<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 0-22068
LEVEL ONE COMMUNICATIONS, INCORPORATED
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0128224
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9750 GOETHE ROAD, SACRAMENTO, CALIFORNIA 95827
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(916) 855-5000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares of Common Stock, par value $.001 per share, of the
registrant outstanding on May 7, 1999 was 39,293,500
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 28, 1999, and............ 3
December 27, 1998
Unaudited Consolidated Statements of Income for the ............ 4
Three Months ended March 28, 1999 and March 29, 1998
Unaudited Consolidated Statements of............................. 5
Cash Flows for the Three Months ended March 28, 1999
and March 29, 1998
Notes to Financial Statements (Unaudited)....................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........... 14
Item 5. Other Information ........... 14
Item 6. Exhibits and Reports on Form 8-K ........... 14
Signatures ........... S-1
</TABLE>
2
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LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
As of March 28, 1999 and December 27, 1998
<TABLE>
<CAPTION>
(IN THOUSANDS)
March 28, 1999 December 27, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 50,304 $ 28,794
Short-term investments 64,887 92,712
Trade accounts receivable, net of allowance for doubtful
accounts of $418 and $418 for March 28, 1999 and
December 27, 1998, respectively 34,201 35,820
Other receivables 2,752 2,620
Inventories 29,320 20,495
Other current assets 14,500 6,077
---------- ----------
Total current assets 195,964 186,518
Property and equipment, net 58,293 48,899
Long-term investments 76,970 68,577
Foundry deposits 1,143 16,460
Other assets 5,795 5,836
---------- ----------
Total assets $ 338,165 $ 326,290
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 1,441 1,241
Accounts payable 17,447 22,319
Accrued payroll costs 5,984 9,925
Deferred revenue 3,857 4,082
Income taxes payable 3,221 227
Other accrued liabilities 8,229 8,623
---------- ----------
Total current liabilities 40,179 46,417
Convertible subordinated notes 115,000 115,000
Capital lease obligations, less current portion 1,029 1,545
Deferred lease expense 95 136
---------- ----------
Total liabilities 156,303 163,098
Shareholders' Equity:
Common Stock, no par value 130,013 124,412
Authorized - 236,250 shares
Outstanding - 39,108 for March 28, 1999,
and 38,511 for December 27, 1998
Unrealized gain on investments 1,262 481
Retained earnings 50,587 38,299
---------- ----------
Total shareholders' equity 181,862 163,192
---------- ----------
Total liabilities and shareholders' equity $ 338,165 $ 326,290
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
3
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) For the Three Months Ended
-------------------------------------------
March 28, 1999 March 29, 1998
------------------ --------------------
<S> <C> <C>
Revenues $ 84,286 $ 56,630
Cost of revenues 34,718 23,526
------------------ --------------------
Gross margin 49,568 33,104
Research and development 17,185 12,553
Sales and marketing 11,341 9,414
General and administrative 4,211 4,166
------------------ --------------------
Total operating expenses 32,737 26,133
Operating income 16,831 6,971
Interest income 2,853 2,140
Interest expense (1,307) (1,705)
Other income (expense) (37) 23
------------------ --------------------
Income before provision for income taxes 18,340 7,429
Provision for income taxes 6,052 3,700
------------------ --------------------
Net income $ 12,288 $ 3,729
------------------ --------------------
------------------ --------------------
Basic earnings per share $ 0.32 $ 0.10
------------------ --------------------
------------------ --------------------
Diluted earnings per share $ 0.28 $ 0.10
------------------ --------------------
------------------ --------------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
4
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------
(IN THOUSANDS) March 28, 1999 March 29, 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,288 $ 3,729
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,074 3,669
Changes in assets and liabilities, net of effect of acquisitions:
Trade accounts receivable 1,619 (2,443)
Other receivables (132) 1,373
Inventories (8,825) (2,534)
Deferred income taxes (3,808) -
Prepaid expenses (4,615) (73)
Accounts payable and accrued liabilities (3,447) 971
Deferred revenues (225) 764
Deferred lease expense (41) (41)
----------------- -----------------
Net cash provided by (used in) operating activities (1,112) 5,415
----------------- -----------------
Cash flows from investing activities:
Purchase of debt and equity securities available-for-sale (36,655) (40,236)
