-----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, P9FCqU096K6mtOruziyw0X5wBuw+2Y4kRzlb4Cs2kw27se7KQGmBhlGSA0zHv4Lz iyOe49q2Bw+A9BgdBFVWGA== 0000908985-98-000013.txt : 19980514 0000908985-98-000013.hdr.sgml : 19980514 ACCESSION NUMBER: 0000908985-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980513 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: 98617980 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 29, 1998 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 May 11, 1998, was 31,012,591. INDEX Part I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of March 29, 1998, and December 28, 1997 3 Consolidated Statements of Income for the Three Months Ended March 29, 1998, and March 30, 1997 4 Consolidated Statements of Cash Flows for the Three Months Ended March 29, 1998, and March 30, 1997 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. Legal Proceedings 14 Item 2. Changes in Securities 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures S-1 LEVEL ONE COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS March 29, 1998, and December 28, 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) March 29, 1998 December 28, 1997 (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 20,879 $ 25,234 Short-term investments 103,164 112,560 Trade Accounts receivable, net of allowance for doubtful accounts of $493 and $343 for 1998 and 1997, respectively 32,549 30,079 Other receivables 1,084 2,473 Inventories 28,487 26,118 Other current assets 6,906 6,552 Total current assets 193,069 203,016 Property and equipment, net 34,811 31,795 Long-term investments 38,186 21,559 Foundry deposits 16,781 14,000 Other assets 5,496 7,327 Total assets $ 288,343 $ 277,697 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of capital lease obligations $ 1,205 $ 1,201 Accounts payable 20,692 20,614 Accrued payroll costs 3,791 4,591 Other accrued liabilities 13,213 10,371 Total current liabilities 38,901 36,777 Convertible subordinated notes 115,000 115,000 Capital lease obligations, less current portion 1,903 2,175 Deferred lease expense 259 300 Total liabilities 156,063 154,252 Shareholders' Equity: Common Stock, no par value 93,220 91,897 Authorized - 236,250,000 shares Outstanding - 30,924,472 and 30,750,701 shares for 1998 and 1997, respectively Retained earnings 39,060 31,548 Total shareholders' equity 132,280 123,445 Total liabilities and shareholders' equity $ 288,343 $ 277,697 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. LEVEL ONE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME March 29, 1998, and March 30, 1997 (Unaudited) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended MARCH 29, 1998 MARCH 30, 1997 Revenues $ 56,607 $ 30,107 Cost of sales 23,491 12,900 Gross margin 33,116 17,207 Research & development 10,542 6,341 Sales & marketing 8,701 4,299 General & administrative 3,462 1,802 Total operating expenses 22,705 12,442 Operating income 10,411 4,765 Interest income 2,123 478 Interest (expense) (1,347) (162) Other income 23 50 Income before provision for income taxes 11,210 5,131 Provision for income taxes 3,699 1,674 Net income $ 7,511 $ 3,457 Basic earnings per share $ 0.24 $ 0.12 Diluted earnings per share $ 0.22 $ 0.11 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. LEVEL ONE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For Three Months Ended (IN THOUSANDS) March 29, 1998 March 30, 1997 Cash flows from operating activities: Net income $ 7,511 $ 3,457 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,439 2,153 Changes in assets and liabilities: Trade receivables (2,470) (1,759) Other receivables 1,389 0 Inventories (2,369) (221) Deferred income tax benefit - - - Prepaid expenses (433) 322 Accounts payable and accrued liabilities 2,120 2,659 Deferred lease expense (41) - Net cash provided by operating activities 9,146 6,611 Cash flows from investing activities: Purchase of short-term investments (19,726) (19,410) Proceeds from sales and maturities of short term investments 29,122 10,948 Purchase of long-term investments (20,511) (5,940) Proceeds from sales and maturities of long term investments 3,884 7,170 Capital expenditures (6,123) (4,132) Payments for related party notes receivable - - - Payments for foundry deposits and other assets (1,203) (32) Net cash provided by (used in) investing activities (14,557) (11,396) Cash flows from financing activities: Net principal payments under capital lease obligations (268) (292) Proceeds from issuance of stock, net of repurchases and costs of issuance 1,324 1,236 Net cash provided by (used in) financing activities 1,056 944 Net increase (decrease) in cash and cash equivalents (4,355) (3,841) Cash and cash equivalents at beginning of period 25,234 20,251 Cash and cash equivalents at end of period $ 20,879 $ 16,410 Supplementary disclosure of cash and noncash transactions Cash payments for: Interest $ 70 $ 162 Income taxes 435 905 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 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 29, 1998, are not necessarily indicative of the results that may be expected for the year ending December 27, 1998. 