UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission File Number: 0-22068
Exact name of registrant as specified in its charter:
LEVEL ONE COMMUNICATIONS,
INCORPORATED
STATE OR OTHER JURISDICTION OF IRS EMPLOYER
INCORPORATION OR ORGANIZATION: IDENTIFICATION NO.
California 33-0128224
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
9750 Goethe Road, Sacramento, California 95827
TELEPHONE NO.:
(916) 855-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
Common Stock,
no par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
nonaffiliates as of February 28, 1997, was $280,564,948.
The number of shares outstanding of the Registrant's only class of
common stock as of February 28, 1997, was 13,405,475 shares of no par value
common stock.
PART I
ITEM 1. BUSINESS
Level One Communications, Incorporated (''Level One'' or ''the
Company'') was incorporated in 1985 under the laws of the state of
California. The Company has operations in the United States, Europe and
Asia.
Level One designs, develops and markets mixed-signal application
specific standard integrated circuit products (''ASSPs'') for high-speed
digital signal transmission and networking connectivity to systems that
transport information, within an office or around the world. Such systems
connect to local area networks ("LANs"), wide area networks ("WANs") and
public telephone transmission networks. LANs, WANs, and telephone
transmission networks make possible such activities as the use of intra-
enterprise networking ("intranets") and the use of the Internet and World
Wide Web.
Level One ASSPs transmit, regenerate and receive digitized voice,
data, and video signals using a wide variety of protocols. Because these
products both transmit and receive signals, they are called "transceivers".
All networks, LAN, WAN, and transmission, require transceivers. Level One
combines its strengths in analog and digital circuit design with its
communications systems expertise to produce mixed-signal solutions with
increased functionality and greater reliability, resulting in lower total
system cost.
As the volume of transmitted digital information continues to grow,
communications original equipment manufacturers (''OEMs'') that supply
products and systems to the transmission and networking markets face a
fundamental challenge of providing greater data throughput on a cost-
effective basis. Level One addresses the needs of leading communications
OEMs by providing high performance mixed-signal ASSPs that optimize the
allocation of analog and digital signal processing functions. The Company's
proprietary simulation software and sophisticated design and testing
methodology accelerate the product design cycle to improve time to market.
A key challenge for Level One's OEM customers and their end users is
the creation of access technologies that maximize the use of the large
installed base of twisted-pair copper telephone lines to transport
information. With more than 1.3 billion miles in place in the United
States, copper telephone wire is expected to remain the primary medium for
local connectivity to the ''electronic superhighway'' transport media that
handle long-distance data transmissions. Such long-distance transport media
include copper telephone lines, coaxial cable, fiber optic cable, wireless
and satellite transmission. Copper telephone wire, which was originally
designed to transmit relatively slow analog voice signals, requires special
signal conditioning circuits to enable transmission of high-speed digital
signals.
PRODUCTS AND APPLICATIONS
Level One develops and sells advanced ASSPs and custom derivatives
that provide silicon connectivity solutions and achieve improved
integration of functions. The Company's current products address the needs
of two primary segments of the communications connectivity market: the
networking market and the transmission market.
NETWORKING PRODUCTS
Level One's networking products address the rapid evolution and the
growing convergence of the LAN and WAN networking connectivity markets.
For these markets, Level One produces Ethernet transceivers, single chip
quad Ethernet repeaters, managed Ethernet repeaters, and integrated
transceiver solutions for Frame Relay, Switched 56/DDS and T1/E1 access
products.
Local Area Networks address the need to share information among
individuals and workgroups within a building or campus environment. The
dominant networking standard in the LAN environment is Ethernet, commonly
implemented over a twisted pair copper wire environment utilizing a 10
megabits per second transmission standard. Fast Ethernet products enable
transmissions of up to 100 megabits per second over twisted pair copper
wiring. Emerging 1-Gigabit per second Ethernet standards are aimed at the
same copper infrastructure as the Fast Ethernet products. These high
speed LANs are expected to be catalysts for a variety of new graphics,
video, multimedia, and network management applications.
Level One's transceivers incorporate analog and digital functions into
single chip solutions. Level One products in this category are used in
computer/workstation, server, portable computing, network printing, and
Ethernet switch applications. To provide Level One customers with cost
effective, high performance intranet and LAN solutions, these transceivers
incorporate features such as patented on-chip transmit filters, full duplex
support, multichannels, 3.3 volt performance, and the smallest form factor
package available.
Level One repeater and network management products include cascadeable
quad repeater hub chips, with integrated, filter technology. These chips
allow development of low cost, multiport managed and unmanaged Ethernet
repeater hub systems. Level One also produces a family of remote network
management devices which incorporate a Media Access Controller and support
for Simple Network Management Protocol ("SNMP") and Remote Monitoring
("RMON"). The Company also has a single chip solution optimized for hybrid
switching systems.
Intranets and Wide Area Networks connect individuals and workgroups
over longer distances than LANs, using telephone company transmission lines
rather than intraoffice wiring. WAN system products that incorporate Level
One devices include routers, digital modems, multichannel Access
Multiplexers, lottery and point-of-sale terminals. The rapid growth of
high bandwidth, low cost digital access services has increased the demand
for business and consumer use of Wide Area Networks. Along with the growth
of the Internet and on-line services, WAN equipment markets have
experienced significant growth in recent years.
The company's transceivers targeted at WAN equipment segments
incorporate analog and digital functions into single chip solutions. Level
One products are used in routers, digital modems, and a variety of other
customer premise equipment applications. Service offerings such as Frame
Relay, Switched 56, and DDS have helped drive demand for Level One's
products such as the LXT441, a single chip 56kbs digital access modem.
As the LAN and WAN markets experience broad based growth, there is
increased demand for compatible protocols and standards to allow LAN/WAN
interoperability and management as well as for silicon technology
addressing the convergence of the two markets. Level One networking
products service these evolving market needs.
TRANSMISSION PRODUCTS
Level One's transmission products service the growing demand for high-
speed digital signal transmission utilizing the industry-wide
specifications referred to as ''T1'' in North America, and ''E1'' in
Europe, Asia and much of the rest of the world. T1 systems transmit 1.544
million bits per second and E1 systems transmit 2.048 million bits per
second. Level One's products also address the transmission service known as
''Fractional T1,'' in which users can access multiple 64kbs sub-channel
rates of T1.
Level One produces fully integrated single chip T1 and E1 transceivers
to meet the requirements of its customers. Short-haul transceivers, which
process signals travelling within buildings, are incorporated into customer
premise equipment and into products sold to network service providers such
as telephone companies. Short-haul transceivers are typically used for
transmissions of 600 feet to 700 feet. Long-haul transceivers, which
transmit to approximately 6,000 feet, are incorporated into products such
as PBXs, channel service units, routers and multiplexers, which provide
connectivity between customer premise devices and the telephone company
network. Long-haul transceivers are also used in base stations for mobile
communication systems.
Repeaters are installed along telephone company transmission lines to
receive and regenerate signals at intervals of 6,000 feet, preventing the
deterioration of the signal. To reduce service costs, telephone companies
use ''smart'' repeaters that enable the system operator to quickly locate a
faulty repeater. Level One's products are used in these ''smart'' repeater
applications.
High-bit-rate digital subscriber line (''HDSL'') products produced by
the Company are designed to transmit up to 12,000 feet at the T1 rate on
two sets of twisted-pair copper wire or at the E1 rate on two or three sets
of twisted pair wire, reducing or eliminating the need for repeaters in
long-haul T1/E1 transmission. HDSL permits the transmission of data at 784
kilobits per second or 1,168 kilobits per second on any twisted-pair copper
wire used for subscriber loops. The Company's HDSL solution is a two-chip
chipset.
The Company expects that HDSL, together with successor and derivative
technologies, will continue to play an important role in the communications
infrastructure. Emerging DSL technologies ("xDSL") include high speed
Internet access and residential broadband. The Company plans to address
these markets with current and future DSL products. During 1996 the
Company shipped Subrate HDSL Multi-Rate Digital Subscriber Line ("MDSL")
chipsets to selected customers, and formally announced the product in
February 1997. MDSL is currently used for Internet access and digital pair
gain, primarily for commercial customers. In the future MDSL is expected
to also be used for wireless base stations and video conferencing.
Level One produces fully integrated quadruple T1/E1 receivers, which
are incorporated into telephone company maintenance and performance
monitoring equipment. In 1996 Level One introduced the LXT360, LXT361,
LXT350 and LXT351 integrated T1/E1 transceivers aimed at
developers of Sonet/SDH multiplexers, digital loop carriers, and
residential broadband access systems. These products permit OEM customers
to develop a single board design that meets both T1 and E1 standards. The
chips are designed to operate over poor quality or "noisy" lines.
Clock rate adapters (CLADs) adapt signals generated at the host
system's internal clock rates for T1/E1 transmission. CLADs are used to
generate internal timing systems for channel banks, digital loop carriers,
multiplexers, timing generators and other E1/T1 equipment, eliminating the
need for expensive discrete crystal oscillators.
BUSINESS AND TECHNOLOGY TRANSACTIONS
In December 1996, the Company acquired Silicon Design Experts, Inc., a
design and consulting company located in New Jersey. The acquisition
provides the Company with research and development personnel and digital
signal processing ("DSP") technology that will accelerate the Company's
product development of 1 Gigabit Ethernet, Asynchronous Transfer Mode
("ATM"), and other high speed DSP applications. The Company incurred a
one-time charge to earnings of $2.5 million during the fourth quarter of
1996 for purchased research and development related to the acquisition.
During the third quarter of 1996, in connection with a third-party
financing transaction for Maker Communications, Inc. ("Maker"), the Company
sold a portion of its minority interest in Maker for an aggregate of
approximately $675,000. This sale was accounted for as a one-time gain
which was reported as other income. The Company continues to hold a
minority interest in Maker and to license certain Maker technology. Other
contractual rights and obligations, including the Company's obligation to
provide certain loan financing to Maker, were terminated in the
transaction. Following the transaction, Maker repaid the Company
approximately $2.9 million, the total balance under an outstanding note.
TECHNOLOGY
The Company's proprietary technology includes systems simulation and
testing software and an extensive circuit cell library. Level One believes
that a key competitive factor in its success is its ability to use this
technology, in conjunction with industry standard design tools, to rapidly
design and introduce new products. The Company continuously reviews new
opportunities in emerging technologies such as xDSL, Switched Ethernet,
Fast and Gigabit Ethernet, infrared, ATM, wireless, frame relay and cable
transmission.
STRATEGIC RELATIONSHIPS
Level One's relationships and strategic development arrangements with
industry leaders help the Company identify and develop new products that
meet industry needs. Through the involvement of key customers in alpha
stage development, the Company's objective is to bring to market products
that are positioned to become market leaders. Level One is an active
member of several important standards committees throughout the world.