Maturities and sales of debt and equity securities available-for-sale 58,868 33,006
Purchases of non-marketable equity securities (2,000) -
Net capital expenditures (15,235) (6,361)
Net (payments) refunds for foundry deposits and other assets 15,125 (1,203)
----------------- -----------------
Net cash provided by (used in) investing activities 20,103 (14,794)
----------------- -----------------
Cash flows from financing activities:
Net principal payments under capital lease obligations (316) 327
Proceeds from issuance of notes - 1,799
Proceeds from issuance of stock, net of
repurchases and costs of issuance 2,835 1,335
----------------- -----------------
Net cash provided by financing activities 2,519 3,461
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 21,510 (5,918)
Cash and cash equivalents at beginning of period 28,794 27,694
----------------- -----------------
Cash and cash equivalents at end of period $ 50,304 $ 21,776
----------------- -----------------
----------------- -----------------
Supplementary disclosure of cash and noncash transactions
Cash payments for:
Interest $ 2,338 $ 2,770
Income taxes 3,254 492
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
5
<PAGE>
LEVEL ONE COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
by Level One Communications, Incorporated ("Level One" or the "Company") in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month
periods ended March 28, 1999 and March 29, 1998 are not necessarily
indicative of the results that may be expected for the year ending January 2,
2000. The information reported in these financial statements should be read
in conjunction with the financial statements and footnotes contained in the
Company's Annual Report Form 10-K filed with the Securities and Exchange
Commission for the year ended December 27, 1998, and subsequent filings with
the Securities and Exchange Commission.
All share and per share numbers in this Report have been restated to
reflect the effect of stock splits. Additionally, in connection with the
stock splits, proportional adjustments were made to the numbers of shares of
common stock issuable upon exercise of all outstanding stock options,
warrants and other outstanding obligations of the Company.
NOTE 2. BUSINESS COMBINATIONS
On March 4, 1999, the Company and Intel Corporation entered into a
definitive stock-for-stock merger agreement valued at approximately $2.2
billion under which Intel would acquire Level One. The acquisition is aimed
at providing advanced networking capabilities through increased bandwidth and
functionality through silicon integration. Under the terms of the agreement,
each share of Level One stock would be exchanged for 0.86 shares of Intel
stock, after adjusting for Intel's two-for-one stock split announced in
January 1999 and effective April 11, 1999. Approximately 37.2 million shares
of Intel stock would be issued, assuming the conversion of Level One's
outstanding convertible subordinated notes into Level One common stock when
permissible under their terms. The completion of this transaction is subject
to compliance with regulatory requirements, Level One stockholder approval,
and other conditions customary in a transaction of this type.
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. For the Company, comprehensive income
includes net income reported on the income statement and changes in the fair
value of its available-for-sale securities reported as a separate component
of shareholders' equity. The Company's total comprehensive income for the
periods ended March 28, 1999 and March 29, 1998 was $13.1 million and $3.7
million, respectively.
6
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NOTE 4. EARNINGS PER SHARE
The following is a reconciliation of the numerator (income) and
denominator (shares) of basic and diluted earnings per share for the three
month periods ended March 28, 1999 and March 29, 1998. No conversion is
assumed for the convertible subordinated notes for the quarter ending March
29, 1998 because it would have an anti-dilutive effect on earnings per share.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME SHARES PER SHARE
AMOUNT
---------- --------- ------------
<S> <C> <C> <C>
QUARTER ENDING:
Net income:
March 28, 1999 $12,288
March 29, 1998 3,729
BASIC EPS: Income available to
common stockholders
March 28, 1999 $12,288 38,830 $ 0.32
March 29, 1998 3,729 36,143 0.10
Effect of dilutive securities:
Convertible debentures:
March 28, 1999 $ 854 4,312 $ 0.20
March 29, 1998 - - -
Options:
March 28, 1999 - 3,306
March 29, 1998 - 2,955
DILUTED EPS: Income available to common
stockholders plus assumed conversions
March 28, 1999 $13,142 46,448 $ 0.28
March 29, 1998 3,729 39,098 0.10
</TABLE>
NOTE 5. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market and include materials, labor and manufacturing overhead costs.