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 28, 1997, and subsequent filings with the Securities and Exchange Commission. All share and per share numbers in this Report reflect the effect of a 3-for-2 stock split effective on March 30, 1998. NOTE 2 - COMPREHENSIVE INCOME On December 29, 1997, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This statement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the Company, comprehensive income includes net income reported on the income statement and changes in the fair value of its available-for-sale securities reported as a separate component of shareholders' equity. The Company's total comprehensive income for the period was $7,530 million and $3,469 million as of March 29, 1998 and March 30, 1997, respectively. NOTE 3 - EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS 128, "Earnings Per Share," which establishes standards for computing and presenting earnings per share ("EPS"). It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The statement is effective for financial statements issued for periods ending after December 15, 1997, and requires restatement for all periods presented.
PER SHARE AMOUNT (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) INCOME SHARES Net income March 29, 1998 $ 7,511 March 30, 1997 3,457 BASIC EPS: income available to common shareholders March 29, 1998 $ 7,511 30,817 $ 0.24 March 30, 1997 3,457 29,984 0.12 Effect of dilutive securities: Convertible debentures: March 29, 1998 $ 854 4,313 March 30, 1997 - - - Options: March 29, 1998 2,213 - March 30, 1997 1,760 - DILUTED EPS: income available to common stockholders plus assumed conversions March 29, 1998 $ 8,365 37,343 $ 0.22 March 30, 1997 3,457 31,744 0.11
NOTE 4 - 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 March 29, 1998 and December 28, 1997 consist of:
(IN THOUSANDS) MARCH 29, 1998 DECEMBER 28, 1997 Raw materials $ 15,390 $ 8,829 Work-in-process 7,032 13,135 Finished goods 6,065 4,154 Total inventories $ 28,487 $ 26,118
NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciation is provided on a straight-line basis, they are comprised of the following:
(IN THOUSANDS) MARCH 29, 1998 DECEMBER 28, 1997 Machinery and equipment $ 37,112 $ 36,222 Furniture and fixtures 23,020 18,066 Leasehold improvements 3,662 3,383 63,794 57,671 Less-Accumulated depreciation (28,983) (25,876) $ 34,811 $ 31,795
NOTE 6 - LONG-TERM DEBT The Company sold $115 million of 4% convertible subordinated notes during 1997. The notes will mature on September 1, 2004. Unless previously redeemed or repurchased, the notes are convertible at any time through the close of business on the final maturity date of the notes, into common stock of the Company, at a conversion price of $26.67 per share. Interest on the notes is payable semi-annually, commencing March 1, 1998. Total interest accrued on the convertible subordinated notes at March 29, 1998 was approximately $353,000. After September 2000, the notes are redeemable at the option of the Company, in whole or in part. The notes may be redeemed for either cash or common stock at a repurchase price of 105% of the principal amount of the notes to be repurchased plus accrued and unpaid interest to the repurchase date. The notes are unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company. The indenture contains no limitations on the incurrence of additional indebtedness or other liabilities by the Company. 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 for the period ended December 28, 1997 filed with the Securities and Exchange Commission on March 27, 1998, and any subsequent filings with the Securities and Exchange Commission. This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements. See "Factors that May Affect Future Results". REVENUES Revenues increased 88% to $56.6 million in the first quarter of 1998 compared to revenues of $30.1 million for the same quarter of 1997. Sequentially, revenues increased by 11% from $51.1 million in the fourth quarter of 1997. During the quarter, no single customer represented 10% of revenues. The increased revenues reflect the substantial unit sales growth due to the continued market acceptance of the Company's products in both the networking and transmission markets, along with increases in the Company's customer base. International revenues were $21.2 million or 37.5% and $10.8 million or 36.0% of revenues, respectively, for the first quarter of 1998 and 1997, respectively. All sales are denominated in U.S. dollars, thereby eliminating the impact of foreign currency exchange rate fluctuations on revenues. GROSS MARGIN Product gross margin is affected by several factors, including average selling prices, the mix between older and newer products, test equipment utilization, manufacturing yields, timing of cost reductions and the mix between direct and distributor sales. Margins on domestic and international sales are similar. At 58.5%, gross product margins for the first quarter of 1998 were flat to the fourth quarter of 1997 and up from 57.1% for