Level One has from time to time entered into development and license
agreements with third parties to broaden the Company's product and
technology offerings. Level One has also in the past entered into
strategic alliances with consortia of industry leaders to develop
communications products, such as the Company's HDSL chipsets. The Company
may in the future enter into such arrangements when appropriate
opportunities arise.
SALES AND MARKETING
Level One's sales and marketing strategy is to achieve design wins by
developing products with superior mixed-signal processing functions that
are designed into equipment offered by industry leaders. Level One has a
direct sales force and a worldwide network of independent distributors and
sales representatives. These independent sales organizations are selected
for their ability to provide effective field sales and technical support to
customers. The Company has a direct order fulfillment service for its
customers ordering smaller quantities of parts with lead times shorter than
the Company's standard lead times.
The Company maintains seven regional sales offices in the United
States. In addition, there are 25 sales representatives or distributors
of the Company's products. Internationally, Level One has six sales
offices along with 22 sales representatives or distributors operating in 37
countries.
RESEARCH AND DEVELOPMENT
The Company believes that the continued introduction of new products
in its target markets is essential to its growth. As of December 29, 1996,
Level One had 104 full-time employees engaged in research and development.
The Company currently anticipates that it will increase research and
development staffing levels in 1997. Expenditures for research and
development in 1996, 1995 and 1994 were approximately $22.0 million, $17.1
million, and $10.0 million, respectively. These expenditures exclude one-
time charges for purchased research and development of $2,500,000 and
$750,000 related to acquisitions in 1996 and 1995, respectively.
The Company released 12 new products during 1996, consisting of four
networking products and eight transmission products. A portion of the
Company's research and development resources may be used to enhance
existing products and to move to smaller geometries on larger wafers to
improve product costs.
MANUFACTURING
FOUNDRIES
Level One uses independent silicon foundries to fabricate its wafers.
This approach enables the Company to concentrate its resources on design
and test and allowing it to eliminate the cost associated with owning and
operating a fabrication facility.
The Company's wafer needs are supplied by six foundries; however, the
Company may, from time to time, qualify other foundries. Except where the
Company has contracted for long-term wafer supplies, the Company's
suppliers generally are not obligated to supply, nor is the Company
obligated to purchase, any minimum amount of wafers. Such suppliers
generally agree on production schedules based on purchase orders and
forecasts. During 1995, the Company entered into five-year agreements with
three of its suppliers for committed foundry capacity in consideration of
equipment financing or cash deposits. During 1995 and 1996, the Company
provided an aggregate of $14.6 million in equipment financing and/or cash
deposits to these three foundries in connection with such agreements.
From time to time, foundries supplying the Company may experience
wafer yield problems or capacity constraints which can result in wafer
delivery delays, and the Company may need to locate an alternative source
of supply for wafers. The Company has experienced increased costs and
delays in customer shipments as a result of a foundry reducing shipments to
the Company without prior notice, forcing the Company to transfer products
to a new foundry. Although the Company believes it can meet customer
demand, there can be no assurances that unforeseen demand or supply
disruptions will not have a material impact on the Company's business.
ASSEMBLY
Once the subcontracted wafers have been tested and accepted by the
Company, the die are assembled into packages by subcontractors located
worldwide. The Company utilizes multiple assembly subcontractors for its
products. While the Company has not experienced any material disruption in
supply from assembly subcontractors, there can be no assurance that
assembly problems will not occur.
QUALITY AND RELIABILITY ASSURANCE
The Company qualifies each assembly and foundry subcontractor before
that vendor manufactures products for the Company. Such qualification
includes an audit and analysis of the subcontractor's quality system and
manufacturing capabilities. The Company continuously monitors
subcontractors' quality and reliability on an ongoing basis. Level One's
objective is to control the quality of finished goods as thoroughly as if
it internally operated every step of the manufacturing process. The
Company and its customers thereby realize the economic efficiencies of
"fabless" production combined with tight quality control.
Effective January 30, 1997, Level One was registered by Underwriters
Laboratory as complying with the requirements of ISO 9001.
BACKLOG
As of December 29, 1996, the Company's total backlog scheduled to be
shipped was approximately $32.6 million, as compared to backlog of
approximately $29.2 million at December 30, 1995. A portion of the orders
constituting the Company's backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without
significant penalty. The Company limits its reported backlog to those
orders expected to ship within the next six months.
COMPETITION
Level One's competition consists of other semiconductor companies and
semiconductor divisions of vertically integrated companies. In the
transmission market, the Company's principal competitors are Lucent,
Brooktree Corporation (a subsidiary of Rockwell International, Inc.),
Crystal Semiconductor, Inc. (a subsidiary of Cirrus Logic, Inc.), Siemens,
Dallas Semiconductor, Inc. and Sierra Semiconductor Corporation. In the
networking market, the Company's principal competitors are Advanced Micro
Devices, Inc., Crystal, Lucent, Seeq Technologies, Inc., Texas Instruments,
Incorporated, and National Semiconductor Corporation. Many of these
competitors have substantially greater financial and other resources than
the Company.
Level One believes that its competitive strengths include efficient
distribution channels, highly experienced digital and mixed-signal circuit
designers, proprietary design and development tools, and its library of
analog and digital blocks and cells.
The ability of the Company to compete successfully in the rapidly
evolving area of high performance integrated circuit technology depends on
factors both within and outside of its control. Such factors include,
without limitation, success in designing and manufacturing new products,
implementing new technologies, intellectual property programs, product
quality, reliability, price, efficiency of production, and general economic
conditions. Although the Company believes that it competes favorably, there
is no assurance that the Company will be able to compete successfully in
the future.
PATENTS AND LICENSES
Level One has 23 United States patents that expire from 2009 to 2014,
16 pending U.S. patent applications and 14 pending international patent
applications. All of Level One's products are covered by at least one
Level One patent. The Company has 24 U.S. mask work registrations on its
products. Level One owns seven registered trademarks or servicemarks. The
Company has initiated a patent infringement suit against one of its
competitors relating to two of the Company's patents. See "Legal
Proceedings".
Level One has entered into various license agreements for product or
technology exchanges. In general, these licenses are to provide second
sources for standard products or to convey or receive rights to certain
proprietary or patented cores, cells or other technology.
EMPLOYEES
As of December 29, 1996, the Company had 410 full-time employees. The
Company's employees are not represented by any collective bargaining
agreement, and the Company has never experienced a work stoppage. The
Company believes its employee relations are good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors may have an impact on the Company's business:
DEPENDENCE UPON INDEPENDENT MANUFACTURERS
The Company does not manufacture the wafers used for its products.
The Company's wafers are manufactured by foundries located in the United
States, Europe, and Asia. The Company depends upon these suppliers to
produce wafers at acceptable yields and to deliver them in a timely manner
at competitive prices. The Company may sustain an adverse impact on
operating results from problems with the cost, timeliness, yield and
quality of wafer deliveries from suppliers. From time to time, the
available industry-wide foundry capacity can fluctuate significantly.
During periods of constrained supply, the Company may experience difficulty
in securing an adequate supply of wafers, and/or its suppliers may increase
wafer prices. The Company's operating results depend in substantial part
on its ability to maintain or increase the capacity available from its
existing or new foundries. In prior years, the Company has experienced
increased costs and delays in customer shipments as a result of a foundry
reducing shipments to the Company without prior notice, requiring the
Company to transfer products to a new foundry. Although the Company
believes that it has planned to meet customer demand, there can be no
assurances that unforeseen demand or other changes will not have a material
impact on the Company's business.
The Company is also dependent upon third-party assembly companies that
package the semiconductor die. The Company depends upon these suppliers to
produce products in a timely manner and at competitive prices. The Company
may sustain an adverse financial impact from problems with the cost,
timeliness, yield and quality of product deliveries from these suppliers.
FACTORS AFFECTING ANNUAL AND QUARTERLY OPERATING RESULTS
The semiconductor industry is characterized by rapid technological
change, intense competitive pressure and cyclical market patterns. The
Company's results of operations are affected by a wide variety of factors,
including general economic conditions, semiconductor industry environment,
changes in average selling prices, the timing of new product introductions
(by the Company and its customers), use of new technologies, the ability to
safeguard patents and intellectual property, and rapid change of demand for
products. The level of net revenues in any specific quarter can also be
affected by the level of orders placed during that quarter. The Company
attempts to respond to changes in market conditions as soon as possible;
however, the rapidity of their onset may make prediction of and reaction to
such events difficult. Due to the foregoing and other factors, past
results, such as those described in this report, may not be predictive of
future performance.
DEPENDENCE ON NEW PRODUCTS
The Company's future success depends on its ability to timely develop
and introduce new products which compete effectively. Because of the
complexity of its products, the Company may experience delays in completing
development and introduction of new products, and, as a result, not achieve
the market share anticipated for such products. The Company's strategy is
to develop products for the fastest growing segments of the communications
market. The Company conducts its own analysis of market trends and reviews
forecasts and information provided by industry analysts. Market conditions
may change rapidly as technology, economic, or user-preference conditions
cause different communications technologies to experience growth other than
that forecast by the Company or others. There can be no assurance that
the Company will successfully identify new product opportunities and bring
new products to market in a timely manner, that products or technologies
developed by others will not render the Company's products or technologies
obsolete or noncompetitive, or that the Company's products will be selected
for design into the products of its targeted customers. In addition, the
average selling price for any particular product tends to decrease over the
product's life. To offset such price decreases, the Company relies
primarily on obtaining yield improvements and corresponding cost reductions
in the manufacture of existing products and on introducing new products
which incorporate advanced features and other price/performance factors
such that higher average selling prices and higher margins are achievable
relative to existing product lines. To the extent that cost reductions and
new product introductions with higher margins do not occur in a timely
manner, or the Company's products do not achieve market acceptance, the
Company's operating results could be adversely affected.
INTELLECTUAL PROPERTY
The Company relies upon patent, trademark, trade secret and copyright
law to protect its intellectual property. There can be no assurance that
such intellectual property rights can be successfully asserted or will not
be invalidated, circumvented or challenged. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources for
the Company. Any infringement claim or other litigation against or by the
Company could have a material effect on the Company's financial condition
and results of operations. In November 1995 the Company commenced
infringement litigation against a competitor. See "Legal Proceedings".
SEMICONDUCTOR INDUSTRY
The semiconductor industry has historically been cyclical and subject
to significant economic downturns at various times. The Company may
experience substantial period-to-period fluctuations in operating results
due to general semiconductor industry conditions, overall economic
conditions or other factors.
In addition, the securities of many high technology companies have
historically been subject to extreme price and volume fluctuations, a
factor which may affect the market price of the Company's common stock. As
is common in the semiconductor industry, the Company frequently ships more
product in the third month of a quarter than in the other months. If a
disruption in the Company's production or shipping occurs near the end of a
quarter, the Company's revenues for that quarter could be adversely
affected.
