-----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, LHBRsFS0BdWhV9HcBHYnUaObbOqKJh6eNpGucF7R0IpyCDWE5AI+78nyp9W5joTK PDUZTKXV1q7tTSX/79ZSZw== 0000908985-97-000011.txt : 19971114 0000908985-97-000011.hdr.sgml : 19971114 ACCESSION NUMBER: 0000908985-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971112 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: SEC FILE NUMBER: 000-22068 FILM NUMBER: 97713986 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: September 28, 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 No _______ The number of Common Shares of the registrant outstanding on September 28, 1997, was 20,294,318. INDEX
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[CAPTION] Part I. FINANCIAL INFORMATION
Item 1. Financial Statements Consolidated Balance Sheets as of September 28, 1997, and December 29, 1996 . . . . . . . . . . 3 . . . Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 1997, and September 29, 1996 . . . . . . . . . . 4 . . . Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 1997, and September 29, 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 2. Changes in Securities . . . . . . . . . . 14 . . . Item 4. Submission of Matters to a Vote of Shareholders . . . . . . . . . . 14 . . . Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 15 . . .
[CAPTION] [CAPTION] Signatures S-1
LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED BALANCE SHEETS September 28, 1997, and December 29, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) Sept. 28, 1997 Dec. 29, 1996
(unaudited) ASSETS Current Assets: Cash and cash equivalents $ 117,849 $ 20,251 $20,251 Short-term investments 21,053 10,211 Accounts receivable, net of allowance for doubtful 28,991 18,279 accounts of $256 and $156 for 1997 and 1996, respectively Inventories 23,115 9,990 Deferred income tax benefits 2,990 2,504 Prepaid expenses 2,293 2,351 Total current assets 196,291 63,586 Property and equipment, net 30,379 23,676 Long-term investments 10,897 12,440 Note acquisition costs 3,120 --- Foundry deposits 14,000 8,000 Other assets 4,169 4,400 Total assets $ 258,856 $ 112,102 $258,856 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of capital lease obligations $ 1,199 $ 1,129 Accounts payable 14,882 4,778 14,882 Accrued payroll costs 2,772 1,985 Income taxes payable 2,240 1,338 Deferred distributor revenue 1,687 864 Other accrued liabilities 5,400 2,621 Total current liabilities 28,180 12,715 Long-term debt 115,000 --- Capital lease obligations, less current portion 2,444 3,194 Deferred lease expense 340 612 Total liabilities 145,964 16,521 Shareholders' Equity: Common Stock, no par value 85,780 83,203 Authorized - 157,500,000 shares Outstanding - 20,356,030 and 19,674,341 shares for 1997 and 1996, respectively Unrealized gain on available-for-sale securities, net of tax 12 12 Retained earnings 27,100 12,366 Total shareholders' equity 112,892 95,581 Total liabilities and shareholders' equity $258,856 $112,102
LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED STATEMENTS OF INCOME SEPTEMBER 28, 1997, AND SEPTEMBER 29, 1996 (unaudited) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Nine Months Ended SEPT. 28, 1997 SEPT. 29, 1996 SEPT. 28, 1997 SEPT. 29, 1996 Revenues $ 42,437 $ 27,363 $ 105,187 $ 82,384 Cost of sales 17,653 11,756 44,120 34,865 Gross margin 24,784 15,607 61,067 47,519 Research & development 8,135 5,249 21,214 16,663 Sales & marketing 6,470 4,219 15,523 12,209 General & administrative 2,826 1,595 6,849 5,126 Total operating expenses 17,431 11,063 43,586 33,998 Operating income 7,353 4,544 17,481 13,521 Interest income 1,129 363 2,082 1,228 Interest expense (514) (127) (685) (318) Other income, net 93 848 169 915 Income before provision for income taxes 8,061 5,628 19,047 15,346 Provision for income taxes 2,660 1,857 6,266 5,065 Net income $ 5,401 $ 3,771 $ 12,781 $ 10,281 Earnings per Share $ .25 $ 0.18 $ 0.60 $ 0.50 Weighted average common shares outstanding 21,819 20,705 21,458 20,585
LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS For Nine Months Ended
(IN THOUSANDS) Sept. 28, 1997 Sept. 29, 1996 Cash flows from operating activities: Net income $ 12,781 $ 10,281 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,976 4,805 Changes in assets and liabilities: Accounts receivable (10,712) (1,614) Inventories (13,125) 3,583 Deferred tax assets (486) --- Prepaid expenses 58 186 Accounts payable and accrued liabilities 15,395 (3,298) Deferred liabilities --- 1,652 Deferred lease expense (272) (280) Net cash provided by operating activities 10,515 15,315 Cash flows from investing activities: Purchase of short-term investments (46,793) (10,325) Proceeds from sales and maturities of short term investments 35,953 2,340 Purchase of long-term investments (19,024) (8,670) Proceeds from sales and maturities of long term investments 20,567 3,026 Capital expenditures (13,269) (4,288) Payments for related party notes receivable --- (1,600) Payments for foundry deposits and other assets (6,078) (5,593) Net cash used in investing activities (28,644) (25,110) Cash flows from financing activities: Net principal payments under capital lease (680) --- obligations Proceeds from issuance of convertible subordinated notes, net of issuance costs 111,880 --- Proceeds from issuance of stock, net of repurchases and costs of issuance 4,529 1,915 Net cash provided by financing 115,729 1,915 activities Net increase (decrease) in cash and cash equivalents 97,600 (7,880) Cash and cash equivalents at beginning of period 20,251 21,628 Cash and cash equivalents at end of period $ 117,851 $ 13,748 SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH TRANSACTIONS Cash payments for: Interest 248 300 Income taxes 42 2,103
