-----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, U6qfCwrgVI9clsQQPhseJemhRv0SVwCfnW96caaFA23I9E9FnjkyXVq6QFA0Euvc lbvDrHMQbI98RnmUfl3VFA== 0000908985-97-000006.txt : 19970514 0000908985-97-000006.hdr.sgml : 19970514 ACCESSION NUMBER: 0000908985-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970330 FILED AS OF DATE: 19970513 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22068 FILM NUMBER: 97601972 BUSINESS ADDRESS: STREET 1: 9750 GOETHE RD CITY: SACRAMENTO STATE: CA ZIP: 95627 BUSINESS PHONE: 9168541138 MAIL ADDRESS: STREET 1: 9750 GOETHE ROAD CITY: SACREMENTO STATE: CA ZIP: 95827 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-22068 LEVEL ONE COMMUNICATIONS, INCORPORATED State: California I.R.S. Employer ID No.: 33-0128224 Address: 9750 Goethe Road, Sacramento, CA 95827 Telephone: (916) 855-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ The number of Common Shares of the registrant outstanding on March 30, 1997, was 13,417,289. INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of March 30,1997, and December 30, 1996 3 Consolidated Statements of Income for the Three Months Ended March 30, 1997, and March 30, 1996 4 Consolidated Statements of Cash Flows for the Three Months Ended March 30, 1997, and March 30, 1996 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Litigation 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures S-1 LEVEL ONE COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS) March 30, 1997 Dec. 29, 1996 (unaudited) ASSETS Current Assets: Cash and cash equivalents $16,410 $20,251 Short-term investments 18,673 10,211 Accounts receivable, net of allowance for doubtful accounts 20,038 18,279 of $156 and $156 for 1997 and 1996, respectively Inventories 10,211 9,990 Deferred income tax benefits 2,504 2,504 Prepaid expenses 2,029 2,351 Total current assets 69,865 63,586 Property and equipment, net 25,792 23,676 Long-term investments 11,210 12,440 Foundry deposits 8,000 8,000 Other assets 4,295 4,400 Total assets $119,162 $112,102 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of capital lease obligations $1,126 $1,129 Accounts payable 6,470 4,778 Accrued payroll costs 2,027 1,985 Income taxes payable 2,107 1,338 Other accrued liabilities 3,641 3,485 Total current liabilities 15,371 12,715 Capital lease obligations, less current portion 2,932 3,194 Deferred lease expense 585 612 Total liabilities 18,888 16,521 Shareholders' Equity: Common stock, no par value 84,466 83,203 Authorized - 105,000,000 shares Outstanding - 13,416,936 and 13,116,227 shares for 1997 and 1996, respectively Unrealized gain on available-for-sale securities, net of tax 12 12 Retained earnings 15,796 12,366 Total shareholders' equity 100,274 95,581 Total liabilities and shareholders' equity $119,162 $112,102 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 3 LEVEL ONE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited) (IN THOUSANDS EXCEPT EARNINGS PER SHARE) Three months ended MARCH 30, 1997 March 30, 1996 Revenues $30,107 $27,542 Cost of sales 12,900 11,588 Gross margin 17,207 15,954 Research & development 6,341 5,675 Sales & marketing 4,299 4,001 General & administrative 1,802 1,766 Total operating expenses 12,442 11,442 Operating income 4,765 4,512 Interest and other income, net 366 392 Income before provision for income taxes 5,131 4,904 Provision for income taxes 1,674 1,618 Net income $3,457 $3,286 Earnings per Share $0.25 $0.24 Weighted Average Common Shares Outstanding 14,108 13,686 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 LEVEL ONE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For three months ended (IN THOUSANDS) March 30, 1997 March 30, 1996 Cash flows from operating activities: Net income $3,457 $3,286 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,153 1,584 Purchased research & development expenses 0 0 Changes in assets and liabilities: Accounts receivable (1,759) 944 Inventories (221) (992) Deferred tax assets 0 0 Prepaid expenses 322 9 Accounts payable and accrued liabilities 2,659 (248) Deferred revenues 0 (36) Net cash provided by operating activities 6,611 4,547 Cash flows from investing activities: Purchase of short-term investments (19,410) (1,400) Proceeds from sales and maturities of short term investments 10,948 4,732 Purchase