $ 0.29 $ 0.16 $ 0.16 $
0.18 $ 0.05
</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 product
("ASSP") integrated circuits and custom derivatives for the
telecom 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
101% since 1990. 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 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".
RESULTS OF OPERATIONS
REVENUES: Revenues for 1997 increased to $156.3
million from $112.0 million in 1996 and $78.0 million in
1995. 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 - telecom and networking. In 1997 and
1995, no single customer accounted for more than 10% of
revenues. In 1996, sales to Hewlett-Packard were 11.2% of
total sales.
Export sales, primarily consisting of sales to Canada,
Europe, and Asia, were 35% of revenues in 1997, 39% in 1996
and 33% in 1995. All sales were in U.S. dollars, thereby
eliminating any foreign currency impact on revenues and net
income. The dollar 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.
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 1997, the Company had $56,000 in revenues from NRE
contracts versus $398,000 in 1996 and $289,000 in 1995. In
1997, the Company received royalties of $987,000. In 1996
and 1995, royalties were $197,000 and $312,000,
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 six months 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) 1997 1996 1995
<S> <C> <C> <C>
Product Sales $155,219 $111,392 $77,417
<ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis>.
Cost of product sales<ellipsis><ellipsis> 65,299 48,477 33,300
<ellipsis><ellipsis><ellipsis>.
Gross margin $ 89,920 $ 62,915 $44,117
Gross margin % product 57.9% 56.5% 57.0%
sales<ellipsis><ellipsis>..
</TABLE>
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. 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 $30.4 million in
1997, $24.5 million in 1996 and $17.9 million in
1995. As a percent of revenues, R&D expenses were
19.5%, 21.9%, and 22.9% in 1997, 1996 and 1995,
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.
SALES AND MARKETING: Sales and marketing
expenses were $24.0 million in 1997, $16.6 million
in 1996 and $11.4 million in 1995. As a percent
of revenue, sales and marketing expenses were
15.3%, 14.8% and 14.6% in 1997, 1996 and 1995,
respectively. The increases in sales and
marketing expenses are largely due to increased
sales, sales support and application engineering
headcount and associated expense increases. The
Company has also increased its international sales
offices and support staff.
GENERAL AND ADMINISTRATIVE: General and
administrative expenses increased to $10.2 million
in 1997 from $6.7 million in 1996 and $5.8 million
in 1995. As a percentage of revenue, expenses
were 6.5% in 1997, compared to 6.0% in 1996 and
7.4% in 1995. The expense increases in dollars
are primarily attributable to additional headcount
and associated expenses due to the Company's
growth.
NET INTEREST AND OTHER INCOME: The Company
earns interest on its cash and investments and
incurs interest expense on its convertible
subordinated notes and on lease obligations used
to finance certain capital equipment. Net
interest and other income for 1997 and 1996 was
$2.3 million versus $2.1 million in 1995. 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 33.0% for 1997. In
1996 and 1995, the effective rate was 37.6% and
13.1%. For a reconciliation of the Company's
effective tax rate to the statutory federal tax
rate, see Note 6 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended 1997, 1996 and 1995,
the Company financed its operations primarily
through cash flows from operations and existing
cash and investment balances. During the third
quarter of 1997 the Company raised $115 million
(less discounts, commissions and expenses of
approximately $3.5 million) from a private
placement to qualified investors of subordinated
convertible notes due 2004 with a 4% coupon.
Working capital as of December 28, 1997, was
$166.2 million.
The Company's principal sources of liquidity
as of December 28, 1997, consisted of $137.8
million in cash and short-term investments and
$10.0 million available under the Company's line
of credit. As of December 28, 1997, the Company
had no outstanding balance under this line of
credit.
During 1997, the Company generated $25.3
million of cash from its operating activities as
compared to $22.5 million in 1996 and $7.5 million
in 1995. In 1997, trade accounts receivable
increased by $12.4 million due to increased sales
levels. Inventories increased by $16.1 million to
$26.1 million at the end of 1997. Days of
inventory on hand were 111 days at the end of
1997. Current liabilities increased $24.1 million
from year end 1996 to 1997.
During 1997, 1996, and 1995, total
expenditures for capital equipment were $17.0
million, $9.8 million, and $10.0 million,
respectively. The expenditures in each year
consisted primarily of equipment used for
designing and testing products. Included in the
total capital expenditures were amounts of $0.7
million in 1996 and $4.8 million in 1995 for
equipment 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. At December 28, 1997, the
Company had provided an aggregate of $20.6 million
in capital equipment financing and/or cash
deposits to these foundries to obtain committed
foundry capacity. During the first quarter of
1998, the Company paid an aggregate $1.3 million
in additional deposits per its agreements. There
are no additional deposits due under the Company's
existing foundry agreements.
The Company expects to finance its 1998
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 1998. 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 March 1, 1998, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Robert S. Pepper, Ph.D. 62 President, Chief Executive Officer
and Chairman of the Board of Directors
John Kehoe 52 Senior Vice President and Chief Financial
Officer
Daniel S. Koellen 40 Vice President, Quality and Reliability
George A. Papa 49 Vice President, Worldwide Sales
Michael A. Ricci 42 Vice President, Telecom
Michael R. Wodopian 45 Vice President, Business Development and
Strategic Planning
Manuel D. Yuen 57 Vice President, Operations
Thomas J. Connors(1)(2) 68 Director
Paul Gray, Ph.D. 55 Director
Martin Jurick (2) 60 Director
Henry Kressel, Ph.D.(2) 64 Director
Joseph P. Landy(1) 36 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. Kehoe joined the Company in October 1995
as Vice President and Chief Financial Officer. In
November 1997, Mr. Kehoe was elected Senior Vice
President. 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. Ricci joined the Company in August 1997.
Prior to joining the Company, Mr. Ricci was
Director of Wireless Communication at Advanced
Micro Devices. Prior to this role, Mr. Ricci held
the position of Director, Desktop Networking, at
AMD. Mr. Ricci worked at AMD for 17 years. Prior
to AMD Mr. Ricci worked at Siliconix, Inc. in the
communications area for two years.
Mr. Wodopian joined the Company in January 1998.
Prior to joining Level One, Mr. Wodopian spent
over 16 years at Advanced Micro Devices, most
recently as the Director of Marketing for the
Communications Products Division. Prior to that,
he spent four years at AMD's European headquarters
as Director of Marketing for Europe. During the
balance of his tenure at AMD, he served in a
variety of program management and field
applications roles. Prior to working at AMD, Mr.
Wodopian was responsible for microprocessor based
system level designs for the process control and
aerospace industries.
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 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., LLC (''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 IA Corporation, Nova
Corporation, Maxis, Inc., and Trescom
International.
Mr. Landy has been a director of the Company
since January 1991. Since January 1994, Mr. Landy
has served as a Managing Director at EMW, 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
Corporation, Indus International, Inc., 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 3,000 shares at
the end of each year. In 1997, Warburg Pincus
Capital Co., an affiliate of EMW, distributed
substantially all of its shares of Company stock.
Dr. Kressel and Mr. Landy each then became
entitled to automatic grants of options to
purchase an aggregate of 15,000 shares vesting
over five years.
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 28, 1997.
<PAGE>
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 whose compensation for the 1997
fiscal year was in excess of $100,000
(collectively the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
<S> <C> <C> <C> <C> <C>
COMPENSATION ALL
ANNUAL SECURITIES OTHER
<S> <C> <C> <C> <C>
COMPENSATION (1) UNDERLYING
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)
OPTIONS (#) ($)(2)
<S> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D. 1997 325,846 583,554 390,000
2,794
President, Chief 1996 296,923 185,382 90,000 6,276
Executive
Officer and Chairman of 1995 220,000 97,172 --- 4,280
the
Board
John Kehoe 1997 186,056 201,859 80,000 1,617
Senior Vice President and 1996 153,182 81,508 30,000
1,800
Chief Financial Officer 1995 27,115 12,500 105,000 ---
George Papa 1997 142,697 142,350 105,000 17,116
Vice President, Worldwide Sales
Manuel D. Yuen 1997 158,711 81,741 22,050 1,376
Vice President, 1996 142,654 28,028 37,950 2,811
Operations
1995 119,674 16,846 49,500 2,443
Daniel S. Koellen 1997 135,740 61,434 6,000 1,253
Vice President, Quality & 1996 120,042 30,726 47,250
3,283
Reliability 1995 106,292 15,227 34,650 3,120
</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 compensation represents the Company's 401(k)
matching contributions, and, in the case of Mr. Papa, an
automobile allowance.
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 28, 1997. 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
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)
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5%
($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D. 225,000 13.9 15.54 4/4/07 2,199,932
5,575,498
165,000 10.2 28.13 12/18/07 2,918,464 7.392,961
John Kehoe 45,000 2.8 15.54 4/4/07 439,986 1,115,099
35,000 2.2 28.13 12/18/07 619,068 1,568,840
Manuel D. Yuen 22,050 1.4 15.54 4/4/07 215,593
546,398
Daniel S. Koellen 6,000 .4 15.54 4/4/07 58,664 148,679
George Papa 105,000 6.5 19.00 2/11/07 1,255.079
3,180,867
</TABLE>
(1) There is no assurance provided to any executive officer or
any other holder of the Company's securities that the actual
stock price appreciation over the 5-year option term will be at
the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option
grants made to the executive officers.
The following table provides information
with respect to the Named Officers concerning the
exercise of options during the last fiscal year
and unexercised options held as of December 28,
1997:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNEXERCISED
<S> <C> <C> <C> <C>
SHARES UNDERLYING UNEXERCISED
IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR END At
Fiscal Year End ($)(1)
(#)
ON EXERCISE (#) REALIZED($) EXERCISABLE
UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Robert S. Pepper, Ph.D. 85,000 2,950,397 208,034 577,500
4,907,108 6,008,744
John Kehoe 7,500 92,624 42,000 165,500 528,498
1,692,745
Manuel D. Yuen 56,250 2,510,218 45,487 97,763 1,047,062
1,591,577
Daniel S. Koellen 0 0 65,362 75,188 1,588,245
1,264,282
George Papa 0 0 0 105,000 0
918,750
</TABLE>
(1) Based upon the market price of $28.00 per share,
which was the closing price per share on the NASDAQ
National Market System on the last day of the 1997
fiscal year, less the option exercise price payable per
share.