Inventories consisted of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
March 28, 1999 December 27, 1998
----------------- -------------------
<S> <C> <C>
Raw materials $ 4,319 $ 2,486
Work-in-process 11,675 9,827
Finished goods 13,326 8,182
----------------- -------------------
Total inventories $ 29,320 $ 20,495
----------------- -------------------
----------------- -------------------
</TABLE>
7
<PAGE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation is
provided on a straight-line basis over their useful lives. Property and
equipment consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS) March 28, 1999 December 27, 1998
----------------- ---------------------
<S> <C> <C>
Machinery and equipment $ 59,397 $ 49,857
Furniture and fixtures 40,603 34,943
Leasehold improvements 5,455 5,420
----------------- ---------------------
105,455 90,220
Less-Accumulated depreciation (47,162) (41,321)
----------------- ---------------------
$ 58,293 $ 48,899
----------------- ---------------------
----------------- ---------------------
</TABLE>
NOTE 7. SEGMENT REPORTING
The following is a summary of the Company's revenue by market and
geographic area for the three month period ended March 28, 1999 and March 29,
1998:
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 28, 1999 MARCH 29, 1998
------------------- ------------------
<S> <C> <C>
Revenues:
Networking $61,942 $37,898
Telecom 20,963 20,925
Other 1,381 (2,193)
------------------- ------------------
Total $84,286 $56,630
------------------- ------------------
------------------- ------------------
United States $46,763 $34,711
Singapore 9,614 4,647
Taiwan 17,338 4,956
Other foreign countries 10,571 12,316
------------------- ------------------
Total $84,286 $56,630
------------------- ------------------
------------------- ------------------
</TABLE>
Geographic area data is based on product shipment destination or
royalty payer location.
Export sales as a percentage of revenues were 44.5% and 38.7% for
the three months ended March 28, 1999 and March 29, 1998, respectively.
Sales to Flextronics Technologies Inc. were 12.4% of total revenues
and sales to Accton Technology Corp. were 12.2% of total revenues during the
first quarter of 1999. No single customer accounted for more than 10% of
total revenues is the first quarter of 1998.
Long-lived assets consist of net property and equipment and foundry
deposits. The following geographic summary of long-lived assets is based on
physical location:
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 28, 1999 DECEMBER 27, 1998
------------------- ----------------------
<S> <C> <C>
Long-lived assets:
United States $ 49,741 $ 44,629
Singapore 6,943 17,634
Other foreign countries 2,752 3,096
------------------- ----------------------
Total $ 59,436 $ 65,359
------------------- ----------------------
------------------- ----------------------
</TABLE>
The decrease in long-lived assets in Singapore is due to foundry
deposit refunds.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following information should be read in conjunction with the
unaudited interim financial statements and the notes thereto included in Item
1 of this Quarterly Report on Form 10-Q, the Management's Discussion and
Analysis of Financial condition and Results of Operations contained in Level
One's Annual Report on Form 10-K for the period ended December 27, 1998 filed
with the Securities and Exchange Commission on March 29, 1999, and any
subsequent filings with the Securities and Exchange Commission.
This report contains forward-looking statements that involve risks
and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements. See "Factors that May Affect Future
Results."
RESULTS OF OPERATIONS
REVENUES. Revenues for the first quarter of 1999 increased 48.8% to
$84.3 million from $56.6 million for the same quarter of 1998. 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 target
market segments. In the first quarter of 1999 Flextronics Technologies, Inc.
represented 12.4% of total revenues and Accton Technology Corp. represented
12.2% of total revenues.
Export sales, primarily consisting of sales to customers located in
Canada, Europe, and Asia, in the first quarter of 1999 were 44.5% of revenues
versus 38.7% of revenues in the same quarter of 1998. 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.
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. Future revenue growth could also be
impacted by the consummation of the proposed merger with Intel Corporation.
See "Notes to Supplemental Financial Statements (Unaudited) - Note 2 -
Business Combinations."
