-----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, UEUNXDUlPAcjCVqEGi4zb0kJwXd36elghZkIh2q+rg1hYCJ+umNeFexIGJ9sH+M4 NGIHxyH6Shbyi1DMUHzAFg== 0001047469-99-019689.txt : 19990513 0001047469-99-019689.hdr.sgml : 19990513 ACCESSION NUMBER: 0001047469-99-019689 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990512 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: 99618413 BUSINESS ADDRESS: STREET 1: 9750 GOETHE RD CITY: SACRAMENTO STATE: CA ZIP: 95627 BUSINESS PHONE: 9168555000 MAIL ADDRESS: STREET 1: 9750 GOETHE ROAD CITY: SACREMENTO STATE: CA ZIP: 95827 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number: 0-22068 LEVEL ONE COMMUNICATIONS, INCORPORATED - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-0128224 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 9750 GOETHE ROAD, SACRAMENTO, CALIFORNIA 95827 - ------------------------------------------------------------------------------- (Address of principal executive offices) (916) 855-5000 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ The number of shares of Common Stock, par value $.001 per share, of the registrant outstanding on May 7, 1999 was 39,293,500 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 28, 1999, and............ 3 December 27, 1998 Unaudited Consolidated Statements of Income for the ............ 4 Three Months ended March 28, 1999 and March 29, 1998 Unaudited Consolidated Statements of............................. 5 Cash Flows for the Three Months ended March 28, 1999 and March 29, 1998 Notes to Financial Statements (Unaudited)....................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........... 14 Item 5. Other Information ........... 14 Item 6. Exhibits and Reports on Form 8-K ........... 14 Signatures ........... S-1
2 LEVEL ONE COMMUNICATIONS, INCORPORATED CONSOLIDATED BALANCE SHEETS As of March 28, 1999 and December 27, 1998
(IN THOUSANDS) March 28, 1999 December 27, 1998 -------------- ----------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 50,304 $ 28,794 Short-term investments 64,887 92,712 Trade accounts receivable, net of allowance for doubtful accounts of $418 and $418 for March 28, 1999 and December 27, 1998, respectively 34,201 35,820 Other receivables 2,752 2,620 Inventories 29,320 20,495 Other current assets 14,500 6,077 ---------- ---------- Total current assets 195,964 186,518 Property and equipment, net 58,293 48,899 Long-term investments 76,970 68,577 Foundry deposits 1,143 16,460 Other assets 5,795 5,836 ---------- ---------- Total assets $ 338,165 $ 326,290 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of capital lease obligations $ 1,441 1,241 Accounts payable 17,447 22,319 Accrued payroll costs 5,984 9,925 Deferred revenue 3,857 4,082 Income taxes payable 3,221 227 Other accrued liabilities 8,229 8,623 ---------- ---------- Total current liabilities 40,179 46,417 Convertible subordinated notes 115,000 115,000 Capital lease obligations, less current portion 1,029 1,545 Deferred lease expense 95 136 ---------- ---------- Total liabilities 156,303 163,098 Shareholders' Equity: Common Stock, no par value 130,013 124,412 Authorized - 236,250 shares Outstanding - 39,108 for March 28, 1999, and 38,511 for December 27, 1998 Unrealized gain on investments 1,262 481 Retained earnings 50,587 38,299 ---------- ---------- Total shareholders' equity 181,862 163,192 ---------- ---------- Total liabilities and shareholders' equity $ 338,165 $ 326,290 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements 3 LEVEL ONE COMMUNICATIONS, INCORPORATED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) For the Three Months Ended ------------------------------------------- March 28, 1999 March 29, 1998 ------------------ -------------------- Revenues $ 84,286 $ 56,630 Cost of revenues 34,718 23,526 ------------------ -------------------- Gross margin 49,568 33,104 Research and development 17,185 12,553 Sales and marketing 11,341 9,414 General and administrative 4,211 4,166 ------------------ -------------------- Total operating expenses 32,737 26,133 Operating income 16,831 6,971 Interest income 2,853 2,140 Interest expense (1,307) (1,705) Other income (expense) (37) 23 ------------------ -------------------- Income before provision for income taxes 18,340 7,429 Provision for income taxes 6,052 3,700 ------------------ -------------------- Net income $ 12,288 $ 3,729 ------------------ -------------------- ------------------ -------------------- Basic earnings per share $ 0.32 $ 0.10 ------------------ -------------------- ------------------ -------------------- Diluted earnings per share $ 0.28 $ 0.10 ------------------ -------------------- ------------------ --------------------