<PAGE>
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 March 1,
1998, 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
NUMBER PERCENT (1)
<S> <C> <C>
Kopp Investment Advisors, Inc. (2) 2,999,181 14.6%
6600 France Avenue South, Suite 672
Edina, Minnesota 55435
Robert S. Pepper, Ph.D. (3) 427,283 2.0%
Thomas J. Connors (4) 70,125 *
Paul Gray (5) 34,500 *
Martin Jurick (6) 24,000 *
Henry Kressel, Ph.D. (7) 18,780 *
Joseph P. Landy (8) 32,368 *
John Kehoe (9) 57,750 *
Daniel S. Koellen (10) 106,735 *
George Papa (11) 23,527 *
Manuel D. Yuen (12) 96,274 *
All Named Officers and Directors as a group (10 persons) 891,342 4.3%
</TABLE>
(1) Percent ownership is based on 20,576,916
shares of Common Stock outstanding as of March 1,
1998, plus shares issuable pursuant to options or
warrants held by the person or class in question
that are exercisable within 60 days after March 1,
1998.
(2) Includes 2,873,181 shares over which Kopp
Investment Advisors, Inc. exercises investment
discretion, but for which it is not the record
holder; 15,000 shares which Kopp Investment
Advisors, Inc., owns directly; 6,000 shares owned
by Kopp Investment Advisors, Inc., Profit Sharing
Plan; 75,000 shares owned by LeRoy C. Kopp
Individual Retirement Plan; and 30,000 shares
owned by Kopp Family Foundation.
(3) Includes 306,784 shares issuable under stock
options held by Dr. Pepper exercisable within 60
days of March 1, 1998.
(4) Includes 43,125 shares issuable under stock
options held by Mr. Connors exercisable within 60
days of March 1, 1998.
(5) Includes 34,500 shares issuable under stock
options held by Dr. Gray exercisable within 60
days of March 1, 1998.
(6) Includes 9,000 shares issuable under stock
options held by Mr. Jurick exercisable within 60
days of March 1, 1998.
(7) Includes 993 shares held of record by Warburg
Pincus Capital Co. ("Warburg"). Dr. Kressel is a
managing director of a Warburg affiliate, and
disclaims beneficial ownership of such shares.
(8) Includes 993 shares held of record by
Warburg. Mr. Landy is a managing director of a
Warburg affiliate, and disclaims beneficial
ownership of such shares.
(9) Includes 57,750 shares issuable under stock
options held by Mr. Kehoe exercisable within 60
days of March 1, 1998.
(10) Includes 89,924 shares issuable under stock
options held by Mr. Koellen exercisable within 60
days of March 1, 1998.
(11) Includes 21,000 shares issuable under stock
options held by Mr. Papa exercisable within 60
days of March 1, 1998.
(12) Includes 76,236 shares issuable under stock
options held by Mr. Yuen exercisable within 60
days of March 1, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
In connection with securing a loan from
Warburg in 1992, the Company issued a warrant
to purchase 304,119 shares of its common
stock at an exercise price of $1.03 per
share. The warrant was exercised January 16,
1997, for 289,131 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
Warburg, 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
$77,400 during 1997 for consulting services
rendered under an agreement with the Company,
and was granted options to purchase 22,500
shares at a price of $15.54 per share, the
market price on the grant date.
<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 __
Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996 __
Consolidated Statements of Income for fiscal years ended
December 28, 1997, December 29, 1996, and December 30, 1995 __
Consolidated Statements of Shareholders' Equity for fiscal years ended
December 28, 1997, December 29, 1996, and December 30, 1995 __
Consolidated Statements of Cash Flows for fiscal years ended December 28, 1997,
December 29, 1996, and December 30, 1995 __
Notes to Financial Statements __
2. FINANCIAL STATEMENT SCHEDULES:
II-Valuation and Qualifying Accounts __
</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* Amended and Restated Articles of Incorporation of the Company, as
amended.
3.2(1) Bylaws of the Company, as amended.
4.1(10) Indenture dated as of August 15, 1997 between the Company and State
Street Bank
and Trust Company of California (National Association) as Trustee.
4.2(10) Form of 4% Convertible Subordinated Note due 2004.
10.1<circumflex><circumflex>(1) 1985 Incentive Stock Option, Nonqualified Stock Option
and Restricted Stock
Purchase
Plan, as amended.
10.2<circumflex><circumflex>(9) 1993 Stock Option Plan, as amended and restated.
10.3<circumflex><circumflex>(1) Amended and Restated Employee Stock Purchase Plan.
10.4<circumflex><circumflex>(1) Form of Directors' Indemnification Agreement.
<S> <C>
10.5<circumflex><circumflex>(2) Consulting Agreement with Thomas J. Connors, as
amended.
10.6<circumflex><circumflex>(3) Consulting Agreement with Paul Gray
10.7<circumflex>(4) Agreement and Plan of Reorganization (San Francisco Telecom,
Inc.)
10.8<circumflex>(5) Foundry Agreement
10.9<circumflex>(6) Deposit Agreement
10.10<circumflex>(7) Agreement and Plan of Reorganization (Silicon Design Experts,
Inc.)
10.11<circumflex>(8) Amendment to Deposit Agreement
22.1* Subsidiaries of Registrant. (see page S-3)
24.1* Consent of Arthur Andersen LLP (see page S-4)
25.1* Powers of Attorney (see page S-1)
27.1* Financial Data Schedule, December 28, 1997
</TABLE>
(1) Incorporated by reference to Registration
Statement No. 33-65810, August 19, 1994.
(2) Incorporated by reference to No. 33-
74088, February 8, 1995.
(3) Incorporated by reference to Report on
Form 10-K for the Fiscal Year Ended December
31, 1994.
(4) Incorporated by reference to Report on
Form 10-Q for the Period Ended July 1, 1995.
(5) Incorporated by reference to Report on
Form 10-Q for the Period Ended September 29,
1995.
(6) Incorporated by reference to Report on
Form 10-K for the Fiscal Year Ended December
30, 1995.
(7) Incorporated by reference to Report on
Form 10-K for the Fiscal Year Ended December
29, 1996.
(8) Incorporated by reference to Report on
Form 10-Q for the Period Ended June 29, 1997
(9) Incorporated by reference to Registration
Statement No. 333-06300, September 23, 1996.
(10) Incorporated by reference to
Registration Statement No. 333-37957,
October 21, 1997.
* Filed herewith.
<circumflex> Confidential treatment
granted.
<circumflex><circumflex> Indicates management
contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K. No reports on
Form 8-K were filed during the fourth quarter
of 1997.