of long-term investments (5,940) (20) Proceeds from sales and maturities of long term investments 7,170 0 Capital expenditures (4,132) (1,427) Payments for related party notes receivable 0 (450) Payments for foundry deposits and other assets (32) (5,779) Net cash provided by (used in) investing activities (11,396) (4,344) Cash flows from financing activities: Net principal payments under capital lease obligations (292) (264) Proceeds from issuance of stock, net of repurchases and costs of issuance 1,236 639 Net cash provided by (used in) financing activities 944 375 Net increase (decrease) in cash and cash equivalents (3,841) 578 Cash and cash equivalents at beginning of period 20,251 21,628 Cash and cash equivalents at end of period $16,410 $22,206 Supplementary disclosure of cash and noncash transactions Cash payments for: Interest 162 91 Income taxes 905 301 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 LEVEL ONE COMMUNICATIONS, INCORPORATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION THE ACCOMPANYING UNAUDITED FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR INTERIM FINANCIAL INFORMATION AND WITH THE INSTRUCTIONS TO FORM 10-Q AND ARTICLE 10 OF REGULATION S-X. ACCORDINGLY, THEY DO NOT INCLUDE ALL OF THE INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE FINANCIAL STATEMENTS. IN THE OPINION OF MANAGEMENT, ALL ADJUSTMENTS (CONSISTING OF NORMAL RECURRING ACCRUALS) CONSIDERED NECESSARY FOR A FAIR PRESENTATION HAVE BEEN INCLUDED. OPERATING RESULTS FOR THE THREE-MONTH PERIOD ENDED MARCH 30, 1997, ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE YEAR ENDING DECEMBER 28, 1997. THE INFORMATION REPORTED IN THIS FORM 10-Q SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND FOOTNOTES CONTAINED IN THE COMPANY'S FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 29, 1996, AND SUBSEQUENT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NOTE 2 - EARNINGS PER SHARE NET INCOME PER SHARE IS COMPUTED USING THE WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, AND THE DILUTIVE COMMON EQUIVALENT SHARES OUTSTANDING FROM STOCK OPTIONS AND WARRANTS (USING THE TREASURY STOCK METHOD). EFFECTIVE DECEMBER 28, 1997, THE COMPANY IS REQUIRED TO ADOPT FINANCIAL ACCOUNTING STANDARDS BOARD NO. 128, EARNINGS PER SHARE. Among other things, the new standard will require replacement of primary EPS with basic EPS. Basic EPS would be computed by dividing reported earnings available to common stockholders by weighted average shares outstanding. No dilution for any potentially dilutive securities would be included. Fully diluted EPS, now called diluted EPS, would still be required. The Company has not quantified the effect of applying the new standard. 6 Note 3 - Inventories Inventories, stated at the lower of cost (first in, first out) or market, consist of: (IN THOUSANDS) March 30, December 30, 1997 1996 Raw materials $ 2 $ 32 Work-in-process 8,746 7,948 Finished goods 2,010 1,463 $ 10,211 $ 9,990 Note 4 - Property and Equipment Property and equipment, net is comprised of the following: (IN THOUSANDS) March 30, December 1997 30, 1996 Machinery and $25,235 $25,254 equipment Furniture and 16,103 11,899 fixtures Leasehold 3,432 3,485 improvements $44,770 $40,638 Less - accumulated (18,978) (16,962) depreciation $25,792 $23,676 7 LEVEL ONE COMMUNICATIONS, INCORPORATED _____ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following information should be read in conjunction with the unaudited interim financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10- Q, the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Form 10-K filed with the Securities and Exchange Commission on March 31, 1997. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth in "Factors that May Affect Future Results" and elsewhere in this Report. REVENUES Revenues increased 9% to $30.1 million in the first quarter of 1997 compared to $27.5 million for the same quarter of 1996. The increases during the first quarter of 1997 reflect unit sales growth due to the continued market acceptance of the Company's products in both the networking and transmission markets, and the broadening of the Company's customer base. International sales were $10.8 million or 36% and $10.2 million or 37% of sales, respectively, for the first quarter of 1997 and 1996. All sales are denominated in U.S. dollars, thereby eliminating the impact of foreign currency exchange rate fluctuations on revenues. GROSS MARGIN 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. Margin on domestic and international sales is similar. Gross margin as a percentage of revenues in the first quarter of 1997 was 57.2% versus 57.9% in the first quarter of 1996 and 54.0% in the fourth quarter of 1996. Gross margin in the first quarter of 1997 improved over the fourth quarter of 1996 due to increased overhead absorption, acceleration of cost reduction programs and die shrinks, and wafer price reductions. RESEARCH AND DEVELOPMENT Research and development expenses were $6.3 million or 20.9% of revenues in the first quarter of 1997 versus $5.7 million, or 20.6% of revenues in the first quarter of 1996. The research and development expense increase is due to additions to the Company's design engineering staff and related new product design expenses. SALES AND MARKETING Sales and marketing expenses were $4.3 million or 14.3% of revenues in the first quarter of 1997 versus $4.0 million or 14.5% of revenues in the first quarter of 1996. The increased expenditures are attributable to sales commissions associated with increased revenues, and the expansion of the Company's sales and marketing staffs. GENERAL AND ADMINISTRATIVE In the first quarter of 1997, general and administrative expenses were $1.8 million or 6.0% of revenues versus $1.8 million or 6.4% of revenues in the same period of 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity as of March 30, 1997, consisted of $35.1 million of cash, cash equivalents and short-term investments, and $10 million available under the Company's revolving line of credit. At March 30, 1997, the Company had no outstanding balance under this line of credit. Working capital as of March 30, 1997, was $54.5 million. During the first three months of 1997, the Company generated $6.6 million of cash from operating activities, as compared to $4.5 million in the same period in 1996. In both years, net cash generated from operations in the first quarter was primarily due to net income before depreciation and amortization expense. Disparities in such line items as accounts receivable, accounts payable, capital expenditures or foundry deposits reported in the first quarter of 1997 and 1996 reflect differences in timing, and not material changes in the Company's operations. 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 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings On November 28, 1995, the Company initiated a patent infringement suit against Seeq Technologies, Inc. in United States District Court for the Northern District of California. The suit relates to two Level One patents, No. 5,267,269 and No. 5,249,183, and to certain Seeq products used in Ethernet system products. The suit seeks damages and injunctive relief. Seeq has denied the allegations. 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 6. Exhibits and Reports on Form 8-K (a)Exhibits - 27.1--Financial Data Schedule, March 30, 1997 (b)Reports on Form 8-K - None. 8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. LEVEL ONE COMMUNICATIONS, INCORPORATED DATE: MAY 13, 1997 BY: Robert S. Pepper, Ph.D. Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: May 13_, 1997 By: John Kehoe Vice President and Chief Financial Officer (Principal Financial Officer) S-1 [DATE] [ARTICLE] 5 [LEGEND] THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. [/LEGEND] [MULTIPLIER] 1,000 3- MOS [FISCAL-YEAR-END] DEC-30-1996 [PERIOD-END] MAR-30-1997 [CASH] 16,410 [SECURITIES] 18,673 [RECEIVABLES] 20,114 [ALLOWANCES] 156 [INVENTORY] 10,211 [CURRENT-ASSETS] 69,865 [PP&E] 44,770 [DEPRECIATION] 18,978 [TOTAL-ASSETS] 119,162 [CURRENT-LIABILITIES] 15,371 [BONDS] 0 0 [PREFERRED] 0 [COMMON] 84,466 [OTHER-SE] 15,808 [TOTAL-LIABILITY-AND-EQUITY] 119,162 [SALES] 30,107 [TOTAL-REVENUES] 30,107 [CGS] 12,900 [TOTAL-COSTS] 12,900 [OTHER-EXPENSES] 12,442 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 162 [INCOME-PRETAX] 5,131 [INCOME-TAX] 1,674 [INCOME-CONTINUING] 3,457 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 3,457 [EPS-PRIMARY] --- [EPS-DILUTED] .25
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