The accompanying notes are an integral part of these consolidated financial statements 4 LEVEL ONE COMMUNICATIONS, INCORPORATED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended ------------------------------------- (IN THOUSANDS) March 28, 1999 March 29, 1998 ----------------- ----------------- Cash flows from operating activities: Net income $ 12,288 $ 3,729 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,074 3,669 Changes in assets and liabilities, net of effect of acquisitions: Trade accounts receivable 1,619 (2,443) Other receivables (132) 1,373 Inventories (8,825) (2,534) Deferred income taxes (3,808) - Prepaid expenses (4,615) (73) Accounts payable and accrued liabilities (3,447) 971 Deferred revenues (225) 764 Deferred lease expense (41) (41) ----------------- ----------------- Net cash provided by (used in) operating activities (1,112) 5,415 ----------------- ----------------- Cash flows from investing activities: Purchase of debt and equity securities available-for-sale (36,655) (40,236) Maturities and sales of debt and equity securities available-for-sale 58,868 33,006 Purchases of non-marketable equity securities (2,000) - Net capital expenditures (15,235) (6,361) Net (payments) refunds for foundry deposits and other assets 15,125 (1,203) ----------------- ----------------- Net cash provided by (used in) investing activities 20,103 (14,794) ----------------- ----------------- Cash flows from financing activities: Net principal payments under capital lease obligations (316) 327 Proceeds from issuance of notes - 1,799 Proceeds from issuance of stock, net of repurchases and costs of issuance 2,835 1,335 ----------------- ----------------- Net cash provided by financing activities 2,519 3,461 ----------------- ----------------- Net increase (decrease) in cash and cash equivalents 21,510 (5,918) Cash and cash equivalents at beginning of period 28,794 27,694 ----------------- ----------------- Cash and cash equivalents at end of period $ 50,304 $ 21,776 ----------------- ----------------- ----------------- ----------------- Supplementary disclosure of cash and noncash transactions Cash payments for: Interest $ 2,338 $ 2,770 Income taxes 3,254 492
The accompanying notes are an integral part of these consolidated financial statements 5 LEVEL ONE COMMUNICATIONS, INCORPORATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared by Level One Communications, Incorporated ("Level One" or the "Company") in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month periods ended March 28, 1999 and March 29, 1998 are not necessarily indicative of the results that may be expected for the year ending January 2, 2000. The information reported in these financial statements should be read in conjunction with the financial statements and footnotes contained in the Company's Annual Report Form 10-K filed with the Securities and Exchange Commission for the year ended December 27, 1998, and subsequent filings with the Securities and Exchange Commission. All share and per share numbers in this Report have been restated to reflect the effect of stock splits. Additionally, in connection with the stock splits, proportional adjustments were made to the numbers of shares of common stock issuable upon exercise of all outstanding stock options, warrants and other outstanding obligations of the Company. NOTE 2. BUSINESS COMBINATIONS On March 4, 1999, the Company and Intel Corporation entered into a definitive stock-for-stock merger agreement valued at approximately $2.2 billion under which Intel would acquire Level One. The acquisition is aimed at providing advanced networking capabilities through increased bandwidth and functionality through silicon integration. Under the terms of the agreement, each share of Level One stock would be exchanged for 0.86 shares of Intel stock, after adjusting for Intel's two-for-one stock split announced in January 1999 and effective April 11, 1999. Approximately 37.2 million shares of Intel stock would be issued, assuming the conversion of Level One's outstanding convertible subordinated notes into Level One common stock when permissible under their terms. The completion of this transaction is subject to compliance with regulatory requirements, Level One stockholder approval, and other conditions customary in a transaction of this type. NOTE 3. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the Company, comprehensive income includes net income reported on the income statement and changes in the fair value of its available-for-sale securities reported as a separate component of shareholders' equity. The Company's total comprehensive income for the periods ended March 28, 1999 and March 29, 1998 was $13.1 million and $3.7 million, respectively. 6 NOTE 4. EARNINGS PER SHARE The following is a reconciliation of the numerator (income) and denominator (shares) of basic and diluted earnings per share for the three month periods ended March 28, 1999 and March 29, 1998. No conversion is assumed for the convertible subordinated notes for the quarter ending March 29, 1998 because it would have an anti-dilutive effect on earnings per share.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME SHARES PER SHARE AMOUNT ---------- --------- ------------ QUARTER ENDING: Net income: March 28, 1999 $12,288 March 29, 1998 3,729 BASIC EPS: Income available to common stockholders March 28, 1999 $12,288 38,830 $ 0.32 March 29, 1998 3,729 36,143 0.10 Effect of dilutive securities: Convertible debentures: March 28, 1999 $ 854 4,312 $ 0.20 March 29, 1998 - - - Options: March 28, 1999 - 3,306 March 29, 1998 - 2,955 DILUTED EPS: Income available to common stockholders plus assumed conversions March 28, 1999 $13,142 46,448 $ 0.28 March 29, 1998 3,729 39,098 0.10
NOTE 5. INVENTORIES Inventories are stated at the lower of cost (first in, first out) or market and include materials, labor and manufacturing overhead costs. Inventories consisted of:
(IN THOUSANDS) March 28, 1999 December 27, 1998 ----------------- ------------------- Raw materials $ 4,319 $ 2,486 Work-in-process 11,675 9,827 Finished goods 13,326 8,182 ----------------- ------------------- Total inventories $ 29,320 $ 20,495 ----------------- ------------------- ----------------- -------------------
7 NOTE 6. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciation is provided on a straight-line basis over their useful lives. Property and equipment consists of:
(IN THOUSANDS) March 28, 1999 December 27, 1998 ----------------- --------------------- Machinery and equipment $ 59,397 $ 49,857 Furniture and fixtures 40,603 34,943 Leasehold improvements 5,455 5,420 ----------------- --------------------- 105,455 90,220 Less-Accumulated depreciation (47,162) (41,321) ----------------- --------------------- $ 58,293 $ 48,899 ----------------- --------------------- ----------------- ---------------------
NOTE 7. SEGMENT REPORTING The following is a summary of the Company's revenue by market and geographic area for the three month period ended March 28, 1999 and March 29, 1998:
(IN THOUSANDS) MARCH 28, 1999 MARCH 29, 1998 ------------------- ------------------ Revenues: Networking $61,942 $37,898 Telecom 20,963 20,925 Other 1,381 (2,193) ------------------- ------------------ Total $84,286 $56,630 ------------------- ------------------ ------------------- ------------------ United States $46,763 $34,711 Singapore 9,614 4,647 Taiwan 17,338 4,956 Other foreign countries 10,571 12,316 ------------------- ------------------ Total $84,286 $56,630 ------------------- ------------------ ------------------- ------------------
Geographic area data is based on product shipment destination or royalty payer location. Export sales as a percentage of revenues were 44.5% and 38.7% for the three months ended March 28, 1999 and March 29, 1998, respectively. Sales to Flextronics Technologies Inc. were 12.4% of total revenues and sales to Accton Technology Corp. were 12.2% of total revenues during the first quarter of 1999. No single customer accounted for more than 10% of total revenues is the first quarter of 1998. Long-lived assets consist of net property and equipment and foundry deposits. The following geographic summary of long-lived assets is based on physical location:
(IN THOUSANDS) MARCH 28, 1999 DECEMBER 27, 1998 ------------------- ---------------------- Long-lived assets: United States $ 49,741 $ 44,629 Singapore 6,943 17,634 Other foreign countries 2,752 3,096 ------------------- ---------------------- Total $ 59,436 $ 65,359 ------------------- ---------------------- ------------------- ----------------------