The Company must order wafers and build inventory in advance of
product shipments. There is risk that the Company could produce excess or
insufficient inventories of particular products because the Company's
markets are volatile and subject to rapid technology and price changes.
This inventory risk is heightened because certain of the Company's
customers place orders with long lead times which may be subject to
cancellation or rescheduling by that customer. To the extent the Company
produces excess or insufficient inventories of particular products, the
Company's revenues and earnings could be adversely affected.
Increased demand for semiconductor products may result in a reduction
in the availability of wafers from foundries. Such capacity limitations
may adversely affect the Company's ability to deliver products on a timely
basis and affect the Company's margins. Additionally, the Company believes
that during periods of strong demand and/or restricted semiconductor
capacity, customers will over-order to assure an adequate supply. Certain
of the Company's customers may cancel or postpone orders without notice if
product becomes available elsewhere.
Shortages of components from other suppliers could cause the Company's
customers to cancel or delay programs incorporating the Company's products,
resulting in the cancellation or delay of orders for the Company's
products.
Because the foregoing factors may affect results, historical results
or trends may not be predictive of future results or trends.
ITEM 2. PROPERTIES
PROPERTIES
The Company's principal facilities are in two separately leased
buildings in an office park in Sacramento, California. The two leases
relate to buildings with 87,000 square feet of space and 51,000 square feet
of space, respectively, and expire in 2004 and 2006, respectively. The
Company also leases approximately 11,000 square feet for the operations of
San Francisco Telecom under a lease that is scheduled to expire in 2000.
The Company believes these facilities are adequate for its current and
immediately foreseeable level of operations.
The Company also leases small office facilities for the operation of
its New Jersey design center and for its domestic and international sales
offices.
ITEM 3. LEGAL PROCEEDINGS
On November 28, 1995, the Company initiated a patent infringement suit
against Seeq Technologies, Inc. in United States District Court for the
Northern District of California. The suit relates to two Level One
patents, No. 5,267,269 and No. 5,249,183, and to certain Seeq Ethernet
products, and seeks damages and injunctive relief. Seeq has denied the
allegations. Although the Company does not believe such litigation will
have a material impact on the Company, litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. See "Factors That May Affect Future Results".
There are no other material pending legal proceedings, other than
routine litigation incidental to the Company's business, to which the
Company is a party or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the 1996 fiscal
year to a vote of security holders, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the NASDAQ National
Market System under the symbol LEVL since its initial public offering on
August 19, 1993 at $11{3}/{8} per share (rounded to the nearest {1}/{16}).
The following table sets forth, for the fiscal quarters indicated, the high
and low closing sale prices of the Common Stock as reported by NASDAQ
National Market System (rounded to the nearest {1}/{16}). The Company's
fiscal year ends on the Sunday nearest to the calendar year end in each
year.
Year High Low
1996
Fourth Quarter $37 1/2 $26{13}/{16}
Third Quarter $29 1/2 $16 1/4
Second Quarter $30 1/2 $19 1/4
First Quarter $36 1/4 $16 3/4
1995
Fourth Quarter $26 $17
Third Quarter $27 1/4 $20 1/2
Second Quarter $22 3/4 $14 1/2
First Quarter $18 3/4 $12
On February 28, 1997, the closing sale price for the Company's Common
Stock was $32.875 per share. As of February 28, 1997, there were
approximately 156 holders of record of the Company's Common Stock.
On December 11, 1996, the Company issued a total of 86,730 shares of
common stock to the shareholders of Silicon Design Experts, Inc. ("SDE"),
in connection with the Company's acquisition of SDE. On February 2, 1996,
the Company issued a warrant to purchase up to 17,000 shares of common
stock at an exercise price of $21.00 per share in connection with an
incentive agreement with an independent sales representative company. In
each case, the issuance of the securities was privately negotiated in a
transaction not involving a public offering in reliance on the exemptions
contained in Section 4 of the Securities Act of 1933.
The Company has never paid dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. The Company's
bank line of credit agreement prohibits the payment of dividends on its
capital stock (other than dividends payable solely in the Company's stock)
without the prior written consent of the bank. The Company intends to
retain its earnings for the operation of its business.
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR
(IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994 1993 1992
DATA)
Statement of Income Data:
Revenues $111,987 $ 78,018 $ 46,825 $ 25,984 $ 14,076
Cost of sales 48,477 33,300 18,785 9,782 5,603
Gross margin 63,510 44,718 28,040 16,202 8,473
Operating expenses:
Research and development 24,505 17,857 9,956 5,934 3,067
(1)
Sales and marketing 16,589 11,372 6,772 4,102 2,400
General and administrative 6,741 5,752 3,424 1,936 933
Total operating 47,835 34,981 20,152 11,972 6,400
expenses
Operating income 15,675 9,737 7,888 4,230 2,073
Net interest and other income
(expense) (2) 2,293 2,064 1,440 12 (46)
Provision for income taxes 6,755 1,543 1,323 503 243
Net income $11,213 $10,258 $ 8,005 $ 3,739 $ 1,784
Earnings per share $ 0.82 $ 0.76 $ 0.60 $ 0.35 $ 0.18
Weighted average common
shares and equivalents 13,756 13,465 13,291 10,750 9,800
(1)Includes one-time charges for research and development relating to the
acquisitions of Silicon Design Experts, Inc., in 1996 of $2.5 million, and San
Francisco Telecom, Inc., in 1995 of $750,000.
(2)A one-time gain relating to the sale of a portion of a minority interest in
Maker Communications, Inc., of $675,000, is included in 1996.
AS OF FISCAL YEAR END
(IN THOUSANDS) 1996 1995 1994 1993 1992
BALANCE SHEET DATA:
Cash and cash equivalents $ 20,251 $ 21,628 $ 9,260 $15,141 $ 3,325
Working capital 50,871 50,834 48,231 21,605 2,821
Total assets 112,102 100,801 71,628 33,060 9,009
Long-term obligations (less
current portion) 3,806 4,463 361 2,431 806
Shareholders' equity 95,581 78,965 63,309 23,910 3,774
SELECTED QUARTERLY FINANCIAL DATA
FISCAL 1996 QUARTERS FISCAL 1995 QUARTERS
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA: FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
Revenues $27,542 $27,479 $27,363 $29,603 $13,219 $16,605 $21,680 $26,514
Cost of sales 11,588 11,521 11,756 13,612 5,600 6,882 9,459 11,359
Gross margin 15,954 15,958 15,607 15,991 7,619 9,723 12,221 15,155
Operating expenses:
Research and development 5,675 5,739 5,249 7,842 2,896 4,741 4,604 5,616
Sales and marketing 4,001 3,989 4,219 4,380 2,247 2,492 3,146 3,487
General and administrative 1,766 1,765 1,595 1,615 1,084 1,337 1,403 1,928
Total operating expenses 11,442 11,493 11,063 13,837 6,227 8,570 9,153 11,031
Operating income 4,512 4,465 4,544 2,154 1,392 1,153 3,068 4,124
Net interest and other income
(expense) 392 349 1,084 468 512 557 511 484
Provision/(benefit) for income 1,618 1,590 1,857 1,690 381 477 1,086 (401)
tax
Net income $3,286 $3,224 $3,771 $ 932 $1,523 $1,233 $2,493 $5,009
Earnings per share $0.24 $0.24 $0.27 $0.25 $0.10 $0.09 $0.18 $0.37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception, the Company has designed, developed
and marketed application specific standard integrated circuit
products ("ASSPs") and custom derivatives for the
transmission and networking markets. Volume shipments of its
initial ASSPs began in 1989. Since that time, the Company
has experienced significant increases in sales as its mixed-
signal integrated circuits have gained market acceptance.
The Company's annual revenue compound growth rate has been
80% since 1989. The Company first achieved profitable
operations in the quarter ended March 28, 1992 and has been
profitable in each subsequent quarter.
The Company derives revenues principally from product
sales. In addition, the Company has received non-recurring
engineering and licensing revenue from strategic partners and
customers in connection with product development projects.
As a result of those and other transactions, the Company
receives royalties and license fees.
The Company's cost of sales includes the costs of wafer
fabrication and assembly performed by third party vendors,
and costs associated with the procurement, scheduling,
testing and quality assurance functions performed by the
Company. Research and development expenses associated with
non-recurring engineering contracts are expensed as incurred,
while the related revenue is recognized only as contract
milestones are completed.
This document includes forward-looking statements which
involve risks and uncertainties. Actual results of the
Company's activities may differ significantly from the
potential results discussed in such forward-looking
statements. Risk factors that might cause such differences
include, but are not limited to, those factors identified
below and under the caption "Factors That May Affect Future
Results".
RESULTS OF OPERATIONS
REVENUES: Revenues for 1996 increased to $112.0 million
from $78.0 million in 1995 and $46.8 million in 1994. The
continued growth in revenues is due to the successful
introduction of new products and increased sales of existing
products to customers in the Company's two target market
segments - transmission and networking. In 1996, sales to
Hewlett-Packard were 11.2% of total sales. In 1995 and 1994,
no single customer accounted for more than 10% of revenues.
Export sales, primarily consisting of sales to Canada,
Europe, and Asia, were 39% of revenues in 1996, 33% in 1995
and 22% in 1994. All sales were in U.S. dollars, thereby
eliminating any foreign currency impact on revenues and net
income. The increase in international sales is attributable
to increased sales to foreign manufacturing facilities and
subcontractors of domestic customers and the Company's
increased international marketing and sales efforts,
including establishment of sales and sales support personnel
in foreign countries.
ROYALTIES, LICENSES AND NON-RECURRING ENGINEERING
REVENUE: The Company has entered into development agreements
with certain customers relating to customer-specific
applications, as well as, license agreements with certain
semiconductor manufacturers. Revenue is not recognized for
non-recurring engineering ("NRE") contracts until contract
milestones are met, although expenditures associated with the
contract are expensed as incurred. During 1996, the Company
had $398,000 in revenues from NRE contracts versus $289,000
in 1995 and $1,400,000 in 1994. In 1996, the Company
received royalties of $198,000 from products sold by
licensees. In 1995 and 1994, royalties were $312,000 and
$321,000, respectively.
The Company believes future revenue growth will depend
on the success and timing of new products along with
continued sales growth of existing products. New products
are generally incorporated into a customer's product or
system at the design stage. However, design wins may precede
volume sales by a year or more. No assurance can be given
that any design win will result in future revenues.
GROSS MARGIN: The following table sets forth the
Company's product sales and product gross margin:
(DOLLARS IN THOUSANDS) 1996 1995 1994
Product Sales $111,392 $77,417 $45,104
<ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis>.
Cost of product sales<ellipsis><ellipsis> 48,477 33,300 18,785
<ellipsis><ellipsis><ellipsis>.