GROSS MARGIN. Product gross margin is affected by several factors,
including 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. Gross product margins for the first quarter
of 1999 were 58.8% versus 58.5% for the first quarter of 1998. This increase
is due to the impact of continuing cost reduction efforts.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
were $17.2 million or 20.4% of revenues in the first quarter of 1999 versus
$12.6 million or 22.2% of revenues in the first quarter of 1998. The dollar
increase in research and development expense is due to additions to Level
One's design engineering staff and related new product design expenses, while
the decline in spending as a percent of revenues is a result of higher
revenue growth than the growth in research and development costs.
SALES AND MARKETING. Sales and marketing expenses were $11.3 million
or 13.5% of revenues in the first quarter of 1999 versus $9.4 million or
16.6% of revenues in the first quarter of 1998. The dollar increases in sales
and marketing expenses are largely due to increased sales, sales support and
field
9
<PAGE>
application engineering headcount and the associated expense increases. The
Company has also increased its international sales offices and support staff.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the first quarter of 1999 were $4.2 million or 5.0% of revenues versus $4.2
million or 7.4% of revenues in the first quarter of 1998. The decline in
spending as a percent of revenues is a result of the growth in revenues while
not increasing general and administrative costs.
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 capital lease obligations used to finance certain
equipment. Net interest and other income for the first quarters of 1999 and
1998 was $1.5 million and $.5 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of
liquidity as of March 28, 1999, consisted of $115.2 million in cash, cash
equivalents and short-term investments. Working capital was $155.8 million at
March 28, 1999 versus $140.1 million at December 27, 1998.
During the first three months of fiscal 1999 the Company used $1.1
million of net cash in operating activities compared to $5.4 million provided
by operating activities during the first three months of fiscal 1998. The
increase in cash used in operating activities for the first three months of
fiscal 1999 was primarily due to increases in the balances of certain current
asset accounts and a decrease in current liabilities. These changes are
primarily due to timing and the expansion of the Company's business, and do
not reflect material changes in the way the Company conducts operations.
Cash provided by investing activities during the first three months
of fiscal 1999 totaled $20.1 million compared to $14.8 million used in
investing activities in the first three months of fiscal 1998. The primary
source of cash from investing activities during the first three months of
fiscal 1999 was the maturity of investments available-for-sale and a foundry
capacity agreement deposit refund of $15.0 million offset by cash used for
capital expenditures. The Company spent $15.2 million for capital
expenditures in the first three months of fiscal 1999 as compared to $6.4
million in the first three months of fiscal 1998.
Cash provided from financing activities for the first three months
of fiscal 1999 and 1998 totaled $2.5 million and $3.5 million, respectively.
The primary source of cash from financing activities for the first three
months of fiscal 1999 was from the issuance of common stock under the
Company's employee stock option and stock purchase plans.
Management believes that, in addition to current financial
resources, adequate capital resources are available to satisfy the Company's
investment and capital programs. Management believes that the Company's cash
flow is sufficient to maintain its current operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
LEVEL ONE'S RELIANCE ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST ITS
PRODUCTS MAY RESULT IN INCREASED COSTS OR DELAYS
Because Level One does not manufacture the silicon wafers used for
its products, Level One depends on its wafer suppliers to produce wafers in
sufficient quantities to meet customer demand at acceptable yields and at
competitive prices. Level One also depends on wafer suppliers to assemble,
test and deliver wafers on time. In 1994 and 1995, Level One's wafer
suppliers reduced shipments without prior notice, which resulted in increased
costs and delays that required Level One to transfer the production of some
products to a new supplier. Supply agreements with wafer suppliers cannot
eliminate this risk since Level One's suppliers may not be able to produce
enough wafers to meet increased demand because of their own capacity
limitations.
10
<PAGE>
IN ORDER TO COMPETE EFFECTIVELY IN THE SEMICONDUCTOR INDUSTRY, LEVEL ONE
NEEDS TO CONTINUALLY DEVELOP NEW PRODUCTS THAT GAIN MARKET ACCEPTANCE
In the semiconductor industry, price competition is intense and
product life cycles are short. As a result, the average selling price for
Level One's products decreases rapidly as new or competing products are
introduced. To compensate, Level One relies on obtaining yield improvements
to reduce manufacturing costs and on introducing new products which
incorporate advanced features that result in higher average selling prices.