<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 28, 1997 and
December 29, 1996, and the related statements
of income, shareholders' equity and cash
flows for each of the three fiscal years in
the period ended December 28, 1997, December
29, 1996 and December 30, 1995. 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 28, 1997 and
December 29, 1996, and the results of their
operations and their cash flows for each of
the three fiscal years in the period ended
December 28, 1997, 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 audits 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
March 13, 1998
<PAGE>
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 28, 1997, and December 29, 1996
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1997
1996
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 25,234 $ 20,251
Short-term investments 112,560 10,211
Trade accounts receivable, net of allowance for
doubtful accounts of $343 and $156 for 1997 30,079 17,671
and 1996, respectively
Other receivables 2,473 608
Inventories 26,118 9,990
Deferred income tax benefit 4,050 2,504
Prepaid expenses 2,502 2,351
Total current assets 203,016 63,586
Property and equipment, net 31,795 23,676
Long-term investments 21,559 12,440
Note acquisition costs 3,296 -
Foundry deposits 14,000 8,000
Other assets 4,031 4,400
Total assets $ 277,697 $ 112,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C> <C> <C> <C>
Current portion of capital lease obligations $1,201 $1,129
Accounts payable 20,614 4,778
Accrued payroll costs 4,591 1,985
Income taxes payable - 1,338
Deferred distributor revenues 2,490 864
Other accrued liabilities 7,881 2,621
Total current liabilities 36,777 12,715
Convertible subordinated notes 115,000 -
Capital lease obligations, less current portion 2,175 3,194
Deferred lease expense 300 612
Total liabilities 154,252 16,521
<S> <C> <C> <C> <C>
Shareholders' Equity:
Common Stock, no par value 91,897 83,230
<S> <C> <C> <C> <C> <C>
Authorized - 157,500,000 shares
Outstanding - 20,559,374 and 19,674,341 shares for 1997 and 1996, respectively
Unrealized gain on available-for-sale 18 12
securities, net of tax
Retained earnings 31,530 12,339
Total shareholders' equity 123,445 95,581
Total liabilities and shareholders' equity $ 277,697 $ 112,102
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For Fiscal Years Ended December 28, 1997,
December 29, 1996, and December 30, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
1995
Revenues $ 156,262 $ 111,987 $ 78,018
Cost of sales 65,299 48,477 33,300
<S> <C> <C> <C> <C> <C> <C>
Gross margin 90,963 63,510 44,718
Research and development* 30,398 24,505 17,857
<S> <C> <C> <C> <C> <C>
Sales and marketing 23,978 16,589 11,372
General and administrative 10,212 6,741 5,752
<S> <C> <C> <C> <C> <C> <C>
Total operating expenses 64,588 47,835 34,981
Operating income 26,375 15,675 9,737
<S> <C> <C> <C> <C> <C>
Interest income 3,959 1,916 2,108
Interest (expense) (1,806) (352) (157)
Other income 110 729 113
Income before provision for income taxes 28,638 17,968 11,801
Provision for income taxes 9,447 6,755 1,543
Net income $ 19,191 $ 11,213 $ 10,258
Basic earnings per share $ 0.95 $ 0.58 $ 0.54
Diluted earnings per share $ 0.89 $ 0.55 $ 0.51
</TABLE>
*Includes one-time charges for acquisitions
of $2,500 and $750 for 1996 and 1995,
respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY
For the Fiscal Years Ended December 28, 1997,
December 29, 1996, and December 30, 1995
<TABLE>
<CAPTION>
Deferred Retained
Common Stock Compen- Unrealized Earnings
(IN THOUSANDS) Shares Amount sation Gain(Loss)
(Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Balance at December 31, 1994 18,722 $72,442 $ $ $(9,132)
$63,309
(1) -
Issuance of common stock under
stock
option and purchase plans 328 431 - - -
431
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Issuance of common stock upon
exercise of warrants 6 19 - - - 19
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Tax benefit of stock option 2,418 - - -
2,418
exercises
Stock issued in connection with
acquisitions 203 2,462 - - - 2,462
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Unrealized gain on available-
for-sale
securitiess, net of tax - - - 67 - 67
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Amortization of deferred
compensation expense - - 1 - - 1
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Net income - - - - 10,258 10,258
Balance at December 30, 1995 19,259 77,772 - 67 1,126
78,965
Issuance of common stock under
stock
option and purchase plans 282 1,243 - - -
1,243
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Issuance of common stock upon
exercise of warrants 3 10 - - - 10
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Tax benefit of stock option - 1,205 - - -
1,205
exercises
Stock issued in connection with
acquisitions 130 3,000 - - - 3,000
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Unrealized loss on available-
for-sale
securitiess, net of tax - - - (55) - (55)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Net income - - - - 11,213 11,213
Balance at December 29, 1996 19,674 83,230 - 12 12,339
95,581
Issuance of common stock under
stock option and purchase 596 3,538
3,538
plans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Issuance of common stock under
cashless exercise of 289 - -
warrants
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Tax benefit of stock option 5,129 5,129
exercises
Unrealized gain on available-
for-sale
securities, net of tax 6 6
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Net income 19,191 19,191
Balance at December 28, 1997 20,559 $91,897 $ - $ 18 $ 31,530
$123,445
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Fiscal Years Ended December 28, 1997,
December 29, 1996, and December 30, 1995
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
Cash flows from operating activities:
Net income $ 19,191 $ 11,213 $
10,258
<S> <C> <C> <C> <C> <C> <C>
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,714 7,389
5,214
<S> <C> <C> <C> <C> <C> <C> <C>
Purchased research & development expenses - 2,500
750
Changes in assets and liabilities, net of effect
of acquisitions:
Trade receivables (12,408) (3,259)
(8,832)
<S> <C> <C> <C> <C> <C> <C> <C>
Other receivables (1,865) 370 (189)
Inventories (16,128) 5,782 (9,268)
Deferred income tax benefit (1,546) 1,785
(977)
Prepaid expenses (466) 236 (1,192)
Accounts payable and accrued liabilities 29,119 (3,427)
11,684
Deferred lease expense (312) (133) 97
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by operating activities 25,299 22,456
7,545
Cash flows from investing activities:
Purchase of short-term investments (155,195) (12,754)
(8,042)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales and maturities of short-term 52,852 10,711
31,027
investments
Purchase of long-term investments (42,900) (11,780)
(3,681)
Proceeds from sales and maturities of long-term 33,781 4,035
1,000
investments
Net capital expenditures (17,033) (9,837)
(10,033)
Payments (receipts) for related party notes - 1,225
(1,225)
receivable
Payments for foundry deposits and other assets (5,951) (6,136)
(4,081)
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) investing (134,446) (24,536)
4,965
activities
Cash flows from financing activities:
<S> <C> <C> <C> <C> <C>
Net principal payments under capital lease (947) (550)
(569)
obligations
<S> <C> <C> <C> <C> <C> <C>
Proceeds from issuance of convertible subordinated
notes,
net of acquisition costs 111,539 - -
Proceeds from issuance of stock, net of
repurchases and costs
of issuance 3,538 1,253 427
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) financing 114,130 703
(142)
activities
Net increase (decrease) in cash and cash equivalents 4,983 (1,377)
12,368
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents at beginning of year 20,251 21,628
9,260
Cash and cash equivalents at end of year $ 25,234 $ 20,251
$ 21,628
SUPPLEMENTARY DISCLOSURE OF CASH AND NON-CASH
TRANSACTIONS
Non-cash and investing and financing activities:
Equipment purchased under capital leases $ - $ 726 $
4,770
<S> <C> <C> <C> <C> <C> <C> <C>
Tax benefit related to stock options 5,129 1,205
2,418
Unrealized gain (loss) on available-for-sale
securities,
net of tax 6 (55) 67
Cash payments for:
Interest 199 351 142
Income taxes 3,861 2,564 1,268
</TABLE>
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE FINANCIAL
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 application specific
standard product ("ASPP") integrated
circuits and custom derivatives 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.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION. The
Company prepares financial
statements 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 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.
INVESTMENTS. The Company
accounts for investments pursuant to
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. As of December 28, 1997
and December 29, 1996, all of the
Company's investments are classified
as available-for-sale and are
carried at fair value. As of
December 28, 1997, and December 29,
1996, the Company's stockholders'
equity reflected an unrealized gain,
net of applicable taxes of $18,000
and $12,000, respectively.
<PAGE>
The amortized cost and market
value of the Company's investments
available-for-sale as of December
28, 1997 and December 29, 1996, were
as follows:
<TABLE>
<CAPTION>
DECEMBER 28, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED
MARKET
COST GAINS LOSSES VALUE
Municipal bonds $ 11,528 $ 24 $ $ 11,552
-
Corporate debt and equity 122,561 36 30 122,567
securities
$ 134,089 $ 60 $ $ 134,119
30
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 29, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED
MARKET
COST GAINS LOSSES VALUE
Municipal bonds $ 20,531 $ 29 $ $ 20,557
3
Corporate debt and equity 2,100 - 6 2,094
securities
$ 22,631 $ 29 $ $ 22,651
9
</TABLE>
The amortized cost and market
value of the Company's investments
available-for-sale, by maturity, at
December 28, 1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 28, 1997
AMORTIZED MARKET
<S> <C> <C> <C>
(IN THOUSANDS) COST VALUE
Due in one year or less $ 112,536 $ 112,560
Due after one year through five 21,553 21,559
years
$ 134,089 $ 134,119
</TABLE>
Proceeds from the sale of
available-for-sale investments
during fiscal 1997 and 1996 were
$86.6 million and $14.7 million,
respectively. The cost basis used
in determining realized gains and
losses is specific identification.
During 1997, gross gains of $20,000
with no losses were realized, and
gross gains of $1,000 and gross
losses of $32,000 were realized in
1996.
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
convertible subordinated notes, 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.
<PAGE>
Inventories as of December 28,
1997, and December 29, 1996,
consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
<S> <C> <C> <C>
Raw materials $ 8,829 $ 32
Work-in-process 13,135 7,948
Finished goods 4,154 2,010
Total inventories $ 26,118 $ 9,990
</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:
<TABLE>
<CAPTION>
Machinery and equipment 3-5 years
<S> <C>
Furniture and fixtures 3-5 years
Leasehold improvements 6-10 years
</TABLE>
Property and equipment, net,
is comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
1997 1996
Machinery and equipment $ 36,222 $ 25,254
Furniture and fixtures 18,066 11,899
Leasehold improvements 3,383 3,485
57,671 40,638
Less accumulated depreciation (25,876) (16,962)
$ 31,795 $ 23,676
</TABLE>
Deferred Lease Expense. Lease
payments for certain equipment 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
$2,490,000, $864,000, and $1,300,000
as of December 28, 1997, December
29, 1996, and December 30, 1995,
respectively. During 1997 and 1995
no single customer accounted for
more than 10% of revenues. In 1996,
sales to Hewlett-Packard were 11.2%
of total sales.
Export sales as a percentage
of revenues were 35%, 39%, and 33%
for 1997, 1996, and 1995,
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 1997, 1996, and
1995, the Company recognized
revenues of $56,000, $398,000, and
$289,000, respectively, in
accordance with the contract
milestones in the Company's
agreements.
The Company earns royalty
income under certain contracts and
recognizes that income in the period
that income is earned. During 1997,
1996, and 1995 the Company
recognized revenues of $987,000,
$197,000, and $312,000,
respectively.
Revenues are comprised of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997 1996 1995
Product sales $ 155,219 $ 111,392 $ 77,417
Royalties, licenses and non-
recurring
engineering revenue 1,043 595 601
Total revenues $ 156,262 $ 111,987 $ 78,018
</TABLE>
INCOME TAXES. The Company
accounts for income taxes pursuant
to Statement of Financial Accounting
Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." 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.
STOCK BASED COMPENSATION. As of
December 31, 1995, the Company
adopted Statement of Financial
Accounting Standards No. 123,
"Accounting for Stock-Based
Compensation" ("SFAS 123"). This
statement defines a fair-value-based
method of accounting for stock-based
compensation. As permitted by SFAS
123, the Company has not changed its
method of accounting for stock
options but has provided the
additional required disclosures.
The Company recognized no
compensation expense related to
stock options in 1997.
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.
FINANCIAL PRESENTATION.
Certain prior year amounts in the
Consolidated Financial Statements
have been reclassified to conform to
the fiscal 1997 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 28, 1997,
and December 29, 1996, was zero.
4. 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
$40 per share. Interest on the
notes is payable semi-annually,
commencing March 1, 1998. Total
interest accrued on the convertible
subordinated notes at December 28,
1997 was approximately $1,550,000.
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.