Gross margin $62,915 $44,117 $26,319
Gross margin % product sales<ellipsis><ellipsis>.. 56.5% 57.0% 58.4%
Product gross margin is affected by several factors,
including average selling prices, the mix between older and
newer products, test equipment utilization, foundry
manufacturing yields, timing of cost reductions and the mix
between direct and distributor sales. Margins on domestic
and international sales are similar. Beginning in 1996,
certain engineering costs associated with product cost
reduction efforts were more appropriately allocated to cost
of product sales rather than research and development. This
caused margins to decline by approximately 2.0 percentage
points in 1996, while reducing research and development
expense a similar amount. There was no net impact on
operating profit.
RESEARCH AND DEVELOPMENT: Research and development
("R&D") expenses were $24.5 million in 1996, $17.9 million in
1995 and $10.0 million in 1994. As a percent of revenues,
R&D expenses were 21.9%, 22.9% and 21.3% in 1996, 1995 and
1994, respectively. In 1996, R&D expense included a one-time
charge for purchased research and development of $2.5 million
related to the acquisition of Silicon Design Experts, Inc.
In 1995, R&D expense included a one-time charge for
purchased research and development of $750,000 associated
with the acquisition of San Francisco Telecom, Inc.
Excluding one time charges, R&D expense as percent of
revenues was 19.6% and 21.9% for 1996 and 1995, respectively.
As previously stated in the gross margin section, in 1996 the
Company began accounting for engineering costs associated
with product cost reduction efforts in cost of product sales,
rather than R&D. In 1996, these costs were approximately 2%
of revenues.
SALES AND MARKETING: Sales and marketing expenses were
$16.6 million in 1996, $11.4 million in 1995 and $6.8 million
in 1994. As a percent of revenue, sales and marketing
expenses were 14.8%, 14.6% and 14.5% in 1996, 1995 and 1994,
respectively.
GENERAL AND ADMINISTRATIVE: General and administrative
expenses increased to $6.7 million in 1996 from $5.8 million
in 1995 and $3.4 million in 1994. As a percentage of
revenue, expenses decreased to 6.0% in 1996, from 7.4% and
7.3% in 1995 and 1994, respectively. The expense increases
in dollars are primarily attributable to additional headcount
and associated expenses due to the Company's growth.
INTEREST AND OTHER INCOME: The Company earns interest
on its cash and investments and incurs interest expense on
lease obligations used to finance certain capital equipment.
Income for 1996 was $2.3 million versus $2.1 million in 1995
and $1.4 million in 1994. In 1996, other income included a
one-time gain of $675,000 from the sale of a portion of the
Company's investment in Maker Communications.
PROVISION FOR INCOME TAXES: The Company's effective
income tax rate was 37.6% for 1996. In 1995 and 1994, the
effective rate was 13.1% and 14.2%. For a reconciliation of
the Company's effective tax rate to the statutory federal tax
rate, see Note 5 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended 1996, 1995 and 1994, the Company
financed its operations primarily through cash flows from
operations and existing cash and investment balances.
Working capital as of December 29, 1996, was $50.9 million.
The Company's principal sources of liquidity as of
December 29, 1996, consisted of $30.5 million in cash and
short-term investments and $10.0 million available under the
Company's line of credit. As of December 29, 1996, the
Company had no outstanding balance under this line of credit.
During 1996, the Company generated $22.5 million of cash
from its operating activities as compared to $7.5 million in
1995 and $4.3 million in 1994. In 1996, accounts receivable
increased by $2.9 million due to increased sales levels.
Inventories decreased by $5.8 million to $10.0 million at the
end of 1996, bringing days of inventory on hand down to 66
days from 125 days in 1995. Accounts payable and accrued
liabilities decreased $3.4 million from year end 1995 to
1996.
During 1996, 1995, and 1994, total expenditures for
capital equipment were $9.8 million, $10.0 million, and $10.6
million, respectively. The expenditures in each year
consisted primarily of equipment used for designing and
testing products. Of the total capital expenditures, $0.6
million in 1996, $4.8 million in 1995, and $1.1 million 1994,
were financed by capital leases.
The Company's current wafer requirements are supplied
primarily by six foundries. During 1995, the Company entered
into five-year agreements with three of its suppliers for
committed foundry capacity in consideration of equipment
financing or cash deposits. During 1995 and 1996, the
Company provided an aggregate of $14.6 million in capital
equipment financing and/or cash deposits to these three
foundries in connection with such activities. The Company has
remaining funding commitments not to exceed $18,000,000.
The Company expects to finance its 1997 capital
equipment requirements using a combination of cash and
equipment leasing. The Company believes that its existing
cash resources, combined with cash generated from operations,
equipment lease management, and its line of credit will be
sufficient to meet the Company's cash requirements through
the end of 1997. However, the Company may from time to time
seek additional equity or debt financing as a result of the
capital intensive nature of the semiconductor industry.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's financial statements included with this
Form 10-K are set forth under Item 14 hereof.
ITEM 9.DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change of accountants nor any
disagreements with accountants on any matter of accounting
principles or practices or financial statement disclosure
required to be reported under this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and
their ages as of February 28, 1997, are as follows:
NAME AGE POSITION WITH THE COMPANY
Robert S. Pepper, Ph.D. 61 President, Chief Executive Officer
and Chairman of the Board of
Directors
J. Fran<c,>ois Crepin 50 Vice President, Business Development
John Kehoe 51 Vice President, Finance and
Administration and Chief Financial
Officer
Daniel S. Koellen 39 Vice President, Quality and
Reliability
George A. Papa 49 Vice President, Worldwide Sales
Manuel D. Yuen 56 Vice President, Operations
Thomas J. Connors(1)(2) 67 Director
Paul Gray, Ph.D. 54 Director
Martin Jurick(2) 59 Director
Henry Kressel, Ph.D.(2) 63 Director
Joseph P. Landy(1) 35 Director
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Dr. Pepper joined the Company in July 1986 as President,
Chief Executive Officer and a director. He became Chairman of
the Board of Directors in January 1993. From 1979 until
1984, Dr. Pepper was Vice President and General Manager of
the Solid State division of RCA Corporation. Prior to joining
RCA, Dr. Pepper had spent over 15 years in the semiconductor
industry, including positions as Vice President and General
Manager of the Semiconductor Division at Analog Devices, Inc.
Dr. Pepper holds B.S., M.S. and Ph.D. degrees in Electrical
Engineering from the University of California at Berkeley.
Mr. Crepin joined the Company in December 1986 as Vice
President, Marketing and Sales, and has held different
positions within the Company prior to becoming Vice President
of Business Development in 1994. Mr. Crepin served as
Director of Strategic Planning for Information Communications
for LSI Logic Corporation prior to joining Level One. Prior
to joining LSI, Mr. Crepin served for 17 years at National
Semiconductor Corporation, the last four of which he was
Director of Worldwide Telecom Marketing. Mr. Crepin holds an
M.B.A. from the University of Paris and a B.S. in Mathematics
and Science from Grenoble University.
Mr. Kehoe joined the Company in October 1995 as Vice
President and Chief Financial Officer. Immediately prior to
joining the Company Mr. Kehoe served as Senior Vice President
and Chief Financial Officer for Focus Surgery, Inc., a
medical device manufacturer. From 1992 to 1993 he served as
Vice President, Finance and Chief Financial Officer for
Celeritek, Inc., a microwave systems company. From 1989 to
1992 he served as Vice President, Finance and Chief Financial
Officer of Poqet Computer Corp., a computer manufacturer.
Prior to 1989 he worked in various financial and CFO
positions for approximately 14 years with high technology
companies, including Texas Instruments. Mr. Kehoe holds an
MBA from Fordham University and a BBA from Manhattan College.
Mr. Koellen has been responsible for the Quality and
Reliability function since he joined the Company in January
1989, serving as Manager until January 1992, then as Director
until January 1993 when he was promoted to Vice President of
Quality and Reliability. From 1985 to 1989, Mr. Koellen was
Lead Failure Analysis Engineer for the Denver Aerospace
Division of Martin Marietta Corp. Prior to joining Martin
Marietta, Mr. Koellen managed the surface analysis laboratory
for Mostek Corporation, a supplier of dynamic random access
memory integrated circuits. Mr. Koellen holds an M.S. in
Engineering and Applied Science from Southern Methodist
University and a B.S. in Applied Mathematics, Engineering and
Physics from the University of Wisconsin.
Mr. Papa joined the Company in February 1997 as Vice
President, Worldwide Sales. Prior to joining the Company, he
had been employed since 1991 as Vice President of Sales for
North America by Siemens Components Corporation, a division
of Siemens. Previously Mr. Papa was employed in other
management and sales positions with Siemens Components
Corporation, LSI Logic Corporation, Intel Corporation, and
Tektronix. Mr. Papa holds a B.S.E.E. from Northeastern
University
Mr. Yuen was Director of Operations from the time he
joined the Company in February 1991 until January 1992, when
he was promoted to Vice President of Operations. Prior to
joining the Company, Mr. Yuen spent over 20 years at National
Semiconductor Corporation, a semiconductor manufacturer, as
Director of its Santa Clara foundry from 1986 to 1987 and as
Vice President-Military Aerospace Division from 1987 to 1989.
Mr. Yuen holds a B.S. and an M.S. in Electrical Engineering
from the University of California at Berkeley.
Mr. Connors has been a director of the Company since
April 1991. Since 1980, Mr. Connors has been the principal of
TJC Investments, an independent consulting firm that works
with companies in the semiconductor and related industries.
Previously, Mr. Connors was employed by Motorola, Inc., where
he last served as Vice President and General Manager of the
Semiconductor Division. Mr. Connors is also a member of the
Board of Directors of Zilog, Inc., Open Vision Technologies,
Inc., and SGS-Thomson Microelectronics, Inc., a wholly-owned
subsidiary of SGS-N.V.
Dr. Gray has been a director since April 1994. Dr. Gray
is the Dean of the College of Engineering at the University
of California, Berkeley. From 1990 to 1993, he served as
Chairman of the Electrical Engineering and Computer Sciences
Department, and as Vice Chairman of the Department from 1988
to 1990. He served as a director of Microlinear Corporation
from 1988 to 1991. He has published more than 100 papers in
the electrical engineering field, has served on numerous
industry committees, and holds 10 patents.
Mr. Jurick has been a director of the Company since
April 1991. Since 1984, Mr. Jurick has been a Senior Vice
President of Silicon Systems, Inc. ("SSI"), a semiconductor
manufacturing company, which until 1996 was a wholly owned
subsidiary of TDK Corporation, and in 1996 became a division
of Texas Instruments Inc. Mr. Jurick also serves as a
director of Microsemi Corp.