To the extent that Level One does not successfully develop and timely
introduce new products that achieve market acceptance, or to the extent that
Level One does not achieve sufficient cost reductions on existing products to
maintain margins, Level One may be adversely impacted. To be successful,
Level One must identify new product opportunities, stay ahead of its
competitors so that their products will not render Level One's products
obsolete or noncompetitive, and gain market acceptance of its products with
target customers. Because of the increasing complexity of Level One's new
products, Level One could experience delays in completing development and
introduction of new products that could adversely impact its anticipated
market share for new products. Level One may be adversely affected by a
failure in any of these areas.
LEVEL ONE'S RECENT ACQUISITIONS PLACE A STRAIN ON LEVEL ONE'S MANAGEMENT AND
PERSONNEL RESOURCES
In July 1998, Level One acquired Acclaim Communications, Inc. In
late November 1998, Level One acquired Jato Technologies, Inc. In order to
successfully integrate these two newly acquired businesses and successfully
manage Level One's existing business, Level One will need to expand and
refine its management and personnel resources. Level One will also need to
significantly increase its development, testing, quality control, marketing,
logistics and service capabilities. If Level One does not effectively expand
and deploy its resources to meet these needs, Level One's business may be
adversely impacted.
ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS MAY IMPACT LEVEL ONE'S
RESULTS OF OPERATIONS REGARDLESS OF SUCCESS
In the semiconductor industry, competitors often assert intellectual
property infringement claims against one another. The success of Level One's
business depends on its ability to successfully defend its intellectual
property. This litigation may have a material impact on Level One's financial
condition regardless of whether or not Level One is successful. There is no
assurance that Level One will be successful in defending or asserting its
intellectual property rights.
EXCESS OR INSUFFICIENT INVENTORIES MAY ADVERSELY IMPACT LEVEL ONE'S REVENUES
AND EARNINGS
If Level One produces excess or insufficient product inventories
because it does not accurately anticipate customer demand, Level One's
revenues and earnings could be materially adversely impacted. This may happen
for three reasons. First, some of Level One's customers place orders with
long lead-times that may be canceled or rescheduled without significant
penalty. Second, Level One's inventory risk increases during periods of
strong demand and/or restricted semiconductor capacity because, based on
Level One's past experience, customers often over-order to assure adequate
supply and then may cancel or postpone orders without notice or significant
penalty if other product becomes available. Third, component shortages from
Level One's customers' suppliers could cause those customers to cancel or
delay plans to incorporate Level One's products into the design of target
products, resulting in the cancellation or delay of orders for Level One's
products.
11
<PAGE>
THE COMPLETION OF LEVEL ONE'S 4% CONVERTIBLE NOTE OFFERING HAS INCREASED
LEVEL ONE'S INTEREST EXPENSE AND MAY LIMIT LEVEL ONE'S ABILITY TO OBTAIN
ADDITIONAL FINANCING FOR WORKING CAPITAL, ACQUISITIONS OR OTHER PURPOSES
In September 1997, Level One incurred approximately $115 million in
additional debt as a result of its issuance of 4% Convertible Subordinated
Notes due 2004. These notes increased Level One's ratio of long-term debt to
total capitalization from 3.0% at June 29, 1997, to 39.0% at March 28, 1999.
This increased leverage has increased Level One's interest expense
substantially. This increased leverage could adversely affect Level One's
ability to obtain additional financing for working capital, acquisitions or
other purposes and could make Level One more vulnerable to economic downturns
and competitive pressures. This increased leverage could also affect Level
One's 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, Level One could be forced to reduce other expenditures
and/or forego potential acquisitions to be able to meet such requirements.
THE FAILURE OF LEVEL ONE'S KEY SUPPLIERS TO BE YEAR 2000 COMPLIANT AND LEVEL
ONE'S FAILURE TO DEVELOP YEAR 2000 CONTINGENCY PLANS COULD CAUSE LEVEL ONE TO
EXPERIENCE MANUFACTURING INTERRUPTIONS OR DELAYS THAT COULD ADVERSELY IMPACT
LEVEL ONE'S BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
Level One is currently in the process of determining whether there
are any critical areas in its business that are not Year 2000 compliant.