5. LEASES
The Company conducts its
operations using leased facilities
and equipment under both capital and
operating leases. Minimum future
lease payments as of December 28,
1997, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) Capital Operating Leases
Leases
Year Ending
1998 $ 1,415 $ 12,747
<S> <C> <C> <C> <C>
1999 1,252 13,481
2000 974 12,070
2001 74 9,049
2002 - 7,212
Thereafter - 29,852
$ 3,715 $ 84,411
</TABLE>
<TABLE>
<CAPTION>
Less - Interest portion (7.38% to 12%) (339)
<S> <C> <C> <C>
Capital lease obligations 3,376
Less - Current portion (1,201)
Long-term portion $2,175
</TABLE>
Rent expense for operating
leases was approximately $9.0
million, $7.4 million, and $3.5
million for the years ended December
28, 1997, December 29, 1996, and
December 30, 1995.
6. INCOME TAXES
The provision for income taxes
consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996 1995
Current provision for income taxes:
State $ 1,098 $ 361 $ 1,353
<S> <C> <C> <C> <C> <C> <C>
Federal 9,603 4,609 2,660
Deferred provision (benefit):
State 242 696 (675)
<S> <C> <C> <C> <C> <C> <C>
Federal (1,496) 1,089 (1,795)
Total tax provision $ 9,447 $ 6,755 $ 1,543
</TABLE>
The tax benefits associated
with nonqualified stock options
reduced taxes currently payable by
$5,129,000, $1,205,000, and
$2,418,000 in 1997, 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.
The significant components of
the Company's deferred tax assets
and liabilities as of December 28,
1997, and December 29, 1996, are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996
<S> <C> <C> <C> <C>
Deferred tax assets (liabilities):
Inventory reserves $ 1,893 $ 397
<S> <C> <C> <C> <C>
Deferred income on shipments to 750 374
distributors
Accounts receivable reserve 114 83
Deferred lease expense 151 265
Inventory Unicap adjustment 796 345
Accrued vacation 445 256
AMT credit carryforwards 365 365
R&D credit carryforwards 573 537
Other - 275
Accelerated depreciation (356) (393)
Unrealized loss on Section 475 securities (681) -
Net deferred income tax benefit $ 4,050 $ 2,504
</TABLE>
The reconciliation of the
federal tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C> <C>
Statutory federal tax rate 35.0% 34.0% 34.0%
Reversal of valuation allowance - - (21.0%)
Foreign taxes & foreign sales (2.6%) (4.7%) (3.0%)
corporation
State taxes 4.9% 3.3% 5.7%
Non-deductible acquisition costs 0.6% 5.5% 2.2%
Research and development credits (3.7%) - -
Other (1.2%) (0.5%) (4.8%)
Effective income tax rate 33.0% 37.6% 13.1%
</TABLE>
7. SHAREHOLDERS' EQUITY AND
EARNINGS PER SHARE
In July 1997, the Board of Directors
authorized a 3 for 2 stock split,
which was effective on August 26,
1997. The stock split was declared
on July 7, 1997, to holders of
record on August 5, 1997. All
common stock amounts and per share
amounts have been retroactively
adjusted to reflect the stock split.
On February 23, 1998, the
Board of Directors authorized a 3
for 2 stock split effective on March
30, 1998 to shareholders of record
on March 9, 1998. Common stock
amounts and per share amounts have
not been adjusted to reflect the
stock split.
The Company adopted SFAS No. 128,
"Earnings per Share," effective
December 15, 1997. As a result, the
Company's earnings per share for all
prior periods have been restated.
The following table reconciles the
numerator and denominator of the
basic and diluted earnings per share
computations.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT EARNINGS PER
EARNINGS
SHARE)
PER-SHARE
NET INCOME SHARES AMOUNT
Net income
1997 $ 19,191
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 11,213
1995 10,258
BASIC EPS: income available to
common shareholders
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $ 19,191 20,233 $ 0.95
1996 11,213 19,439 0.58
1995 10,258 19,068 0.54
Effect of dilutive securities:
Options:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 - 1,361
1996 - 1,066
1995 - 910
DILUTED EPS: income available to
common stockholders plus
<S> <C> <C> <C> <C> <C> <C> <C> <C>
assumed conversions
1997 $ 19,191 21,594 $ 0.89
1996 11,213 20,505 0.55
1995 10,258 19,978 0.51
</TABLE>
No conversion is assumed for
the convertible subordinated notes
issued in 1997 because it would have
an antidilutive effect on earnings
per share. Options to purchase
approximately 61,000, 98,000, and
128,000 shares of common stock in
1997, 1996, and 1995, respectively,
were not included in the computation
of diluted EPS because the options'
exercise price was greater than the
average market price of the common
shares, making the shares antidilutive.
8. STOCK OPTION AND PURCHASE
PLANS AND EMPLOYEE BENEFIT PLAN
STOCK-BASED COMPENSATION
PLANS. The Company has three stock
option plans, the 1985 Stock Option
Plan (the "1985 Plan"), the 1993
Stock Option Plan (the "1993 Plan"),
and 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 345,132
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 fixed
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
net income per common share would
have been reduced to the following
pro forma amounts:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996 1995
Net income
As reported $ 19,191 $ 11,213 $ 10,258
<S> <C> <C> <C> <C> <C> <C>
Pro forma 15,401 9,325 9,549
Earnings per share, as reported
Basic $ 0.95 $ 0.58 $ 0.54
<S> <C> <C> <C> <C> <C> <C>
Diluted 0.89 0.55 0.51
Pro-forma earnings per share
Basic $ 0.76 $ 0.48 $ 0.50
<S> <C> <C> <C> <C> <C> <C>
Diluted 0.76 0.48 0.50
</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 1997, 1996, and 1995. In
calculating compensation cost:
risk-free interest rates of 6.12,
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 1997, 1996, and 1995,
respectively.
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 675,000 shares of
stock to its full-time employees
under the ESPP. The Company has
sold 44,991 shares and 33,205 shares
as of December 28, 1997 and December
29, 1996, respectively, and has sold
a total of 112,433 shares through
December 28, 1997. The Company
sells shares at 85% of the stock's
market price, which is either the
market price at the beginning or at
the end of offering period,
whichever is lower.
The Company may grant options for up
to 4,575,000 shares under the 1993
Plan. The Company had 717,387
shares available for grant at
December 28, 1997. Under the 1993
Option Plan the option exercise
price equals the market price on
date of grant.
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 28,
1997, December 29, 1996, and
December 30, 1995, at their
respective weighted average exercise
prices.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
Wtd.Avg. Wtd.Avg. Wtd.Avg.
(SHARES IN THOUSANDS) Shares Exer.Price Shares Exer.Price Shares
Exer.Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
Outstanding beginning of 2,855 $ 10.10 2,235 $ 7.60 1,635 $
3.44
year
Granted
Price = Fair Value 1,698 22.94 1,084 14.34 1,035
11.98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Price < Fair Value - - 38 0.45
Exercised (464) 5.59 (261) 3.70 (325)
0.94
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Cancelled (221) 12.58 (203) 13.44 (148)
5.00
Outstanding end of year 3,868 $16.13 2,855 $10.10 2,235
$7.60
Exercisable, end of period 785 723 551
</TABLE>
The following table
summarizes information about
options outstanding under the
1985 Plan, 1993 Plan, and the
SFT Plan at December 28,
1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
EXERCISABLE
(SHARES IN THOUSANDS) Shares Wtd. Avg. Shares
Outstanding Remaining Exercisable
as of Contractual Wtd. Avg. as of 12/28/97 Wtd.
Avg.
Range of Exercise Prices 12/28/97 Life Exercise Price
Exercise Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
$ 0.26 $ 11.00 968 6.29 $ 6.81 505 $
4.05
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
11.17 15.17 1,019 8.00 12.90 236
13.21
15.54 24.00 985 9.08 17.26 44 19.24
24.50 40.75 896 9.72 28.65 - 25.08
$ 0.26 $ 40.75 3,868 8.24 $16.13 785 $
7.66
</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.
401(K) TAX
DEFERRED SAVINGS 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
at least 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 28,
1997, December 29,
1996, and December 30,
1995, the Company has
contributed $490,000,
$420,000, and $315,000,
respectively, to the
401(k) Plan.
9. INCENTIVE PLANS
The Company has
reserved 135,000 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 28, 1997, 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 $3,739,000,
$1,791,000, and
$833,000 for 1997, 1996
and 1995, respectively.
10. STOCK WARRANTS
The Company has
issued warrants to
independent sales
representatives to
purchase up to 63,750
shares of its Common
Stock with exercise
prices ranging from
$1.55 to $14.00 per
share. As of December
28, 1997, an aggregate
of 30,103 shares has
been issued upon
exercise of warrants.
In connection
with securing a loan
from investors in 1992,
the Company issued
warrants to purchase
304,119 shares of
Common Stock with an
exercise price of $1.03
per share. The
warrants were exercised
January 16, 1997, for
289,131 shares, and the
balance was
surrendered, on a net
appreciation basis, in
an amount equal to the
exercise price.
11. PREFERRED STOCK
No shares of
Preferred Stock are
currently outstanding.
The Company's Board of
Directors is authorized
to issue up to
10,000,000 shares of
Preferred Stock.
12. RELATED PARTY
TRANSACTIONS
During 1997, 1996
and 1995, the Company
paid consulting and/or
directors' fees of
approximately $117,000,
$129,600, and $130,000
respectively, to three
members of the Board of
Directors.
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
was accounted as 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 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.
13. 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 130,095
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 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 203,040
shares of its common
stock to SFT's
shareholders, assumed
existing SFT stock
options, which will be
exercisable for a total
of 37,426 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 Operations.