the first quarter of 1997. The margin increases from the first quarter of 1997 are due to the impact of cost reductions that were implemented during 1997. RESEARCH AND DEVELOPMENT Research and development expenses were $10.5 million or 18.6% of revenues in the first quarter of 1998 versus $6.3 million or 21.1% of revenues in the first quarter of 1997. The dollar increase in research and development expense 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 $8.7 million or 15.4% of revenues in the first quarter of 1998 versus $4.3 million or 14.3% of revenues in the first quarter of 1997. The increased expenditures are primarily attributable to increased sales commissions along with the expansion of the Company's sales and marketing staffs and their related costs. GENERAL AND ADMINISTRATIVE In the first quarter of 1998, general and administrative expenses were $3.5 million or 6.1% of revenues versus $1.8 million or 6.0% of revenues in the same period of 1997. The increased expenses are primarily attributable to additional staffing associated with the Company's growth. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity as of March 29, 1998, consisted of $124.0 million of cash, cash equivalents and short-term investments, and $10 million available under the Company's revolving line of credit. At March 29, 1998, the Company had no outstanding balance under this line of credit. Working capital as of March 29, 1998, was $154.2 million. During the first three months of 1998, the Company generated $9.1 million of cash from operating activities, as compared to $6.6 million in the same period in 1997. In both years, net cash generated from operations during the period was primarily due to net income before depreciation and amortization expense. This cash generated was offset by the net changes during the period for inventories, accounts receivable, and accounts payable These changes are due primarily to expansion of the Company's business, and do not reflect material changes in the way the Company conducts operations. The Company spent $6.1 million for capital expenditures during the first three months of 1998 as compared to $4.1 million for the same period of 1997. FACTORS THAT MAY AFFECT FUTURE RESULTS The following factors may have an impact on the Company's business: MANUFACTURING RISKS The Company does not manufacture the silicon 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 1994 and 1995, the Company 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, supplier interruptions or other changes will not have a material impact on the Company's business. Manufacturing process technologies are subject to rapid change. Other companies in the industry have experienced difficulty in migrating to new manufacturing processes, and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. The Company's business, financial condition and results of operations could be materially adversely affected if any such transition is substantially delayed or inefficiently implemented. The Company is also dependent upon third-party assembly companies that package or test the Company's devices. The Company depends upon these suppliers to produce products in a timely manner and at competitive prices. The Company may sustain an adverse financial impact from problems with the cost, timeliness, yield and quality of product deliveries from these suppliers. FACTORS AFFECTING OPERATING RESULTS The semiconductor industry is characterized by rapid technological change, intense competitive pressure and cyclical market patterns. The Company's results of operations are affected by a wide variety of factors, including general economic conditions, semiconductor industry environment, changes in average selling prices, the timing of new product introductions (by the Company and its customers), use of new technologies, the ability to safeguard patents and intellectual property, and rapid change of demand for products. The level of net revenues in any specific quarter can also be affected by the level of orders placed during that quarter. The Company attempts to respond to changes in market conditions as soon as possible; however, the rapidity of their onset may make prediction of and reaction to such events difficult. Due to the foregoing and other factors, past results, such as those described in this report, may not be predictive of future performance. DEPENDENCE ON NEW PRODUCTS The Company's future success depends on its ability to timely develop and introduce new products which compete effectively. Because of the complexity of its products, the Company may experience delays in completing development and introduction of new products, and, as a result, not achieve the market share anticipated for such products. The Company's strategy is to develop products for the fastest growing segments of the communications market. The Company conducts its own analysis of market trends and reviews forecasts and information provided by industry analysts. Market conditions may change rapidly as technology, economic, or user-preference conditions cause different