Level One has begun a comprehensive project to prepare its computer systems
for the Year 2000. Level One presently estimates that the total cost of
addressing its Year 2000 problems will be approximately $500,000, of which
approximately 48% has been expended to date. This cost estimate was derived
utilizing numerous assumptions, including the assumption that Level One has
already identified its most significant Year 2000 problems and that the
assessment, remediation and contingency plans of its third party suppliers
will be fulfilled in a timely manner without significant additional cost to
Level One. Level One believes that there is a remote possibility of an
adverse impact on its business due to problems with its internal systems or
products. Level One's products have no date specific functions or date
dependencies and will operate according to published specifications through
the Year 2000 and dates into the 21st century. As part of its Year 2000
assessment, Level One is contacting key suppliers of products and services to
determine whether such suppliers' operations, products and services are Year
2000 capable and/or to monitor their progress toward Year 2000 compliance. If
Level One's suppliers are not Year 2000 compliant, Level One could experience
manufacturing interruptions or shutdowns, decreased yields, quality
inconsistencies, delayed or inaccurate product testing, delivery delays, or
service interruptions. It is possible that one or more of these problems
could have a material adverse effect on Level One's business, financial
condition, or results of operations. There is also a risk because Level One
has not yet fully developed Year 2000 contingency plans to address any
failure of Level One's Year 2000 assessment to identify and remediate
significant Year 2000 risks to its business operations. Development of
contingency plans is in progress and will continue during calendar year 1999.
Such plans could include accelerating replacement of affected equipment or
software, using back-up equipment and software, developing temporary manual
procedures to compensate for system deficiencies, and identifying Year 2000
capable suppliers and service providers. There can be no assurance that any
such contingency plans would adequately address the Year 2000 problem. The
failure to develop a successful contingency plan could result in significant
delays and inefficiency in Level One's business which could have a material
adverse effect on Level One's business, financial condition and results of
operations.
12
<PAGE>
THE FAILURE OF LEVEL ONE TO COMPLETE THE PROPOSED MERGER WITH INTEL
CORPORATION COULD ADVERSELY AFFECT LEVEL ONE'S STOCK PRICE AND FUTURE
OPERATING RESULTS
Certain risks are inherent in the proposed merger with Intel
Corporation, including, but not limited to, the failure of the proposed
merger to occur. Level One's pre-merger stock price is significantly
influenced by the stock price of Intel. Any fluctuations in the stock price
of Intel may have an effect on the stock price of Level One prior to the
completion of the merger. The failure of the proposed merger to occur could
have a material adverse effect on Level One's stock price as well as Level
One's future operating results due to the write-off of pre-merger costs
incurred and possible market stigma.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 12, 1999, the Company and Zekko Corp. ("Zekko"), an
entity in which the Company has made an equity investment, jointly filed a
complaint in the United States District Court for the Eastern District of
California against Vision Tek, L.P. ("Vision Tek") and certain of its
principals alleging claims of fraud and breach of fiduciary duty and seeking
a judgment declaring the respective rights and obligations of Zekko under an
Option and License Agreement, dated as of October 8, 1997, entered into
between Zekko, Vision Tek and certain of Vision Tek's principals (the "Option
and License Agreement"). On February 16, 1999, Vision Tek filed an action
against the Company and Zekko in the District Court for the City and County
of Denver, Colorado seeking a declaratory judgment that neither Zekko nor the
Company has any rights to the technology licensed to Zekko under the Option
and License Agreement.
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 5. OTHER INFORMATION.
On April 27, 1999, the Company and Intel announced that the parties
have received clearance from the Federal Trade Commission and the Department
of Justice to consummate the proposed merger. The proposed merger is expected
to be completed following the approval of the merger by the Company's
stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K.
Amendment No. 1 to Form 8-K, filed on February 3,
1999, to report under Item 5 certain supplementary financial
information related to the registrant's November 24, 1998
acquisition of Jato Technologies, Inc.
Form 8-K, filed on March 8, 1999, to report under
Item 5 the issuance of the March 4, 1999 press release
announcing an agreement for Intel Corporation to acquire Level
One Communications, Incorporated.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1999 LEVEL ONE COMMUNICATIONS,
INCORPORATED
By: /s/ ROBERT S. PEPPER
----------------------------------
Robert S. Pepper, Ph.D.
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1999 By: /s/ JOHN KEHOE
-------------------------------
John Kehoe
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
S-1
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