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 and nine month periods ended September 28, 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. All shares and per share numbers in this Report reflect the effect of a 3-for-2 stock split to shareholders of record on August 5, 1997, effective on August 26, 1997. NOTE 2 - NET INCOME 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) and convertible subordinated notes. 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 would be called diluted EPS under the new standard and would still be required. Additional disclosure will be required by Statement 128, but the Company does not expect the effect of Statement 128 to be material. LEVEL ONE COMMUNICATIONS, INCORPORATED __________ NOTE 3 - INVENTORIES Inventories, stated at the lower of cost (first in, first out) or market, consist of:
(IN THOUSANDS) September 28, 1997 December 29, 1996 Raw materials $ 6,414 $ 32 Work-in-process 13,555 7,948 Finished goods 3,146 2,010 $23,115 $ 9,990
NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment, net is comprised of the following:
(IN THOUSANDS) September 28, 1997 December 29, 1996 Machinery & equipment $28,686 $25,254 Furniture & fixtures 21,838 11,899 Leasehold improvements 3,383 3,485 $53,907 $40,638 Less - accumulated depreciation (23,528) (16,962) $30,379 $23,676
NOTE 5 - LONG-TERM DEBT During the third quarter of 1997 the Company raised $115 million (less discounts, commissions and expenses of approximately $3.1 million) from a private placement to qualified investors of subordinated convertible notes due 2004 with a 4% coupon (the "Notes"). The Notes are convertible to shares of the Company's Common Stock at a price of $40 per share. 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, and subsequent filings with the Securities and Exchange Commission. 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 55% to $42.4 million in the third quarter of 1997 compared to revenues of $27.4 million for the same quarter of 1996. Revenues increased 28% to $105.2 million in the first nine months of 1997 compared to $82.4 million for the first nine months of 1996. The increases during the third quarter and first nine months of 1997 reflect the substantial unit sales growth due to the continued market acceptance of the Company's products in both the networking and transmission markets, and increases in the Company's customer base. International sales were $14.4 million or 34% and $9.7 million or 35.4% of sales, respectively, for the third quarter of 1997 and 1996, and $36.1 million or 34.5% and $31.0 million or 37.6% of sales for the first nine months of 1997 and 1996, respectively. 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 third quarter of 1997 was 58.4% versus 57.0% in the third quarter of 1996 and 58.4% in the second quarter of 1997. Gross margin as a percentage of revenues in the first nine months of 1997 was 58.1% versus 57.7% in the first nine months of 1996. RESEARCH AND DEVELOPMENT Research and development expenses were $8.1 million or 19.2% of revenues in the third quarter of 1997 versus $5.2 million, or 19.2% of revenues in the third quarter of 1996. For the first nine months of 1997, research and development expenses were $21.2 million or 20.2% of revenues versus $16.7 million or 20.2% of revenues in the same period of 1996. The research and development expense increase in each period in 1997 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 $6.5 million or 15.2% of revenues in the third quarter of 1997 versus $4.2 million or 15.4% of revenues in the third quarter of 1996. For the first nine months of 1997, sales and marketing expenses were $15.5 million or 14.8% of revenues compared to $12.2 million or 14.8% of revenues in the first nine months of 1996. The increased expenditures are primarily attributable to sales commissions associated with increased revenues and the expansion of the Company's sales and marketing staffs. GENERAL AND ADMINISTRATIVE In the third quarter of 1997, general and administrative expenses were $2.8 million or 6.7% of revenues versus $1.6 million or 5.8% of revenues in the same period of 1996. For the first nine months general and administrative expenses were $6.8 million or 6.5% of revenues in 1997 versus $5.1 million or 6.2% of revenues in 1996. The increased expenses are primarily attributable to additional headcount associated with the Company's growth. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity as of September 28, 1997, consisted of $138.9 million of cash, cash equivalents and short-term investments, and $10 million available under the Company's revolving line of credit. At September 28, 1997, the Company had no outstanding balance under this line of credit. Working capital as of September 28, 1997, was $168.2 million. During the first nine months of 1997, the Company generated $10.5 million of cash from operating activities, as compared to $15.3 million in the same period in 1996. In both years, net cash generated from operations during the period was primarily due to net income before depreciation and amortization expense. In the first nine months of 1997, cash generated from net income before depreciation and amortization was $19.8 million. This cash generated was offset by $8.4 million due to the net changes during the period