-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WFAXpAUu6EM/iVTg/TUYOfvjLKWutNN6Z/ExJIu9uCu0KZODdRSKR75JJClGF4r0 Xkyp3HSAbZZ+shsBWyKWFA== 0000908985-97-000004.txt : 19970401 0000908985-97-000004.hdr.sgml : 19970401 ACCESSION NUMBER: 0000908985-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEVEL ONE COMMUNICATIONS INC /CA/ CENTRAL INDEX KEY: 0000908985 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 330128224 STATE OF INCORPORATION: CA FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22068 FILM NUMBER: 97568685 BUSINESS ADDRESS: STREET 1: 9750 GOETHE RD CITY: SACRAMENTO STATE: CA ZIP: 95627 BUSINESS PHONE: 9168555000 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from to Commission File Number: 0-22068 Exact name of registrant as specified in its charter: LEVEL ONE COMMUNICATIONS, INCORPORATED STATE OR OTHER JURISDICTION OF IRS EMPLOYER INCORPORATION OR ORGANIZATION: IDENTIFICATION NO. California 33-0128224 ADDRESS OF PRINCIPAL EXECUTIVE OFFICES: 9750 Goethe Road, Sacramento, California 95827 TELEPHONE NO.: (916) 855-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS Common Stock, no par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock held by nonaffiliates as of February 28, 1997, was $280,564,948. The number of shares outstanding of the Registrant's only class of common stock as of February 28, 1997, was 13,405,475 shares of no par value common stock. PART I ITEM 1. BUSINESS Level One Communications, Incorporated (''Level One'' or ''the Company'') was incorporated in 1985 under the laws of the state of California. The Company has operations in the United States, Europe and Asia. Level One designs, develops and markets mixed-signal application specific standard integrated circuit products (''ASSPs'') for high-speed digital signal transmission and networking connectivity to systems that transport information, within an office or around the world. Such systems connect to local area networks ("LANs"), wide area networks ("WANs") and public telephone transmission networks. LANs, WANs, and telephone transmission networks make possible such activities as the use of intra- enterprise networking ("intranets") and the use of the Internet and World Wide Web. Level One ASSPs transmit, regenerate and receive digitized voice, data, and video signals using a wide variety of protocols. Because these products both transmit and receive signals, they are called "transceivers". All networks, LAN, WAN, and transmission, require transceivers. Level One combines its strengths in analog and digital circuit design with its communications systems expertise to produce mixed-signal solutions with increased functionality and greater reliability, resulting in lower total system cost. As the volume of transmitted digital information continues to grow, communications original equipment manufacturers (''OEMs'') that supply products and systems to the transmission and networking markets face a fundamental challenge of providing greater data throughput on a cost- effective basis. Level One addresses the needs of leading communications OEMs by providing high performance mixed-signal ASSPs that optimize the allocation of analog and digital signal processing functions. The Company's proprietary simulation software and sophisticated design and testing methodology accelerate the product design cycle to improve time to market. A key challenge for Level One's OEM customers and their end users is the creation of access technologies that maximize the use of the large installed base of twisted-pair copper telephone lines to transport information. With more than 1.3 billion miles in place in the United States, copper telephone wire is expected to remain the primary medium for local connectivity to the ''electronic superhighway'' transport media that handle long-distance data transmissions. Such long-distance transport media include copper telephone lines, coaxial cable, fiber optic cable, wireless and satellite transmission. Copper telephone wire, which was originally designed to transmit relatively slow analog voice signals, requires special signal conditioning circuits to enable transmission of high-speed digital signals. PRODUCTS AND APPLICATIONS Level One develops and sells advanced ASSPs and custom derivatives that provide silicon connectivity solutions and achieve improved integration of functions. The Company's current products address the needs of two primary segments of the communications connectivity market: the networking market and the transmission market. NETWORKING PRODUCTS Level One's networking products address the rapid evolution and the growing convergence of the LAN and WAN networking connectivity markets. For these markets, Level One produces Ethernet transceivers, single chip quad Ethernet repeaters, managed Ethernet repeaters, and integrated transceiver solutions for Frame Relay, Switched 56/DDS and T1/E1 access products. Local Area Networks address the need to share information among individuals and workgroups within a building or campus environment. The dominant networking standard in the LAN environment is Ethernet, commonly implemented over a twisted pair copper wire environment utilizing a 10 megabits per second transmission standard. Fast Ethernet products enable transmissions of up to 100 megabits per second over twisted pair copper wiring. Emerging 1-Gigabit per second Ethernet standards are aimed at the same copper infrastructure as the Fast Ethernet products. These high speed LANs are expected to be catalysts for a variety of new graphics, video, multimedia, and network management applications. Level One's transceivers incorporate analog and digital functions into single chip solutions. Level One products in this category are used in computer/workstation, server, portable computing, network printing, and Ethernet switch applications. To provide Level One customers with cost effective, high performance intranet and LAN solutions, these transceivers incorporate features such as patented on-chip transmit filters, full duplex support, multichannels, 3.3 volt performance, and the smallest form factor package available. Level One repeater and network management products include cascadeable quad repeater hub chips, with integrated, filter technology. These chips allow development of low cost, multiport managed and unmanaged Ethernet repeater hub systems. Level One also produces a family of remote network management devices which incorporate a Media Access Controller and support for Simple Network Management Protocol ("SNMP") and Remote Monitoring ("RMON"). The Company also has a single chip solution optimized for hybrid switching systems. Intranets and Wide Area Networks connect individuals and workgroups over longer distances than LANs, using telephone company transmission lines rather than intraoffice wiring. WAN system products that incorporate Level One devices include routers, digital modems, multichannel Access Multiplexers, lottery and point-of-sale terminals. The rapid growth of high bandwidth, low cost digital access services has increased the demand for business and consumer use of Wide Area Networks. Along with the growth of the Internet and on-line services, WAN equipment markets have experienced significant growth in recent years. The company's transceivers targeted at WAN equipment segments incorporate analog and digital functions into single chip solutions. Level One products are used in routers, digital modems, and a variety of other customer premise equipment applications. Service offerings such as Frame Relay, Switched 56, and DDS have helped drive demand for Level One's products such as the LXT441, a single chip 56kbs digital access modem. As the LAN and WAN markets experience broad based growth, there is increased demand for compatible protocols and standards to allow LAN/WAN interoperability and management as well as for silicon technology addressing the convergence of the two markets. Level One networking products service these evolving market needs. TRANSMISSION PRODUCTS Level One's transmission products service the growing demand for high- speed digital signal transmission utilizing the industry-wide specifications referred to as ''T1'' in North America, and ''E1'' in Europe, Asia and much of the rest of the world. T1 systems transmit 1.544 million bits per second and E1 systems transmit 2.048 million bits per second. Level One's products also address the transmission service known as ''Fractional T1,'' in which users can access multiple 64kbs sub-channel rates of T1. Level One produces fully integrated single chip T1 and E1 transceivers to meet the requirements of its customers. Short-haul transceivers, which process signals travelling within buildings, are incorporated into customer premise equipment and into products sold to network service providers such as telephone companies. Short-haul transceivers are typically used for transmissions of 600 feet to 700 feet. Long-haul transceivers, which transmit to approximately 6,000 feet, are incorporated into products such as PBXs, channel service units, routers and multiplexers, which provide connectivity between customer premise devices and the telephone company network. Long-haul transceivers are also used in base stations for mobile communication systems. Repeaters are installed along telephone company transmission lines to receive and regenerate signals at intervals of 6,000 feet, preventing the deterioration of the signal. To reduce service costs, telephone companies use ''smart'' repeaters that enable the system operator to quickly locate a faulty repeater. Level One's products are used in these ''smart'' repeater applications. High-bit-rate digital subscriber line (''HDSL'') products produced by the Company are designed to transmit up to 12,000 feet at the T1 rate on two sets of twisted-pair copper wire or at the E1 rate on two or three sets of twisted pair wire, reducing or eliminating the need for repeaters in long-haul T1/E1 transmission. HDSL permits the transmission of data at 784 kilobits per second or 1,168 kilobits per second on any twisted-pair copper wire used for subscriber loops. The Company's HDSL solution is a two-chip chipset. The Company expects that HDSL, together with successor and derivative technologies, will continue to play an important role in the communications infrastructure. Emerging DSL technologies ("xDSL") include high speed Internet access and residential broadband. The Company plans to address these markets with current and future DSL products. During 1996 the Company shipped Subrate HDSL Multi-Rate Digital Subscriber Line ("MDSL") chipsets to selected customers, and formally announced the product in February 1997. MDSL is currently used for Internet access and digital pair gain, primarily for commercial customers. In the future MDSL is expected to also be used for wireless base stations and video conferencing. Level One produces fully integrated quadruple T1/E1 receivers, which are incorporated into telephone company maintenance and performance monitoring equipment. In 1996 Level One introduced the LXT360, LXT361, LXT350 and LXT351 integrated T1/E1 transceivers aimed at developers of Sonet/SDH multiplexers, digital loop carriers, and residential broadband access systems. These products permit OEM customers to develop a single board design that meets both T1 and E1 standards. The chips are designed to operate over poor quality or "noisy" lines. Clock rate adapters (CLADs) adapt signals generated at the host system's internal clock rates for T1/E1 transmission. CLADs are used to generate internal timing systems for channel banks, digital loop carriers, multiplexers, timing generators and other E1/T1 equipment, eliminating the need for expensive discrete crystal oscillators. BUSINESS AND TECHNOLOGY TRANSACTIONS In December 1996, the Company acquired Silicon Design Experts, Inc., a design and consulting company located in New Jersey. The acquisition provides the Company with research and development personnel and digital signal processing ("DSP") technology that will accelerate the Company's product development of 1 Gigabit Ethernet, Asynchronous Transfer Mode ("ATM"), and other high speed DSP applications. The Company incurred a one-time charge to earnings of $2.5 million during the fourth quarter of 1996 for purchased research and development related to the acquisition. During the third quarter of 1996, in connection with a third-party financing transaction for Maker Communications, Inc. ("Maker"), the Company sold a portion of its minority interest in Maker for an aggregate of approximately $675,000. This sale was accounted for as a one-time gain which was reported as other income. The Company continues to hold a minority interest in Maker and to license certain Maker technology. Other contractual rights and obligations, including the Company's obligation to provide certain loan financing to Maker, were terminated in the transaction. Following the transaction, Maker repaid the Company approximately $2.9 million, the total balance under an outstanding note. TECHNOLOGY The Company's proprietary technology includes systems simulation and testing software and an extensive circuit cell library. Level One believes that a key competitive factor in its success is its ability to use this technology, in conjunction with industry standard design tools, to rapidly design and introduce new products. The Company continuously reviews new opportunities in emerging technologies such as xDSL, Switched Ethernet, Fast and Gigabit Ethernet, infrared, ATM, wireless, frame relay and cable transmission. STRATEGIC RELATIONSHIPS Level One's relationships and strategic development arrangements with industry leaders help the Company identify and develop new products that meet industry needs. Through the involvement of key customers in alpha stage development, the Company's objective is to bring to market products that are positioned to become market leaders. Level One is an active member of several important standards committees throughout the world. Level One has from time to time entered into development and license agreements with third parties to broaden the Company's product and technology offerings. Level One has also in the past entered into strategic alliances with consortia of industry leaders to develop communications products, such as the Company's HDSL chipsets. The Company may in the future enter into such arrangements when appropriate opportunities arise. SALES AND MARKETING Level One's sales and marketing strategy is to achieve design wins by developing products with superior mixed-signal processing functions that are designed into equipment offered by industry leaders. Level One has a direct sales force and a worldwide network of independent distributors and sales representatives. These independent sales organizations are selected for their ability to provide effective field sales and technical support to customers. The Company has a direct order fulfillment service for its customers ordering smaller quantities of parts with lead times shorter than the Company's standard lead times. The Company maintains seven regional sales offices in the United States. In addition, there are 25 sales representatives or distributors of the Company's products. Internationally, Level One has six sales offices along with 22 sales representatives or distributors operating in 37 countries. RESEARCH AND DEVELOPMENT The Company believes that the continued introduction of new products in its target markets is essential to its growth. As of December 29, 1996, Level One had 104 full-time employees engaged in research and development. The Company currently anticipates that it will increase research and development staffing levels in 1997. Expenditures for research and development in 1996, 1995 and 1994 were approximately $22.0 million, $17.1 million, and $10.0 million, respectively. These expenditures exclude one- time charges for purchased research and development of $2,500,000 and $750,000 related to acquisitions in 1996 and 1995, respectively. The Company released 12 new products during 1996, consisting of four networking products and eight transmission products. A portion of the Company's research and development resources may be used to enhance existing products and to move to smaller geometries on larger wafers to improve product costs. MANUFACTURING FOUNDRIES Level One uses independent silicon foundries to fabricate its wafers. This approach enables the Company to concentrate its resources on design and test and allowing it to eliminate the cost associated with owning and operating a fabrication facility. The Company's wafer needs are supplied by six foundries; however, the Company may, from time to time, qualify other foundries. Except where the Company has contracted for long-term wafer supplies, the Company's suppliers generally are not obligated to supply, nor is the Company obligated to purchase, any minimum amount of wafers. Such suppliers generally agree on production schedules based on purchase orders and forecasts. During 1995, the Company entered into five-year agreements with three of its suppliers for committed foundry capacity in consideration of equipment financing or cash deposits. During 1995 and 1996, the Company provided an aggregate of $14.6 million in equipment financing and/or cash deposits to these three foundries in connection with such agreements. From time to time, foundries supplying the Company may experience wafer yield problems or capacity constraints which can result in wafer delivery delays, and the Company may need to locate an alternative source of supply for wafers. The Company has experienced increased costs and delays in customer shipments as a result of a foundry reducing shipments to the Company without prior notice, forcing the Company to transfer products to a new foundry. Although the Company believes it can meet customer demand, there can be no assurances that unforeseen demand or supply disruptions will not have a material impact on the Company's business. ASSEMBLY Once the subcontracted wafers have been tested and accepted by the Company, the die are assembled into packages by subcontractors located worldwide. The Company utilizes multiple assembly subcontractors for its products. While the Company has not experienced any material disruption in supply from assembly subcontractors, there can be no assurance that assembly problems will not occur. QUALITY AND RELIABILITY ASSURANCE The Company qualifies each assembly and foundry subcontractor before that vendor manufactures products for the Company. Such qualification includes an audit and analysis of the subcontractor's quality system and manufacturing capabilities. The Company continuously monitors subcontractors' quality and reliability on an ongoing basis. Level One's objective is to control the quality of finished goods as thoroughly as if it internally operated every step of the manufacturing process. The Company and its customers thereby realize the economic efficiencies of "fabless" production combined with tight quality control. Effective January 30, 1997, Level One was registered by Underwriters Laboratory as complying with the requirements of ISO 9001. BACKLOG As of December 29, 1996, the Company's total backlog scheduled to be shipped was approximately $32.6 million, as compared to backlog of approximately $29.2 million at December 30, 1995. A portion of the orders constituting the Company's backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. The Company limits its reported backlog to those orders expected to ship within the next six months. COMPETITION Level One's competition consists of other semiconductor companies and semiconductor divisions of vertically integrated companies. In the transmission market, the Company's principal competitors are Lucent, Brooktree Corporation (a subsidiary of Rockwell International, Inc.), Crystal Semiconductor, Inc. (a subsidiary of Cirrus Logic, Inc.), Siemens, Dallas Semiconductor, Inc. and Sierra Semiconductor Corporation. In the networking market, the Company's principal competitors are Advanced Micro Devices, Inc., Crystal, Lucent, Seeq Technologies, Inc., Texas Instruments, Incorporated, and National Semiconductor Corporation. Many of these competitors have substantially greater financial and other resources than the Company. Level One believes that its competitive strengths include efficient distribution channels, highly experienced digital and mixed-signal circuit designers, proprietary design and development tools, and its library of analog and digital blocks and cells. The ability of the Company to compete successfully in the rapidly evolving area of high performance integrated circuit technology depends on factors both within and outside of its control. Such factors include, without limitation, success in designing and manufacturing new products, implementing new technologies, intellectual property programs, product quality, reliability, price, efficiency of production, and general economic conditions. Although the Company believes that it competes favorably, there is no assurance that the Company will be able to compete successfully in the future. PATENTS AND LICENSES Level One has 23 United States patents that expire from 2009 to 2014, 16 pending U.S. patent applications and 14 pending international patent applications. All of Level One's products are covered by at least one Level One patent. The Company has 24 U.S. mask work registrations on its products. Level One owns seven registered trademarks or servicemarks. The Company has initiated a patent infringement suit against one of its competitors relating to two of the Company's patents. See "Legal Proceedings". Level One has entered into various license agreements for product or technology exchanges. In general, these licenses are to provide second sources for standard products or to convey or receive rights to certain proprietary or patented cores, cells or other