Dr. Kressel has been a director of the Company since
August 1987. Since 1985, Dr. Kressel has been a Managing
Director at E.M. Warburg, Pincus & Co., Inc. (''EMW''), an
investment firm, where he has been employed since 1983. Prior
to joining EMW, Dr. Kressel spent 20 years at RCA
Laboratories, where he became a Staff Vice President. Dr.
Kressel is also a member of the Board of Directors of Zilog,
Inc., Maxis, Inc., and Trescom International.
Mr. Landy has been a director of the Company since
January 1991 and was appointed Secretary of the Company in
July 1993. Since January 1994, Mr. Landy has served as a
Managing Director at E.M. Warburg, Pincus & Co., Inc.
(''EMW''), an investment firm, where he has been employed
since 1985. Prior to joining EMW, Mr. Landy was employed by
Dean Witter Realty, Inc., the real estate investment banking
affiliate of Dean Witter Reynolds, Inc., as a financial
analyst. He also serves as a director of NOVA Information
Systems and CN Biosciences, Inc.
Directors are elected by the shareholders at each annual
meeting to serve until the next annual meeting of
shareholders or until their successors are duly elected and
qualified. Officers are elected to serve, subject to the
discretion of the Board of Directors, until their successors
are appointed. There are no family relationships between any
directors or executive officers. There are no agreements or
other arrangements or understandings pursuant to which any
director of the Company will be selected as a director or
nominee.
Non-employee, non-affiliated Directors of the Company
receive $1,800 per day for each day devoted to Company Board
or committee meetings. The Company reimburses each director
for reasonable expenses of attending meetings of the Board of
Directors and any committees thereof. Non-affiliated non-
employee directors receive an annual automatic option grant
of 2,000 shares at the end of each year.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, based solely on its review
of the copies of such reports furnished to the Company and
written representations that no other reports were required,
all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial
owners were complied with during the fiscal year ended
December 29, 1996, with the exception of one report for one
transaction which was untimely filed for each of Messrs.
Pepper, Kehoe, Holmes, Koellen and Yuen.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other
highest paid executive officers, plus one officer who
resigned, whose compensation for the 1995 fiscal year was in
excess of $100,000 (collectively the "Named Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION ALL
ANNUAL SECURITIES OTHER
COMPENSATION (1) UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)(2)
Robert S. Pepper, Ph.D. 1996 296,923 185,382 60,000 6,276
President, Chief 1995 220,000 97,172 --- 4,280
Executive
Officer and Chairman of 1994 196,794 50,000 120,000 78,632
the
Board
John Kehoe 1996 153,182 81,508 20,000 1,800
Vice President and 1995 27,115 12,500 70,000 ---
Chief Financial Officer
J. Fran<c,>ois Crepin 1996 137,271 14,625 27,000 4,594
Vice President, Business 1995 129,126 16,323 35,500 4,284
Development 1994 124,650 9,500 --- 8,530
Manuel D. Yuen 1996 142,654 28,028 25,300 2,811
Vice President, 1995 119,674 16,846 33,000 2,443
Operations
1994 110,778 10,000 --- 2,853
Daniel S. Koellen 1996 120,042 30,726 31,500 3,282
Vice President, Quality & 1995 106,292 15,227 23,100 3,120
Reliability 1994 98,566 11,000 --- 2,869
George B. Holmes (3) 1996 115,033 82,914 25,000 4,166
Vice President Worldwide 1995 126,538 182,902 60,000 4,205
Sales 1994 41,556 51,251 --- 433
(1) Annual compensation amounts include amounts deferred at the election of the
Named Officer pursuant to the Company's 401(k) plan.
(2) Other annual compensation represents the Company's 401(k) matching
contributions.
(3) Mr. Holmes served as Vice President of Worldwide Sales until October 1996.
OPTION GRANTS IN LAST FISCAL YEAR AND YEAR-END OPTION
VALUES
The following table sets forth certain information
concerning grants of stock options to each of the Named
Officers during the fiscal year ended December 29, 1996. The
options listed were granted under the 1993 Option Plan. In
accordance with the rules of the Securities and Exchange
Commission, also shown is the potential realizable value
based on the assumed rates of stock price appreciation of 5%
and 10%, compounded annually, from the date the option was
granted over the full option term. These amounts represent
certain assumed rates of appreciation only and do not
represent the Company's estimate of future stock price.
Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Stock Price
Underlying Granted to Exercise Appreciation for
Options Employees in Price Expiration OPTION TERM (1)
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
Robert S. Pepper, Ph.D. 60,000 6.3 18.25 1/20/06 688,878 1,745,890
J. Fran<c,>ois Crepin 22,000 2.3 18.25 1/20/06 252,598 640,160
5,000 .5 16.75 7/26/06 52,688 133,533
John Kehoe 20,000 2.1 18.25 1/20/06 229,626 581,963
Manuel D. Yuen 11,300 1.1 18.25 1/20/06 129,739 328,809
14,000 1.5 16.75 7/26/06 147,527 373,891
Daniel S. Koellen 21,500 2.3 18.25 1/20/06 246,848 625,610
10,000 1.1 16.75 7/26/06 105,376 267,065
George B. Holmes 20,000 2.1 18.25 1/31/97 18,865 37,760
5,000 .5 16.75 7/26/06 52,688 133,532
(1) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over the
5-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to the
executive officers.
The following table provides information with respect to
the Named Officers concerning the exercise of options during
the last fiscal year and unexercised options held as of
December 29, 1996:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR END At Fiscal Year End ($)(1)
(#)
ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Robert S. Pepper, Ph.D. 10,000 347,917 140,356 180,000 $4,893,786 3,570,000
John Kehoe 0 0 14,000 76,000 175,000 1,040,000
J. Fran<c,>ois Crepin 9,000 147,717 10,000 57,000 251,233 1,029,000
George B. Holmes 0 0 24,000 61,000 459,000 1,121,000
Manuel D. Yuen 0 0 51,000 67,300 1,778,200 1,383,650
Daniel S. Koellen 0 0 28,200 61,500 968,735 1,238,710
(1) Based upon the market price of $35.75 per share, which was the closing
price per share on the NASDAQ National Market System on the last day of the
1996 fiscal year, less the option exercise price payable per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information
regarding beneficial ownership of the Company's Common
Stock as of February 28, 1997, by (i) each person (or
group of affiliated persons) known by the Company to
own beneficially more than 5% of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each
Named Officer, and (iv) the Company's directors and
executive officers as a group. Except as indicated in
the footnotes to this table, the persons named herein,
based on information provided by such persons, have
sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by
them, subject to community property laws, where
applicable.
SHARES BENEFICIALLY
DIRECTORS, NAMED OFFICERS AND 5% SHAREHOLDERS OWNED
NUMBER PERCENT (1)
Warburg, Pincus Capital Company, L.P. (2) 4,699,674 35.1%
466 Lexington Avenue
New York, New York 10017
Kopp Investment Advisors, Inc. (3) 2,315,944 17.3%
6600 France Avenue South, Suite 672
Edina, Minnesota 55435
Robert S. Pepper, Ph.D. (4). 293,689 2.2%
Thomas J. Connors (5) 44,000 *
Paul Gray (6) 16,000 *
Martin Jurick (7) 14,000 *
Henry Kressel, Ph.D. (2)(8) 4,699,674 35.1%
Joseph P. Landy (2)(8) 4,699,674 35.1%
John Kehoe (9) 19,000 *
J. Fran<c,>ois Crepin (10) 40,670 *
Daniel S. Koellen (11) 54,586 *
Manuel D. Yuen (12) 80,817 *
George B. Holmes (13) 6,000 *
All Named Officers and Directors as a group (11 persons) (14) 5,268,436 38.2%
(1) Percent ownership is based on 13,405,475 shares of Common Stock outstanding
as of February 28, 1997, plus shares issuable pursuant to options or warrants
held by the person or class in question that are exercisable within 60 days
after February 28, 1997.
(2) The shares listed are owned of record by Warburg, Pincus Capital
Company, L.P., a Delaware limited partnership ("WPCC"), and beneficial
ownership may be attributed to E.M. Warburg, Pincus & Co., LLC, a New York
Limited Liability Company ("EMW LLC"), the successor to Warburg, Pincus
Ventures, Inc., a Delaware corporation; and to Warburg, Pincus & Co., a New
York general partnership ("WP"). WP, the sole general partner of WPCC, has a
20% interest in the profits of WPCC. Lionel I. Pincus is the managing partner
of WP and the managing member of EMW LLC and may be deemed to control both WP
and EMW LLC. The members of EMW LLC are substantially the same as the partners
of WP. Henry Kressel and Joseph P. Landy, each a director of the Company, is a
Managing Director and a member of EMW LLC and a general partner of WP. As
such, each of Messrs. Kressel and Landy may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 of the Securities Exchange
Act of 1934, as amended) in an indeterminate portion of the common shares
beneficially owned by WPCC and WP. Each of Messrs. Kressel and Landy disclaims
beneficial ownership, for purposes of Section 16 of the Act and otherwise, of
such common shares.
(3) Includes 2,231,944 shares over which Kopp Investment Advisors, Inc.
exercises investment discretion, but for which it is not the record holder;
10,000 shares which Kopp Investment Advisors, Inc., owns directly; 4,000 shares
owned by Kopp Investment Advisors, Inc., Profit Sharing Plan; 50,000 shares
owned by LeRoy C. Kopp Individual Retirement Plan; and 20,000 shares owned by
Kopp Family Foundation.
(4) Includes 8,000 shares held of record by the Robert S. and Star Pepper
Charitable Trust, and 195,356 shares issuable under stock options held by Dr.
Pepper exercisable within 60 days of February 28, 1997.
(5) Includes 20,000 shares issuable under stock options held by Mr. Connors
exercisable within 60 days of February 28, 1997.
(6) Includes 16,000 shares issuable under stock options held by Dr. Gray
exercisable within 60 days of February 28, 1997.
(7) Includes 4,000 shares issuable under stock options held by Mr. Jurick
exercisable within 60 days of February 28, 1997.
(8) Shares held of record by Warburg. Both Dr. Kressel and Mr. Landy are
managing directors of EMW and general partners of WPC. All of the shares
indicated as owned by both Dr. Kressel and Mr. Landy are owned directly by
Warburg and are included because of their affiliation with Warburg. Both Dr.
Kressel and Mr. Landy disclaim beneficial ownership of such shares.
(9) Includes 19,000 shares issuable under stock options held by Mr. Kehoe
exercisable within 60 days of February 28, 1997.
(10) Includes 25,500 shares issuable under stock options held by Mr. Crepin
exercisable within 60 days of February 28, 1997.
(11) Includes 43,575 shares issuable under stock options held by Mr. Koellen
exercisable within 60 days of February 28, 1997.
(12) Includes 67,825 shares issuable under stock options held by Mr. Yuen
exercisable within 60 days of February 28, 1997.