for inventories, accounts receivable, and accounts payable. The changes in accounts receivable, accounts payable, and inventories are due to expansion of the Company's business, and do not reflect material changes in the way the Company conducts operations. During the third quarter of 1997, the Company raised $115 million from a private placement to qualified investors of subordinated convertible notes due 2004 with a 4% coupon (the "Notes"). The company expects that the net proceeds from the sale of the Notes, together with existing sources of liquidity, will provide the Company with capital required for its continued expansion in the rapidly growing segments of the telecom and networking markets. FACTORS THAT MAY AFFECT FUTURE RESULTS MANUFACTURING RISKS The Company does not manufacture the wafers used for its products. The Company's wafers are manufactured by foundries located in the United States, Europe and Asia. The Company depends upon these suppliers to produce wafers at acceptable yields and to deliver them in a timely manner at competitive prices. The Company may sustain an adverse impact on operating results from problems with the cost, timeliness, yield and quality of wafer deliveries from suppliers. From time to time, the available industry-wide foundry capacity can fluctuate significantly. During periods of constrained supply, the Company may experience difficulty in securing an adequate supply of wafers, and/or its suppliers may increase wafer prices. The Company's operating results depend in substantial part on its ability to maintain or increase the capacity available from its existing or new foundries. In prior years, the Company has experienced increased costs and delays in customer shipments as a result of a foundry reducing shipments to the Company without prior notice, requiring the Company to transfer products to a new foundry. Although the Company believes that it has planned to meet customer demand, there can be no assurances that unforeseen demand, current supplier interruptions or other changes will not have a material impact on the Company's business. Manufacturing process technologies are subject to rapid change. Other companies in the industry have experienced difficulty in migrating to new manufacturing processes, and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. The Company's business, financial condition and results of operations could be materially adversely affected if any such transition is substantially delayed or inefficiently implemented. The Company is also dependent upon third-party assembly companies that package 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 Prospectus, may not be predictive of future performance. DEPENDENCE ON NEW PRODUCTS The Company's future success depends on its ability to timely develop and introduce new products which compete effectively. Because of the complexity of its products, the Company may experience delays in completing development and introduction of new products, and, as a result, not achieve the market share anticipated for such products. The Company's strategy is to develop products for the fastest growing segments of the communications market. The Company conducts its own analysis of market trends and reviews forecasts and information provided by industry analysts. Market conditions may change rapidly as technology, economic, or user-preference conditions cause different communications technologies to experience growth other than that forecast by the Company or others. There can be no assurance that the Company will successfully identify new product opportunities and bring new products to market in a timely manner, that products or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive, or that the Company's products will be selected for design into the products of its targeted customers. In addition, the average selling price for any particular product tends to decrease over the product's life. To offset such price decreases, the Company relies primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and other price/performance factors such that higher average selling prices and higher margins are achievable relative to existing product lines. To the extent that cost reductions and new product introductions with higher margins do not occur in a timely manner, or the Company's products do not achieve market acceptance, the Company's operating results could be adversely affected. MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL The Company is currently experiencing a period of significant growth which has placed, and could continue to place, a significant strain on the Company's personnel and other resources. The Company's ability to manage its growth effectively will require continued expansion and refinement of the Company's operational, financial and management and control systems as well as a significant increase in the Company's development, testing, quality control, marketing, logistics and service capabilities, any of which could place a significant strain on the Company's resources. The Company's success also depends to a significant extent upon the continued services of its key personnel and its ability to attract and retain key technical, sales and management personnel in the future. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain key technical, sales and management personnel in the future. If the Company's management is unable to manage growth effectively, maintain the quality and marketability of the Company's products and retain, hire and integrate key personnel, the Company's business, financial condition and results of operations could be materially adversely affected. INTELLECTUAL PROPERTY The Company relies upon patent, trademark, trade secret and copyright law to protect its intellectual property. There can be no assurance that such intellectual property rights can be successfully asserted or will not be invalidated, circumvented or challenged. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources for the Company. Any infringement claim or other litigation against or by the Company could have a material effect on the Company's financial condition and results of operations. In November 1995 the Company commenced infringement litigation against a competitor. SEMICONDUCTOR INDUSTRY The semiconductor industry has historically been cyclical and subject to significant economic downturns at various times. The Company may experience substantial period-to-period fluctuations in operating results due to general semiconductor industry conditions, overall economic conditions or other factors. In addition, the securities of many high technology companies have historically been subject to extreme price and volume fluctuations, factors which may affect the market price of the Company's Common Stock. As is common in the semiconductor industry, the Company frequently ships more product in the third month of a quarter than in the other months. If a disruption in the Company's production or shipping occurs near the end of a quarter, the Company's revenues for that quarter could be adversely affected. The Company must order wafers and build inventory in advance of product shipments. There is risk that the Company could produce excess or insufficient inventories of particular products because the Company's markets are volatile and subject to rapid technology and price changes. This inventory risk is heightened because certain of the Company's customers place orders with long lead times which may be subject to cancellation or rescheduling by that customer. To the extent the Company produces excess or insufficient inventories of particular products, the Company's revenues and earnings could be adversely affected. Increased demand for semiconductor products may result in a reduction in the availability of wafers from foundries. Such capacity limitations may adversely affect the Company's ability to deliver products on a timely basis and affect the Company's margins. Additionally, the Company believes that during periods of strong demand and/or restricted semiconductor capacity, customers will over- order to assure an adequate supply. Certain of the Company's customers may cancel or postpone orders without notice if product becomes available elsewhere. Shortages of components from other suppliers could cause the Company's customers to cancel or delay programs incorporating the Company's products, resulting in the cancellation or delay of orders for the Company's products. INTENSE COMPETITION The semiconductor industry is intensely competitive. The Company's competition consists of semiconductor companies and semiconductor divisions of vertically integrated companies. In the telecom market, the Company's principal competitors are Brooktree Corporation (a subsidiary of Rockwell International, Inc.), Crystal Semiconductor, Inc. (a subsidiary of Cirrus Logic, Inc.) ("Crystal"), Dallas Semiconductor, Inc., Lucent Technologies Inc. ("Lucent"), PMC-Sierra Inc. and Siemens A.G. In the networking market, the Company's principal competitors are Advanced Micro Devices, Inc., Broadcom Corporation, Crystal, Integrated Circuit Systems, Inc., Lucent, Micro Linear Corp., National Semiconductor Corporation, Quality Semiconductor, Inc., Seeq Technologies, Inc. and Texas Instruments, Incorporated. Many of these competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial and other resources than the Company with which to pursue engineering, manufacturing, marketing and distribution of products. The ability of the Company to compete successfully in the rapidly evolving area of high performance integrated circuit technology depends on factors both within and outside of the Company's control. Such factors include, without limitation, success in designing and manufacturing new products, implementing new technologies, intellectual property programs, product quality, reliability, price, efficiency of production, and general economic conditions. There is no assurance that the Company will be able to compete successfully against current and future competitors. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which may have a material adverse effect on the Company's business, financial condition and results of operations. INTERNATIONAL OPERATIONS Due to its reliance on international sales and foreign third-party manufacturing and assembly operations, the Company is subject to the risks of conducting business outside of the United States including government regulatory risks, political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. There can be no assurance that one or more of the foregoing factors will not have a material adverse effect on the Company's business, financial condition or operating results. INCREASED LEVERAGE In connection with the sale of the Notes, the Company has incurred approximately $115.0 million in additional indebtedness which increases the ratio of its long-term debt to its total capitalization from 3.0%, at June 29, 1997, to 51.1%, as of September 28, 1997. As a result of