technology. EMPLOYEES As of December 29, 1996, the Company had 410 full-time employees. The Company's employees are not represented by any collective bargaining agreement, and the Company has never experienced a work stoppage. The Company believes its employee relations are good. FACTORS THAT MAY AFFECT FUTURE RESULTS The following factors may have an impact on the Company's business: DEPENDENCE UPON INDEPENDENT MANUFACTURERS The Company does not manufacture the wafers used for its products. The Company's wafers are manufactured by foundries located in the United States, Europe, and Asia. The Company depends upon these suppliers to produce wafers at acceptable yields and to deliver them in a timely manner at competitive prices. The Company may sustain an adverse impact on operating results from problems with the cost, timeliness, yield and quality of wafer deliveries from suppliers. From time to time, the available industry-wide foundry capacity can fluctuate significantly. During periods of constrained supply, the Company may experience difficulty in securing an adequate supply of wafers, and/or its suppliers may increase wafer prices. The Company's operating results depend in substantial part on its ability to maintain or increase the capacity available from its existing or new foundries. In prior years, the Company has experienced increased costs and delays in customer shipments as a result of a foundry reducing shipments to the Company without prior notice, requiring the Company to transfer products to a new foundry. Although the Company believes that it has planned to meet customer demand, there can be no assurances that unforeseen demand or other changes will not have a material impact on the Company's business. The Company is also dependent upon third-party assembly companies that package the semiconductor die. The Company depends upon these suppliers to produce products in a timely manner and at competitive prices. The Company may sustain an adverse financial impact from problems with the cost, timeliness, yield and quality of product deliveries from these suppliers. FACTORS AFFECTING ANNUAL AND QUARTERLY OPERATING RESULTS The semiconductor industry is characterized by rapid technological change, intense competitive pressure and cyclical market patterns. The Company's results of operations are affected by a wide variety of factors, including general economic conditions, semiconductor industry environment, changes in average selling prices, the timing of new product introductions (by the Company and its customers), use of new technologies, the ability to safeguard patents and intellectual property, and rapid change of demand for products. The level of net revenues in any specific quarter can also be affected by the level of orders placed during that quarter. The Company attempts to respond to changes in market conditions as soon as possible; however, the rapidity of their onset may make prediction of and reaction to such events difficult. Due to the foregoing and other factors, past results, such as those described in this report, may not be predictive of future performance. DEPENDENCE ON NEW PRODUCTS The Company's future success depends on its ability to timely develop and introduce new products which compete effectively. Because of the complexity of its products, the Company may experience delays in completing development and introduction of new products, and, as a result, not achieve the market share anticipated for such products. The Company's strategy is to develop products for the fastest growing segments of the communications market. The Company conducts its own analysis of market trends and reviews forecasts and information provided by industry analysts. Market conditions may change rapidly as technology, economic, or user-preference conditions cause different communications technologies to experience growth other than that forecast by the Company or others. There can be no assurance that the Company will successfully identify new product opportunities and bring new products to market in a timely manner, that products or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive, or that the Company's products will be selected for design into the products of its targeted customers. In addition, the average selling price for any particular product tends to decrease over the product's life. To offset such price decreases, the Company relies primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and other price/performance factors such that higher average selling prices and higher margins are achievable relative to existing product lines. To the extent that cost reductions and new product introductions with higher margins do not occur in a timely manner, or the Company's products do not achieve market acceptance, the Company's operating results could be adversely affected. INTELLECTUAL PROPERTY The Company relies upon patent, trademark, trade secret and copyright law to protect its intellectual property. There can be no assurance that such intellectual property rights can be successfully asserted or will not be invalidated, circumvented or challenged. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources for the Company. Any infringement claim or other litigation against or by the Company could have a material effect on the Company's financial condition and results of operations. In November 1995 the Company commenced infringement litigation against a competitor. See "Legal Proceedings". SEMICONDUCTOR INDUSTRY The semiconductor industry has historically been cyclical and subject to significant economic downturns at various times. The Company may experience substantial period-to-period fluctuations in operating results due to general semiconductor industry conditions, overall economic conditions or other factors. In addition, the securities of many high technology companies have historically been subject to extreme price and volume fluctuations, a factor which may affect the market price of the Company's common stock. As is common in the semiconductor industry, the Company frequently ships more product in the third month of a quarter than in the other months. If a disruption in the Company's production or shipping occurs near the end of a quarter, the Company's revenues for that quarter could be adversely affected. The Company must order wafers and build inventory in advance of product shipments. There is risk that the Company could produce excess or insufficient inventories of particular products because the Company's markets are volatile and subject to rapid technology and price changes. This inventory risk is heightened because certain of the Company's customers place orders with long lead times which may be subject to cancellation or rescheduling by that customer. To the extent the Company produces excess or insufficient inventories of particular products, the Company's revenues and earnings could be adversely affected. Increased demand for semiconductor products may result in a reduction in the availability of wafers from foundries. Such capacity limitations may adversely affect the Company's ability to deliver products on a timely basis and affect the Company's margins. Additionally, the Company believes that during periods of strong demand and/or restricted semiconductor capacity, customers will over-order to assure an adequate supply. Certain of the Company's customers may cancel or postpone orders without notice if product becomes available elsewhere. Shortages of components from other suppliers could cause the Company's customers to cancel or delay programs incorporating the Company's products, resulting in the cancellation or delay of orders for the Company's products. Because the foregoing factors may affect results, historical results or trends may not be predictive of future results or trends. ITEM 2. PROPERTIES PROPERTIES The Company's principal facilities are in two separately leased buildings in an office park in Sacramento, California. The two leases relate to buildings with 87,000 square feet of space and 51,000 square feet of space, respectively, and expire in 2004 and 2006, respectively. The Company also leases approximately 11,000 square feet for the operations of San Francisco Telecom under a lease that is scheduled to expire in 2000. The Company believes these facilities are adequate for its current and immediately foreseeable level of operations. The Company also leases small office facilities for the operation of its New Jersey design center and for its domestic and international sales offices. ITEM 3. LEGAL PROCEEDINGS On November 28, 1995, the Company initiated a patent infringement suit against Seeq Technologies, Inc. in United States District Court for the Northern District of California. The suit relates to two Level One patents, No. 5,267,269 and No. 5,249,183, and to certain Seeq Ethernet products, and seeks damages and injunctive relief. Seeq has denied the allegations. Although the Company does not believe such litigation will have a material impact on the Company, litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. See "Factors That May Affect Future Results". There are no other material pending legal proceedings, other than routine litigation incidental to the Company's business, to which the Company is a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the 1996 fiscal year to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common Stock has been traded on the NASDAQ National Market System under the symbol LEVL since its initial public offering on August 19, 1993 at $11{3}/{8} per share (rounded to the nearest {1}/{16}). The following table sets forth, for the fiscal quarters indicated, the high and low closing sale prices of the Common Stock as reported by NASDAQ National Market System (rounded to the nearest {1}/{16}). The Company's fiscal year ends on the Sunday nearest to the calendar year end in each year.
Year High Low 1996 Fourth Quarter $37 1/2 $26{13}/{16} Third Quarter $29 1/2 $16 1/4 Second Quarter $30 1/2 $19 1/4 First Quarter $36 1/4 $16 3/4 1995 Fourth Quarter $26 $17 Third Quarter $27 1/4 $20 1/2 Second Quarter $22 3/4 $14 1/2 First Quarter $18 3/4 $12
On February 28, 1997, the closing sale price for the Company's Common Stock was $32.875 per share. As of February 28, 1997, there were approximately 156 holders of record of the Company's Common Stock. On December 11, 1996, the Company issued a total of 86,730 shares of common stock to the shareholders of Silicon Design Experts, Inc. ("SDE"), in connection with the Company's acquisition of SDE. On February 2, 1996, the Company issued a warrant to purchase up to 17,000 shares of common stock at an exercise price of $21.00 per share in connection with an incentive agreement with an independent sales representative company. In each case, the issuance of the securities was privately negotiated in a transaction not involving a public offering in reliance on the exemptions contained in Section 4 of the Securities Act of 1933. The Company has never paid dividends on its Common Stock and does not anticipate paying any dividends in the foreseeable future. The Company's bank line of credit agreement prohibits the payment of dividends on its capital stock (other than dividends payable solely in the Company's stock) without the prior written consent of the bank. The Company intends to retain its earnings for the operation of its business. ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR (IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994 1993 1992 DATA) Statement of Income Data: Revenues $111,987 $ 78,018 $ 46,825 $ 25,984 $ 14,076 Cost of sales 48,477 33,300 18,785 9,782 5,603 Gross margin 63,510 44,718 28,040 16,202 8,473 Operating expenses: Research and development 24,505 17,857 9,956 5,934 3,067 (1) Sales and marketing 16,589 11,372 6,772 4,102 2,400 General and administrative 6,741 5,752 3,424 1,936 933 Total operating 47,835 34,981 20,152 11,972 6,400 expenses Operating income 15,675 9,737 7,888 4,230 2,073 Net interest and other income (expense) (2) 2,293 2,064 1,440 12 (46) Provision for income taxes 6,755 1,543 1,323 503 243 Net income $11,213 $10,258 $ 8,005 $ 3,739 $ 1,784 Earnings per share $ 0.82 $ 0.76 $ 0.60 $ 0.35 $ 0.18 Weighted average common shares and equivalents 13,756 13,465 13,291 10,750 9,800
(1)Includes one-time charges for research and development relating to the acquisitions of Silicon Design Experts, Inc., in 1996 of $2.5 million, and San Francisco Telecom, Inc., in 1995 of $750,000. (2)A one-time gain relating to the sale of a portion of a minority interest in Maker Communications, Inc., of $675,000, is included in 1996.
AS OF FISCAL YEAR END (IN THOUSANDS) 1996 1995 1994 1993 1992 BALANCE SHEET DATA: Cash and cash equivalents $ 20,251 $ 21,628 $ 9,260 $15,141 $ 3,325 Working capital 50,871 50,834 48,231 21,605 2,821 Total assets 112,102 100,801 71,628 33,060 9,009 Long-term obligations (less current portion) 3,806 4,463 361 2,431 806 Shareholders' equity 95,581 78,965 63,309 23,910 3,774
SELECTED QUARTERLY FINANCIAL DATA FISCAL 1996 QUARTERS FISCAL 1995 QUARTERS
(IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH Revenues $27,542 $27,479 $27,363 $29,603 $13,219 $16,605 $21,680 $26,514 Cost of sales 11,588 11,521 11,756 13,612 5,600 6,882 9,459 11,359 Gross margin 15,954 15,958 15,607 15,991 7,619 9,723 12,221 15,155 Operating expenses: Research and development 5,675 5,739 5,249 7,842 2,896 4,741 4,604 5,616 Sales and marketing 4,001 3,989 4,219 4,380 2,247 2,492 3,146 3,487 General and administrative 1,766 1,765 1,595 1,615 1,084 1,337 1,403 1,928 Total operating expenses 11,442 11,493 11,063 13,837 6,227 8,570 9,153 11,031 Operating income 4,512 4,465 4,544 2,154 1,392 1,153 3,068 4,124 Net interest and other income (expense) 392 349 1,084 468 512 557 511 484 Provision/(benefit) for income 1,618 1,590 1,857 1,690 381 477 1,086 (401) tax Net income $3,286 $3,224 $3,771 $ 932 $1,523 $1,233 $2,493 $5,009 Earnings per share $0.24 $0.24 $0.27 $0.25 $0.10 $0.09 $0.18 $0.37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since its inception, the Company has designed, developed and marketed application specific standard integrated circuit products ("ASSPs") and custom derivatives for the transmission and networking markets. Volume shipments of its initial ASSPs began in 1989. Since that time, the Company has experienced significant increases in sales as its mixed- signal integrated circuits have gained market acceptance. The Company's annual revenue compound growth rate has been 80% since 1989. The Company first achieved profitable operations in the quarter ended March 28, 1992 and has been profitable in each subsequent quarter. The Company derives revenues principally from product sales. In addition, the Company has received non-recurring engineering and licensing revenue from strategic partners and customers in connection with product development projects. As a result of those and other transactions, the Company receives royalties and license fees. The Company's cost of sales includes the costs of wafer fabrication and assembly performed by third party vendors, and costs associated with the procurement, scheduling, testing and quality assurance functions performed by the Company. Research and development expenses associated with non-recurring engineering contracts are expensed as incurred, while the related revenue is recognized only as contract milestones are completed. This document includes forward-looking statements which involve risks and uncertainties. Actual results of the Company's activities may differ significantly from the potential results discussed in such forward-looking statements. Risk factors that might cause such differences include, but are not limited to, those factors identified below and under the caption "Factors That May Affect Future Results". RESULTS OF OPERATIONS REVENUES: Revenues for 1996 increased to $112.0 million from $78.0 million in 1995 and $46.8 million in 1994. The continued growth in revenues is due to the successful introduction of new products and increased sales of existing products to customers in the Company's two target market segments - transmission and networking. In 1996, sales to Hewlett-Packard were 11.2% of total sales. In 1995 and 1994, no single customer accounted for more than 10% of revenues. Export sales, primarily consisting of sales to Canada, Europe, and Asia, were 39% of revenues in 1996, 33% in 1995 and 22% in 1994. All sales were in U.S. dollars, thereby eliminating any foreign currency impact on revenues and net income. The increase in international sales is attributable to increased sales to foreign manufacturing facilities and subcontractors of domestic customers and the Company's increased international marketing and sales efforts, including establishment of sales and sales support personnel in foreign countries. ROYALTIES, LICENSES AND NON-RECURRING ENGINEERING REVENUE: The Company has entered into development agreements with certain customers relating to customer-specific applications, as well as, license agreements with certain semiconductor manufacturers. Revenue is not recognized for non-recurring engineering ("NRE") contracts until contract milestones are met, although expenditures associated with the contract are expensed as incurred. During 1996, the Company had $398,000 in revenues from NRE contracts versus $289,000 in 1995 and $1,400,000 in 1994. In 1996, the Company received royalties of $198,000 from products sold by licensees. In 1995 and 1994, royalties were $312,000 and $321,000, respectively. The Company believes future revenue growth will depend on the success and timing of new products along with continued sales growth of existing products. New products are generally incorporated into a customer's product or system at the design stage. However, design wins may precede volume sales by a year or more. No assurance can be given that any design win will result in future revenues. GROSS MARGIN: The following table sets forth the Company's product sales and product gross margin:
(DOLLARS IN THOUSANDS) 1996 1995 1994 Product Sales $111,392 $77,417 $45,104 . Cost of product sales 48,477 33,300 18,785 . Gross margin $62,915 $44,117 $26,319 Gross margin % product sales.. 56.5% 57.0% 58.4%
Product gross margin is affected by several factors, including average selling prices, the mix between older and newer products, test equipment utilization, foundry manufacturing yields, timing of cost reductions and the mix between direct and distributor sales. Margins on domestic and international sales are similar. Beginning in 1996, certain engineering costs associated with product cost reduction efforts were more appropriately allocated to cost of product sales rather than research and development. This caused margins to decline by approximately 2.0 percentage points in 1996, while reducing research and development expense a similar amount. There was no net impact on operating profit. RESEARCH AND DEVELOPMENT: Research and development ("R&D") expenses were $24.5 million in 1996, $17.9 million in 1995 and $10.0 million in 1994. As a percent of revenues, R&D expenses were 21.9%, 22.9% and 21.3% in 1996, 1995 and 1994, respectively. In 1996, R&D expense included a one-time charge for purchased research and development of $2.5 million related to the acquisition of Silicon Design Experts, Inc. In 1995, R&D expense included a one-time charge for purchased research and development of $750,000 associated with the acquisition of San Francisco Telecom, Inc. Excluding one time charges, R&D expense as percent of revenues was 19.6% and 21.9% for 1996 and 1995, respectively. As previously stated in the gross margin section, in 1996 the Company began accounting for engineering costs associated with product cost reduction efforts in cost of product sales, rather than R&D. In 1996, these costs were approximately 2% of revenues. SALES AND MARKETING: Sales and marketing expenses were $16.6 million in 1996, $11.4 million in 1995 and $6.8 million in 1994. As a percent of revenue, sales and marketing expenses were 14.8%, 14.6% and 14.5% in 1996, 1995 and 1994, respectively. GENERAL AND ADMINISTRATIVE: General and administrative expenses increased to $6.7 million in 1996 from $5.8 million in 1995 and $3.4 million in 1994. As a percentage of revenue, expenses decreased to 6.0% in 1996, from 7.4% and 7.3% in 1995 and 1994, respectively. The expense increases in dollars are primarily attributable to additional headcount and associated expenses due to the Company's growth. INTEREST AND OTHER INCOME: The Company earns interest on its cash and investments and incurs interest expense on lease obligations used to finance certain capital equipment. Income for 1996 was $2.3 million versus $2.1 million in 1995 and $1.4 million in 1994. In 1996, other income included a one-time gain of $675,000 from the sale of a portion of the Company's investment in Maker Communications. PROVISION FOR INCOME TAXES: The Company's effective income tax rate was 37.6% for 1996. In 1995 and 1994, the effective rate was 13.1% and 14.2%. For a reconciliation of the Company's effective tax rate to the statutory federal tax rate, see Note 5 of Notes to Financial Statements. LIQUIDITY AND CAPITAL RESOURCES During the years ended 1996, 1995 and 1994, the Company financed its operations primarily through cash flows from operations and existing cash and investment balances. Working capital as of December 29, 1996, was $50.9 million. The Company's principal sources of liquidity as of December 29, 1996, consisted of $30.5 million in cash and short-term investments and $10.0 million available under the Company's line of credit. As of December 29, 1996, the Company had no outstanding balance under this line of credit. During 1996, the Company generated $22.5 million of cash from its operating activities as compared to $7.5 million in 1995 and $4.3 million in 1994. In 1996, accounts receivable increased by $2.9 million due to increased sales levels. Inventories decreased by $5.8 million to $10.0 million at the end of 1996, bringing days of inventory on hand down to 66 days from 125 days in 1995. Accounts payable and accrued liabilities decreased $3.4 million from year end 1995 to 1996. During 1996, 1995, and 1994, total expenditures for capital equipment were $9.8 million, $10.0 million, and $10.6 million, respectively. The expenditures in each year consisted primarily of equipment used for designing and testing products. Of the total capital expenditures, $0.6 million in 1996, $4.8 million in 1995, and $1.1 million 1994, were financed by capital leases. The Company's current wafer requirements are supplied primarily by six foundries. During 1995, the Company entered into five-year agreements with three of its suppliers for committed foundry capacity in consideration of equipment financing or cash deposits. During 1995 and 1996, the Company provided an aggregate of $14.6 million in capital equipment financing and/or cash deposits to these three foundries in connection with such activities. The Company has remaining funding commitments not to exceed $18,000,000. The Company expects to finance its 1997 capital equipment requirements using a combination of cash and equipment leasing. The Company believes that its existing cash resources, combined with cash generated from operations, equipment lease management, and its line of credit will be sufficient to meet the Company's cash requirements through the end of 1997. However, the Company may from time to time seek additional equity or debt financing as a result of the capital intensive nature of the semiconductor industry. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Company's financial statements included with this Form 10-K are set forth under Item 14 hereof. ITEM 9.DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure required to be reported under this Item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company and their ages as of February 28, 1997, are as follows:
NAME AGE POSITION WITH THE COMPANY Robert S. Pepper, Ph.D. 61 President, Chief Executive Officer and Chairman of the Board of Directors J. Franois Crepin 50 Vice President, Business Development John Kehoe 51 Vice President, Finance and Administration and Chief Financial Officer Daniel S. Koellen 39 Vice President, Quality and Reliability George A. Papa 49 Vice President, Worldwide Sales Manuel D. Yuen 56 Vice President, Operations Thomas J. Connors(1)(2) 67 Director Paul Gray, Ph.D. 54 Director Martin Jurick(2) 59 Director Henry Kressel, Ph.D.(2) 63 Director Joseph P. Landy(1) 35 Director
(1) Member of the Audit Committee (2) Member of the Compensation Committee Dr. Pepper joined the Company in July 1986 as President, Chief Executive Officer and a director. He became Chairman of the Board of Directors in January 1993. From 1979 until 1984, Dr. Pepper was Vice President and General Manager of the Solid State division of RCA Corporation. Prior to joining RCA, Dr. Pepper had spent over 15 years in the semiconductor industry, including positions as Vice President and General Manager of the Semiconductor Division at Analog Devices, Inc. Dr. Pepper holds B.S., M.S. and Ph.D. degrees in Electrical Engineering from the University of California at Berkeley. Mr. Crepin joined the Company in December 1986 as Vice President, Marketing and Sales, and has held different positions within the Company prior to becoming Vice President of Business Development in 1994. Mr. Crepin served as Director of Strategic Planning for Information Communications for LSI Logic Corporation prior to joining Level One. Prior to joining LSI, Mr. Crepin served for 17 years at National Semiconductor Corporation, the last four of which he was Director of Worldwide Telecom Marketing. Mr. Crepin holds an M.B.A. from the University of Paris and a B.S. in Mathematics and Science from Grenoble University. Mr. Kehoe joined the Company in October 1995 as Vice President and Chief Financial Officer. Immediately prior to joining the Company Mr. Kehoe served as Senior Vice President and Chief Financial Officer for Focus Surgery, Inc., a medical device manufacturer. From 1992 to 1993 he served as Vice President, Finance and Chief Financial Officer for Celeritek, Inc., a microwave systems company. From 1989 to 1992 he served as Vice President, Finance and Chief Financial Officer of Poqet Computer Corp., a computer manufacturer. Prior to 1989 he worked in various financial and CFO positions for approximately 14 years with high technology companies, including Texas Instruments. Mr. Kehoe holds an MBA from Fordham University and a BBA from Manhattan College. Mr. Koellen has been responsible for the Quality and Reliability function since he joined the Company in January 1989, serving as Manager until January 1992, then as Director until January 1993 when he was promoted to Vice President of Quality and Reliability. From 1985 to 1989, Mr. Koellen was Lead Failure Analysis Engineer for the Denver Aerospace Division of Martin Marietta Corp. Prior to joining Martin Marietta, Mr. Koellen managed the surface analysis laboratory for Mostek Corporation, a supplier of dynamic random access memory integrated circuits. Mr. Koellen holds an M.S. in Engineering and Applied Science from Southern Methodist University and a B.S. in Applied Mathematics, Engineering and Physics from the University of Wisconsin. Mr. Papa joined the Company in February 1997 as Vice President, Worldwide Sales. Prior to joining the Company, he had been employed since 1991 as Vice President of Sales for North America by Siemens Components Corporation, a division of Siemens. Previously Mr. Papa was employed in other management and sales positions with Siemens Components Corporation, LSI Logic Corporation, Intel Corporation, and Tektronix. Mr. Papa holds a B.S.E.E. from Northeastern University Mr. Yuen was Director of Operations from the time he joined the Company in February 1991 until January 1992, when he was promoted to Vice President of Operations. Prior to joining the Company, Mr. Yuen spent over 20 years at National Semiconductor Corporation, a semiconductor manufacturer, as Director of its Santa Clara foundry from 1986 to 1987 and as Vice President-Military Aerospace Division from 1987 to 1989. Mr. Yuen holds a B.S. and an M.S. in Electrical Engineering from the University of California at Berkeley. Mr. Connors has been a director of the Company since April 1991. Since 1980, Mr. Connors has been the principal of TJC Investments, an independent consulting firm that works with companies in the semiconductor and related industries. Previously, Mr. Connors was employed by Motorola, Inc., where he last served as Vice President and General Manager of the Semiconductor Division. Mr. Connors is also a member of the Board of Directors of Zilog, Inc., Open Vision Technologies, Inc., and SGS-Thomson Microelectronics, Inc., a wholly-owned subsidiary of SGS-N.V. Dr. Gray has been a director since April 1994. Dr. Gray is the Dean of the College of Engineering at the University of California, Berkeley. From 1990 to 1993, he served as Chairman of the Electrical Engineering and Computer Sciences Department, and as Vice Chairman of the Department from 1988 to 1990. He served as a director of Microlinear Corporation from 1988 to 1991. He has published more than 100 papers in the electrical engineering field, has served on numerous industry committees, and holds 10 patents. Mr. Jurick has been a director of the Company since April 1991. Since 1984, Mr. Jurick has been a Senior Vice President of Silicon Systems, Inc. ("SSI"), a semiconductor manufacturing company, which until 1996 was a wholly owned subsidiary of TDK Corporation, and in 1996 became a division of Texas Instruments Inc. Mr. Jurick also serves as a director of Microsemi Corp. Dr. Kressel has been a director of the Company since August 1987. Since 1985, Dr. Kressel has been a Managing Director at E.M. Warburg, Pincus & Co., Inc. (''EMW''), an investment firm, where he has been employed since 1983. Prior to joining EMW, Dr. Kressel spent 20 years at RCA Laboratories, where he became a Staff Vice President. Dr. Kressel is also a member of the Board of Directors of Zilog, Inc., Maxis, Inc., and Trescom International. Mr. Landy has been a director of the Company since January 1991 and was appointed Secretary of the Company in July 1993. Since January 1994, Mr. Landy has served as a Managing Director at E.M. Warburg, Pincus & Co., Inc. (''EMW''), an investment firm, where he has been employed since 1985. Prior to joining EMW, Mr. Landy was employed by Dean Witter Realty, Inc., the real estate investment banking affiliate of Dean Witter Reynolds, Inc., as a financial analyst. He also serves as a director of NOVA Information Systems and CN Biosciences, Inc. Directors are elected by the shareholders at each annual meeting to serve until the next annual meeting of shareholders or until their successors are duly elected and qualified. Officers are elected to serve, subject to the discretion of the Board of Directors, until their successors are appointed. There are no family relationships between any directors or executive officers. There are no agreements or other arrangements or understandings pursuant to which any director of the Company will be selected as a director or nominee. Non-employee, non-affiliated Directors of the Company receive $1,800 per day for each day devoted to Company Board or committee meetings. The Company reimburses each director for reasonable expenses of attending meetings of the Board of Directors and any committees thereof. Non-affiliated non- employee directors receive an annual automatic option grant of 2,000 shares at the end of each year. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE To the Company's knowledge, based solely on its review of the copies of such reports furnished to the Company and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with during the fiscal year ended December 29, 1996, with the exception of one report for one transaction which was untimely filed for each of Messrs. Pepper, Kehoe, Holmes, Koellen and Yuen. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation earned by the Company's Chief Executive Officer and the four other highest paid executive officers, plus one officer who resigned, whose compensation for the 1995 fiscal year was in excess of $100,000 (collectively the "Named Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ALL
ANNUAL SECURITIES OTHER COMPENSATION (1) UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)(2) Robert S. Pepper, Ph.D. 1996 296,923 185,382 60,000 6,276 President, Chief 1995 220,000 97,172 --- 4,280 Executive Officer and Chairman of 1994 196,794 50,000 120,000 78,632 the Board John Kehoe 1996 153,182 81,508 20,000 1,800 Vice President and 1995 27,115 12,500 70,000 --- Chief Financial Officer J. Franois Crepin 1996 137,271 14,625 27,000 4,594 Vice President, Business 1995 129,126 16,323 35,500 4,284 Development 1994 124,650 9,500 --- 8,530 Manuel D. Yuen 1996 142,654 28,028 25,300 2,811 Vice President, 1995 119,674 16,846 33,000 2,443 Operations 1994 110,778 10,000 --- 2,853 Daniel S. Koellen 1996 120,042 30,726 31,500 3,282 Vice President, Quality & 1995 106,292 15,227 23,100 3,120 Reliability 1994 98,566 11,000 --- 2,869 George B. Holmes (3) 1996 115,033 82,914 25,000 4,166 Vice President Worldwide 1995 126,538 182,902 60,000 4,205 Sales 1994 41,556 51,251 --- 433
(1) Annual compensation amounts include amounts deferred at the election of the Named Officer pursuant to the Company's 401(k) plan. (2) Other annual compensation represents the Company's 401(k) matching contributions. (3) Mr. Holmes served as Vice President of Worldwide Sales until October 1996. OPTION GRANTS IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES The following table sets forth certain information concerning grants of stock options to each of the Named Officers during the fiscal year ended December 29, 1996. The options listed were granted under the 1993 Option Plan. In accordance with the rules of the Securities and Exchange Commission, also shown is the potential realizable value based on the assumed rates of stock price appreciation of 5% and 10%, compounded annually, from the date the option was granted over the full option term. These amounts represent certain assumed rates of appreciation only and do not represent the Company's estimate of future stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS Potential Realizable Value at Assumed 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% ($) Robert S. Pepper, Ph.D. 60,000 6.3 18.25 1/20/06 688,878 1,745,890 J. Franois Crepin 22,000 2.3 18.25 1/20/06 252,598 640,160 5,000 .5 16.75 7/26/06 52,688 133,533 John Kehoe 20,000 2.1 18.25 1/20/06 229,626 581,963 Manuel D. Yuen 11,300 1.1 18.25 1/20/06 129,739 328,809 14,000 1.5 16.75 7/26/06 147,527 373,891 Daniel S. Koellen 21,500 2.3 18.25 1/20/06 246,848 625,610 10,000 1.1 16.75 7/26/06 105,376 267,065 George B. Holmes 20,000 2.1 18.25 1/31/97 18,865 37,760 5,000 .5 16.75 7/26/06 52,688 133,532
(1) There is no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 5-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. The following table provides information with respect to the Named Officers concerning the exercise of options during the last fiscal year and unexercised options held as of December 29, 1996: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED VALUE OPTIONS AT FISCAL YEAR END At Fiscal Year End ($)(1) (#) ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE Robert S. Pepper, Ph.D. 10,000 347,917 140,356 180,000 $4,893,786 3,570,000 John Kehoe 0 0 14,000 76,000 175,000 1,040,000 J. Franois Crepin 9,000 147,717 10,000 57,000 251,233 1,029,000 George B. Holmes 0 0 24,000 61,000 459,000 1,121,000 Manuel D. Yuen 0 0 51,000 67,300 1,778,200 1,383,650 Daniel S. Koellen 0 0 28,200 61,500 968,735 1,238,710
(1) Based upon the market price of $35.75 per share, which was the closing price per share on the NASDAQ National Market System on the last day of the 1996 fiscal year, less the option exercise price payable per share. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 28, 1997, by (i) each person (or group of affiliated persons) known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors, (iii) each Named Officer, and (iv) the Company's directors and executive officers as a group. Except as indicated in the footnotes to this table, the persons named herein, based on information provided by such persons, have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws, where applicable.
SHARES BENEFICIALLY DIRECTORS, NAMED OFFICERS AND 5% SHAREHOLDERS OWNED NUMBER PERCENT (1) Warburg, Pincus Capital Company, L.P. (2) 4,699,674 35.1% 466 Lexington Avenue New York, New York 10017 Kopp Investment Advisors, Inc. (3) 2,315,944 17.3% 6600 France Avenue South, Suite 672 Edina, Minnesota 55435 Robert S. Pepper, Ph.D. (4). 293,689 2.2% Thomas J. Connors (5) 44,000 * Paul Gray (6) 16,000 * Martin Jurick (7) 14,000 * Henry Kressel, Ph.D. (2)(8) 4,699,674 35.1% Joseph P. Landy (2)(8) 4,699,674 35.1% John Kehoe (9) 19,000 * J. Franois Crepin (10) 40,670 * Daniel S. Koellen (11) 54,586 * Manuel D. Yuen (12) 80,817 * George B. Holmes (13) 6,000 * All Named Officers and Directors as a group (11 persons) (14) 5,268,436 38.2%
(1) Percent ownership is based on 13,405,475 shares of Common Stock outstanding as of February 28, 1997, plus shares issuable pursuant to options or warrants held by the person or class in question that are exercisable within 60 days after February 28, 1997. (2) The shares listed are owned of record by Warburg, Pincus Capital Company, L.P., a Delaware limited partnership ("WPCC"), and beneficial ownership may be attributed to E.M. Warburg, Pincus & Co., LLC, a New York Limited Liability Company ("EMW LLC"), the successor to Warburg, Pincus Ventures, Inc., a Delaware corporation; and to Warburg, Pincus & Co., a New York general partnership ("WP"). WP, the sole general partner of WPCC, has a 20% interest in the profits of WPCC. Lionel I. Pincus is the managing partner of WP and the managing member of EMW LLC and may be deemed to control both WP and EMW LLC. The members of EMW LLC are substantially the same as the partners of WP. Henry Kressel and Joseph P. Landy, each a director of the Company, is a Managing Director and a member of EMW LLC and a general partner of WP. As such, each of Messrs. Kressel and Landy may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 of the Securities Exchange Act of 1934, as amended) in an indeterminate portion of the common shares beneficially owned by WPCC and WP. Each of Messrs. Kressel and Landy disclaims beneficial ownership, for purposes of Section 16 of the Act and otherwise, of such common shares. (3) Includes 2,231,944 shares over which Kopp Investment Advisors, Inc. exercises investment discretion, but for which it is not the record holder; 10,000 shares which Kopp Investment Advisors, Inc., owns directly; 4,000 shares owned by Kopp Investment Advisors, Inc., Profit Sharing Plan; 50,000 shares owned by LeRoy C. Kopp Individual Retirement Plan; and 20,000 shares owned by Kopp Family Foundation. (4) Includes 8,000 shares held of record by the Robert S. and Star Pepper Charitable Trust, and 195,356 shares issuable under stock options held by Dr. Pepper exercisable within 60 days of February 28, 1997. (5) Includes 20,000 shares issuable under stock options held by Mr. Connors exercisable within 60 days of February 28, 1997. (6) Includes 16,000 shares issuable under stock options held by Dr. Gray exercisable within 60 days of February 28, 1997. (7) Includes 4,000 shares issuable under stock options held by Mr. Jurick exercisable within 60 days of February 28, 1997. (8) Shares held of record by Warburg. Both Dr. Kressel and Mr. Landy are managing directors of EMW and general partners of WPC. All of the shares indicated as owned by both Dr. Kressel and Mr. Landy are owned directly by Warburg and are included because of their affiliation with Warburg. Both Dr. Kressel and Mr. Landy disclaim beneficial ownership of such shares. (9) Includes 19,000 shares issuable under stock options held by Mr. Kehoe exercisable within 60 days of February 28, 1997. (10) Includes 25,500 shares issuable under stock options held by Mr. Crepin exercisable within 60 days of February 28, 1997. (11) Includes 43,575 shares issuable under stock options held by Mr. Koellen exercisable within 60 days of February 28, 1997. (12) Includes 67,825 shares issuable under stock options held by Mr. Yuen exercisable within 60 days of February 28, 1997. (13) Includes 6,000 shares issuable under stock options held by Mr. Holmes exercisable within 60 days of February 28, 1997. (14) Includes an aggregate of 397,256 shares issuable upon exercise of stock options held by Named Officers and Directors exercisable within 60 days of February 28, 1997. See footnotes (2), (4), (5), (6), (7),(8), (9), (10), (11), (12) and (13) above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with securing a loan from WPCC in 1992, the Company issued a warrant to purchase 202,746 shares of its common stock at an exercise price of $1.54 per share. The warrant was exercised January 16, 1997, for 192,754 shares, and the balance was surrendered, on a net appreciation basis, in an amount equal to the exercise price. Directors Kressel and Landy, each of whom is an affiliate of the entity controlling WPCC, disclaims beneficial ownership, for purposes of Section 16 of the Act and otherwise, of such common stock. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee currently consists of directors Connors, Jurick and Kressel. The Compensation Committee reviews and approves the compensation of the Company's executive officers. The compensation of the Chief Executive Officer is subject to approval by the Board of Directors. Mr. Connors was paid $129,600 during 1996 for consulting services rendered under an agreement with the Company. 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:
FORM 10-K PAGE NO. 1. Financial Statements: Report of Independent Public Accountants 32 Consolidated Balance Sheets as of December 29, 1996 and December 30, 1995 33 Consolidated Statements of Income for fiscal years ended December 29, 1996, December 30, 1995, and December 31, 1994 35 Consolidated Statements of Shareholders' Equity for fiscal years ended December 29, 1996, December 30, 1995, and December 31, 1994 37 Consolidated Statements of Cash Flows for fiscal years ended December 29, 1996, December 30, 1995, and December 31, 1994 39 Notes to Financial Statements 41 2. FINANCIAL STATEMENT SCHEDULES: II-Valuation and Qualifying Accounts 53
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:
EXHIBIT NUMBER 3.1(1) Amended and Restated Articles of Incorporation of the Company. 3.2(1) Bylaws of the Company, as amended. 3.3(1) Amended and Restated Articles of Incorporation filed August 31, 1994. 3.4(2) Certificate of Amendment to the Company's Amended and Restated Articles of Incorporation, filed December 30, 1994. 4.1 Reference Exhibit 3.1. 4.2(1) Investor Rights Agreement dated as of October 19, 1990, as amended. 4.3(1) Stock Purchase Agreement dated as of April 24, 1991 between the Company and Silicon Systems, Inc. 10.1(1) 1985 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan, as amended. 10.2* 1993 Stock Option Plan, as amended and restated. 10.3(1) Amended and Restated Employee Stock Purchase Plan. 10.4(2) Employment Agreement between the Company and Robert S. Pepper dated as of July 14, 1986, as amended. 10.5(2) Employment Agreement between the Company and Daniel S. Koellen dated as of February 11, 1989, as amended. 10.6(1) Warrant to Purchase Common Stock dated February 24, 1993 issued to Warburg, Pincus Capital Company, L.P. 10.7(1) Warrant Agreement between the Company and Equitec Leasing Company dated March 7, 1986, as amended.