(13) Includes 6,000 shares issuable under stock options held by Mr. Holmes
exercisable within 60 days of February 28, 1997.
(14) Includes an aggregate of 397,256 shares issuable upon exercise of stock
options held by Named Officers and Directors exercisable within 60 days of
February 28, 1997. See footnotes (2), (4), (5), (6), (7),(8), (9), (10), (11),
(12) and (13) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with securing a loan from WPCC in 1992,
the Company issued a warrant to purchase 202,746 shares of
its common stock at an exercise price of $1.54 per share.
The warrant was exercised January 16, 1997, for 192,754
shares, and the balance was surrendered, on a net
appreciation basis, in an amount equal to the exercise price.
Directors Kressel and Landy, each of whom is an affiliate of
the entity controlling WPCC, disclaims beneficial ownership,
for purposes of Section 16 of the Act and otherwise, of such
common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee currently consists
of directors Connors, Jurick and Kressel. The Compensation
Committee reviews and approves the compensation of the
Company's executive officers. The compensation of the Chief
Executive Officer is subject to approval by the Board of
Directors.
Mr. Connors was paid $129,600 during 1996 for consulting
services rendered under an agreement with the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON
FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
FORM 10-K
PAGE NO.
1. Financial Statements:
Report of Independent Public Accountants 32
Consolidated Balance Sheets as of December 29, 1996 and December 30, 1995 33
Consolidated Statements of Income for fiscal years ended
December 29, 1996, December 30, 1995, and December 31, 1994 35
Consolidated Statements of Shareholders' Equity for fiscal years ended
December 29, 1996, December 30, 1995, and December 31, 1994 37
Consolidated Statements of Cash Flows for fiscal years ended December 29, 1996,
December 30, 1995, and December 31, 1994 39
Notes to Financial Statements 41
2. FINANCIAL STATEMENT SCHEDULES:
II-Valuation and Qualifying Accounts 53
ALL OTHER SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE OR
THE REQUIRED INFORMATION IS SHOWN IN THE FINANCIAL STATEMENTS OR NOTES
THERETO.
3. EXHIBITS:
EXHIBIT
NUMBER
3.1(1) Amended and Restated Articles of Incorporation of the Company.
3.2(1) Bylaws of the Company, as amended.
3.3(1) Amended and Restated Articles of Incorporation filed August 31, 1994.
3.4(2) Certificate of Amendment to the Company's Amended and Restated Articles of
Incorporation, filed December 30, 1994.
4.1 Reference Exhibit 3.1.
4.2(1) Investor Rights Agreement dated as of October 19, 1990, as amended.
4.3(1) Stock Purchase Agreement dated as of April 24, 1991 between the Company and
Silicon
Systems, Inc.
10.1<circumflex><circumflex>(1) 1985 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase
Plan, as amended.
10.2<circumflex><circumflex>* 1993 Stock Option Plan, as amended and restated.
10.3<circumflex><circumflex>(1) Amended and Restated Employee Stock Purchase Plan.
10.4<circumflex><circumflex>(2) Employment Agreement between the Company and Robert S. Pepper dated as of July 14,
1986, as amended.
10.5<circumflex><circumflex>(2) Employment Agreement between the Company and Daniel S. Koellen dated as of
February
11, 1989, as amended.
10.6(1) Warrant to Purchase Common Stock dated February 24, 1993 issued to Warburg, Pincus
Capital Company, L.P.
10.7(1) Warrant Agreement between the Company and Equitec Leasing Company dated March 7,
1986, as amended.
EXHIBIT
NUMBER
10.8(1) Warrant Agreement between the Company and Equitec Leasing Company dated October
13, 1987, as amended.
10.9(1) Warrant Agreement between the Company and Equitec Leasing Company dated October
30, 1987, as amended.
10.10(1) Business Loan Agreement dated as of October 21, 1991 between the Company and
Silicon
Valley Bank.
10.11(1) Master Equipment Lease dated as of April 15, 1993 between the Company and Phoenix
Leasing Incorporated.
10.12(1) Leastec Master Lease Agreement dated as of January 24, 1991 between the Company
and
Leastec Corporation.
10.13(1) Master Equipment Lease dated as of April 15, 1994 between the Company and Phoenix
Leasing Incorporated.
10.14<circumflex>(1) Foundry Agreement dated as of March 25, 1993 between the Company and Austria
Mikro Systems International GmbH.
10.15<circumflex>(1) Joint Development and License Agreement dated February 14, 1991 between the
Company and Fujitsu Limited.
10.16<circumflex>(1) License Agreement dated April 24, 1991 between the Company and Silicon Systems
Inc.,
as amended.
10.17<circumflex>(1) License Agreement dated April 13, 1994 between the Company and Silicon Systems
Inc.
10.18<circumflex>(1) License Agreement dated September 26, 1989 between the Company and Asahi Chemical
Industry Co., Ltd.
10.19<circumflex>(1) Light Industrial Lease dated as of December 3, 1985 between the Company and Sparks
Properties, Inc. for premises at 195 Lake Forest Way, as amended.
10.20<circumflex>(1) Development Agreement for a General DataComm Customer - Specific Line Interface
Transceiver dated October 1, 1990.
10.21(1) Form of Participation Agreement to a High Speed Digital Subscriber Line Interface
Circuit Development Consortium.
10.22<circumflex>(1) Development and Supply Agreement for Integrated Circuits dated as of September 28,
1993 between the Company and Northern Telecom, Inc.
10.23<circumflex><circumflex>(1) Form of Directors' Indemnification Agreement.
10.24(2) Form of Custody and Escrow Agreement for Selling Shareholders.
10.25(2) Form of Selling Shareholder's Irrevocable Power of Attorney.
10.26<circumflex><circumflex>(2) Consulting Agreement with Thomas J. Connors, as amended.
10.27(1) Real Property Lease with Evergreen/Bradville IV dated July 16, 1994.
10.28(1) Real Property Lease with EI Dorado Savings Bank dated July 28, 1994.
10.29(2) Amendment to Real Property Lease with Evergreen/Bradville IV, dated November 5,
1994.
10.30(2) Amendment to Form of Participation Agreement to a High Speed Digital Subscriber
Line
Interface Circuit Development Consortium.
10.31(2) Settlement Agreement between the Company and Fujitsu Limited, dated November 11,
1994.
10.32<circumflex><circumflex>(3) Consulting Agreement with Paul Gray
10.33<circumflex>(4) Foundry Agreement
10.34<circumflex>(5) Agreement and Plan of Reorganization (Maker Communications, Inc.)
10.35<circumflex>(5) Agreement and Plan of Reorganization (San Francisco Telecom, Inc.)
10.36<circumflex>(5) Equipment Lease Agreement
10.37<circumflex><circumflex><circumflex>(6) Foundry Agreement
10.38(7) Deposit Agreement
10.39(7) Real Property Lease Agreement with Evergreen/Bradville IV dated December 29, 1995
10.40*<circumflex><circumflex><circumflex> Agreement and Plan of Reorganization (Silicon Design Experts, Inc.)
22.1* Subsidiaries of Registrant. (see page S3)
24.1* Consent of Arthur Andersen & Co. (see page S4)
25.1* Powers of Attorney. (see page S1)
27.1* Financial Data Schedule, December 29, 1996
(1) Incorporated by reference to Exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-65810), which was
declared effective August 19, 1994.
(2) Incorporated by reference to Exhibit filed with the Company's
Registration Statement-Form S-1 (File No. 33-74088), which was declared
effective February 8, 1995.
(3) Incorporated by reference to Exhibit filed with the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1994.
(4) Incorporated by reference to Exhibit filed with the Company's
Quarterly Report on Form 10-Q for the Period Ended April 1, 1995.
(5) Incorporated by reference to Exhibit filed with the Company's
Quarterly Report on Form 10-Q for the Period Ended July 1, 1995.
(6) Incorporated by reference to Exhibit filed with the Company's
Quarterly Report on Form 10-Q for the Period Ended September 29, 1995.
(7) Incorporated by reference to Exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995.
* Filed herewith.
<circumflex> Confidential treatment granted.
<circumflex><circumflex> Indicates management contract or compensatory
plan or arrangement.
<circumflex><circumflex><circumflex> Confidential treatment requested.
Upon written request to the Company, the Company will furnish
shareholders with a copy of any Exhibit upon payment of $.10 per page,
which represents the Company's reasonable expenses in furnishing such
Exhibits.