communications technologies to experience growth other than that forecast by the Company or others. There can be no assurance that the Company will successfully identify new product opportunities and bring new products to market in a timely manner, that products or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive, or that the Company's products will be selected for design into the products of its targeted customers. In addition, the average selling price for any particular product tends to decrease over the product's life. To offset such price decreases, the Company relies primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and other price/performance factors such that higher average selling prices and higher margins are achievable relative to existing product lines. To the extent that cost reductions and new product introductions with higher margins do not occur in a timely manner, or the Company's products do not achieve market acceptance, the Company's operating results could be adversely affected. MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL The Company is currently experiencing a period of significant growth which has placed, and could continue to place, a significant strain on the Company's personnel and other resources. The Company's ability to manage its growth effectively will require continued expansion and refinement of the Company's operational, financial, management and control systems, as well as a significant increase in the Company's development, testing, quality control, marketing, logistics and service capabilities, any of which could place a significant strain on the Company's resources. The Company's success also depends to a significant extent upon its ability to retain and attract key personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to retain and attract key personnel. If the Company's management is unable to manage growth effectively, maintain the quality and marketability of the Company's products and retain, hire and integrate key personnel, the Company's business, financial condition and results of operations could be materially adversely affected. INTELLECTUAL PROPERTY The Company relies upon patent, trademark, trade secret and copyright law to protect its intellectual property. There can be no assurance that such intellectual property rights can be successfully asserted or will not be invalidated, circumvented or challenged. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources for the Company. Any infringement claim or other litigation against or by the Company could have a material effect on the Company's financial condition and results of operations. In November 1995 the Company commenced infringement litigation against a competitor. See "Legal Proceedings". SEMICONDUCTOR INDUSTRY The semiconductor industry has historically been cyclical and subject to significant economic downturns at various times. The Company may experience substantial period-to-period fluctuations in operating results due to general semiconductor industry conditions, overall economic conditions or other factors. In addition, the securities of many high technology companies have historically been subject to extreme price and volume fluctuations, factors which may affect the market price of the Company's Common Stock. As is common in the semiconductor industry, the Company frequently ships more product in the third month of a quarter than in the other months. If a disruption in the Company's production or shipping occurs near the end of a quarter, the Company's revenues for that quarter could be adversely affected. The Company must order wafers and build inventory in advance of product shipments. There is risk that the Company could produce excess or insufficient inventories of particular products because the Company's markets are volatile and subject to rapid technology and price changes. This inventory risk is heightened because certain of the Company's customers place orders with long lead times which may be subject to cancellation or rescheduling by that customer. To the extent the Company produces excess or insufficient inventories of particular products, the Company's revenues and earnings could be adversely affected. Increased demand for semiconductor products may result in a reduction in the availability of wafers from foundries. Such capacity limitations may adversely affect the Company's ability to deliver products on a timely basis and affect the Company's margins. Additionally, the Company believes that during periods of strong demand and/or restricted semiconductor capacity, customers will over- order to assure an adequate supply. Certain of the Company's customers may cancel or postpone orders without notice if product becomes available elsewhere. Shortages of components from other suppliers could cause the Company's customers to cancel or delay programs incorporating the Company's products, resulting in the cancellation or delay of orders for the Company's products. INTENSE COMPETITION The semiconductor industry is intensely competitive. The Company's competition consists of