The decrease in long-lived assets in Singapore is due to foundry deposit refunds. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following information should be read in conjunction with the unaudited interim financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, the Management's Discussion and Analysis of Financial condition and Results of Operations contained in Level One's Annual Report on Form 10-K for the period ended December 27, 1998 filed with the Securities and Exchange Commission on March 29, 1999, and any subsequent filings with the Securities and Exchange Commission. This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements. See "Factors that May Affect Future Results." RESULTS OF OPERATIONS REVENUES. Revenues for the first quarter of 1999 increased 48.8% to $84.3 million from $56.6 million for the same quarter of 1998. The continued growth in revenues is due to the successful introduction of new products and increased sales of existing products to customers in the Company's target market segments. In the first quarter of 1999 Flextronics Technologies, Inc. represented 12.4% of total revenues and Accton Technology Corp. represented 12.2% of total revenues. Export sales, primarily consisting of sales to customers located in Canada, Europe, and Asia, in the first quarter of 1999 were 44.5% of revenues versus 38.7% of revenues in the same quarter of 1998. All sales were in U.S. dollars, thereby eliminating any foreign currency impact on revenues and net income. The dollar increase in international sales is attributable to increased sales to foreign manufacturing facilities and subcontractors of domestic customers and the Company's increased international marketing and sales efforts. The Company believes future revenue growth will depend on the success and timing of new products along with continued sales growth of existing products. New products are generally incorporated into a customer's product or system at the design stage. However, design wins may precede volume sales by six months or more. No assurance can be given that any design win will result in future revenues. Future revenue growth could also be impacted by the consummation of the proposed merger with Intel Corporation. See "Notes to Supplemental Financial Statements (Unaudited) - Note 2 - Business Combinations." GROSS MARGIN. Product gross margin is affected by several factors, including selling prices, the mix between older and newer products, test equipment utilization, manufacturing yields, timing of cost reductions and the mix between direct and distributor sales. Margins on domestic and international sales are similar. Gross product margins for the first quarter of 1999 were 58.8% versus 58.5% for the first quarter of 1998. This increase is due to the impact of continuing cost reduction efforts. RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses were $17.2 million or 20.4% of revenues in the first quarter of 1999 versus $12.6 million or 22.2% of revenues in the first quarter of 1998. The dollar increase in research and development expense is due to additions to Level One's design engineering staff and related new product design expenses, while the decline in spending as a percent of revenues is a result of higher revenue growth than the growth in research and development costs. SALES AND MARKETING. Sales and marketing expenses were $11.3 million or 13.5% of revenues in the first quarter of 1999 versus $9.4 million or 16.6% of revenues in the first quarter of 1998. The dollar increases in sales and marketing expenses are largely due to increased sales, sales support and field 9 application engineering headcount and the associated expense increases. The Company has also increased its international sales offices and support staff. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the first quarter of 1999 were $4.2 million or 5.0% of revenues versus $4.2 million or 7.4% of revenues in the first quarter of 1998. The decline in spending as a percent of revenues is a result of the growth in revenues while not increasing general and administrative costs. NET INTEREST AND OTHER INCOME. The Company earns interest on its cash and investments and incurs interest expense on its convertible subordinated notes and on capital lease obligations used to finance certain equipment. Net interest and other income for the first quarters of 1999 and 1998 was $1.5 million and $.5 million, respectively. LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of liquidity as of March 28, 1999, consisted of $115.2 million in cash, cash equivalents and short-term investments. Working capital was $155.8 million at March 28, 1999 versus $140.1 million at December 27, 1998. During the first three months of fiscal 1999 the Company used $1.1 million of net cash in operating activities compared to $5.4 million provided by operating activities during the first three months of fiscal 1998. The increase in cash used in operating activities for the first three months of fiscal 1999 was primarily due to increases in the balances of certain current asset accounts and a decrease in