this increased leverage, the Company's interest obligations will increase substantially. The degree to which the Company will be leveraged could adversely affect the Company's ability to obtain additional financing for working capital, acquisitions or other purposes and could make it more vulnerable to economic downturns and competitive pressures. The Company's increased leverage could also adversely affect its liquidity, as a substantial portion of available cash from operations may have to be applied to meet debt service requirements and, in the event of a cash shortfall, the Company could be forced to reduce other expenditures and forego potential acquisitions to be able to meet such requirements. VOLATILITY OF NOTES AND STOCK PRICE Economic and other external factors, many of which are beyond the control of the Company, may have a significant impact on the Company's business and on the market price of the Notes and the Common Stock into which the Notes are convertible. Such factors include, without limitation, fluctuations in product revenue and net income of the Company or its competitors, shortfalls in the Company's operating results from levels forecast by securities analysts, announcements concerning the Company, its competitors or customers, announcements of technological innovations by the Company, its competitors or its customers, the introduction of new products or changes in product pricing policies by the Company, its competitors or its customers, market conditions in the industry and the general state of the securities market. In addition, the stock prices of many technology companies fluctuate significantly for reasons that may be unrelated or disproportionate to operating results. These fluctuations, as well as general economic, political and market conditions such as recession or international instability, may adversely affect the market price of the Notes and the Common Stock. 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 and may file a counter claim against the Company. 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 2. CHANGES IN SECURITIES On August 4, 1997, the Company's Certificate of Incorporation was amended to effect a 3-for-2 stock split to shareholders of record on August 5, 1997. The split was effective on August 26, 1997. During the third quarter of 1997 the Company raised $115 million (less discounts, commissions and expenses of approximately $3.1 million) from a private placement to qualified investors of subordinated convertible notes due 2004 with a 4% coupon (the "Notes"). The Notes are convertible to shares of the Company's Common Stock at a price of $40 per share. On July 14, 1997, the Company issued an aggregate of 702 shares to employees who are not "affiliates" (as that term is defined in SEC Rule 144) pursuant to an employee benefit plan. The shares were issued without registration in reliance on Section 4(1) of the Securities Act, as interpreted in Release 33- 6188 and Release 33-6281. On July 15, 1997 and August 27, 1997, the Company issued an aggregate of 2,037 shares of Common Stock to independent sales representatives for aggregate cash consideration of $4,384 pursuant to warrants issued in 1990. The shares were issued without registration in reliance on SEC Rule 701. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 17, 1997, the Company held its annual meeting of shareholders, at which the following matters were submitted to shareholder vote: Election of Directors:
Robert S. Pepper For: 12,676,163 Against: 16,417 Thomas J. Connors For: 12,684,763 Against: 7,817 Paul Gray For: 12,681,363 Against: 11,217 Martin Jurick For: 12,684,979 Against: 7,601 Henry Kressel For: 12,679,463 Against: 13,117 Joseph P. Landy For: 12,355,063 Against: 337,517
Ratification of Appointment of Arthur Andersen LLP as auditor: For:12,672,558 Against: 4,138 Abstain: 14,234 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)Exhibits - 4.1 - Indenture dated as of August 15, 1997 between the Company and State Street Bank and Trust Company of California (National Association) as Trustee.* 4.1 - Form of 4% Convertible Subordinated Note due 2004* 4.3 - Registration Rights Agreement* 27.1--Financial Data Schedule, September 28, 1997 *Incorporated by reference to Registrant's Registration Statement on Form S-3 filed October 15, 1997. (b)Reports on Form 8-K - Announcement of Intention to Issue Notes, August 14, 1997 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: November 12, 1997 By: /S/ ROBERT S. PEPPER Robert S. Pepper, Ph.D. Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: November 12, 1997 By: /S/ JOHN KEHOE 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 SEPTEMBER, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. [/LEGEND] [MULTIPLIER] 1,000
[PERIOD-TYPE] 3-MOS [FISCAL-YEAR-END] DEC-30-1996 [PERIOD-END] SEP-28-1997 [CASH] 117,849 [SECURITIES] 21,053 [RECEIVABLES] 28,991 [ALLOWANCES] 256 [INVENTORY] 23,115 [CURRENT-ASSETS] 196,291 [PP&E] 30,379 [DEPRECIATION] 23,528 [TOTAL-ASSETS] 258,856 [CURRENT-LIABILITIES] 28,180 [BONDS] 115,000 0 [PREFERRED] 0 [COMMON] 85,780 [OTHER-SE] 27,100 [TOTAL-LIABILITY-AND-EQUITY] 258,856 [SALES] 42,437 [TOTAL-REVENUES] 42,437 [CGS] 17,653 [TOTAL-COSTS] 17,653 [OTHER-EXPENSES] 17,431 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 514 [INCOME-PRETAX] 8,061 [INCOME-TAX] 2,660 [INCOME-CONTINUING] 5,401 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 5,401 [EPS-PRIMARY] --- [EPS-DILUTED] .25 S-1
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