14. RISK FACTORS
The Company does
not manufacture the
wafers used for its
products. The Company's
wafers are manufactured
by foundries located in
the United States,
Europe and Asia. The
Company depends upon
these suppliers to
produce wafers at
acceptable yields and
to deliver them in a
timely manner at
competitive prices. The
Company may sustain an
adverse impact on
operating results from
problems with the cost,
timeliness, yield and
quality of wafer
deliveries from
suppliers. From time to
time, the available
industry-wide foundry
capacity can fluctuate
significantly. During
periods of constrained
supply, the Company may
experience difficulty
in securing an adequate
supply of wafers,
and/or its suppliers
may increase wafer
prices. The Company's
operating results
depend in substantial
part on its ability to
maintain or increase
the capacity available
from its existing or
new foundries. In prior
years, the Company has
experienced increased
costs and delays in
customer shipments as a
result of a foundry
reducing shipments to
the Company without
prior notice, requiring
the Company to transfer
products to a new
foundry. Although the
Company believes that
it has planned to meet
customer demand, there
can be no assurances
that unforeseen demand,
current supplier
interruptions or other
changes will not have a
material impact on the
Company's business.
<PAGE>
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.
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.
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
subject.
15. 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
cash deposits. At
December 28, 1997, the
Company had provided an
aggregate of $20.6
million in capital
equipment financing
and/or cash deposits to
these foundries to
obtain committed
foundry capacity.
During the first
quarter of 1998, the
Company paid an
aggregate $1.3 million
in additional deposits
per its agreements.
There are no additional
deposits due under the
Company's existing
foundry agreements.
<PAGE>
SCHEDULE II
LEVEL ONE
COMMUNICATIONS, INC.
VALUATION AND
QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS) Balance at Charged to
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Costs and End of
Classification of Period Expenses Deductions Period
YEAR ENDED DECEMBER 28, 1997:
Allowance for doubtful 156 - 343
accounts 187
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 29, 1996:
Allowance for doubtful 300 - 144 156
accounts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 30, 1995:
Allowance for doubtful 90 210 - 300
accounts
</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 _________ DAY
OF MARCH, 1998.
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 27,
1998
/S/ ROBERT
S. PEPPER
Robert S. Pepper,
PRESIDENT, CHIEF
EXECUTIVE OFFICER
(PRINCIPAL
EXECUTIVE OFFICER)
AND CHAIRMAN OF
THE BOARD OF
DIRECTORS
Dated: March 27,
1998 /S/ THOMAS
J. CONNORS
Thomas J.
Connors,
DIRECTOR
Dated: March 27,
1998
/S/
PAUL GRAY
Paul Gray
DIRECTOR
Dated: March 27
, 1998
/S/ MARTIN JURICk
Martin
Jurick,
DIRECTOR
Dated: March
271998
/S/ HENRY
KRESSEL
Henry
Kressel,
DIRECTOR
Dated: March 27,
1998
/S/ JOSEPH
P. LANDY
Joseph P. Landy,
DIRECTOR
Dated: March 27,
1998
/S/ JOHN
KEHOE
John Kehoe,
SENIOR VICE
PRESIDENT AND
CHIEF FINANCIAL
OFFICER
(PRINCIPAL
FINANCIAL OFFICER)
(PRINCIPAL
ACCOUNTING
OFFICER)
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF
REGISTRANT
Registrant
has five 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;
Level One
Communications
Europe SARL, which
is incorporated in
France and does
business under the
name Level One
Communications
Europe; and
LOCSWEDE, A.B.,
which is
incorporated in
Sweden and does
business under the
name Level One
Communications.
<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, 333-
06300 and 333-
48333.
/S/ ARTHUR
ANDERSEN LLP
Sacramento,
California
March 27, 1998
<PAGE>
EX-3.1
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
LEVEL ONE COMMUNICATIONS, INCORPORATED
ROBERT S. PEPPER and JOHN KEHOE certify that:
1. They are the President and the Secretary, respectively, of Level
One Communications, Incorporated.
2. Subsection A of Article Third of the Restated Articles of
Incorporation of Level One Communications, Incorporated is amended to read in
its entirety as follows:
"A. This Corporation is authorized to issue two classes of
shares to be designated respectively Preferred Stock ("Preferred Stock")
and Common Stock ("Common Stock"). The total number of shares of Common
Stock this Corporation shall have authority to issue is Two Hundred
Thirty-six Million, Two Hundred Fifty Thousand (236,250,000). The total
number of shares of Preferred Stock this Corporation shall have authority
to issue is Ten Million (10,000,000). The Board of Directors of this
Corporation is authorized to determine or alter the rights, privileges,
preferences and restrictions granted to or imposed upon any wholly
unissued shares or series of shares of Preferred Stock, and within the
limitations or restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the number of shares
constituting any series, to increase or decrease (but not below the
number of shares of any series then outstanding) the number of shares of
any such series subsequent to the issue of shares of that series, to
determine the designation of any series, and to fix the number of shares
of any series.
"B. Upon the effective date of this Amendment to the Restated
Articles of Incorporation, each outstanding share of Common Stock of the
Corporation is split and converted to 1.5 shares of Common Stock."
3. The foregoing amendment of the Articles of Incorporation was duly
approved by the Board of Directors by unanimous written consent on February 13,
1998.
4. The change which has been made hereby to the Articles of Incorporation
is to effect a three-for-two stock split (including a proportionate increase in
the authorized number of Common Shares). No shares of Preferred Stock are
outstanding. Pursuant to Section 902(c) of the California Corporations Code,
shareholder approval is not required for this action.
5. The foregoing amendment of the Articles of Incorporation of Level One
Communications, Incorporated, shall become effective at the close of business
on March 9, 1998.
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing certificate are true of their own knowledge.
Executed at Sacramento, California on March 3, 1998.
/S/ ROBERT S. PEPPER
Robert S. Pepper, President
/S/ JOHN KEHOE
John Kehoe, Secretary
- 2 -
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
LEVEL ONE COMMUNICATIONS, INCORPORATED
ROBERT S. PEPPER and JOHN KEHOE certify that:
1. They are the President and the Secretary, respectively, of Level One
Communications, Incorporated.
2. Subsection A of Article Third of the Restated Articles of
Incorporation of Level One Communications, Incorporated is amended to read in
its entirety as follows:
"A. This Corporation is authorized to issue two classes of
shares to be designated respectively Preferred Stock ("Preferred Stock")
and Common Stock ("Common Stock"). The total number of shares of Common
Stock this Corporation shall have authority to issue is One Hundred and
Fifty-seven Million Five Hundred Thousand (157,500,000). The total
number of shares of Preferred Stock this Corporation shall have authority
to issue is Ten Million (10,000,000). The Board of Directors of this
Corporation is authorized to determine or alter the rights, privileges,
preferences and restrictions granted to or imposed upon any wholly
unissued shares or series of shares of Preferred Stock, and within the
limitations or restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the number of shares
constituting any series, to increase or decrease (but not below the
number of shares of any series then outstanding) the number of shares of
any such series subsequent to the issue of shares of that series, to
determine the designation of any series, and to fix the number of shares
of any series.
"B. Upon the effective date of this Amendment to the Restated
Articles of Incorporation, each outstanding share of Common Stock of the
Corporation is split and converted to 1.5 shares of Common Stock."
3. The foregoing amendment of the Articles of Incorporation was duly
approved by the Board of Directors at its duly held meeting on July 17, 1997,
at which a quorum was present and acting throughout.
4. The change which has been made hereby to the Articles of Incorporation
is to effect a three-for-two stock split (including a proportionate increase in
the authorized number of Common Shares). No shares of Preferred Stock are
outstanding. Pursuant to Section 902(c) of the California Corporations Code,
shareholder approval is not required for this action.
5. The foregoing amendment of the Articles of Incorporation of Level One
Communications, Incorporated, shall become effective at the close of business
on August 5, 1997.
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing certificate are true of their own knowledge.
Executed at Sacramento, California on August 4, 1997.
/S/ ROBERT S. PEPPER
Robert S. Pepper, President
/S/ JOHN KEHOE
John Kehoe, Secretary
- 3 -
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
LEVEL ONE COMMUNICATIONS, INCORPORATED
ROBERT S. PEPPER and JOHN ZIMMERMAN certify that:
1. They are the President and the Assistant Secretary, respectively, of
Level One Communications, Incorporated.
2. Subsection A of Article Third of the Restated Articles of
Incorporation of Level One Communications, Incorporated is amended to read in
its entirety as follows:
"A. This Corporation is authorized to issue two classes of
shares to be designated respectively Preferred Stock ("Preferred Stock")
and Common Stock ("Common Stock"). The total number of shares of Common
Stock this Corporation shall have authority to issue is One Hundred and
Five Million (105,000,000). The total number of shares of Preferred
Stock this Corporation shall have authority to issue is Ten Million
(10,000,000). The Board of Directors of this Corporation is authorized
to determine or alter the rights, privileges, preferences and
restrictions granted to or imposed upon any wholly unissued shares or
series of shares of Preferred Stock, and within the limitations or
restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series,
to increase or decrease (but not below the number of shares of any series
then outstanding) the number of shares of any such series subsequent to
the issue of shares of that series, to determine the designation of any
series, and to fix the number of shares of any series.
"B. Upon the effective date of this Amendment to the Restated
Articles of Incorporation, each outstanding share of Common Stock of the
Corporation is split and converted to 1.5 shares of Common Stock."
3. The foregoing amendment of the Articles of Incorporation was duly
approved by the Board of Directors at its duly held meeting on December 13,
1993, at which a quorum was present and acting throughout.
4. The change which has been made hereby to the Articles of Incorporation
is to effect a three-for-two stock split (including a proportionate increase in
the authorized number of Common Shares). No shares of Preferred Stock are
outstanding. Pursuant to Section 902(c) of the California Corporations Code,
shareholder approval is not required for this action.
5. The foregoing amendment of the Articles of Incorporation of Level One
Communications, Incorporated, shall become effective at the close of business
on December 30, 1993.
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing certificate are true of their own knowledge.