EXHIBIT NUMBER 10.8(1) Warrant Agreement between the Company and Equitec Leasing Company dated October 13, 1987, as amended. 10.9(1) Warrant Agreement between the Company and Equitec Leasing Company dated October 30, 1987, as amended. 10.10(1) Business Loan Agreement dated as of October 21, 1991 between the Company and Silicon Valley Bank. 10.11(1) Master Equipment Lease dated as of April 15, 1993 between the Company and Phoenix Leasing Incorporated. 10.12(1) Leastec Master Lease Agreement dated as of January 24, 1991 between the Company and Leastec Corporation. 10.13(1) Master Equipment Lease dated as of April 15, 1994 between the Company and Phoenix Leasing Incorporated. 10.14(1) Foundry Agreement dated as of March 25, 1993 between the Company and Austria Mikro Systems International GmbH. 10.15(1) Joint Development and License Agreement dated February 14, 1991 between the Company and Fujitsu Limited. 10.16(1) License Agreement dated April 24, 1991 between the Company and Silicon Systems Inc., as amended. 10.17(1) License Agreement dated April 13, 1994 between the Company and Silicon Systems Inc. 10.18(1) License Agreement dated September 26, 1989 between the Company and Asahi Chemical Industry Co., Ltd. 10.19(1) Light Industrial Lease dated as of December 3, 1985 between the Company and Sparks Properties, Inc. for premises at 195 Lake Forest Way, as amended. 10.20(1) Development Agreement for a General DataComm Customer - Specific Line Interface Transceiver dated October 1, 1990. 10.21(1) Form of Participation Agreement to a High Speed Digital Subscriber Line Interface Circuit Development Consortium. 10.22(1) Development and Supply Agreement for Integrated Circuits dated as of September 28, 1993 between the Company and Northern Telecom, Inc. 10.23(1) Form of Directors' Indemnification Agreement. 10.24(2) Form of Custody and Escrow Agreement for Selling Shareholders. 10.25(2) Form of Selling Shareholder's Irrevocable Power of Attorney. 10.26(2) Consulting Agreement with Thomas J. Connors, as amended. 10.27(1) Real Property Lease with Evergreen/Bradville IV dated July 16, 1994. 10.28(1) Real Property Lease with EI Dorado Savings Bank dated July 28, 1994. 10.29(2) Amendment to Real Property Lease with Evergreen/Bradville IV, dated November 5, 1994. 10.30(2) Amendment to Form of Participation Agreement to a High Speed Digital Subscriber Line Interface Circuit Development Consortium. 10.31(2) Settlement Agreement between the Company and Fujitsu Limited, dated November 11, 1994. 10.32(3) Consulting Agreement with Paul Gray 10.33(4) Foundry Agreement 10.34(5) Agreement and Plan of Reorganization (Maker Communications, Inc.) 10.35(5) Agreement and Plan of Reorganization (San Francisco Telecom, Inc.) 10.36(5) Equipment Lease Agreement 10.37(6) Foundry Agreement 10.38(7) Deposit Agreement 10.39(7) Real Property Lease Agreement with Evergreen/Bradville IV dated December 29, 1995 10.40* Agreement and Plan of Reorganization (Silicon Design Experts, Inc.) 22.1* Subsidiaries of Registrant. (see page S3) 24.1* Consent of Arthur Andersen & Co. (see page S4) 25.1* Powers of Attorney. (see page S1) 27.1* Financial Data Schedule, December 29, 1996
(1) Incorporated by reference to Exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-65810), which was declared effective August 19, 1994. (2) Incorporated by reference to Exhibit filed with the Company's Registration Statement-Form S-1 (File No. 33-74088), which was declared effective February 8, 1995. (3) Incorporated by reference to Exhibit filed with the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1994. (4) Incorporated by reference to Exhibit filed with the Company's Quarterly Report on Form 10-Q for the Period Ended April 1, 1995. (5) Incorporated by reference to Exhibit filed with the Company's Quarterly Report on Form 10-Q for the Period Ended July 1, 1995. (6) Incorporated by reference to Exhibit filed with the Company's Quarterly Report on Form 10-Q for the Period Ended September 29, 1995. (7) Incorporated by reference to Exhibit filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995. * Filed herewith. Confidential treatment granted. Indicates management contract or compensatory plan or arrangement. Confidential treatment requested. Upon written request to the Company, the Company will furnish shareholders with a copy of any Exhibit upon payment of $.10 per page, which represents the Company's reasonable expenses in furnishing such Exhibits. (b) On October 10, 1996, the Registrant filed a Current Report on Form 8-K relating to the September 27, 1996, determination to change the Registrant's fiscal year, which now ends on the last Sunday nearest calendar year end in a 52-53 week year. ARTHUR ANDERSEN LLP Report of Independent Public Accountants To the Shareholders and Board of Directors of Level One Communications, Incorporated: We have audited the accompanying consolidated balance sheets of LEVEL ONE COMMUNICATIONS, INCORPORATED (a California corporation), and subsidiaries as of December 29, 1996 and December 30, 1995, and the related statements of income, shareholders' equity and cash flows for each of the three fiscal years ended December 29, 1996, December 30, 1995 and December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Level One Communications, Incorporated, and subsidiaries, as of December 29, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three fiscal years ended December 29, 1996, December 30, 1995 and December 31, 1994 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /S/ ARTHUR ANDERSEN LLP Sacramento, California February 28, 1997
LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED BALANCE SHEETS December 29, 1996 and December 30, 1995
(IN THOUSANDS EXCEPT SHARE AMOUNTS) 1996 1995 ASSETS Current Assets: Cash and cash equivalents $ $ 20,251 21,628 Short-term investments 10,211 8,223 Accounts receivable, net of allowance 18,279 15,390 for doubtful accounts of $156 and $300 for 1996 and 1995, respectively Inventories 9,990 15,772 Deferred income tax benefit 2,504 4,289 Prepaid expenses 2,351 2,905 Total current assets 63,586 68,207 Property and equipment, net 23,676 20,438 Long-term investments 12,440 4,695 Related party note receivable 1,225 - Foundry deposits 8,000 2,000 Other assets 4,400 4,236 Total assets $ $ 112,102 100,801 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of capital lease obligations $ $ 1,129 1,059 Accounts payable 4,778 9,541 Accrued payroll costs 1,985 1,762 Income taxes payable 1,338 - Deferred revenue 133 - Other accrued liabilities 3,485 4,878 Total current liabilities 12,715 17,373 Capital lease obligations, less current portion 3,194 3,814 Deferred lease expense 612 649 Total liabilities 16,521 21,836 Shareholders' Equity: Common Stock, no par value 83,230 77,772 Authorized - 105,000,000 shares Outstanding - 13,116,227 and 12,839,319 shares for 1996 and 1995, respectively Unrealized gain on available-for-sale securities, net of tax 12 67 Retained earnings 12,339 1,126 Total shareholders' equity 95,581 78,965 Total liabilities and shareholders' equity $ $ 112,102 100,801
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED STATEMENTS OF INCOME For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 Revenues $ $ $ 111,987 78,018 46,825 Cost of sales 48,477 33,300 18,785 Gross margin 63,510 44,718 28,040 Research & development* 24,505 17,857 9,956 Sales & marketing 16,589 11,372 6,772 General & administrative 6,741 5,752 3,424 Total operating expenses 47,835 34,981 20,152 Operating income 15,675 9,737 7,888 Interest and other income, net 2,293 2,064 1,440 Income before provision for income taxes 17,968 11,801 9,328 Provision for income taxes 6,755 1,543 1,323 Net income $ $ $ 11,213 10,258 8,005 Earnings per Share $0.82 $0.76 $0.60 Weighted Average Common Shares Outstanding 13,756 13,465 13,291 *Includes one-time charges for acquisitions of $2,500 and $750 for 1996 and 1995, respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
Retained (IN THOUSANDS) Common Stock Deferred Unrealized Earnings SHARES AMOUNT COMPENSATION GAIN (LOSS) (DEFICIT) TOTAL Balance at January 1, 1994 $ 41,143 $ $ $(17,137) $ 23,910 10,874 (96) - Issuance of common stock under stock option and purchase 72 220 plans 220 - - - Issuance of common stock upon exercise of warrants 31 6 31 - - - Issuance of common stock 1,529 31,629 31,629 - - - Stock issuance costs (581) - (581) - - - Amortization of deferred compensation expense - - 95 - 95 - Net income 8,005 - - - - 8,005 Balance at December 31, 1994 12,481 72,442 (1) - (9,132) 63,309 Issuance of common stock under stock option and purchase plans and purchase plans 219 431 - - - 431 Issuance of common stock upon exercise of warrants 19 4 19 - - - Tax benefit of stock option 2,418 2,418 exercises - - - - Stock issued in connection with 135 2,462 2,462 acquisitions - - - Unrealized gain on available-for- sale investments, net of tax 67 - - - 67 - Amortization of deferred compensation expense - 1 - 1 - - Net income 10,258 - - - - 10,258 Balance at December 30, 1995 12,839 77,772 - 67 1,126 78,965 Issuance of common stock under stock option and purchase plans 188 1,243 1,243 - - - Issuance of common stock upon exercise of warrants 10 2 10 - - - Tax benefit of stock option 1,205 1,205 exercises - - - - Stock issued in connection with 3,000 3,000 acquisitions 87 - - - Unrealized loss on available-for- sale investments, net of tax (55) - - - (55) - Net income 11,213 - - - - 11,213 Balance at December 29, 1996 13,116 $ 83,230 $ $ $ 12,339 $ 95,581 - 12
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
(IN THOUSANDS) 1996 1995 1994 Cash flows from operating activities: Net income $ 11,213 $ 10,258 $ 8,005 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,389 5,214 3,144 Purchased research & development 2,500 750 expenses - Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (2,889) (9,021) (2,028) Inventories 5,782 (9,268) (4,578) Deferred tax assets 1,785 (977) (466) Prepaid expenses 236 (1,481) (1,192) Accounts payable and accrued liabilities (3,427) 11,684 2,881 Deferred revenues (133) 97 (1,148) Net cash provided by operating 22,456 7,545 4,329 activities Cash flows from investing activities: Purchase of short-term investments (12,754) (8,042) (35,108) Proceeds from sales and maturities of short-term investments 10,711 31,027 9,499 Purchase of long-term investments (11,780) (3,681) (2,000) Proceeds from sales and maturities of long-term investments 4,035 1,000 - Net capital expenditures (9,837) (10,033) (10,597) Payments (receipts) for related party notes 1,225 (1,225) receivable - Payments for foundry deposits and other assets (6,136) (4,081) (139) Net cash provided by (used in) (24,536) 4,965 (38,345) investing activities Cash flows from financing activities: Net principal payments under capital lease (550) (569) (3,164) obligations Proceeds from issuance of stock, net of repurchases and costs of issuance 1,253 427 31,299 Net cash provided by (used in) 703 (142) 28,135 financing activities Net increase (decrease) in cash and cash equivalents (1,377) 12,368 (5,881) Cash and cash equivalents at beginning of year 21,628 9,260 15,141 Cash and cash equivalents at end of year $ 20,251 $ 21,628 $ 9,260 SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH TRANSACTIONS Non-cash investing and financing activities: Equipment purchased under capital leases $ $ 4,770 $ 726 1,122 Tax benefit related to stock options 1,205 2,418 - Unrealized gain (loss) on available-for- sale investments (55) 67 - Cash payments for: Interest 351 142 222 Income taxes 2,564 1,268 766
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. LEVEL ONE COMMUNICATIONS, INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS Level One Communications, Incorporated (the "Company") was incorporated in California on November 26, 1985. The Company designs, develops and markets mixed signal application specific standard integrated circuit products ("ASSPs") for silicon connectivity solutions. The Company's target customers are the worldwide original equipment manufacturers of personal computers, workstations, network access equipment, data transmission equipment and networking equipment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The Company prepares financial statements based on a 52-53 week year. During the 3{rd} Quarter of Fiscal 1996, the Company changed its fiscal year end from the last Saturday nearest to the calendar year end to the last Sunday nearest the calendar year end. The impact of the change in fiscal year was immaterial to the Company's results of operations. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consists of cash deposits with banks, tax advantaged municipal bonds, and money market instruments with insignificant interest rate risk. INVESTMENTS. As of January 2, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). This statement requires that investments be classified into one of three categories: held-to-maturity, available-for-sale, or trading. It requires that investments classified as held-to-maturity be reported at amortized cost, that investments classified as available for sale be reported at fair value with unrealized gains and losses, net of related tax, reported as a separate component of shareholders' equity, and that investments classified as trading be reported at fair value with unrealized gains and losses included in earnings. In July of 1995, certain of the Companies previously classified held-to- maturity investments were sold, causing the investment portfolio to be reclassified as being available-for-sale. The unrealized gain at the time of the reclassification to available-for-sale was immaterial to the financial statements. As of December 29, 1996 and December 30, 1995, all of the Company's investments are classified as available- for-sale and are carried at fair value. As of December 29, 1996, and December 30, 1995, the Company's stockholders' equity reflected an unrealized gain, net of applicable taxes, of $12,000 and $67,000, respectively. The amortized cost and market value of the Company's investments available for sale as of December 29, 1996, were as follows:
Gross Unrealized Gross Unrealized AMORTIZED COST GAINS LOSSES MARKET (IN THOUSANDS) VALUE Municipal Bonds $ 20,531 $ 29 $ 3 $ 20,557 Corporate Debt and Equity Securities 2,100 -- 6 2,094 $ 22,631 $ 29 $ 9 $ 22,651
The amortized cost and market value of the Company's investments available for sale as of December 30, 1995, were as follows:
Gross Unrealized Gross Unrealized AMORTIZED COST GAINS LOSSES MARKET VALUE (IN THOUSANDS) Municipal Bonds $ 12,287 $ 107 $ -- $ 12,394 Corporate Debt and Equity Securities 518 6 -- 524 $ 12,805 $ 113 $ -- $ 12,918
The amortized cost and market value of the Company's investments, by maturity, at December 29, 1996, were as follows:
(IN THOUSANDS) AVAILABLE-FOR-SALE
DECEMBER 29, 1996 Amortized Cost Market Value Due in one year or less $ 10,212 $ 10,211 Due after one year through five years 12,419 12,440 $22,631 $ 22,651
Proceeds from the sale of available-for-sale investments during fiscal 1996 and 1995 were $14.7 million and $1.0 million, respectively. The cost basis used in determining realized gains and loses is specific identification. Gross gains of $1,000 and gross losses of $31,000, and gross gains of $9,000, with no losses, were realized on those sales in 1996 and 1995, respectively. FINANCIAL INSTRUMENTS. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: For cash and cash equivalents, accounts receivable, trade accounts payable, and related party notes receivable, the carrying value is a reasonable estimate of fair value. For investments, fair values are based on quoted market prices or dealer quotes. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market and include materials, labor and manufacturing overhead costs. Inventories as of December 29, 1996, and December 30, 1995, consisted of the following:
(IN THOUSANDS) 1996 1995 Raw materials $ 32 $ 26 Work-in-process 7,948 14,281 Finished goods 2,010 1,465 $ 9,990 $15,772
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost. Depreciation is provided on a straight- line basis over the following estimated useful lives: Machinery and equipment 3-5 years Furniture and fixtures 3-5 years Leasehold improvements 6-10 years Property and equipment, net is comprised of the following:
(IN THOUSANDS) 1996 1995 Machinery and equipment $25,254 $22,557 Furniture and fixtures 11,899 6,059 Leasehold improvements 3,485 2,185 40,638 30,801 Less-Accumulated depreciation (16,962) (10,363) $ 23,676 $ 20,438
DEFERRED LEASE EXPENSE. Lease payments are recognized as expense on a straight-line basis over the term of the lease. PATENT COSTS. Patent costs include direct costs of obtaining the patents. Upon patent approval, patent costs are amortized over the estimated useful life of the patent using the straight-line method. REVENUE RECOGNITION. Product sales are generally recognized upon shipment of product. However, the Company defers recognition of revenues and gross margin from sales to stocking distributors until such distributors resell the related products to their customers. The Company has deferred recognition of gross margin amounting to $864,000, $1,300,000, and $255,000 as of December 29, 1996, December 30, 1995, and December 31, 1994, respectively. For 1996, sales to Hewlett-Packard were 11.2% of total sales. For 1995 and 1994, no single customer accounted for more than 10% of revenues. Export sales as a percentage of revenues were 39%, 33%, and 22% for 1996, 1995, and 1994, respectively. The Company from time to time enters into development and license agreements with certain customers related to customer-specific applications. Related costs are expensed as incurred and are included in research and development expenses, while revenue for non- recurring engineering contracts is deferred until contract milestones are met. During 1996, 1995, and 1994, the Company recognized revenues of $220,000, $155,000, and $1.4 million, respectively, in accordance with the contract milestones in the Company's agreements. The Company earns royalty income from products sold by licensees and recognizes that income in the period that income is earned. Revenues are comprised of the following:
(IN THOUSANDS) 1996 1995 1994 Product sales $111,392 $77,417 $45,104 Royalties, licenses and non- recurring engineering revenue 595 601 1,721 Total revenues $111,987 $78,018 $46,825
INCOME TAXES. The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). This statement provides for a liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. EARNINGS PER SHARE. Earnings per share is based on the weighted average common shares outstanding and dilutive common equivalent shares. Common equivalent shares include dilutive stock options and warrants when appropriate. Dual presentation of primary and fully diluted earnings per share is not shown on the face of the statements of income because the differences are insignificant. RECLASSIFICATIONS. Certain prior year amounts on the Consolidated Financial Statements have been reclassified to conform to the fiscal 1996 presentation. 3. SHORT-TERM BORROWINGS The Company has a $10 million revolving line of credit with a bank. The Company compensates the bank for credit facilities by paying annual administrative fees. The balance of the Company's short-term borrowings as of December 29, 1996, and December 30, 1995, was zero. 4. LEASES The Company conducts its operations using leased facilities and equipment under both capital and operating leases. Minimum future lease payments as of December 29, 1996, are as follows:
CAPITAL OPERATING (IN THOUSANDS) LEASES LEASES YEAR ENDING 1997 $ 1,415 $ 7,791 1998 1,284 6,982 1999 1,252 6,587 2000 974 6,175 2001 74 3,316 Thereafter -- 7,205 $ 4,999 $ 36,056 Less-Interest portion (7.38% to 12%) (676) Capital lease obligations 4,323 Less-Current portion (1,129) Long-term portion $ 3,194
Rent expense for operating leases was approximately $7.4 million, $3.5 million, and $1.6 million for the years ended December 29, 1996, December 30, 1995, and December 31, 1994. 5. INCOME TAXES The provision for income taxes consists of:
(IN THOUSANDS) 1996 1995 1994 Current provision for income taxes State $ 361 $ 1,353 $ 1,337 Federal 4,609 2,660 452 Deferred provision (benefits) State 696 (675) (466) Federal 1,089 (1,795) -- Total tax provision $ 6,755 $ 1,543 $ 1,323
The tax benefits associated with nonqualified stock options reduced taxes currently payable by $1,205,000 and $2,418,000 in 1996 and 1995, respectively. Such benefits were recorded as an increase to common stock. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities. They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse. The significant components of the Company's deferred tax assets and liabilities as of December 29, 1996, and December 30, 1995, are as follows:
(IN THOUSANDS) 1996 1995 Deferred tax assets: Inventory reserves $ 397 $ 415 Deferred income on shipments to distributors 374 532 Accounts receivable reserve 83 145 Deferred lease expense 265 345 Inventory Unicap adjustment 345 303 Accrued vacation 256 204 AMT credit carryforwards 365 497 Capitalized R&D 537 1,780 Other 275 187 Total deferred taxes $ 2,897 $ 4,408 Deferred tax liabilities: Accelerated depreciation $ (393) $ (119) Net deferred income tax assets $ 2,504 $ 4,289
The reconciliation of the federal tax rate to the effective tax rate is as follows:
1996 1995 1994 Statutory federal tax rate 34.0% 34.0% 34.0% Reversal of valuation allowance -- (21.0) -- Net operating loss deduction -- -- (29.1) Foreign taxes & foreign sales corporation (4.7) (3.0) .3 State taxes 3.3 5.7 9.0 Non-deductible acquisition costs 5.5 2.2 -- Other (.5) (4.8) -- Effective income tax rate 37.6% 13.1% 14.2%
6. STOCK OPTION AND PURCHASE PLANS The Company has three stock option plans, the 1985 Stock Option Plan (the "1985 Plan"), the 1993 Stock Option Plan (the "1993 Plan"), the San Francisco Telecom Stock Option Plan (the "SFT Plan"), and an employee stock purchase plan (the "ESPP"). No further options may be granted under either the 1985 Plan or the SFT Plan, and 400,242 options previously granted under these plans remain outstanding. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
(IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 Net income As reported $ 11,213 $ 10,258 Pro forma $ 9,325 $ 9,549 Earnings per share As reported $ 0.82 $ 0.76 Pro forma $ 0.72 $ 0.75
The fair value of each option grant has been estimated on the date of the grant using the Black- Scholes option-pricing model with the following assumptions used for grants in 1996 and 1995. In calculating compensation cost: risk-free interest rates of 6.15 and 5.90 percent, respectively, and expected stock price volatility of 70%, an expected life of six years and no dividend payments for both 1996 and 1995. Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, and due to the nature and timing of option grants, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The Company has authorized the issuance of up to 450,000 shares of stock to its full-time employees under the ESPP. The Company has sold 22,137 shares and 15,079 shares as of December 29, 1996, and December 30, 1995, respectively, and has sold a total of 44,961 shares through December 29, 1996. The company sells shares in two six-month offering periods per year. The price is 85% of the market price of the stock on the start date or end date of each offering period, whichever is lower. The Company may grant options for up to 3,050,000 shares under the 1993 Plan. The Company has granted options on 1,777,850 shares through December 29, 1996. Under the 1993 Plan the option exercise price equals the stock's closing market price on date of grant. The following table presents the aggregate options granted, forfeited, and exercised under the 1985 Plan, 1993 Plan and SFT Plan for the years ended December 29, 1996, December 30, 1995, and December 31, 1994, at their respective weighted average exercise prices.
(SHARES IN THOUSANDS) 1996 1995 1994 Wtd. Avg. Wtd. Avg. Wtd. Avg. SHRS EXER. PRICE SHRS EXER. PRICE SHRS EXER. PRICE Outstanding, beginning of period 1,489 $ 11.41 1,090 $ 5.16 941 $ 1.67 Granted Price = Fair Value 722 21.59 690 17.97 272 15.85 Price < Fair Value -- -- 25 .67 4 3.86 Exercised (174) 5.55 (217) 1.41 (74) 1.90 Canceled (135) 20.16 (99) 7.50 (53) 2.72 Outstanding, end of 1,902 $ 15.19 1,489 $11.41 1,090 $ 5.15 period Exercisable, end of 482 367 334 period
The following table summarizes information about options outstanding under the 1985 Plan, 1993 Plan and SFT Plan at December 29, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE (SHARES IN THOUSANDS) Shares Outstanding Weighted Avg. Shares As of 12/29/96 Remaining Weighted Avg. Exercisable As of Weighted Avg. Range of Exercise Prices Contractual Life Exercise Price 12/29/96 Exercise Price $ 0.38 $ 0.67 390 5.96 $ 0.40 344 $ 0.39 1.00 16.50 559 8.00 15.52 70 15.01 16.75 19.75 480 8.67 17.57 31 17.85 19.75 36.00 473 9.13 24.58 37 22.22 $ 0.38 $ 36.00 1,902 8.03 $ 15.19 482 $ 5.29
Options for all plans are exercisable in installments at intervals determined by the Board of Directors, not to exceed ten years and one day. 7. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Tax Deferred Savings Plan (the "401(k) Plan") under which eligible employees may elect to have a portion of their salary deferred and contributed to their accounts under the 401(k) Plan. Under the 401(k) Plan, the Company will contribute a minimum of 1% and up to a maximum of 3% of an eligible employee's annual gross salary to the employee's account under the 401(k) Plan. For the fiscal years ended December 29, 1996, December 30, 1995, and December 31, 1994, the Company has contributed $420,000, $315,000, and $184,000, respectively, to the 401(k) Plan. 8. INCENTIVE PLANS The Company has reserved 90,000 shares of Common Stock for issuance to employees pursuant to a stock bonus plan to be agreed upon by the Board of Directors. As of December 29, 1996, no shares had been issued. Beginning in January 1994, the Company implemented an incentive compensation plan. The Company's incentive compensation plan provides for incentive compensation for substantially all employees of the Company based upon the achievement of specified operating and performance results. Incentive compensation totaled $1,791,000, $833,000, and $497,000 for 1996, 1995 and 1994, respectively. 9. STOCK WARRANTS The Company has issued warrants to independent sales representatives to purchase up to 43,879 shares of its Common Stock with exercise prices ranging from $2.33 to $21.00 per share. As of December 29, 1996, an aggregate of 13,208 shares has been issued upon exercise of warrants. In connection with securing a loan from investors in 1992, the Company issued a warrant to purchase 202,746 shares of Common Stock at an exercise price of $1.54 per share. The warrant was exercised January 16, 1997, for 192,754 shares, and the balance was surrendered, on a net appreciation basis, in an amount equal to the exercise price. 10. PREFERRED STOCK No shares of Preferred Stock are currently outstanding, although the Company's Board of Directors is authorized to issue up to 10,000,000 shares of Preferred Stock. 11. RELATED PARTY TRANSACTIONS During 1996, 1995 and 1994, the Company paid fees of approximately $129,600, $130,363, and $140,000 respectively, to members of the Board of Directors for consulting services. Services performed included the development of marketing and sales strategies and services relating to engineering matters. During the third quarter of 1996, in connection with a third-party financing for Maker Communications, Inc. ("Maker"), the Company sold a portion of its minority interest in Maker for an aggregate of approximately $675,000. This sale resulted in a one-time gain recorded as "Other Income" in the accompanying Consolidated Statements of Income. The Company continues to hold a minority interest in Maker and to license certain Maker technology. Other contractual rights and obligations, including the Company's obligation to provide certain loan financing to Maker, were terminated in the transaction. Following the transaction, Maker repaid the Company approximately $2.9 million, the total balance under an outstanding note. 12. BUSINESS AND TECHNOLOGY ACQUISITIONS During December 1996, the Company acquired Silicon Design Experts, Inc. (SDE). In connection with the transaction, the Company issued an aggregate of 86,730 shares of its common stock valued at $3,000,000 to SDE's shareholders, and agreed to issue additional shares of Common Stock in the future to SDE's shareholders and employees, with the amount to be contingent upon the extent of sales of products developed by SDE and Level One's stock price. The total purchase price of $3,000,000 was allocated as follows: $500,000 to goodwill, and $2,500,000 for purchased research and development. The purchased research and development of $2,500,000 was reported as a one- time charge. The transaction was accounted for under the purchase method of accounting. Accordingly, SDE's operating results after the date of the acquisition are included in the Consolidated Statements of Income. On June 6, 1995, the Company acquired San Francisco Telecom, Inc. ("SFT"). SFT operates as a wholly-owned subsidiary of the Company. In connection with the transaction, the Company issued an aggregate 135,360 shares of its common stock to SFT's shareholders, assumed existing SFT stock options, which will be exercisable for a total of 24,951 shares of Common Stock, and agreed to issue additional shares of Common Stock in the future to SFT's shareholders and employees, with the amount to be contingent upon the extent of sales of products developed by SFT. The transaction was accounted for under the purchase method of accounting. Accordingly, SFT's operating results after the date of the acquisition are included in the Consolidated Statements of Income. 13. RISK FACTORS The Company does not manufacture the wafers used for its products. To date, the Company's wafers have been manufactured by foundries located in the United States, Europe, and Asia. The Company depends upon these suppliers to produce wafers at acceptable yields and to deliver them to the Company in a timely manner at competitive prices. The Company may sustain an adverse impact on operating results from problems with the cost, timeliness, yield and quality of wafer deliveries from suppliers. From time to time, the available industry-wide foundry capacity fluctuates significantly. During periods of constrained supply, the Company may experience difficulty in securing an adequate supply of wafers, and/or its suppliers may increase wafer prices which must be paid by the Company. The Company's operating results depend in substantial part on its ability to maintain and to increase the capacity available to it from existing or new foundries. Although the Company believes that it has planned appropriately to meet customer demand, there can be no assurances that unforeseen demand or unforeseen changes in the conditions under which the Company does business with its foundries will not have a material impact on the Company's business in the future. The Company is also dependent upon third-party assembly companies that package the semiconductor die. The Company depends upon these suppliers to produce products in a timely manner and at competitive prices. The Company may sustain adverse financial impact from problems with the cost, timeliness, yield and quality of product deliveries from these suppliers. The Company relies upon patent, trademark, trade secret and copyright law to protect its intellectual property. There can be no assurance that such intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could have a material effect on the Company's financial condition and results of operations. In November 1995 the Company commenced infringement litigation against a competitor. There are no other material pending legal proceedings, other than routine litigation incidental to the Company's business, to which the Company is a party or of which any of its property is the subject. 14. FOUNDRY COMMITMENTS The Company's current wafer requirements are supplied primarily by six foundries. During 1995, the Company entered into five-year agreements with three of its suppliers for committed foundry capacity in consideration of equipment financing or a cash deposit. During 1995 and 1996, the Company provided an aggregate of $14.6 million in capital equipment financing and/or cash deposits to these three foundries in connection with such activities. The Company has remaining funding commitments not to exceed $18,000,000. SCHEDULE II LEVEL ONE COMMUNICATIONS, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands of dollars)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD YEAR ENDED DECEMBER 29, 1996: Allowance for doubtful accounts 300 --- 144 156 YEAR ENDED DECEMBER 30, 1995: Allowance for doubtful accounts 90 210 --- 300 YEAR ENDED DECEMBER 31, 1994: Allowance for doubtful accounts 85 5 --- 90
SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE COUNTY OF SACRAMENTO, STATE OF CALIFORNIA, ON THE 29TH DAY OF MARCH, 1996. LEVEL ONE COMMUNICATIONS, INCORPORATED By: /S/ ROBERT S. PEPPER Robert S. Pepper PRESIDENT AND CHIEF EXECUTIVE OFFICER Each of the officers and directors of Level One Communications, Incorporated whose signature appears below hereby constitutes and appoints Robert S. Pepper and John Kehoe, and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution, each with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this Annual Report, and does hereby ratify and confirm all that said attorneys-in-fact and agents shall do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Dated: March 29, 1996 /S/ ROBERT S. PEPPER Robert S. Pepper, PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) AND CHAIRMAN OF THE BOARD OF DIRECTORS Dated: March 29, 1996 /S/ THOMAS J. CONNORS Thomas J. Connors, DIRECTOR Dated: March 29, 1996 Paul Gray, DIRECTOR Dated: March 29, 1996 /S/ MARTIN JURICK Martin Jurick, DIRECTOR Dated: March 29, 1996 /S/ HENRY KRESSEL Henry Kressel, DIRECTOR Dated: March 29, 1996 /S/ JOSEPH P. LANDY Joseph P. Landy, DIRECTOR Dated: March 29, 1996 /S/ JOHN KEHOE John Kehoe, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) (PRINCIPAL ACCOUNTING OFFICER) S1 EXHIBIT 22.1 SUBSIDIARIES OF REGISTRANT Registrant has four wholly-owned subsidiaries, Level One Communications International, Incorporated, which is incorporated in Barbados, and which does business under the name Level One Communications International, Incorporated; San Francisco Telecom, Inc., which is incorporated in California, and which does business under the name San Francisco Telecom, Inc.; Silicon Design Experts, Inc. California, which is incorporated in California and does business under the name Level One Communications, Incorporated; and Level One Communications Europe SARL, which is incorporated in France and does business under the name Level One Communications Europe. S2 EXHIBIT 24.1 LEVEL ONE COMMUNICATIONS, INCORPORATED CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-65810, 33-72398, 33-93360, 33-95590 and 333-06300. /S/ ARTHUR ANDERSEN LLP Sacramento, California March 28, 1997 S3 EX-10 2 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION IS MADE THIS ____ DAY OF DECEMBER, 1996, BY AND AMONG SILICON DESIGN EXPERTS, INC., a New Jersey corporation ("SDE"), LEVEL ONE COMMUNICATIONS, INCORPORATED, a California corporation ("LOC"), SILICON DESIGN EXPERTS, CALIFORNIA, a California corporation formed by LOC ("NEWCO"), and Sailesh Rao and Juan Jover, comprising shareholders of one hundred percent (100%) of the issued and outstanding shares of SDE ("Shareholders"). W I T N E S S E T H: WHEREAS, SDE desires to merge with NEWCO and NEWCO desires to merge with SDE in a transaction (the "Merger") pursuant to which the outstanding common stock of SDE (the "SDE Common") shall be automatically converted into shares of the Common Stock, no par value, of LOC (the "LOC Common") in the numbers set forth herein, all in a transaction which is intended to qualify as a reorganization under sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, on the basis of the respective representations and warranties set forth in this Agreement and of the covenants and agreements contained therein, the parties agree as follows: 1. MERGER. (a) EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this Agreement and the Agreement of Merger by and among SDE, LOC and NEWCO in substantially the form attached hereto as Exhibit 1(a) (the "Merger Agreement"), the Merger Agreement, together with required related certificates, shall be filed in accordance with each of the California General Corporation Law and the New Jersey Business Corporations Act as soon as practicable on or after the Closing Date (as defined in Section 2(a) of this Agreement). The Merger shall become effective upon the filing of the Merger Agreement and such certificates with each of the California Secretary of State and the New Jersey Secretary of State in accordance with the provisions of applicable law at the Effective Time (as defined in Section 2(b) of this Agreement). (b) EFFECTS OF THE MERGER. At the Effective Time, (i) the separate existence of SDE shall cease and SDE shall be merged with and into NEWCO as the surviving corporation (the "Surviving Corporation"); (ii) the Articles of Incorporation of NEWCO shall be the Articles of Incorporation of the Surviving Corporation; (iii) the Bylaws of NEWCO shall be the Bylaws of the Surviving Corporation; (iv) the directors and officers of the Surviving Corporation shall be as set forth in Schedule 1(b) attached hereto; and (v) the merger shall, from and after the Effective Time, have all the effects provided by applicable law. (c) EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of the issued and outstanding shares of SDE Common: (i) CAPITAL STOCK OF NEWCO. All issued and outstanding shares of capital stock of NEWCO shall continue to be issued and shall be converted into 1,000 shares of Common Stock of the Surviving Corporation. Each stock certificate of NEWCO evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (ii) CONVERSION OF SDE COMMON. Other than fractional shares as provided in Section 1(c)(iii) below, each share and fractional share of SDE Common issued and outstanding immediately prior to the Effective Time shall be converted, without any action on the part of the holders thereof, into that number of shares of LOC Common to be determined by dividing the number of Deliverable LOC Shares (as determined pursuant to Section 1(g) below) by the number of shares of SDE Common outstanding at the Effective Time (hereinafter the "Stock Exchange Ratio"). (iii) FRACTIONAL SHARES. No fractional shares of LOC Common shall be issued, but in lieu thereof each holder of SDE Common who would otherwise be entitled to receive a fraction of a share of LOC Common (after aggregating all fractional shares of LOC Common to be received by such holder) shall receive from LOC an amount of cash (rounded up to the nearest whole cent) equal to the product of (1) the fraction of a share of LOC Common to which such holder would otherwise be entitled, times (2) the Trading Price, as defined in Section 1(g) below. (d) EXCHANGE OF CERTIFICATES. (i) LOC TO PROVIDE COMMON STOCK. Promptly after the Effective Time, LOC shall make available, in accordance with this Section 1 and the Merger Agreement, through such reasonable procedures as LOC may adopt, the shares of LOC Common issuable pursuant to Section 1 and the Merger Agreement in exchange for outstanding shares of SDE Common. (ii) EXCHANGE PROCEDURES. On the Closing Date, each Shareholder of a certificate or certificates which immediately prior to the Effective Time represents outstanding shares of SDE Common (the "Certificates") whose shares are being converted into LOC Common pursuant to Section 1 and the Merger Agreement, shall surrender the Certificates, to be exchanged for LOC Common after the Effective Time. Upon surrender of a Certificate for cancellation to LOC, the holder of such Certificate shall be entitled to receive in exchange therefor certificates representing the number of shares of LOC Common and payments in lieu of fractional shares to which the holder of SDE Common is entitled pursuant to Section 1 and the Merger Agreement and which are represented by the Certificate so surrendered. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of SDE Common which is not registered in the transfer records of SDE, the stock certificates representing shares of LOC Common may be delivered to a transferee if the Certificate representing the right to receive such LOC Common is presented to LOC and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. LOC shall follow the same procedure with respect to lost, stolen or mutilated Certificates as it follows with respect to lost, stolen or mutilated certificates representing other LOC common stock. Unless and until any such Certificate shall be so surrendered, or such procedures respecting lost, stolen or mutilated Certificates are followed, the holders of the Certificate shall not be entitled to receive certificates for the LOC Common or cash for any fractional share of LOC Common and any dividends paid or other distributions made to holders of record of LOC Common after the Effective Time shall be paid to and retained by LOC and paid over to such holder when such Certificate is surrendered or such procedures are implemented in accordance with this Section 1(d)(ii). (e) NO FURTHER OWNERSHIP RIGHTS IN SDE COMMON. All LOC Common delivered upon the surrender for exchange of shares of SDE Common in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such shares of SDE Common. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of SDE Common which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 1. (f) TAX TREATMENT. The parties intend that the Merger will be a tax-free reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of the Code. (g) PAYMENT. (1) The "Deliverable LOC Shares" shall be that number of shares of LOC Common that is the nearest whole number of shares of LOC Common that is determined by dividing the calendar thirty (30) day average of the last sale price of LOC common stock on the NASDAQ National Market preceding the date this Agreement is executed (the "Trading Price") into $3,000,000 with the value of any fractional shares payable in cash at the Closing as provided in Section 1(c)(iii) above. (2) If necessary, on the second anniversary from the Effective Time, LOC shall be obligated to make an additional payment to the Shareholders (the AMatrix Payment@) [ * ]. If, at any point during the two years following the closing, [*] LOC shall not be obligated to make a Matrix Payment. LOC shall issue additional shares of LOC common stock in accordance with the matrix, and subject to the conditions, set forth in Schedule 1(g)(2) hereto. (h) EMPLOYMENT OF SHAREHOLDERS. Following the Effective Time, each of the Shareholders shall be engaged as an employee of LOC pursuant to an employment agreement substantially in the form of Exhibit 1(h)(the AEmployment Agreement@) hereto. 2. CLOSING. (a) CLOSING DATE. The Closing under this Agreement (the "Closing") shall be held not more than two (2) business days following the later of (i) the approval of the Merger by the shareholders of SDE and (ii) satisfaction of all other conditions precedent to the Merger specified in this Agreement, unless duly waived by the party entitled to satisfaction thereof. Such date on which the Closing is to be held is herein referred to as the "Closing Date." The Closing shall be held at the offices of LOC at 10:00 A.M. on the Closing Date, or at such other date as the parties may agree upon in writing. (b) EFFECTIVE TIME. Subject to the provisions of this Agreement and the Merger Agreement, on the Closing Date or the soonest practicable day following the Closing Date, a fully executed and acknowledged copy of the Merger Agreement, along with required related certificates of SDE and Surviving Corporation meeting the requirements of the California General Corporation Law and the New Jersey Business Corporations Act, shall be filed with each of the California Secretary of State and the New Jersey Secretary of State, all in accordance with the provisions of the Merger Agreement and shall become effective upon such filing (the "Effective Time"). 3. REPRESENTATIONS AND WARRANTIES. (a) SDE AND SHAREHOLDERS. Except as set forth in the Schedules delivered pursuant to this Section 3, SDE and each of the Shareholders, severally and not jointly, represents and warrants that: (i) ORGANIZATION AND GOOD STANDING. SDE is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey and has corporate power to carry on its business as it is now being conducted. Certified copies of SDE's Articles of Incorporation and Bylaws have been delivered to LOC and NEWCO and are complete and correct as of the date of this Agreement. SDE's minute books contain a complete and accurate record of all meetings and other corporate action of its shareholders and Board of Directors. (ii) CAPITALIZATION. SDE's authorized capital stock consists of 2,500 shares of common stock, no par value, of which 134 shares are issued and outstanding. No shares are held in SDE's treasury. All of the outstanding shares of common stock of SDE are validly issued, fully paid and nonassessable. Except as set forth on Schedule 3(a)(ii) hereto, there are no outstanding options, agreements, contracts, calls or commitments of any character which would require the issuance by SDE of any capital stock. (iii) SUBSIDIARIES. SDE has no subsidiaries. (iv) FINANCIAL STATEMENTS. SDE has delivered to NEWCO copies of its balance sheets and statements of operations from inception to the most recent practicable date (the "Financial Statements"), all of which have been prepared in accordance with generally accepted accounting principles consistently applied through the periods indicated therein. (v) ABSENCE OF UNDISCLOSED LIABILITIES. Except with respect to matters referred to in Schedule 3(a)(v) hereto, SDE does not have any liabilities or obligations, secured or unsecured (whether accrued, absolute, contingent or otherwise), of a nature that would be reflected or reserved against in a corporate balance sheet or disclosed in the notes thereto, prepared in accordance with the generally accepted accounting principles applied in the preparation of such financial statements, that are not reflected or reserved against in the most recent balance sheet include in the Financial Statements. (vi) ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 3(a)(vi) to this Agreement, there have not been since November 1, 1996, any changes of the following nature: (1) BUSINESS, PROPERTIES AND FINANCIAL CONDITION. Any material adverse change in SDE's properties, business, supply of raw materials, or markets for its products (including, but not limited to, damage or destruction of property by fire or other casualty, whether or not covered by insurance, or any material adverse change in the financial condition or results of operations of SDE taken as a whole). For purposes of this Agreement, technological changes, price changes and other changes affecting the industry generally and any diminution of orders per se shall not be deemed to be material adverse changes. (2) CAPITAL STOCK; OPTIONS DIVIDENDS, ETC. Any change in the authorized, issued, or outstanding capital stock of SDE, any granting of any stock option or right to purchase shares of capital stock or any issuance of any security convertible into shares of capital stock of SDE, any purchase, redemption, retirement or other acquisition of any shares of capital stock by SDE, or any agreement to do any of the foregoing, or any declaration, setting aside, or payment of any dividend or other distribution in respect of the capital stock of SDE. (3) SALES, LEASES, BORROWINGS, ETC. Any sale or lease of SDE's property or assets (other than inventory sold in the ordinary course of business) with an original cost in excess of $5,000 for any single item or any mortgage or pledge of any properties or assets of SDE, any borrowing incurred, assumed or guaranteed by SDE maturing more than one (1) year from the date thereof, or any other borrowing made or guaranteed by SDE other than in the ordinary course of business. (4) EMPLOYEE BENEFIT PLANS AND CERTAIN SALARIES. Any employment contract, bonus, stock option, profit sharing, pension, retirement, incentive or similar arrangement or plan instituted, agreed to or amended. (vii) LITIGATION, ETC. Except as set forth in Schedule 3(a)(vii) to this Agreement, there is no material litigation, proceeding or governmental investigation pending or, to the knowledge of SDE, threatened against or relating to SDE, its properties or business, or the transactions contemplated by this Agreement; nor, to SDE's knowledge, is there any reasonable basis for any such actions or for any claims (including, without limitation, claims based upon alleged product liability, pollution of air, water or land, or violations of federal or state antitrust or securities laws); and SDE is not a party to or subject to the provisions of any judicial decree or judgment or any order of any governmental agency. (viii) LISTS OF PROPERTIES, CONTRACTS, ETC. Schedule 3(a)(viii) to this Agreement sets forth lists, each of which is complete and accurate in all material respects as of the date set out therein, of the following: (1) REAL PROPERTY. All real property owned of record or beneficially or leased by SDE. (2) OTHER PROPERTY. Inventories and tangible fixed assets as shown on SDE's books, showing, with respect to inventories, the amounts of raw materials, work in process and finished goods, and with respect to fixed assets, the total of each of the following categories: leasehold improvements, machinery and equipment, furniture and fixtures and automotive equipment. (3) AUTOMOBILES AND TRUCKS. All automobiles and trucks owned or leased by SDE. (4) INSURANCE POLICIES. All policies of insurance with respect to SDE's properties, buildings, machinery, equipment, furniture, fixtures, operations, and the lives of its directors, officers and employees. (5) CERTAIN LEASES AND CONTRACTS. Each existing lease, contract, or other commitment of SDE extending beyond twelve (12) months from the date of this Agreement (whether or not terminable at the option of any party to such lease, contract, or commitment at an earlier date) other than (i) leases, contracts or commitments furnished pursuant to other paragraphs of this Section 3, and (ii) contracts or other commitments of SDE for the purchase or sale by it in the ordinary course of business of materials and products which do not involve an aggregate payment by or to SDE of more than $10,000 or extend beyond twelve (12) months from the date of this Agreement; and all existing sales representative agreements. (6) CERTAIN SALARIED EMPLOYEES. The names and annual salary rates as of November 1, 1996, of SDE's directors, officers, employees and agents. (7) LABOR CONTRACTS. Each existing labor contract to which SDE is a party. (8) PATENTS, TRADEMARKS, ETC. All of SDE's patents, trademarks, trade names, copyrights, and registrations and applications therefor; all patent, trademark or trade name licenses, assignments or royalty agreements to which SDE is a party; and all contracts with employees or others relating in whole or in part to disclosure, nondisclosure, assignment, or patenting of inventions, discoveries, improvements, processes, formulas, or other know-how. (9) PROFIT-SHARING PLANS, ETC. All employment contracts, bonus, stock- option, profit-sharing, pension, retirement, incentive or other compensation or retirement plans or arrangements of SDE and all employee fringe benefit plans maintained by SDE. (10) BANKS. The name of each bank in which SDE has an account or safe- deposit box, and the names of all persons authorized to draw thereon or having access thereto. (11) POWERS OF ATTORNEY. The names of all persons, if any, holding powers of attorney from SDE. (12) LOAN AND CREDIT AGREEMENTS, ETC. All mortgages, indentures, promissory notes, deeds of trust, loan or credit agreements, or similar instruments except for credit agreements or similar arrangements with suppliers entered into in the ordinary course of business to which SDE is a party, and all amendments or modifications of any of the above- mentioned documents with a statement of any as to which there is any existing default by SDE. (13) EMPLOYEE STOCK OPTIONS. The names of all persons holding employee stock options to purchase shares of capital stock of SDE and, with respect to each, the date of grant or issue, the expiration date, the number and class of shares subject to such options, and the price at which shares may be purchased pursuant to such options. (14) LITIGATION. Each lawsuit, administrative proceeding, or arbitration to which SDE is a party (whether as plaintiff, defendant, or otherwise), including the damages or relief sought therein, the name of counsel for SDE in charge of such matter, and its current status. (15) MATERIAL ASSETS. A list of every material asset used by SDE in the conduct of its business that is not either owned by SDE or leased by or licensed to it under an agreement listed under the foregoing. (16) OTHER CONTRACTS AND COMMITMENTS. Every material contract and commitment not listed above. (ix) TITLE. With respect to the property listed in Schedule 3(a)(viii), SDE has good and marketable title to the real property stated to be owned by it, has good title to the leasehold interests in real property stated to be held by it, and good title to all of the tangible property stated to be owned by it, in each case free and clear of all liens and encumbrances, except for: (1) liens and encumbrances disclosed in Schedule 3; (2) the lien of current taxes not yet due and payable; and (3) such liens by operation of law and such imperfections of title, and other liens and encumbrances, if any, as are not substantial in character, amount, or extent and do not interfere with the present or future use by SDE of the properties subject thereto or affected thereby. SDE has clear record title to the patents and patent applications, trademark registrations and applications therefor and copyright registrations listed in Schedule 3(a)(viii) and all trade secrets as owned by it, and has not entered into any agreements, contracts or licenses that would impair free and unencumbered use by Surviving Corporation of the patents and trademarks enumerated in Schedule 3(a)(viii) or any of SDE's trade secrets. No third party has asserted infringement by SDE of any patents, trademark, tradename, trade secrets or copyright of another, and there are no grounds on which a third party can successfully assert a claim that it is infringing a patent, trademark, trade name, trade secrets or copyright of another. All patentable inventions may be registered in any country in the world. All employees, consultants, officers, directors and shareholders of SDE are parties to a written agreement ("Proprietary Information and Inventions Agreement"), under which each such person or entity (i) is obligated to disclose and transfer to SDE, without the receipt by such person of any additional value therefor (other than normal salary or fees for consulting services), all inventions, developments and discoveries which, during the period of employment with or performance of services for SDE, he makes or conceives of either solely or jointly with others, that relate to any subject matter with which his work for SDE may be concerned, or relate to or are connected with the business, products or projects of SDE, or involve the use of the time, material or facilities of SDE, and (ii) is obligated to maintain the confidentiality of proprietary information of SDE. None of SDE's employees, consultants, officers, directors or shareholders is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would conflict with their obligation to use their best efforts to promote the interests of SDE or that would conflict with SDE's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of SDE's business by its employees and consultants, nor the conduct of SDE's business, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such persons or entities are now obligated. It is currently not necessary nor will it be necessary for SDE to utilize nor will SDE utilize any inventions of any of such persons or entities (or people it currently intends to hire) made or owned prior to their employment with or engagement by SDE, in violation of any limitations or restrictions to which any such person or entity is a party or to which any of such assets or rights may be subject. None of SDE's employees, consultants, officers, directors or shareholders has taken, removed or made use of any proprietary documentation, manuals, products, materials, or any other tangible item from his or her previous employer relating to the business as conducted of such previous employer which has resulted in SDE's access to or use of such proprietary items, and SDE will not gain access to or make use of any such proprietary items in the business of SDE. All actions required to be taken to transfer interest in such Intellectual Property to SDE have been taken, all notices required to be made in connection with such transfer have been made, and all consents required to be secured in connection with such transfer have been secured. (x) TAX RETURNS. The provision for taxes reflected in the Financial Statements is sufficient for the payment of all accrued and unpaid federal, state, county, and local taxes of SDE (including any penalties or interest payable in respect of such taxes), whether or not disputed, for the period through the Closing Date, and for all periods prior thereto. There have been no audits of prior year tax returns, all returns have been filed and are complete, and all taxes owed by SDE for years prior to 1996 have been paid. (xi) NO VIOLATION. The execution of this Agreement does not, and performance thereof will not, violate the provisions of SDE's Articles of Incorporation, Bylaws, any note of which SDE is the maker or any indenture, agreement, or other instrument to which SDE is party, except insofar as any such instrument may require consent by a lender, mortgagee, lessor, or other party to such actions, whose consent SDE agrees to obtain before the Closing Date of this Agreement. Any such parties are listed on Schedule 3(xi) hereof. (xii) AUTHORIZATION. The execution, delivery and performance of this Agreement have been duly authorized and approved by SDE's Board of Directors, subject to approval by SDE's shareholders. Upon approval by the affirmative vote of the holders of the requisite majority of the outstanding shares of SDE's common stock, this Agreement and the consummation of the transactions contemplated herein will have been duly and validly authorized by all necessary corporate action on the part of SDE, and this Agreement will be binding upon, and enforceable against, SDE in accordance with its terms. (xiii) ACCOUNTS AND NOTES RECEIVABLE. SDE's accounts and notes receivable as shown on the Financial Statements are collectible in the amounts there shown. (xiv) INVENTORIES. To the best knowledge of SDE, its inventories in the amounts reflected on the Financial Statements and the inventories thereafter acquired before the date of this Agreement consist of items of a quality and quantity usable or salable in the normal course of its business and, if salable, are in the aggregate salable, if sold in the normal course, at market values not less than the book value thereof; the value of obsolete materials, determined by formula, and of materials of below-standard quality has been written down to realizable marketable value or adequate reserves provided therefor; the values at which such inventories are carried reflect an inventory valuation policy of stating inventory at the lower of first-in, first-out or market and of valuing finished goods and work-in-process at standard costs developed for individual items using current materials labor and overhead costs at normal production levels; and an obsolescence formula based on historical sales and backlog orders is applied to inventories of finished goods in order to determine the maximum quantities to be valued at each inventory date. (xv) PLANT AND EQUIPMENT. All of SDE's plants, buildings, machinery and equipment are in good operating condition and reasonable state of repair, normal wear and tear and normal maintenance requirements excepted. (xvi) AUTHORITY. The execution and delivery of this Agreement by SDE, the performance by SDE and Shareholders of their respective obligations hereunder and the consummation by SDE and Shareholders of the transactions contemplated hereby have been duly authorized by the Board of Directors and Shareholders and no other act or proceeding on the part of or on behalf of SDE or its Shareholders is necessary to approve the execution and delivery of this Agreement, the performance by SDE or Shareholders of their respective obligations hereunder and the consummation of the transactions contemplated hereby. The signatory officers of SDE have the power and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by SDE pursuant hereto, to consummate the transactions hereby and thereby contemplated and to take all other actions required to be taken by it pursuant to the provisions hereof and thereof. (xvii) EXECUTION AND BINDING EFFECT ON SDE AND SHAREHOLDERS. This Agreement has been duly and validly executed and delivered by SDE and Shareholders and constitutes, and the other documents and instruments to be executed and