current liabilities. These changes are primarily due to timing and the expansion of the Company's business, and do not reflect material changes in the way the Company conducts operations. Cash provided by investing activities during the first three months of fiscal 1999 totaled $20.1 million compared to $14.8 million used in investing activities in the first three months of fiscal 1998. The primary source of cash from investing activities during the first three months of fiscal 1999 was the maturity of investments available-for-sale and a foundry capacity agreement deposit refund of $15.0 million offset by cash used for capital expenditures. The Company spent $15.2 million for capital expenditures in the first three months of fiscal 1999 as compared to $6.4 million in the first three months of fiscal 1998. Cash provided from financing activities for the first three months of fiscal 1999 and 1998 totaled $2.5 million and $3.5 million, respectively. The primary source of cash from financing activities for the first three months of fiscal 1999 was from the issuance of common stock under the Company's employee stock option and stock purchase plans. Management believes that, in addition to current financial resources, adequate capital resources are available to satisfy the Company's investment and capital programs. Management believes that the Company's cash flow is sufficient to maintain its current operations. FACTORS THAT MAY AFFECT FUTURE RESULTS LEVEL ONE'S RELIANCE ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST ITS PRODUCTS MAY RESULT IN INCREASED COSTS OR DELAYS Because Level One does not manufacture the silicon wafers used for its products, Level One depends on its wafer suppliers to produce wafers in sufficient quantities to meet customer demand at acceptable yields and at competitive prices. Level One also depends on wafer suppliers to assemble, test and deliver wafers on time. In 1994 and 1995, Level One's wafer suppliers reduced shipments without prior notice, which resulted in increased costs and delays that required Level One to transfer the production of some products to a new supplier. Supply agreements with wafer suppliers cannot eliminate this risk since Level One's suppliers may not be able to produce enough wafers to meet increased demand because of their own capacity limitations. 10 IN ORDER TO COMPETE EFFECTIVELY IN THE SEMICONDUCTOR INDUSTRY, LEVEL ONE NEEDS TO CONTINUALLY DEVELOP NEW PRODUCTS THAT GAIN MARKET ACCEPTANCE In the semiconductor industry, price competition is intense and product life cycles are short. As a result, the average selling price for Level One's products decreases rapidly as new or competing products are introduced. To compensate, Level One relies on obtaining yield improvements to reduce manufacturing costs and on introducing new products which incorporate advanced features that result in higher average selling prices. To the extent that Level One does not successfully develop and timely introduce new products that achieve market acceptance, or to the extent that Level One does not achieve sufficient cost reductions on existing products to maintain margins, Level One may be adversely impacted. To be successful, Level One must identify new product opportunities, stay ahead of its competitors so that their products will not render Level One's products obsolete or noncompetitive, and gain market acceptance of its products with target customers. Because of the increasing complexity of Level One's new products, Level One could experience delays in completing development and introduction of new products that could adversely impact its anticipated market share for new products. Level One may be adversely affected by a failure in any of these areas. LEVEL ONE'S RECENT ACQUISITIONS PLACE A STRAIN ON LEVEL ONE'S MANAGEMENT AND PERSONNEL RESOURCES In July 1998, Level One acquired Acclaim Communications, Inc. In late November 1998, Level One acquired Jato Technologies, Inc. In order to successfully integrate these two newly acquired businesses and successfully manage Level One's existing business, Level One will need to expand and refine its management and personnel resources. Level One will also need to significantly increase its development, testing, quality control, marketing, logistics and service capabilities. If Level One does not effectively expand and deploy its resources to meet these needs, Level One's business may be adversely impacted. ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS MAY IMPACT LEVEL ONE'S RESULTS OF OPERATIONS REGARDLESS OF SUCCESS In the semiconductor industry, competitors often assert intellectual property infringement claims against one another. The success of Level One's business depends on its ability to successfully defend its intellectual property. This litigation may have a material impact on Level One's financial condition regardless of whether or not Level One is successful. There is no assurance that Level One will be successful in defending or asserting its intellectual property rights. EXCESS OR INSUFFICIENT INVENTORIES MAY ADVERSELY IMPACT LEVEL ONE'S REVENUES AND EARNINGS If Level One produces excess or insufficient product inventories because it does not accurately anticipate customer demand, Level One's revenues and earnings could be materially adversely impacted. This may happen for three reasons. First, some of Level One's customers place orders with long lead-times that may be canceled or rescheduled without significant penalty. Second, Level One's inventory risk increases during periods of strong demand and/or restricted semiconductor capacity because, based on Level One's past experience, customers often over-order to assure adequate supply and then may cancel or postpone orders without notice or significant penalty if other product becomes available. Third, component shortages from Level One's customers' suppliers could cause those customers to cancel or delay plans to incorporate Level One's products into the design of target products, resulting in the cancellation or delay of orders for Level One's products. 11 THE COMPLETION OF LEVEL ONE'S 4% CONVERTIBLE NOTE OFFERING HAS INCREASED LEVEL ONE'S INTEREST EXPENSE AND MAY LIMIT LEVEL ONE'S ABILITY TO OBTAIN ADDITIONAL FINANCING FOR WORKING CAPITAL, ACQUISITIONS OR OTHER PURPOSES In September 1997, Level One incurred approximately $115 million in additional debt as a result of its issuance of 4% Convertible Subordinated Notes due 2004. These notes increased Level One's ratio of long-term debt to total capitalization from 3.0% at June 29, 1997, to 39.0% at March 28, 1999. This increased leverage has increased Level One's interest expense substantially. This increased leverage could adversely affect Level One's ability to obtain additional financing for working capital, acquisitions or other purposes and could make Level One more vulnerable to economic downturns and competitive pressures. This increased leverage could also affect Level One's liquidity, as a substantial portion of available cash from operations may have to be applied to meet debt service requirements and, in the event of a cash shortfall, Level One could be forced to reduce other expenditures and/or forego potential acquisitions to be able to meet such requirements. THE FAILURE OF LEVEL ONE'S KEY SUPPLIERS TO BE YEAR 2000 COMPLIANT AND LEVEL ONE'S FAILURE TO DEVELOP YEAR 2000 CONTINGENCY PLANS COULD CAUSE LEVEL ONE TO EXPERIENCE MANUFACTURING INTERRUPTIONS OR DELAYS THAT COULD ADVERSELY IMPACT LEVEL ONE'S BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS Level One is currently in the process of determining whether there are any critical areas in its business that are not Year 2000 compliant. Level One has begun a comprehensive project to prepare its computer systems for the Year 2000. Level One presently estimates that the total cost of addressing its Year 2000 problems will be approximately $500,000, of which approximately 48% has been expended to date. This cost estimate was derived utilizing numerous assumptions, including the assumption that Level One has already identified its most significant Year 2000 problems and that the assessment, remediation and contingency plans of its third party suppliers will be fulfilled in a timely manner without significant additional cost to Level One. Level One believes that there is a remote possibility of an adverse impact on its business due to problems with its internal systems or products. Level One's products have no date specific functions or date dependencies and will operate according to published specifications through the Year 2000 and dates into the 21st century. As part of its Year 2000 assessment, Level One is contacting key suppliers of products and services to determine whether such suppliers' operations, products and services are Year 2000 capable and/or to monitor their progress toward Year 2000 compliance. If Level One's suppliers are not Year 2000 compliant, Level One could experience manufacturing interruptions or shutdowns, decreased yields, quality inconsistencies, delayed or inaccurate product testing, delivery delays, or service interruptions. It is possible that one or more of these problems