Executed at Sacramento, California on December 15, 1993.
/S/ ROBERT S. PEPPER
Robert S. Pepper, President
/S/ JOHN ZIMMERMAN
John Zimmerman, Assistant Secretary
- 4 -
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
LEVEL ONE COMMUNICATIONS, INCORPORATED
Robert Pepper and Joseph Landy hereby certify as follows:
1. That they are the President and Secretary, respectively, of Level One
Communications, Incorporated, a California corporation.
2. That the Articles of Incorporation of the corporation are hereby
amended and restated to read in full as follows:
"FIRST: The name of the corporation (hereinafter called the
"Corporation") is Level One Communications, Incorporated.
SECOND: The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated
by the California Corporations Code.
THIRD:
A. This Corporation is authorized to issue two classes of shares to be
designated respectively Preferred Stock ("Preferred Stock") and Common Stock
("Common Stock"). The total number of shares of Common Stock this Corporation
shall have authority to issue is Seventy Million (70,000,000). The total
number of shares of Preferred Stock this Corporation shall have authority to
issue is Seventeen Million Five Hundred Seventy Thousand (17,570,000), of
which Five Million Nine Hundred Seventy Thousand (5,970,000) shares are
designated "Series D Preferred Stock," and One Million Six Hundred Thousand
(1,600,000) shares are designated "Series E Preferred Stock." The Board of
Directors of this corporation is authorized to determine or alter the rights,
privileges, preferences and restrictions granted to or imposed upon any wholly
unissued shares or series of shares of Preferred Stock, and within the
limitations or restrictions stated in any resolution or resolutions of the
Board of Directors originally fixing the number of shares constituting any
series, to increase or decrease (but not below the number of shares of any
series then outstanding) the number of shares of any such series subsequent to
the issue of shares of that series, to determine the designation of any series,
and to fix the number of shares of any series. Upon the filing of these
Amended and Restated Articles of Incorporation, each ten (10) shares of Common
Stock then outstanding ("Old Common Stock") shall be combined into one (1)
share of Common Stock. In lieu of fractional shares, the corporation will
distribute one whole share of Common Stock.
B. The rights, preferences, privileges, restrictions and other matters
relating to the Series D and E Preferred Stock are as follows:
1. DIVIDENDS.
(a) The holders of the Series D and E Preferred Stock shall be
entitled to receive, when and as declared by the Corporation's Board of
Directors (the "Board of Directors"), and out of any funds legally available
therefor, cumulative dividends on each share at the rate of $0.125 per share
per annum, payable in cash annually as the Board of Directors may from time to
time determine. Such dividends shall accrue on each share from the date of its
original issue and shall accrue from day to day, whether or not earned or
declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, the deficiency shall first be fully paid before
any dividend (other than those payable solely in the Common Stock of the
Corporation) or other distribution shall be paid on or declared and set apart
for the Common Stock.
Except as limited by the provisions of California Corporations
Code Sections 500 et. seq., in the event the Corporation conducts an initial
public offering of its Common Stock which would cause an automatic conversion
of the Series D and E Preferred Stock to Common Stock (as provided below), the
Board of Directors, prior to such conversion, shall declare a dividend of
accumulated and unpaid dividends, PROVIDED, HOWEVER, that the Board of
Directors in its sole discretion may declare such dividend to holders of the
Series D and E Preferred Stock as of a record date determined by the Board of
Directors (the "Dividend Record Date"), and payment of such dividend may be
made in shares of Common Stock in lieu of cash (the "Share Dividend"). The
number of shares of Common Stock to be paid in the Share Dividend shall be
calculated by dividing the cumulative dividend payable as of the Dividend
Record Date by the price at which shares of Common Stock are offered to the
public in the initial public offering, net of underwriting discounts. The
Share Dividend shall be payable upon, and shall be contingent upon, the closing
of such initial public offering. Upon payment of the Share Dividend, the
Corporation shall have no further obligation to pay dividends with respect to
the Series D and E Preferred Stock.
(b) In the event the Corporation shall declare a distribution
(OTHER THAN any distribution described in Section 2) payable in securities of
other persons, evidences of indebtedness issued by the Corporation or other
persons, assets (excluding cash dividends) or options or rights to purchase any
such securities or evidences of indebtedness, then, in each such case the
holders of the Series D and E Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of the
Series D and E Preferred Stock were the holders of the number of shares of
Common Stock of the Corporation into which their respective shares of Series D
and E Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(c) Each holder of shares of Series D and E Preferred Stock
shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of
the General Corporation Law of the State of California, to distributions made
by the Corporation in connection with the repurchase of shares of Common Stock
issued to or held by employees or consultants upon termination of their
employment or services pursuant to agreements providing for such repurchase.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of the Series
D and E Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds of the Corporation to
the holders of the Common Stock by reason of their ownership thereof, the
amount of $1.25 per share (as adjusted for any stock dividends, combinations or
splits with respect to such shares) plus all declared or accumulated but unpaid
dividends on such share for each share of Series D and E Preferred Stock then
held by them and no more. If upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series D and E Preferred Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series D and E Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(b) After payment to the holders of the Series D and E
Preferred Stock of the amounts set forth in subparagraph (a) above, the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the Common
Stock and the Series D and E Preferred Stock in proportion to the shares of
Common Stock then held by them and the shares of Common Stock which they then
have the right to acquire upon conversion of the shares of Series D and E
Preferred Stock then held by them.
(c) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring
corporation, or its subsidiary (other than a mere reincorporation transaction),
(ii) any transaction or series of transactions within any three-month period
pursuant to an agreement to which the Corporation is a party (other than a
registered public offering pursuant to which the Series D and E Preferred Stock
are automatically converted into Common Stock pursuant to Section 4(b) below)
in which greater than fifty percent (50%) of the Corporation's voting
securities (on an as-converted-to-Common Stock basis) shall be transferred, or
(iii) a sale of all or substantially all of the assets of the Corporation,
shall be treated as a liquidation, dissolution or winding up of the Corporation
and shall entitle the holders of Series D and E Preferred Stock to receive at
the closing in cash or securities (valued as provided in (d) below) amounts as
specified in subparagraphs (a) and (b) above.
(d) Whenever the distribution provided for in this Section 2
shall be payable in property other than cash, the value of such distribution
shall be the fair market value of such property as determined in good faith by
the Board of Directors.
3. VOTING RIGHTS; DIRECTORS.
(a) The holder of each share of the Series D and E Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Common Stock into which such share of Series D and E Preferred Stock could be
converted and shall have voting rights and powers equal to the voting rights
and powers of the Common Stock (except as otherwise expressly provided herein
or as required by law, voting together with the Common Stock as a single class)
and shall be entitled to notice of any shareholders' meeting in accordance with
the Bylaws of the Corporation. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Series D and E Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half being rounded upward). Each holder of Common Stock
shall be entitled to one vote for each share of Common Stock held.
(b) Prior to the conversion of the Series D and Series E
Preferred Stock to Common Stock, the Board of Directors shall consist of seven
(7) members. The holders of Series D Preferred Stock, as a class, shall be
entitled to designate five (5) members of the Board of Directors. The holders
of the Common Stock, as a class, shall be entitled to designate the remaining
two (2) members of the Board of Directors. So long as any shares of Series D
Preferred Stock remain outstanding, the Corporation shall not, without the vote
or written consent of the holders of more than eighty percent (80%) of the then
outstanding shares of Series D Preferred Stock, change the authorized number of
directors of the Corporation or the terms of this Section 3(b). The
Corporation shall not take any of the actions described in Sections 5 or 6
below without the approval of a majority of the Board of Directors.
(c) In the case of any vacancy in the office of a director
occurring among the directors elected by the holders of the Series D Preferred
Stock or Common Stock pursuant to the second and third sentences of Section
3(b) hereof, the remaining director or directors so elected by the holders of
the Series D Preferred Stock or Common Stock may elect a successor or
successors to hold the office for the unexpired term of the director or
directors whose place or places shall be vacant. Any director who shall have
been elected by the holders of the Series D Preferred Stock or Common Stock or
any director so elected as provided in the preceding sentence hereof, shall be
removed during the aforesaid term of office, whether with or without cause,
only by the affirmative vote of the holders of a majority of the Series D
Preferred Stock or Common Stock, as the case may be.
4. CONVERSION. The holders of the Preferred Stock shall have
respective conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series D Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share, at the office of the Corporation or any
transfer agent for such stock, into such number of fully paid and
non-assessable shares of Old Common Stock as is determined by dividing $1.25 by
the Series D Conversion Price applicable to such share, determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion. The price at which shares of Old Common Stock shall be deliverable
upon conversion of shares of the Series D Preferred Stock (the "Series D
Conversion Price") shall initially be $.16848 per share of Old Common Stock.
Such initial Series D Conversion Price shall be adjusted as hereinafter
provided.
Each share of Series E Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of
such share, at the office of the Corporation or any transfer agent for such
stock, into such number of fully paid and non-assessable shares of Old Common
Stock as is determined by dividing $1.25 by the Series E Conversion Price
applicable to such share, determined as hereinafter provided, in effect on the
date the certificate is surrendered for conversion. The price at which shares
of Old Common Stock shall be deliverable upon conversion of shares of the
Series E Preferred Stock (the "Series E Conversion Price") shall initially be
$.34 per share of Old Common Stock. Such initial Series E Conversion Price
shall be adjusted as hereinafter provided.
(b) AUTOMATIC CONVERSION. Each share of Series D Preferred
Stock shall automatically be converted into shares of Old Common Stock at the
then-effective Series D Conversion Price upon the earlier of (i) the date
specified by written agreement of at least eighty percent (80%) of the Series D
Preferred Stock then outstanding, or (ii) immediately upon the closing of the
sale of the Corporation's Common Stock in a firm commitment, underwritten
public offering registered under the Securities Act of 1933, as amended (other
then a registration relating solely to a transaction under Rule 145 under such
Act (or any successor thereto) or to an employee benefit plan of the Company),
at a public offer price (prior to underwriter commissions and expenses) equal
to or exceeding $6.00 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to such shares) and the
aggregate proceeds to the Corporation (after deduction for underwriter
commissions and expenses relating to the issuance, including without limitation
fees of the Corporation's counsel) of which equal or exceed $7,500,000.