delivered by SDE or any Shareholder pursuant hereto, upon their execution and delivery on or prior to the Closing Date will constitute legal, valid and binding agreements of SDE and the Shareholders, respectively, enforceable against SDE or Shareholder, respectively, in accordance with their respective terms, except as they may be limited by bankruptcy, insolvency or other similar laws affective the enforcement of creditors' rights in general. Each shareholder owns his shares of SDE free and clear of any liens or encumbrances. (xviii) FULL DISCLOSURE. Each Shareholder hereby represents that he is not aware of any facts pertaining to SDE which he believes affect adversely SDE or which are likely in the future to affect adversely SDE which have not been disclosed in this Agreement or the Schedules hereto. Neither this Agreement nor any Exhibit, Schedule or Agreement being entered into or delivered pursuant hereto nor any other material respecting SDE contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein contained not misleading. (xix) NO DISTRIBUTION. There has not, since January 1, 1996, been a distribution or dividend of assets to shareholders, other than payments of salary and bonuses made in the normal course of business. (b) LOC AND NEWCO. Each of LOC and NEWCO represents and warrants as follows: (i) ORGANIZATION AND GOOD STANDING. Each of LOC and NEWCO is duly organized, validly existing and in good standing under the laws of the State of California and has corporate power to carry on its business as it is now being conducted. (ii) LITIGATION. There is no pending litigation, proceeding, governmental investigation or other action that, if successful, would prevent either of LOC or NEWCO from performing its agreements and covenants and fulfilling its obligations under this Agreement; and, to the knowledge of LOC and NEWCO, there is no threat of or reasonable basis for any such litigation, proceeding, governmental investigation or other action. (iii) DISCLOSURE. To each of LOC's and NEWCO's knowledge, no representation or warranty by it and no statement or certificate furnished or to be furnished by it to SDE pursuant to the provisions of this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to provide the information required by the provisions of this Agreement relating to such representation, warranty, statement or certificate. (iv) NO VIOLATION. The execution of this Agreement by each of LOC and NEWCO does not, and performance thereof will not, violate the provisions of their respective Articles of Incorporation or Bylaws, or the provisions of any indenture, agreement, or other instrument to which either LOC or NEWCO is a party. (v) AUTHORIZATION. The execution, delivery and performance of this Agreement by each of LOC and NEWCO has been duly and validly authorized and approved by all necessary corporate action. (vi) CAPITALIZATION. LOC's authorized capital stock consists of 105,000,000 shares of common stock, no par value, of which 12,983,554 shares were issued, outstanding, fully paid, and nonassessable as of September 30, 1996, and of 10,000,000 shares of preferred stock, of which none are issued or outstanding. Upon consummation of the transactions contemplated hereby, the LOC Common to be received by SDE will be validly issued, fully paid and nonassessable. 4. COVENANTS. (a) COVENANTS OF SDE. SDE agrees that prior to the Closing, its business shall be conducted only in the ordinary course of business and that no material transactions shall be entered into without the consent of the other parties to this Agreement. (b) COVENANTS OF LOC. (i) SEC DOCUMENTS. LOC will furnish, or make available, to each of the Shareholders, a true and complete copy of LOC's Form 10-K for the 1994 and 1995 fiscal years, and a Form 10-Q for the three (3) month period ended September 29, 1996, and any other statement, report, registration statement or definitive proxy statement filed by LOC with the Securities Exchange Commission (the "SEC") since December 30, 1995 (the "LOC SEC Documents"). As of their respective filing dates, the LOC SEC Documents comply in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the Securities Exchange Act of 1934, as amended (the "Exchange Act") and none of the LOC SEC Documents contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, except to the extent corrected by a subsequently filed LOC SEC Document. LOC will use its best efforts to comply with the reporting requirements of sections 13 and 15(d) of the Exchange Act to the extent it shall be required to do so pursuant to such sections, and at all times while so required shall use its best efforts to comply with all other public information reporting requirements of the SEC from time to time in effect and relating to the availability of an exemption from the Securities Act for the sale of any LOC Common or the registration thereof under Form S-3. As of the date of this Agreement, LOC qualifies as a registrant who is eligible to register securities in a secondary offering on a Registration Statement on Form S-3. LOC will also cooperate with each holder of any LOC Common being purchased hereunder in supplying such information and documentation as may be reasonably necessary for such holder to complete and file any informational reporting forms presently or hereafter required by the SEC as a condition to the availability of an exemption from the Securities Act for the sale of any such LOC Common. (ii) PUBLIC INFORMATION. LOC covenants and agrees that (1) it is in compliance with and will use its best efforts to continue to comply with the current public information requirements of Rule 144(c)(1) under the Securities Act; (2) it will furnish each Shareholder upon request with all information required for the preparation and filing of Form 144; and (3) it will on a timely basis use its best efforts to file all reports required to be filed and make all disclosures, including disclosures of material adverse information, required to permit each Shareholder to make the required representations in Form 144. 5. CONDITIONS PRECEDENT. The obligations of the parties are subject to the fulfillment, prior to or on the Closing Date, as indicated below, of each of the following conditions, all or any of which may be waived in whole or in part by the parties as provided herein except as otherwise provided by law: (a) SATISFACTORY DUE DILIGENCE. LOC shall conduct technical, financial and legal due diligence regarding SDE prior to the Closing, and shall be satisfied, in its reasonable judgment, that the representations and warranties contained in this Agreement and the description of the technology proposed for the SDE Products are correct and complete. SDE shall conduct such technical, financial and legal due diligence regarding LOC prior to the Closing, and shall be satisfied, in its reasonable judgment, that the representations and warranties contained in this Agreement are correct and complete. Notwithstanding such mutual due diligence reviews, the indemnification provisions of Section 6 hereof shall apply to any inaccurate representations and warranties by any party hereto. (b) REPRESENTATIONS AND WARRANTIES OF LOC, SDE AND THE SHAREHOLDERS TO BE TRUE. (i) The representations and warranties of LOC, SDE and the Shareholders contained in this Agreement shall be true and correct on the date hereof and as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date, except for any representation or warranty expressly stated to have been made or given as of a specified date, which, at the Closing Date, shall be true and correct as of the date expressly stated; and (ii) Each of LOC, SDE and the Shareholders shall have performed and complied with all of its or his agreements, covenants and conditions required by this Agreement to be performed or complied with by it or him prior to or at the Closing Date. (c) CONSENTS. All notices to, and declarations, filings and registrations with, and consents, approvals and waivers from, governmental and regulatory agencies required to consummate the transactions contemplated hereby and all consents, approvals and waivers from third parties required under this Agreement to have been obtained prior to Closing, shall have been obtained. (d) NO PROCEEDING OR LITIGATION. (i) No preliminary or permanent injunction or other order shall have been issued by any court, whether Federal, state, local or foreign, or by any governmental or regulatory body, whether federal, state, local or foreign, nor shall any statute, rule, regulation or executive order be promulgated or enacted by any governmental authority, whether Federal, state, local or foreign, which prevents the consummation of the transactions contemplated in this Agreement. (ii) No suit, action, claim, proceeding or investigation before any court, arbitrator or administrative, governmental or regulatory body, whether Federal, state, local or foreign, shall have been commenced and be pending against any of the parties to this Agreement or any of their respective affiliates, associates, officers or directors seeking to prevent the transaction contemplated hereunder. (e) DOCUMENTS. All other documents to be delivered at the Closing and all actions by each of the parties required by this Agreement or incidental thereto, and all related matters shall be in the form and substance reasonably satisfactory to the respective counsel of the parties. (f) OPINION OF SDE COUNSEL. Purchaser shall have received an opinion from SDE's counsel, dated the Closing Date, conforming in form and substance to Exhibit 5(f). (g) APPROVALS. LOC's Board of Directors shall have approved this Agreement and the transactions contemplated herein. SDE's Board of Directors and shareholders shall have approved this Agreement and the transactions contemplated herein. (h) EXECUTION AND DELIVERY OF OTHER AGREEMENTS AT CLOSING. At the Closing, the parties shall have entered into the Merger Agreement and the Employment Agreement. 6. INDEMNIFICATION. (a) INDEMNIFICATION BY SDE AND THE SHAREHOLDERS. (i) SDE, in the event the transactions contemplated hereby do not close, and each Shareholder, subject to the limitations set forth in this Section 6, severally and not jointly, after the Closing, agree to defend and indemnify NEWCO and LOC (and, after the Closing, SDE), and their respective affiliates, directors, officers and shareholders, and their respective successors and assigns (collectively, "LOC Indemnitees"), against and hold each of them harmless from any and all losses, liabilities, taxes, claims, suits, proceedings, demands, judgments, damages, expenses and costs, including, without limitation, reasonable counsel fees, costs and expenses incurred in the investigation, defense or settlement of any claims covered by this indemnity (net of any tax benefit and insurance recovery) (in this Section 6 collectively, the "Indemnifiable Damages") which any such indemnified person may suffer or incur by reason of (1) the inaccuracy or breach of any of the representations, warranties and covenants of SDE or the Shareholders contained in this Agreement or any documents, certificate or agreement delivered pursuant hereto; and (2) any claim made by any person relating to or arising out of transactions, events, acts or omissions of or by SDE, prior to the Effective Time that is not adequately accrued or otherwise reflected on SDE's financial statements or that has not been otherwise disclosed in the schedules and lists delivered to LOC by SDE at or prior to the Closing Date other than any and all liabilities of SDE which are incurred after the date of such balance sheet in the ordinary course of its business. SDE or the Shareholders, as the case may be, are hereinafter referred to as "SDE Indemnitor." The indemnity provided in this Section 6 shall be the sole and exclusive remedy of the LOC Indemnitees and, after the Closing, SDE, for any breach in or inaccuracy of any representation and warranty of SDE or the Shareholders or any other matter relating to this Agreement or the transactions contemplated by this Agreement; PROVIDED, however, that nothing herein shall limit in any way LOC's remedies in the event of breach by the Shareholders of any of their covenants or agreements hereunder which are not also a representation or warranty for willful fraud or intentionally deceptive material misrepresentation or omission by any of the Shareholders in connection herewith or with the transactions contemplated hereby; and FURTHER PROVIDED, in the event any representation and warranty of SDE and Shareholders with respect to SDE=s intellectual property is untrue, and LOC and/or Surviving Corporation sustains a loss or losses arising from or caused by such breach of representation and warranty, or LOC and/or the Surviving Corporation incurs the cost of any licenses or additional engineering required to avoid infringement arising in such circumstance or to pay such third party with respect to any prior infringement, LOC shall be entitled to set off such amounts from any future payments otherwise due to any Shareholder. (ii) The SDE Indemnitor waives any right to require LOC to (1) proceed against any person or entity including any other Shareholder, (2) proceed against or exhaust any collateral or security or any part thereof, or (3) pursue any other remedy in its power, and waives any defense arising by reason of any inability of any other obligor to pay or any defense based on bankruptcy or insolvency or other similar limitations on creditors' remedies with respect to any other person. (iii) The indemnity referred to in Section 6(a) above shall only apply to Indemnifiable Damages claimed by the party seeking indemnification prior to the expiration of the Indemnification Period (as defined below). Any indemnitee under this Agreement may not seek recovery under the indemnities set forth herein unless and until the Indemnifiable Damages of such party are greater than [*] in which case such indemnity shall apply to all Indemnifiable Damages. In no event may Indemnifiable Damages indemnified by SDE and/or the Shareholders exceed the aggregate of [*]. The Indemnification Period shall begin on the Closing Date and shall continue until six (6) years from such Closing Date. (b) INDEMNIFICATION BY LOC AND NEWCO. (i) LOC and NEWCO, in the event the transactions contemplated hereby do not close, and LOC and Surviving Corporation, subject to the limitations set forth in this Section 6, jointly and severally, after the Closing, agree to defend and indemnify each Shareholder, and their respective affiliates, directors, officers and shareholders, and their respective successors and assigns (collectively, "SDE Indemnitees"), against and hold each of them harmless from any and all losses, liabilities, taxes, claims, suits, proceedings, demands, judgments, damages, expenses and costs, including, without limitation, reasonable counsel fees, costs and expenses incurred in the investigation, defense or settlement of any claims covered by this indemnity (net of any insurance recovery) (in this Section 6 collectively, the "Indemnifiable Damages") which any such indemnified person may suffer or incur by reason of (1) the inaccuracy or breach of any of the representations, warranties and covenants of NEWCO or LOC contained in this Agreement or any documents, certificate or agreement delivered pursuant hereto; and (2) any claim made by any person relating to or arising out of transactions, events, acts or omissions of or by LOC or NEWCO, prior to the Effective Time that is not adequately accrued or otherwise reflected on LOC's financial statements or that has not been otherwise disclosed in the schedules and lists delivered to SDE by LOC or NEWCO at or prior to the Closing Date other than any and all liabilities of LOC or NEWCO which are incurred after the date of such balance sheet in the ordinary course of its business. LOC or NEWCO, as the case may be, are hereinafter referred to as "LOC Indemnitor." The indemnity provided in this Section 6 shall be the sole and exclusive remedy of the SDE Indemnitees for any breach in or inaccuracy of any representation and warranty of LOC or NEWCO or any other matter relating to this Agreement or the transactions contemplated by this Agreement; PROVIDED, however, that nothing herein shall limit in any way the Shareholders' remedies in the event of breach by LOC or NEWCO of any of their covenants or agreements hereunder which are not also a representation or warranty for willful fraud or intentionally deceptive material misrepresentation or omission by LOC or NEWCO in connection herewith or with the transactions contemplated hereby. (ii) The LOC Indemnitor waives any right to require the Shareholders or, in the event the transactions contemplated hereby to not close, SDE, to (1) proceed against any person or entity including any other party hereto, (2) proceed against or exhaust any collateral or security or any part thereof, or (3) pursue any other remedy in its power, and waives any defense arising by reason of any inability of any other obligor to pay or any defense based on bankruptcy or insolvency or other similar limitations on creditors' remedies with respect to any other person. (iii) The indemnity referred to in Section 6(b) above shall only apply to Indemnifiable Damages claimed by the party seeking indemnification prior to the expiration of the Indemnification Period. (c) COLLECTION OF INDEMNIFIABLE DAMAGES. LOC, NEWCO and SDE agree to use their reasonable efforts to collect any Indemnifiable Damages from any available insurer or third party indemnitors before collecting from the Shareholders, however, nothing in the foregoing clause shall preclude any claiming party from filing a claim against the Shareholders from the outset. 7. GENERAL PROVISIONS. (d) FURTHER ASSURANCES. The parties agree that, from time to time hereafter, and upon request, each of them will execute, acknowledge and deliver such other instruments as may be reasonably required to more effectively carry out the intent of the parties to this Agreement or to otherwise carry out this Agreement's terms and conditions. (e) BENEFIT AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto. The rights of the parties under this Agreement may not be assigned. In the event LOC merges with, or sells substantially all of its assets to, another corporation and LOC is not the surviving corporation, any successor corporation to LOC shall assume the benefits and obligations of this Agreement and the other agreements referenced herein, provided, however, that any obligation of a successor corporation to make a payment to Shareholders denominated in LOC common stock shall be made on economically equivalent terms. (f) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (g) NOTICES. All notices, requests, demands and other communications pursuant to this Agreement shall be in writing, and shall be deemed to have been given if delivered or mailed, certified mail, first class, postage prepaid, to SDE at: Silicon Design Experts, Inc. 1116 Campus Drive West Morganville, NJ 07751 Attn: Sailesh Rao or if to NEWCO, at: Silicon Design Experts, California c/o Level One Communications, Incorporated 9750 Goethe Road Sacramento, CA 95827 Attn: Robert S. Pepper or if to LOC, at: Level One Communications, Incorporated 9750 Goethe Road Sacramento, CA 95827 Attn: Robert S. Pepper with a copy to: Bruce F. Dravis General Counsel Level One Communications, Incorporated 9750 Goethe Road Sacramento, CA 95827 (h) EXPENSE. Except as otherwise provided herein, any expenses in connection with this Agreement or the transactions herein provided for shall be paid for by the party incurring such expenses. (i) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (j) HEADINGS. All paragraph headings in this Agreement are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement. (k) AMENDMENT, MODIFICATION AND WAIVER. This Agreement may be modified, amended and supplemented by mutual written agreement of the respective Boards of Directors of the parties hereto, or their respective officers authorized by such Boards of Directors, at any time prior to the Closing, whether before or after the approval of this Agreement by the stockholders of any of the parties. Each party may waive any condition intended to be for its benefit. Each amendment, modification, supplement or waiver shall be in writing and signed by the parties to be charged. (l) ENTIRE AGREEMENT. This Agreement and the Schedules and Exhibits delivered with it and the other agreements specifically provided for under this Agreement represent the parties' entire Agreement and no provision or document of any kind shall be included in, or form a part of, this Agreement unless it is in writing and is delivered to the other party by the party to be charged. (m) PRIOR NEGOTIATIONS. All prior negotiations and discussions by and among the parties to this Agreement which are not reflected or set forth in this Agreement or the Schedules or Exhibits delivered with it are merged into this Agreement. (n) TERMINATION. This Agreement may be terminated at any time before the Closing Date as follows: (i) By the consents of the Board of Directors of SDE, LOC and NEWCO; (ii) By SDE if the conditions contained in this Agreement to which SDE's obligations are subject have not been fulfilled by LOC or NEWCO; (iii) By either of LOC or NEWCO if the conditions contained in this Agreement to which their respective obligations are subject have not been fulfilled by SDE. (iv) This Agreement shall terminate without obligation of any party to the others if the Closing contemplated by this Agreement does not occur on or before _____________. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. ATTEST:SILICON DESIGN EXPERTS, INC. By Its ATTEST:LEVEL ONE COMMUNICATIONS, INCORPORATED By Its ATTEST:SILICON DESIGN EXPERTS, CALIFORNIA By Its ATTEST: Sailesh Rao ATTEST: Juan Jover SCHEDULE 1(B) DIRECTOR OF SURVIVING CORPORATION Robert S. Pepper SCHEDULE 1(G) MATRIX PAYMENT If necessary, on the second anniversary from the Effective Time, LOC shall be obligated to make an additional payment to the Shareholders (the AMatrix Payment@) if [*] If, at any point during the two years following the closing, [*] LOC shall not be obligated to make a Matrix Payment. The parties shall determine the amount of any Matrix Payment in accordance with the attached matrix. [*] Any Matrix Payment shall be subject to the following conditions: a. Any Matrix Payment LOC is otherwise obligated to make shall be reduced by 25% in the event [* ] b. Any Matrix Payment LOC is otherwise obligated to make shall be reduced by 25% in the event [*] c. No Matrix Payment shall be made to a Shareholder who has terminated employment with LOC under the Employment Agreement for a reason other than death or disability. LOC shall notify Shareholder in writing at the time any of the foregoing conditions has been achieved. [*] All amounts set forth herein shall be adjusted in the event of any forward or reverse stock splits, share dividends effecting a stock split, or like transactions. [*] Schedule 1(g) MATRIXCLEVEL ONE/ SDE Initial Shares ($3m / $34.59) 86730 [*] SCHEDULE 5(F) FORM OF OPINION OF SELLER=S COUNSEL SDE is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey and has corporate power to carry on its business as it is now being conducted. Certified copies of SDE's Articles of Incorporation and Bylaws delivered to LOC and NEWCO are complete and correct as of the date of this Agreement. SDE's minute books contain a complete and accurate record of all meetings and other corporate action of its shareholders and Board of Directors. SDE's authorized capital stock consists of 1000 shares of common stock, no par value, of which 134 shares are issued and outstanding. No shares are held in SDE's treasury. All of the outstanding shares of common stock of SDE are validly issued, fully paid and nonassessable. Except as disclosed, there are no outstanding options, agreements, contracts, calls or commitments of any character which would require the issuance by SDE of any capital stock. SDE has no subsidiaries. Except as disclosed, there is no material litigation, proceeding or governmental investigation pending or threatened against or relating to SDE, its properties or business, or the transactions contemplated by this Agreement. The execution of the Agreement does not, and performance thereof will not, violate the provisions of SDE's Articles of Incorporation, Bylaws, any note of which SDE is the maker or any indenture, agreement, or other instrument to which SDE is party, except insofar as any such instrument may require consent by a lender, mortgagee, lessor, or other party to such actions, whose consent SDE agrees to obtain before the Closing Date of the Agreement. The execution and delivery of the Agreement by SDE, the performance by SDE and Shareholders of their respective obligations thereunder and the consummation by SDE and Shareholders of the transactions contemplated thereby have been duly authorized by the Board of Directors and Shareholders and no other act or proceeding on the part of or on behalf of SDE or its Shareholders is necessary to approve the execution and delivery of the Agreement, the performance by SDE or Shareholders of their respective obligations thereunder and the consummation of the transactions contemplated thereby. The signatory officers of SDE have the power and authority to execute and deliver the Agreement and all of the other agreements and instruments to be executed and delivered by SDE pursuant hereto, to consummate the transactions thereby contemplated and to take all other actions required to be taken by it pursuant to the provisions hereof and thereof. The Agreement has been duly and validly executed and delivered by SDE and Shareholders and constitutes, and the other documents and instruments to be executed and delivered by SDE or any Shareholder pursuant thereto, constitute legal, valid and binding agreements of SDE and the Shareholders, respectively, enforceable against SDE or Shareholder, respectively, in accordance with their respective terms, except as they may be limited by bankruptcy, insolvency or other similar laws affective the enforcement of creditors' rights in general. Exhibit 1(h) FORM OF EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT sets forth the basic terms and conditions of employment of _______________ (AEmployee@) after the Effective Time (the AEffective Time@) described in the Agreement and Plan of Reorganization among SILICON DESIGN EXPERTS, INC. (ASDE@), LEVEL ONE COMMUNICATIONS, INCORPORATED (ALOC@) and SILICON DESIGN EXPERTS, CALIFORNIA (@NEWCO@), dated ___________, 1996 (the AReorganization Agreement@). WHEREAS, the continued exclusive employment of Employee by LOC and LOC=s reliance on Employee to contribute to the successful and timely development of certain products were material inducements to LOC in entering into the Reorganization Agreement; and WHEREAS, in addition to the payments to Employee as a Shareholder under the Reorganization Agreement, the parties intend that Employee participate financially in the profits of certain products developed by Employee; and WHEREAS, LOC warrants that it is empowered under its Articles of Incorporation and Bylaws to enter into this Agreement; Employee warrants that he is under no employment contract, bond, confidentiality agreement, or any other obligation which would violate or be in conflict with the terms and conditions of this Agreement or encumber his performance of duties assigned to him by LOC; and Employee further warrants that he has not signed or committed to any employment or consultant duties or other obligations which would divert his full attention from the duties assigned to him by LOC under this Agreement; NOW THEREFORE, the parties in consideration of the foregoing premises and mutual agreements and the promises contained herein, do hereby agree as follows: 1. DUTIES. LOC hereby employs Employee and Employee hereby accepts such employment. Employee will execute LOC=s standard confidentiality and assignment of invention agreements. Employee shall devote his full time, ability, attention, energy, knowledge and skill solely and exclusively to performing all duties of LOC as assigned or delegated to him by the directors and officers of LOC. Employee=s duties will be as set forth in Exhibit 1 hereto. Such duties shall also include [*] 2. SALARY/OTHER COMPENSATION. In consideration for Employee=s services to LOC during the time period in which this Agreement is effective, Employee shall receive a base salary of ________ per annum to be paid in equal installments every ___________, from which LOC shall withhold and deduct all applicable federal and state income, social security and disability taxes as required by applicable laws. 3. EMPLOYEE BENEFITS. Employee will be eligible for the Employee benefit, vacation and similar plans set forth in Exhibit 3 hereto. 4. PARTICIPATION POOL. To provide Employee with the opportunity to participate in the profits generated by certain of Employee=s developments for LOC, and as compensation for performance of services hereunder and pursuant to the provisions of the non-competition agreement contained herein, Employee will be eligible to participate in the Employee Participation Pool described in Exhibit 4 hereto on the terms and conditions set forth therein, including any provisions relating to participation following termination of employment. 5. TERM OF EMPLOYMENT. A. Employee=s employment with LOC shall be governed by the provisions of this Section 5A for two years. Such employment shall be terminable on the following terms: (i) BY DEATH. Employee=s employment shall be terminated upon the death of Employee. LOC=s total liability in such event shall be limited to payment of Employee=s salary and benefits through the date of Employee=s death, plus any amounts payable pursuant to the terms of the Employee Pool. (ii) BY DISABILITY. If, in the sole opinion of LOC=s Board of Directors, Employee shall be prevented from properly performing his duties hereunder by reason of any physical or mental incapacity for a period of more than 90 days in the aggregate in any twelve-month period, then, to the extent permitted by law, his employment with LOC shall terminate. LOC=s total liability in the event of disability termination shall be limited to payment of Employee=s salary and benefits through the effective date of termination upon disability, plus any amounts payable pursuant to the terms of the Employee Pool. (iii) FOR CAUSE. LOC reserves the right to terminate Employee=s employment immediately, at any time, if, in the reasonable opinion of LOC=s Board of Directors: Employee commits any material act of dishonesty, fraud, misrepresentation, or other act of moral turpitude; is guilty of gross carelessness or misconduct; fails to obey the lawful direction of LOC=s Board of Directors; or acts in any way that has a direct, substantial and adverse effect on LOC=s reputation. LOC=s total liability to Employee in the event of termination of Employee=s employment under this section shall be limited to the payment of Employee=s salary and benefits through the effective date of termination, plus any amounts payable pursuant to the terms of the Employee Pool through the date of termination. (iv) MUTUAL CONSENT. This Agreement shall be terminated upon mutual written consent of LOC and Employee. LOC=s total liability to Employee in the event of termination of employment under this subsection shall be limited to the payment of Employee=s salary and benefits through the effective date of termination, plus any amounts payable pursuant to the terms of the Employee Pool through the date of termination. B. Following the initial two years of employment with LOC, Employee shall remain an Employee of LOC in accordance with LOC=s Aemployment at will@ employment policies, provided, however, that Employee shall continue to be bound by the non-competition provisions of this Agreement and shall be entitled to any amounts payable pursuant to the terms of the Employee Pool. C. Upon termination of employment for any reason whatsoever, Employee shall be deemed to have resigned from all offices and directorships then held with LOC. 6. NON-COMPETITION AGREEMENT. Employee agrees to be bound by the non- competition provisions set forth at Exhibit 6 hereof, and hereby acknowledges and agrees that the consideration provided to Employee as described in this Agreement is good and sufficient consideration to support the non-competition covenant contained therein. Parties acknowledge that any breach of their obligations under this non competition covenant shall cause irreparable harm for which there is no adequate remedy at law. The parties therefore agree that, if any obligation of this covenant is breached, the non-breaching party, at is sole discretion, in addition to any other remedies, available to it, may bring an action or actions for injunctive release, specific performance or both, and have entered a temporary restraining order, preliminary or permanent injunction or order compelling specific performance, and if successful, recover costs and attorney fees from breaching party. 7. DISPUTE RESOLUTION PROCEDURE. The parties agree that any dispute arising out of the employment relationship between them, including the termination of that relationship, shall be resolved under the following procedures. A. The party claiming to be aggrieved shall furnish to the other party a written statement of the grievance identifying any witnesses or documents that support the grievance and the relief requested or proposed. B. If the other party does not agree to furnish the relief requested or proposed, or otherwise does not satisfy the demand of the party claiming to be aggrieved, the parties shall submit the dispute to nonbinding mediation before a mediator to be jointly selected by the parties. The parties will share equally the cost of the mediation. C. If the mediation does not produce a resolution of the dispute, any controversy between LOC and Employee or between any employee of LOC and Employee, including, but not limited to, claims of race, age, gender, religious or national origin discrimination under Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Americans with Disabilities Act, as amended; the California Fair Employment and Housing Act and any other federal, state or local laws; and those involving the construction or application of any of the terms, provisions of conditions of this Agreement or otherwise arising out of or relating to this Agreement, shall be settled by arbitration in accordance with the then current employment dispute resolution rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator(s) may be rendered by any court having jurisdiction thereof. LOC and Employee shall share the costs of the arbitrator equally but shall each bear their own costs and legal fees associated with the arbitration. The location of the arbitration shall be in Sacramento, California. In the event of a breach by Employee of any of the covenants contained in section 7 of this Agreement, it is recognized that LOC shall be entitled to institute or prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for nay breach of this Agreement or to sue for specific performance, or injunction against performance of any acts or to seek any other available remedy. 8. GOVERNING LAW. This Agreement and the rights and obligations hereunder shall be governed by the laws of California, and the parties to this Agreement specifically consent to the jurisdiction of the courts of California over any action arising out of or related to this Agreement. 9. SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall, nevertheless, continue in full force and effect without being impaired or invalidated in any way. 10. INTEGRATED AGREEMENT. This Agreement and the documents referenced herein supersede any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein, and constitute the full, complete and exclusive agreement between Employee and LOC with respect to the subject matters herein. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. LEVEL ONE COMMUNICATIONS, INCORPORATED By__________________________________ Its__________________________________ ____________________________________ ____________________________________ Employee EXHIBIT 4 EMPLOYEE PARTICIPATION POOL [*] If Employee terminates employment with LOC, he or she shall no longer be eligible to participate in any future distributions from the Employee Pool and any undistributed amounts to which such Employee might otherwise have been entitled in any Fiscal Year shall be reallocated pro rata among the remaining Employees, provided, however, that in the event Employee is terminated by LOC without cause, or because of death or disability, such Employee shall be entitled to participate in the Employees' Pool through the end of the Fiscal Year of such termination and through the next Fiscal Year following such termination. For purposes of this Agreement, a change in responsibilities for any Employee will not be deemed to be a termination of such Employee. In the event all of the Employees participating in the Employee Pool and LOC agree, additional Employees may be permitted to participate in the Employee Pool, in such percentages as may be agreed at the time of such addition, with the percentage share of the Employee Pool of the then- participating Employees adjusted pro rata. LOC payments into the Employee Pool shall be subject to the following conditions: a. Any payment LOC is otherwise obligated to make shall be reduced by 25% in the event [*] b. Any payment LOC is otherwise obligated to make shall be reduced by 25% in the event [*] EXHIBIT 6 NON-COMPETITION COVENANT 1. BUSINESS OF LOC AND SDE. Employee understands and acknowledges that LOC (which, for purposes of this Agreement, shall hereinafter be deemed to include LOC and all of its subsidiaries, including SDE following the Merger) is primarily engaged in the design, development and marketing of mixed signal application specific standard integrated circuit products for the telecommunications industry (the "Business"). 2. COMPETITION. Employee covenants and agrees that for three years from the date hereof (the "Contract Period"), he will refrain, in the United States, or elsewhere, from: (a) directly or indirectly (as a director, officer, employee, manager, consultant, independent contractor, advisor or otherwise) engaging in competition with LOC, or owning any interest in, performing any services for, or participating in any business or organization which competes with LOC or with any portion of the Business which the Employee knew prior to his termination of employment LOC planned to commence within the twelve (12) months following such termination of employment, in the United States or in any geographical area where the Business is conducted by LOC during Employee's term of employment with LOC; PROVIDED, HOWEVER, that the provisions of this paragraph shall not prohibit such Employee's ownership of not more than five percent (5%) of the total shares of all classes of stock outstanding of any company with a class of securities registered under the Securities Exchange Act of 1934; (b) inducing or encouraging any Employee or consultant or group of Employees or consultants who are then employed or retained by LOC to leave the faithful employment of or consulting with LOC; or (c) discussing with any existing client of LOC, or with any entity whose business Employee knows LOC is actively soliciting (a "potential client"), the present or future availability of services or products by a business, if such Employee has, or has the right to acquire, a proprietary interest in such business or is, or within six months of such Employee's termination of employment with LOC becomes, an Employee, officer or director of such business, where such services or products are competitive with the Business. For purposes of this Agreement, (i) a "proprietary interest" in a business shall mean ownership, whether through direct or indirect stock holdings or otherwise, of five percent (5%) or more of such business; and (ii) the words "compete", "competitor", "competition", "competitive" and words of like derivation, when used in relation to LOC and the Business, shall encompass businesses which compete with the Business which is engaged in by LOC as of the date hereof or which the Employee knew prior to his termination of employment LOC planned to commence within the twelve (12) months following such termination of employment. If the non-competition provisions contained herein shall be deemed to exceed the time or geographic limits or any other limitation imposed by applicable law in any jurisdiction, then such provision shall be deemed reformed in such jurisdiction to the maximum extent permitted by applicable law. EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 29, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-29-1996 DEC-29-1996 20251 10211 18435 156 9990 63586 40638 16962 112102 12715 0 0 0 83230 12351 112102 111392 111987 48477 48477 47835 0 0 17968 6755 11213 0 0 0 11213 0 .82
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