semiconductor companies and semiconductor divisions of vertically integrated companies. In the telecom market, the Company's principal competitors are 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 erosion, reduced gross margins and loss of market share, any of which may have a material adverse effect on the Company's business, financial condition and results of operations. INTERNATIONAL OPERATIONS Due to its reliance on international sales and foreign third-party manufacturing and assembly operations, the Company is subject to the risks of conducting business outside of the United States including government regulatory risks, political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. There can be no assurance that one or more of the foregoing factors will not have a material adverse effect on the Company's business, financial condition or operating results. The recent economic downturn in several Asian countries has not affected the Company in a material way, but there can be no assurances that continued economic problems in Asia or any other region of the world will not affect the Company. INCREASED LEVERAGE As a result of the Company's sale in August and September 1997 of its 4% Convertible Subordinated Notes due 2004 (the "Notes"), the Company has incurred approximately $115.0 million in additional indebtedness which increases the ratio of its long-term debt to its total capitalization from 3.0%, at June 29, 1997, to 47.0%, at March 29, 1998. This increased leverage will increase the Company's interest expense 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/or forego potential acquisitions to be able to meet such requirements. VOLATILITY OF NOTES AND STOCK PRICE Economic and other external factors, many of which are beyond the control of the Company, may have a significant impact on the Company's business and on the market price of its Notes and the Common Stock. Such factors include, without limitation, fluctuations in product revenues 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 Company's Notes and the Common Stock. YEAR 2000 COMPLIANCE The Company has reviewed its exposure to risks that could be caused if internal computer systems do not correctly recognize date information when the year changes to 2000. Management believes that the likelihood of a material adverse impact due to problems with internal systems or products sold to customers is remote and expects that the cost of remedying internal systems that currently cannot process the date change will not have a material effect on the Company's financial position or overall trends in results of operations. The Company is also contacting critical suppliers of products and services to determine that the supplier's operations and the products and services they provide are year 2000 compliant. There can be no assurance that another company's failure to ensure year 2000 capability would not have an adverse effect on the Company. 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. On January 21, 1998, the Court denied Seeq's motion to declare claims of the Level One patents invalid. The Court also permitted Seeq to amend its counterclaim to include a claim that certain of the Company's products infringe Seeq's U.S. Patent 5,504,738; the Company has denied these allegations. Trial is set for August 1998. Although the Company does not believe such litigation will have a material impact on the Company, litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. 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 March 3, 1998, the Company's Certificate of Incorporation was amended to effect a 3-for-2 stock split to shareholders of record on March 9, 1998. The split was effective March 30, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)Exhibits - 27.1--Financial Data Schedule, March 29, 1998 (b) Reports on Form 8-K - None 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 10, 1998 By: /S/ ROBERT S. PEPPER Robert S. Pepper, Ph.D. Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: May 10, 1998 By: /S/ JOHN KEHOE John Kehoe Senior Vice President and Chief Financial Officer (Principal Financial Officer) S-1 [DATE] [ARTICLE] 5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 29, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. [MULTIPLIER] 1,000 [CAPTION] [PERIOD-TYPE] 3-MOS [CAPTION] [FISCAL-YEAR-END] DEC-29,1997 [CAPTION] [PERIOD-END] MAR-29-1998 [CASH] 20,879 [SECURITIES] 103,164 [RECEIVABLES] 33,042 [ALLOWANCES] 493 [INVENTORY] 28,487 [CURRENT-ASSETS] 193,069 [PP&E] 34,811 [DEPRECIATION] 28,983 [TOTAL-ASSETS] 288,343 [CURRENT-LIABILITIES] 38,901 [BONDS] 115,000 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 93,220 [OTHER-SE] 39,060 [TOTAL-LIABILITY-AND-EQUITY] 288,343 [SALES] 56,607 [TOTAL-REVENUES] 56,607 [CGS] 23,491 [TOTAL-COSTS] 23,491 [OTHER-EXPENSES] 22,705 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 1,347 [INCOME-PRETAX] 11,210 [INCOME-TAX] 3,669 [INCOME-CONTINUING] 7,511 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 7,511 [EPS-PRIMARY] --- [EPS-DILUTED] .22 -----END PRIVACY-ENHANCED MESSAGE-----