could have a material adverse effect on Level One's business, financial condition, or results of operations. There is also a risk because Level One has not yet fully developed Year 2000 contingency plans to address any failure of Level One's Year 2000 assessment to identify and remediate significant Year 2000 risks to its business operations. Development of contingency plans is in progress and will continue during calendar year 1999. Such plans could include accelerating replacement of affected equipment or software, using back-up equipment and software, developing temporary manual procedures to compensate for system deficiencies, and identifying Year 2000 capable suppliers and service providers. There can be no assurance that any such contingency plans would adequately address the Year 2000 problem. The failure to develop a successful contingency plan could result in significant delays and inefficiency in Level One's business which could have a material adverse effect on Level One's business, financial condition and results of operations. 12 THE FAILURE OF LEVEL ONE TO COMPLETE THE PROPOSED MERGER WITH INTEL CORPORATION COULD ADVERSELY AFFECT LEVEL ONE'S STOCK PRICE AND FUTURE OPERATING RESULTS Certain risks are inherent in the proposed merger with Intel Corporation, including, but not limited to, the failure of the proposed merger to occur. Level One's pre-merger stock price is significantly influenced by the stock price of Intel. Any fluctuations in the stock price of Intel may have an effect on the stock price of Level One prior to the completion of the merger. The failure of the proposed merger to occur could have a material adverse effect on Level One's stock price as well as Level One's future operating results due to the write-off of pre-merger costs incurred and possible market stigma. 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On February 12, 1999, the Company and Zekko Corp. ("Zekko"), an entity in which the Company has made an equity investment, jointly filed a complaint in the United States District Court for the Eastern District of California against Vision Tek, L.P. ("Vision Tek") and certain of its principals alleging claims of fraud and breach of fiduciary duty and seeking a judgment declaring the respective rights and obligations of Zekko under an Option and License Agreement, dated as of October 8, 1997, entered into between Zekko, Vision Tek and certain of Vision Tek's principals (the "Option and License Agreement"). On February 16, 1999, Vision Tek filed an action against the Company and Zekko in the District Court for the City and County of Denver, Colorado seeking a declaratory judgment that neither Zekko nor the Company has any rights to the technology licensed to Zekko under the Option and License Agreement. There are no other material pending legal proceedings, other than routine litigation incidental to the Company's business, to which the Company is a party or of which any of its property is the subject. ITEM 5. OTHER INFORMATION. On April 27, 1999, the Company and Intel announced that the parties have received clearance from the Federal Trade Commission and the Department of Justice to consummate the proposed merger. The proposed merger is expected to be completed following the approval of the merger by the Company's stockholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 27.1 - Financial Data Schedule (b) Reports on Form 8-K. Amendment No. 1 to Form 8-K, filed on February 3, 1999, to report under Item 5 certain supplementary financial information related to the registrant's November 24, 1998 acquisition of Jato Technologies, Inc. Form 8-K, filed on March 8, 1999, to report under Item 5 the issuance of the March 4, 1999 press release announcing an agreement for Intel Corporation to acquire Level One Communications, Incorporated. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 12, 1999 LEVEL ONE COMMUNICATIONS, INCORPORATED By: /s/ ROBERT S. PEPPER ---------------------------------- Robert S. Pepper, Ph.D. Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: May 12, 1999 By: /s/ JOHN KEHOE ------------------------------- John Kehoe Senior Vice President and Chief Financial Officer (Principal Financial Officer) S-1 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 28, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-02-2000 MAR-28-1999 50,304 64,887 37,371 (418) 29,320 195,964 105,455 (47,162) 338,165 40,179 115,000 0 0 130,013 51,849 338,165 84,286 84,286 34,718 34,718 32,737 0 1,307 18,340 6,052 12,288 0 0 0 12,288 0.32 0.28
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