Each share of Series E Preferred Stock shall automatically be
converted into shares of Old Common Stock at the then-effective Series E
Conversion Price upon the earlier of (i) the date specified by written
agreement of at least eighty percent (80%) of the Series E Preferred Stock then
outstanding, or (ii) immediately upon the closing of the sale of the
Corporation's Common Stock in a firm commitment, underwritten public offering
registered under the Securities Act of 1933, as amended (other then a
registration relating solely to a transaction under Rule 145 under such Act (or
any successor thereto) or to an employee benefit plan of the Company), at a
public offer price (prior to underwriter commissions and expenses) equal to or
exceeding $6.00 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to such shares) and the
aggregate proceeds to the Corporation (after deduction for underwriter
commissions and expenses relating to the issuance, including without limitation
fees of the Corporation's counsel) of which equal or exceed $7,500,000.
(c) MECHANICS OF CONVERSION.
(i) Before any holder of Series D or E Preferred Stock
shall be entitled to convert the same into shares of Old Common Stock, he shall
surrender the certificate or certificates thereof, duly endorsed, at the office
of the Corporation or of any transfer agent for such stock, and shall give
written notice to the Corporation at such office that he elects to convert the
same and shall state therein the name or names in which he wishes the
certificate or certificates for shares of to be issued. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Series D or E Preferred Stock, a certificate or certificates for
the number of shares of Common Stock to which he shall be entitled , after
taking into account the reverse stock split as provided in Article Third,
Section A of these Amended and Restated Articles of Incorporation. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of surrender of the shares of Series D or E Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the Securities Act, the
conversion may, at the option of any holder tendering shares of Series D or E
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock upon conversion of the
Series D or E Preferred Stock shall not be deemed to have converted such
Series D or E Preferred Stock until immediately prior to the closing of such
sale of securities.
(d) ADJUSTMENTS TO SERIES D AND SERIES E CONVERSION PRICE FOR
CERTAIN DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this Section
4(d), the following definitions apply:
(1) 'OPTIONS' shall mean rights, options, or
warrants to subscribe for,
purchase or otherwise acquire
either Common Stock or Convertible Securities.
(2) 'ORIGINAL ISSUE DATE' shall mean the date on which a share of Series
D or E Preferred Stock was
first issued.
(3) 'CONVERTIBLE SECURITIES' shall mean any evidences of
indebtedness, shares (other than the Common
Stock and Series D and E Preferred Stock) or other securities convertible
into or exchangeable
for Common Stock.
(4) 'ADDITIONAL SHARES OF COMMON STOCK '
shall mean all shares of Common Stock issued (or, pursuant to Section
4(d)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series D or
E Preferred Stock;
(B) to officers, directors or bona fide employees of, or consultants to, the
Corporation pursuant
to stock option or stock purchase plans,
on terms approved by the Board of Directors, but not
exceeding 9,652,067 shares of Old
Common Stock (including for purposes of
calculating said 9,652,067 shares, 2,207,768 shares
outstanding on the Original Issue Date
and net of any repurchases of such 9,652,067 shares),
subject to adjustment for all subdivisions
and combinations;
(C) in connection with lease or working capital financing on terms
approved by the Board of
Directors, but not exceeding
2,418,950 shares of Old Common Stock (including shares issuable
upon exercise of any warrants issued in
connection with such lease or
working capital financings), subject to adjustment for all
subdivisions and combinations;
(D) as a dividend or distribution on Series D or E Preferred Stock; or
(E) for which adjustment of the Series D or Series E Conversion Price is
made pursuant to Section
4(e).
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in
the Conversion Price for a series of Preferred Stock shall be made in respect
of the issuance of Additional Shares of Common Stock unless the consideration
per share (determined pursuant to Section 4(d)(v) hereof) for an Additional
Share of Common Stock issued or deemed to be issued by the Corporation is less
than the respective Series D or Series E Conversion Price in effect on the date
of, and immediately prior to such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In
the event the Corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities then
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained
therein designed to protect against
dilution) of Common Stock issuable
upon the exercise of such Options or in the
case of Convertible Securities and Options
therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a
record date
shall have been fixed, as of the close of business on such record date,
provided that Additional Shares of Common Stock shall not be deemed to have
been issued unless the consideration per share (determined pursuant to Section
4(d)(v) hereof) of such Additional Shares of Common Stock would be less than
the Series D or E Conversion Price in effect on the date of and immediately
prior to such issue, or such record date, as the case may be, and provided
further that in any such case in which Additional Shares of Common Stock are
deemed to be issued:
(1) no further adjustments in the Series D
or E Conversion Price shall be made
upon the subsequent
issue of Convertible Securities or shares of Common Stock upon the exercise
of such Options or
conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities
by their terms provide, with the
passage of time or
otherwise, for any increase in the consideration payable to the Corporation,
or decrease in the
number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Series D
or E Conversion Price
computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent
adjustments based thereon, shall, upon
any such increase or decrease becoming effective, be recomputed to
reflect such increase or
decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities (provided,
however, that no such adjustment of the
Series D or E Conversion Price shall effect Common Stock previously
issued upon conversion of
the Series D or E Preferred Stock);
(3) upon the expiration of any such Options
or any rights of conversion or
exchange under such
Convertible Securities which shall not have been exercised, the
Series D or E Conversion Price
computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and
any subsequent
adjustments based thereon, shall, upon
such expiration, be recomputed as if:
(A) in the case of Convertible Securities
or Options for Common Stock the
only Additional Shares
of Common Stock issued were the shares of Common Stock, if any,
actually issued upon the
exercise of such Options or the conversion
or exchange of such Convertible Securities and the consideration
received therefor was the
consideration actually received by the
Corporation for the issue of all such
Options, whether or not exercised, plus the consideration
actually received by the Corporation
upon such exercise, or for the issue
of all such Convertible Securities which were actually
converted or exchanged, plus the
additional consideration, if any, actually
received by the Corporation upon such conversion or
exchange; and
(B) in the case of Options for Convertible
Securities only the Convertible
Securities, if any,
actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the
consideration received by the
Corporation for the issue of all such
Options, whether or not exercised, plus the consideration
deemed to have been received by the
Corporation (determined pursuant to
Section 4(d)(v) upon the issue of the Convertible Securities
with respect to which such Options
were actually exercised;
(4) no readjustment pursuant to clause (2)
or (3) above shall have the effect of
increasing the
Series D or E Conversion Price to an amount which exceeds the lower of
(A) the Series D or E
Conversion Price on the original
adjustment date, or (B) the Series D or E Conversion Price that would
have resulted from any
issuance of Additional Shares of Common
Stock between the original adjustment date and such readjustment date; and
(5) in the case of any Options which expire
by their terms not more than 30
days after the date of
issue thereof, no adjustment of the Series D or E Conversion Price shall be
made until the
expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner
provided in clause (3)
above.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event this Corporation, at any time
after the Original Issue Date shall issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Section 4(d)(iii)) without consideration or for a consideration per share less
than the Conversion Price with respect to any series of Preferred Stock in
effect on the date of and immediately prior to such issue, then and in such
event, the Conversion Price for such series of Preferred Stock shall be
reduced, concurrently with such issue, to a price calculated to the nearest
one-tenth of a cent) determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Corporation for the
total number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price in effect immediately prior to such issuance, and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional Shares of
Common Stock so issued. For the purpose of the above calculation, the number
of shares of Common Stock outstanding immediately prior to such issue shall be
calculated on a fully diluted basis, as if all shares of Series D or E
Preferred Stock and all Convertible Securities had been fully converted into
shares of Common Stock and any outstanding Options for the purchase of shares
of stock or Convertible Securities had been fully exercised (and the resulting
securities fully converted into shares of Common Stock, if so convertible) as
of such date, but not including in any such calculation any additional shares
of Common Stock issuable with respect to shares of Series D or E Preferred
Stock, Convertible Securities, or outstanding Options for the purchase of
shares of stock or Convertible Securities, solely as a result of the adjustment
of the respective Conversion Prices (or other conversion ratios) resulting from
the issuances of Additional Shares of Common Stock causing such adjustment.
(v) DETERMINATION OF CONSIDERATION. For purposes of
this Section 4(d), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY: Such consideration shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of
cash received by the
Corporation excluding amounts paid or payable for accrued interest
or accrued dividends;
(B) insofar as it consists of property other than cash, be computed at the
fair value thereof at
the time of such issue, as determined in good faith by the Board; and
(C) in the event Additional Shares of Common Stock are issued together
with other shares or
securities or other assets of the
Corporation for consideration which covers both, be the
proportion of such consideration so
received, computed as provided in clauses (A) and (B) above, as determined
in good faith by the
Board.
(2) OPTIONS AND CONVERTIBLE SECURITIES . The consideration per
share received by the Corporation for
Additional Shares of Common Stock
deemed to have been issued pursuant to Section 4(d)(iii),
relating to Options and Convertible
Securities, shall be determined by dividing
(A) the total amount, if any, received or receivable by the Corporation as
consideration for the
issue of such Options or Convertible
Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the
instruments relating thereto, without
regard to any provision contained therein designed to
protect against dilution) payable to the
Corporation upon the exercise of such
Securities, or in the case of Options for Convertible
Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such
Convertible Securities by
(B) the maximum number of shares of Common Stock (as set forth in the
instruments relating
thereto, without regard to any provision contained therein designed to
protect against the
dilution) issuable upon the exercise of
such Options or conversion or exchange of such Convertible Securities.