(b) On October 10, 1996, the Registrant filed a Current Report on Form
8-K relating to the September 27, 1996, determination to change the
Registrant's fiscal year, which now ends on the last Sunday nearest
calendar year end in a 52-53 week year.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Level One Communications, Incorporated:
We have audited the accompanying consolidated balance sheets
of LEVEL ONE COMMUNICATIONS, INCORPORATED (a California
corporation), and subsidiaries as of December 29, 1996 and
December 30, 1995, and the related statements of income,
shareholders' equity and cash flows for each of the three
fiscal years ended December 29, 1996, December 30, 1995 and
December 31, 1994. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Level One Communications, Incorporated, and
subsidiaries, as of December 29, 1996 and December 30, 1995,
and the results of their operations and their cash flows for
each of the three fiscal years ended December 29, 1996,
December 30, 1995 and December 31, 1994 in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The
schedule listed in the index of financial statements is
presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set
forth therein in relation to the basic financial statements
taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Sacramento, California
February 28, 1997
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 29, 1996 and December 30, 1995
(IN THOUSANDS EXCEPT SHARE AMOUNTS) 1996 1995
ASSETS
Current Assets:
Cash and cash equivalents $ $
20,251 21,628
Short-term investments 10,211 8,223
Accounts receivable, net of allowance 18,279 15,390
for doubtful accounts of $156 and $300
for 1996 and 1995, respectively
Inventories 9,990 15,772
Deferred income tax benefit 2,504 4,289
Prepaid expenses 2,351 2,905
Total current assets
63,586 68,207
Property and equipment, net 23,676 20,438
Long-term investments 12,440 4,695
Related party note receivable 1,225
-
Foundry deposits 8,000 2,000
Other assets 4,400 4,236
Total assets $ $
112,102 100,801
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ $
1,129 1,059
Accounts payable 4,778 9,541
Accrued payroll costs 1,985 1,762
Income taxes payable 1,338
-
Deferred revenue 133
-
Other accrued liabilities 3,485 4,878
Total current liabilities 12,715 17,373
Capital lease obligations, less current portion 3,194 3,814
Deferred lease expense 612 649
Total liabilities
16,521 21,836
Shareholders' Equity:
Common Stock, no par value 83,230 77,772
Authorized - 105,000,000 shares
Outstanding - 13,116,227 and 12,839,319
shares for 1996 and 1995,
respectively
Unrealized gain on available-for-sale
securities, net of tax 12 67
Retained earnings 12,339 1,126
Total shareholders' equity 95,581 78,965
Total liabilities and shareholders' equity $ $
112,102 100,801
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
1996 1995 1994
Revenues $ $ $
111,987 78,018 46,825
Cost of sales 48,477 33,300 18,785
Gross margin 63,510 44,718 28,040
Research & development* 24,505 17,857 9,956
Sales & marketing 16,589 11,372 6,772
General & administrative 6,741 5,752 3,424
Total operating expenses 47,835 34,981 20,152
Operating income 15,675 9,737 7,888
Interest and other income, net 2,293 2,064 1,440
Income before provision
for income taxes 17,968 11,801 9,328
Provision for income taxes 6,755 1,543 1,323
Net income $ $ $
11,213 10,258 8,005
Earnings per Share $0.82 $0.76 $0.60
Weighted Average Common
Shares Outstanding 13,756 13,465 13,291
*Includes one-time charges for
acquisitions of $2,500 and $750 for 1996
and 1995,
respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
Retained
(IN THOUSANDS) Common Stock Deferred Unrealized Earnings
SHARES AMOUNT COMPENSATION GAIN (LOSS) (DEFICIT) TOTAL
Balance at January 1, 1994 $ 41,143 $ $ $(17,137) $ 23,910
10,874 (96) -
Issuance of common stock under
stock option and purchase 72 220
plans 220 - - -
Issuance of common stock upon
exercise
of warrants 31
6 31 - - -
Issuance of common stock 1,529 31,629 31,629
- - -
Stock issuance costs (581)
- (581) - - -
Amortization of deferred
compensation expense - - 95
- 95 -
Net income 8,005
- - - - 8,005
Balance at December 31, 1994 12,481 72,442
(1) - (9,132) 63,309
Issuance of common stock under
stock option and purchase plans
and purchase plans 219 431 - - - 431
Issuance of common stock upon
exercise
of warrants 19
4 19 - - -
Tax benefit of stock option 2,418 2,418
exercises - - - -
Stock issued in connection with 135 2,462 2,462
acquisitions - - -
Unrealized gain on available-for-
sale
investments, net of tax 67
- - - 67 -
Amortization of deferred
compensation expense - 1
- 1 - -
Net income 10,258
- - - - 10,258
Balance at December 30, 1995 12,839 77,772
- 67 1,126 78,965
Issuance of common stock under
stock option and purchase plans 188 1,243 1,243
- - -
Issuance of common stock upon
exercise
of warrants 10
2 10 - - -
Tax benefit of stock option 1,205 1,205
exercises - - - -
Stock issued in connection with 3,000 3,000
acquisitions 87 - - -
Unrealized loss on available-for-
sale
investments, net of tax (55)
- - - (55) -
Net income 11,213
- - - - 11,213
Balance at December 29, 1996 13,116 $ 83,230 $ $ $ 12,339 $ 95,581
- 12
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Fiscal Years Ended December 29, 1996, December 30, 1995, and December 31, 1994
(IN THOUSANDS)
1996 1995 1994
Cash flows from operating activities:
Net income $ 11,213 $ 10,258 $ 8,005
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,389 5,214 3,144
Purchased research & development 2,500 750
expenses -
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable (2,889) (9,021) (2,028)
Inventories 5,782 (9,268) (4,578)
Deferred tax assets 1,785 (977) (466)
Prepaid expenses 236 (1,481)
(1,192)
Accounts payable and accrued liabilities (3,427) 11,684 2,881
Deferred revenues (133) 97 (1,148)
Net cash provided by operating 22,456 7,545 4,329
activities
Cash flows from investing activities:
Purchase of short-term investments (12,754) (8,042) (35,108)
Proceeds from sales and maturities of short-term
investments 10,711 31,027 9,499
Purchase of long-term investments (11,780) (3,681) (2,000)
Proceeds from sales and maturities of long-term
investments 4,035 1,000
-
Net capital expenditures (9,837) (10,033) (10,597)
Payments (receipts) for related party notes 1,225 (1,225)
receivable -
Payments for foundry deposits and other assets
(6,136) (4,081) (139)
Net cash provided by (used in) (24,536) 4,965 (38,345)
investing activities
Cash flows from financing activities:
Net principal payments under capital lease (550) (569) (3,164)
obligations
Proceeds from issuance of stock, net of
repurchases and costs of issuance 1,253 427 31,299
Net cash provided by (used in) 703 (142) 28,135
financing activities
Net increase (decrease) in cash and cash equivalents (1,377) 12,368 (5,881)
Cash and cash equivalents at beginning of year 21,628 9,260 15,141
Cash and cash equivalents at end of year $ 20,251 $ 21,628 $
9,260
SUPPLEMENTARY DISCLOSURE OF CASH AND NONCASH TRANSACTIONS
Non-cash investing and financing activities:
Equipment purchased under capital leases $ $ 4,770 $
726 1,122
Tax benefit related to stock options 1,205
2,418 -
Unrealized gain (loss) on available-for-
sale investments (55)
67 -
Cash payments for:
Interest 351 142 222
Income taxes 2,564
1,268 766
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
LEVEL ONE COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Level One Communications, Incorporated (the "Company")
was incorporated in California on November 26, 1985.
The Company designs, develops and markets mixed signal
application specific standard integrated circuit products
("ASSPs") for silicon connectivity solutions. The Company's
target customers are the worldwide original equipment
manufacturers of personal computers, workstations, network
access equipment, data transmission equipment and networking
equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Company prepares financial
statements based on a 52-53 week year. During the 3{rd}
Quarter of Fiscal 1996, the Company changed its fiscal year
end from the last Saturday nearest to the calendar year end
to the last Sunday nearest the calendar year end. The impact
of the change in fiscal year was immaterial to the Company's
results of operations.
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS. For purposes of the
consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Cash and cash equivalents consists of cash deposits with
banks, tax advantaged municipal bonds, and money market
instruments with insignificant interest rate risk.
INVESTMENTS. As of January 2, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). This statement requires that
investments be classified into one of three categories:
held-to-maturity, available-for-sale, or trading. It
requires that investments classified as held-to-maturity be
reported at amortized cost, that investments classified as
available for sale be reported at fair value with unrealized
gains and losses, net of related tax, reported as a separate
component of shareholders' equity, and that investments
classified as trading be reported at fair value with
unrealized gains and losses included in earnings. In July of
1995, certain of the Companies previously classified held-to-
maturity investments were sold, causing the investment
portfolio to be reclassified as being available-for-sale.
The unrealized gain at the time of the reclassification to
available-for-sale was immaterial to the financial
statements. As of December 29, 1996 and December 30, 1995,
all of the Company's investments are classified as available-
for-sale and are carried at fair value. As of December 29,
1996, and December 30, 1995, the Company's stockholders'
equity reflected an unrealized gain, net of applicable taxes,
of $12,000 and $67,000, respectively.
The amortized cost and market value of the Company's
investments available for sale as of December 29, 1996, were
as follows:
Gross Unrealized Gross Unrealized
AMORTIZED COST GAINS LOSSES MARKET
(IN THOUSANDS) VALUE
Municipal Bonds $ 20,531 $ 29 $ 3 $ 20,557
Corporate Debt and Equity Securities 2,100 -- 6 2,094
$ 22,631 $ 29 $ 9 $ 22,651
The amortized cost and market value of the Company's
investments available for sale as of December 30, 1995, were
as follows:
Gross Unrealized Gross Unrealized
AMORTIZED COST GAINS LOSSES MARKET VALUE
(IN THOUSANDS)
Municipal Bonds $ 12,287 $ 107 $ -- $ 12,394
Corporate Debt and Equity Securities 518 6 -- 524
$ 12,805 $ 113 $ -- $ 12,918
The amortized cost and market value of the Company's
investments, by maturity, at December 29, 1996, were as
follows:
(IN THOUSANDS) AVAILABLE-FOR-SALE
DECEMBER 29, 1996 Amortized Cost Market Value
Due in one year or less $ 10,212 $ 10,211
Due after one year through five years 12,419 12,440
$22,631 $ 22,651
Proceeds from the sale of available-for-sale investments
during fiscal 1996 and 1995 were $14.7 million and $1.0
million, respectively. The cost basis used in determining
realized gains and loses is specific identification. Gross
gains of $1,000 and gross losses of $31,000, and gross gains
of $9,000, with no losses, were realized on those sales in
1996 and 1995, respectively.
FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair
value disclosures for financial instruments: For cash and
cash equivalents, accounts receivable, trade accounts
payable, and related party notes receivable, the carrying
value is a reasonable estimate of fair value. For
investments, fair values are based on quoted market prices or
dealer quotes.
INVENTORIES. Inventories are stated at the lower of
cost (first-in, first-out) or market and include materials,
labor and manufacturing overhead costs.
Inventories as of December 29, 1996, and December 30,
1995, consisted of the following:
(IN THOUSANDS) 1996 1995
Raw materials $ 32 $ 26
Work-in-process 7,948 14,281
Finished goods 2,010 1,465
$ 9,990 $15,772
PROPERTY AND EQUIPMENT. Property and equipment are
recorded at cost. Depreciation is provided on a straight-
line basis over the following estimated useful lives:
Machinery and equipment 3-5 years
Furniture and fixtures 3-5 years
Leasehold improvements 6-10 years
Property and equipment, net is comprised of the
following:
(IN THOUSANDS) 1996 1995
Machinery and equipment $25,254 $22,557
Furniture and fixtures 11,899 6,059
Leasehold improvements 3,485 2,185
40,638 30,801
Less-Accumulated depreciation (16,962) (10,363)
$ 23,676 $ 20,438
DEFERRED LEASE EXPENSE. Lease payments are
recognized as expense on a straight-line basis over
the term of the lease.
PATENT COSTS. Patent costs include direct
costs of obtaining the patents. Upon patent
approval, patent costs are amortized over the
estimated useful life of the patent using the
straight-line method.
REVENUE RECOGNITION. Product sales are
generally recognized upon shipment of product.
However, the Company defers recognition of revenues
and gross margin from sales to stocking
distributors until such distributors resell the
related products to their customers. The Company
has deferred recognition of gross margin amounting
to $864,000, $1,300,000, and $255,000 as of
December 29, 1996, December 30, 1995, and December
31, 1994, respectively. For 1996, sales to
Hewlett-Packard were 11.2% of total sales. For
1995 and 1994, no single customer accounted for
more than 10% of revenues.
Export sales as a percentage of revenues were
39%, 33%, and 22% for 1996, 1995, and 1994,
respectively.
The Company from time to time enters into
development and license agreements with certain
customers related to customer-specific
applications. Related costs are expensed as
incurred and are included in research and
development expenses, while revenue for non-
recurring engineering contracts is deferred until
contract milestones are met. During 1996, 1995,
and 1994, the Company recognized revenues of
$220,000, $155,000, and $1.4 million, respectively,
in accordance with the contract milestones in the
Company's agreements.