(e) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND
FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this
Corporation at any time or from time to time after the Original Issue Date
shall declare or pay any dividend on the Common Stock payable in Common Stock
or in any right to acquire Common Stock, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire Common Stock), or in the
event the outstanding shares of Common stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, then the Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate. In the event that this Corporation
shall declare or pay, without consideration, any dividend on the Common Stock
payable in any right to acquire Common Stock for no consideration then the
Corporation shall be deemed to have made a dividend payable in Common Stock in
an amount of shares equal to the maximum number of shares issuable upon
exercises of such rights to acquire Common Stock.
(f) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If
the Common Stock issuable upon conversion of the Series D and E Preferred Stock
shall be changed into the same or a different number of shares of any other
class or class of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section 4(e) above or a merger or other reorganization referred to in Section
2(c) above), the Series D and E Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted so that the Series D and E Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series D and E Preferred Stock immediately before that
change.
(g) NO IMPAIRMENT. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series D and E Preferred Stock against impairment.
(h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and cause
independent public accountants selected by the corporation to verify such
computation and prepare and furnish to each holder of Series D or E Preferred
Stock, within ten (10) days following the occurrence of the event causing such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series D or E Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series D or
E Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time: (i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus; (ii) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (iii) to effect any reclassification or recapitalization of its
common Stock outstanding involving a change in the common Stock; (iv) to merge
or consolidate with or into any other corporation, or sell, lease or convey all
or substantially all of its assets, or to liquidate, dissolve or wind up; or
(v) to enter into any transaction or series of transactions within any
three-month period pursuant to any agreement to which the corporation is a
party (other than a registered public offering pursuant to which the Series D
and E Preferred Stock is automatically converted into Common Stock pursuant to
Section 4(b) above) in which greater than fifty percent (50%)of the
Corporation's voting securities (on an as-converted-to-Common Stock basis)
shall be transferred;
Then, in connection with each such event, the Corporation shall send
to holders of Series D and E Preferred Stock: (1) at least twenty (20) days'
prior written notice of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying the date on which
the holders of Common Stock shall be entitled thereto) or for determining
rights to vote, if any, in respect of the matters referred to in (iii), (iv)
and (v) above; and (2) in the case of the matters referred to in (iii), (iv)
and (v) above, at least twenty (20) days' prior written notice of that date
when the same shall take place (and specifying the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
(j) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of common Stock on conversion of shares of Series D or E Preferred Stock
pursuant hereto; provided, however, that the corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION . The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series D and E Preferred Stock, such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Series D and E Preferred Stock;
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of the Series D and E Preferred Stock, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose, including, without limitation, engaging
in best efforts to obtain the requisite shareholder approval of any necessary
amendment to this Certificate.
(l) FRACTIONAL SHARES. No fractional share shall be issued upon
the conversion of any share or shares of Series D or E Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion
of more than one share of Series D or E Preferred Stock by a holder thereof
shall be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash equal
to the fair market value of such fraction on the date of conversion (as
determined in good faith by the Board of Directors of the Corporation).
(m) NOTICES. Any notice required by the provisions of this
section 4 to be given to the holders of shares of Series D or E Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
certified and return receipt requested, and addressed to each holder of record
at the address appearing on the books of the Corporation provided that any
notice to be given to a holder of shares of Series D or E Preferred Stock
residing outside of the United States shall be given by facsimile and second
day courier service to the address of such holder as it appears on the books of
the Corporation.
5. AMENDMENT. Except as provided in Section 3(b) herein, any term
relating to the Series D or E Preferred Stock may be amended and the observance
of any term relating to any shares of that series of Preferred Stock may be
waived (either generally or in a particular instance and either retroactively
or prospectively) only with the vote or written consent of holders of more that
fifty percent (50%) of that series of Preferred Stock then outstanding. Any
amendment or waiver so effected shall be binding upon the Corporation and all
holders of such series of Preferred Stock.
6. RESTRICTIONS AND LIMITATIONS.
Except as provided in Section 3(b) herein, so long as any shares of
Series D or E Preferred Stock remain outstanding, the Corporation shall not,
without the vote or written consent by the holders of more than fifty percent
(50%) of the then outstanding share of Series D and E Preferred Stock:
(i) Redeem, purchase or otherwise acquire for value (or pay into or
set aside for a sinking fund for such purpose) any share or shares of Series D
or E Preferred Stock otherwise than by conversion in accordance with Section 4
hereof, or
(ii) Pay any dividends on, or purchase, redeem or otherwise acquire (or
pay into or set aside for a sinking fund for such purpose), any of the Common
Stock of the Corporation, provided, however, that this restriction shall not
apply to the repurchase of shares of Common Stock from directors, officers,
consultants or employees of the corporation or any subsidiary pursuant to
agreements approved by the corporations's Board of Directors under which the
Corporation has the option to repurchase such shares at the repurchase price
set forth in such agreements, not to exceed original or the most recent
issuance price of such stock, upon the occurrence of certain events, such as
the termination of employment, or
(iii) Effect any sale, lease, assignment, transfer or other conveyance
of all or substantially all of the assets of the Corporation or any of its
subsidiaries, or any consolidation or merger involving the Corporation or any
of its subsidiaries, or
(iv) Permit any subsidiary to issue or sell, or obligate itself to
issue or sell, except to the Corporation or any wholly owned subsidiary, any
stock of such subsidiary, or
(v) Effect any reclassification, recapitalization or other change
with respect to any outstanding shares of stock which results in the issuance
of shares of stock having any preference or priority as to dividend or
redemption rights, liquidation preferences, conversion rights, voting rights or
otherwise, superior to any such preference or priority of the Series D or E
Preferred Stock, or
(vi) Increase of decrease (other than by redemption or conversion) the
total number of authorized shares of Preferred Stock of the Corporation or the
total number of such shares of Preferred Stock designated Series D or E
Preferred Stock, or
(vii) Authorize or issue, or obligate itself to issue, any other equity
security senior to the Series D or E Preferred Stock as to dividend or
redemption rights, liquidation preferences, conversion rights, voting rights or
otherwise, or create any obligation or security convertible into or
exchangeable for, or having any option rights to purchase, any such equity
security which is senior to the Series D or E Preferred Stock, or
(viii) Reduce the dividend rate on the Series D or E Preferred Stock
provided for herein, or make such dividends noncumulative, or defer the date
from which dividend will accrue, or cancel accrued and unpaid dividends, or
change the relative seniority rights of the holders of the Series D or E
Preferred Stock as to the payment of dividends in relation to the holders of
any other capital stock of the Corporation, or
(ix) Reduce the amount payable to the holders of the Series D or E
Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, or change the relative seniority of the
liquidation preferences of the holders of the Series D or E Preferred Stock to
the rights upon liquidation of the holders of any other capital stock of the
Corporation, or
(x) Make the Series D or E Preferred Stock redeemable at the option
of the Corporation; or
(xi) Cancel or modify the Conversion Rights provided for in Section 4
hereof.
7. NO REISSUANCE OF SERIES D OR E PREFERRED STOCK. No share of
shares of Series D or E Preferred Stock acquired by the Corporation by reason
of redemption, purchase, conversion or otherwise shall be reissued, and all
such shares shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
FOURTH:
A. The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
B. The Corporation is authorized to indemnify the directors and
officers of the Corporation to the fullest extent permissible under California
law.
C. Any repeal or modification of the foregoing provisions of this
Article FOURTH by the shareholders of this Corporation shall not adversely
affect any right or protection of an agent of this Corporation existing at the
time of such appeal or modification.
FIFTH: That, effective upon conversion of the Series D and Series E
Preferred Stock to Common Stock, the number of Directors of the Corporation
shall be no fewer than five (5) nor more than nine (9).
3. That the foregoing Amendment and Restatement of the Articles of
Incorporation has been duly approved by the Board of Directors of this
Corporation.
4. That the foregoing Amendment and Restatement of Articles of
Incorporation set forth herein has been duly approved by the required vote of
shareholders in accordance with Section 902 of the Corporations Code. The
total number of shares entitled to vote on or consent to the Amendment and
Restatement is 8,411,768 shares of Old Common Stock , 5,970,000 shares of
Series D Preferred Stock and 1,600,000 shares of Series E Preferred Stock.
The percentage of shares required to effect the amendment was (i) a majority of
the outstanding shares of Old Common Stock Preferred Stock, (ii) 50% of the
outstanding shares of the Series D Preferred Stock and (iii) 50% of the
outstanding Series E Preferred Stock. The number of shares voting in favor of
this amendment exceeded the vote required.
/S/ROBERT PEPPER
Robert Pepper, President
/S/JOSEPH LANDY
Joseph Landy, Secretary
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true
and correct of our own knowledge.
Executed at SACRAMENTO, California, on July 30, 1993.
/S/ROBERT PEPPER
Robert Pepper, President
Joseph Landy, Secretary
- 5 -
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 28, 1997, AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
EX-27.1
FINANCIAL DATA SCHEDULE
[MULTIPLIER] 1,000
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-28-1997
[PERIOD-END] DEC-28-1997
[CASH] 25234
[SECURITIES] 112560
[RECEIVABLES] 30422
[ALLOWANCES] 343
[INVENTORY] 26118
[CURRENT-ASSETS] 203016
[PP&E] 57671
[DEPRECIATION] 25876
[TOTAL-ASSETS] 277697
[CURRENT-LIABILITIES] 36777
[BONDS] 115000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 91897
[OTHER-SE] 31548
[TOTAL-LIABILITY-AND-EQUITY] 277697
[SALES] 155219
[TOTAL-REVENUES] 156262
[CGS] 65299
[TOTAL-COSTS] 65299
[OTHER-EXPENSES] 64588
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1806
[INCOME-PRETAX] 28638
[INCOME-TAX] 9447
[INCOME-CONTINUING] 19191
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 19191
[EPS-PRIMARY] .95
[EPS-DILUTED] .89