The Company earns royalty income from products
sold by licensees and recognizes that income in the
period that income is earned.
Revenues are comprised of the following:
(IN THOUSANDS) 1996 1995 1994
Product sales $111,392 $77,417 $45,104
Royalties, licenses and non-
recurring engineering revenue 595 601 1,721
Total revenues $111,987 $78,018 $46,825
INCOME TAXES. The Company accounts for income
taxes pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). This statement provides for a
liability approach under which deferred income
taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes
become payable.
EARNINGS PER SHARE. Earnings per share is
based on the weighted average common shares
outstanding and dilutive common equivalent shares.
Common equivalent shares include dilutive stock
options and warrants when appropriate. Dual
presentation of primary and fully diluted earnings
per share is not shown on the face of the
statements of income because the differences are
insignificant.
RECLASSIFICATIONS. Certain prior year amounts
on the Consolidated Financial Statements have been
reclassified to conform to the fiscal 1996
presentation.
3. SHORT-TERM BORROWINGS
The Company has a $10 million revolving line
of credit with a bank. The Company compensates the
bank for credit facilities by paying annual
administrative fees. The balance of the Company's
short-term borrowings as of December 29, 1996, and
December 30, 1995, was zero.
4. LEASES
The Company conducts its operations using
leased facilities and equipment under both capital
and operating leases. Minimum future lease
payments as of December 29, 1996, are as follows:
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
YEAR ENDING
1997 $ 1,415 $ 7,791
1998 1,284 6,982
1999 1,252 6,587
2000 974 6,175
2001 74 3,316
Thereafter -- 7,205
$ 4,999 $ 36,056
Less-Interest portion (7.38% to 12%) (676)
Capital lease obligations 4,323
Less-Current portion (1,129)
Long-term portion $ 3,194
Rent expense for operating leases was
approximately $7.4 million, $3.5 million, and $1.6
million for the years ended December 29, 1996,
December 30, 1995, and December 31, 1994.
5. INCOME TAXES
The provision for income taxes consists of:
(IN THOUSANDS) 1996 1995 1994
Current provision for income taxes
State $ 361 $ 1,353 $ 1,337
Federal 4,609 2,660 452
Deferred provision (benefits)
State 696 (675) (466)
Federal 1,089 (1,795) --
Total tax provision $ 6,755 $ 1,543 $ 1,323
The tax benefits associated with nonqualified
stock options reduced taxes currently payable by
$1,205,000 and $2,418,000 in 1996 and 1995,
respectively. Such benefits were recorded as an
increase to common stock.
Deferred tax assets and liabilities are
determined based on the differences between the
financial reporting and tax basis of assets and
liabilities. They are measured by applying the
enacted tax rates and laws in effect for the years
in which such differences are expected to reverse.
The significant components of the Company's
deferred tax assets and liabilities as of December
29, 1996, and December 30, 1995, are as follows:
(IN THOUSANDS) 1996 1995
Deferred tax assets:
Inventory reserves $ 397 $ 415
Deferred income on shipments to distributors 374 532
Accounts receivable reserve 83 145
Deferred lease expense 265 345
Inventory Unicap adjustment 345 303
Accrued vacation 256 204
AMT credit carryforwards 365 497
Capitalized R&D 537 1,780
Other 275 187
Total deferred taxes $ 2,897 $ 4,408
Deferred tax liabilities:
Accelerated depreciation $ (393) $ (119)
Net deferred income tax assets $ 2,504 $ 4,289
The reconciliation of the federal tax rate to
the effective tax rate is as follows:
1996 1995 1994
Statutory federal tax rate 34.0% 34.0% 34.0%
Reversal of valuation allowance -- (21.0) --
Net operating loss deduction -- -- (29.1)
Foreign taxes & foreign sales corporation (4.7) (3.0) .3
State taxes 3.3 5.7 9.0
Non-deductible acquisition costs 5.5 2.2 --
Other (.5) (4.8) --
Effective income tax rate 37.6% 13.1% 14.2%
6. STOCK OPTION AND PURCHASE PLANS
The Company has three stock option plans, the
1985 Stock Option Plan (the "1985 Plan"), the 1993
Stock Option Plan (the "1993 Plan"), the San
Francisco Telecom Stock Option Plan (the "SFT
Plan"), and an employee stock purchase plan (the
"ESPP"). No further options may be granted under
either the 1985 Plan or the SFT Plan, and 400,242
options previously granted under these plans remain
outstanding. The Company applies Accounting
Principles Board Opinion No. 25 and related
interpretations in accounting for its plans.
Accordingly, no compensation cost has been
recognized for its stock option plans. Had
compensation cost for these plans been determined
consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), the Company's net income
and earnings per share would have been reduced to
the following pro forma amounts:
(IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995
Net income
As reported $ 11,213 $ 10,258
Pro forma $ 9,325 $ 9,549
Earnings per share
As reported $ 0.82 $ 0.76
Pro forma $ 0.72 $ 0.75
The fair value of each option grant has been
estimated on the date of the grant using the Black-
Scholes option-pricing model with the following
assumptions used for grants in 1996 and 1995. In
calculating compensation cost: risk-free interest
rates of 6.15 and 5.90 percent, respectively, and
expected stock price volatility of 70%, an expected
life of six years and no dividend payments for both
1996 and 1995.
Because the SFAS 123 method of accounting has not
been applied to options granted prior to January 1,
1995, and due to the nature and timing of option
grants, the resulting pro forma compensation cost
may not be representative of that to be expected in
future years.
The Company has authorized the issuance of up to
450,000 shares of stock to its full-time employees
under the ESPP. The Company has sold 22,137 shares
and 15,079 shares as of December 29, 1996, and
December 30, 1995, respectively, and has sold a
total of 44,961 shares through December 29, 1996.
The company sells shares in two six-month offering
periods per year. The price is 85% of the market
price of the stock on the start date or end date of
each offering period, whichever is lower.
The Company may grant options for up to 3,050,000
shares under the 1993 Plan. The Company has
granted options on 1,777,850 shares through
December 29, 1996. Under the 1993 Plan the option
exercise price equals the stock's closing market
price on date of grant.
The following table presents the aggregate options
granted, forfeited, and exercised under the 1985
Plan, 1993 Plan and SFT Plan for the years ended
December 29, 1996, December 30, 1995, and December
31, 1994, at their respective weighted average
exercise prices.
(SHARES IN THOUSANDS) 1996 1995 1994
Wtd. Avg. Wtd. Avg. Wtd. Avg.
SHRS EXER. PRICE SHRS EXER. PRICE SHRS EXER. PRICE
Outstanding, beginning
of period 1,489 $ 11.41 1,090 $ 5.16 941 $ 1.67
Granted
Price = Fair Value 722 21.59 690 17.97 272 15.85
Price < Fair Value -- -- 25 .67 4 3.86
Exercised (174) 5.55 (217) 1.41 (74) 1.90
Canceled (135) 20.16 (99) 7.50 (53) 2.72
Outstanding, end of 1,902 $ 15.19 1,489 $11.41 1,090 $ 5.15
period
Exercisable, end of 482 367 334
period
The following table summarizes information about
options outstanding under the 1985 Plan, 1993 Plan
and SFT Plan at December 29, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
(SHARES IN THOUSANDS) Shares Outstanding Weighted Avg. Shares
As of 12/29/96 Remaining Weighted Avg. Exercisable As of Weighted Avg.
Range of Exercise Prices Contractual Life Exercise Price 12/29/96 Exercise Price
$ 0.38 $ 0.67 390 5.96 $ 0.40 344 $ 0.39
1.00 16.50 559 8.00 15.52 70 15.01
16.75 19.75 480 8.67 17.57 31 17.85
19.75 36.00 473 9.13 24.58 37 22.22
$ 0.38 $ 36.00 1,902 8.03 $ 15.19 482 $ 5.29
Options for all plans are exercisable in
installments at intervals determined by the Board
of Directors, not to exceed ten years and one day.
7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Tax Deferred Savings
Plan (the "401(k) Plan") under which eligible
employees may elect to have a portion of their
salary deferred and contributed to their accounts
under the 401(k) Plan. Under the 401(k) Plan, the
Company will contribute a minimum of 1% and up to a
maximum of 3% of an eligible employee's annual
gross salary to the employee's account under the
401(k) Plan. For the fiscal years ended December
29, 1996, December 30, 1995, and December 31, 1994,
the Company has contributed $420,000, $315,000, and
$184,000, respectively, to the 401(k) Plan.
8. INCENTIVE PLANS
The Company has reserved 90,000 shares of
Common Stock for issuance to employees pursuant to
a stock bonus plan to be agreed upon by the Board
of Directors. As of December 29, 1996, no shares
had been issued.
Beginning in January 1994, the Company
implemented an incentive compensation plan. The
Company's incentive compensation plan provides for
incentive compensation for substantially all
employees of the Company based upon the achievement
of specified operating and performance results.
Incentive compensation totaled $1,791,000,
$833,000, and $497,000 for 1996, 1995 and 1994,
respectively.
9. STOCK WARRANTS
The Company has issued warrants to independent
sales representatives to purchase up to 43,879
shares of its Common Stock with exercise prices
ranging from $2.33 to $21.00 per share. As of
December 29, 1996, an aggregate of 13,208 shares
has been issued upon exercise of warrants.
In connection with securing a loan from
investors in 1992, the Company issued a warrant to
purchase 202,746 shares of Common Stock at an
exercise price of $1.54 per share. The warrant was
exercised January 16, 1997, for 192,754 shares, and
the balance was surrendered, on a net appreciation
basis, in an amount equal to the exercise price.
10. PREFERRED STOCK
No shares of Preferred Stock are currently
outstanding, although the Company's Board of
Directors is authorized to issue up to 10,000,000
shares of Preferred Stock.
11. RELATED PARTY TRANSACTIONS
During 1996, 1995 and 1994, the Company paid
fees of approximately $129,600, $130,363, and
$140,000 respectively, to members of the Board of
Directors for consulting services. Services
performed included the development of marketing and
sales strategies and services relating to
engineering matters.
During the third quarter of 1996, in
connection with a third-party financing for Maker
Communications, Inc. ("Maker"), the Company sold a
portion of its minority interest in Maker for an
aggregate of approximately $675,000. This sale
resulted in a one-time gain recorded as "Other
Income" in the accompanying Consolidated Statements
of Income. The Company continues to hold a
minority interest in Maker and to license certain
Maker technology. Other contractual rights and
obligations, including the Company's obligation to
provide certain loan financing to Maker, were
terminated in the transaction. Following the
transaction, Maker repaid the Company approximately
$2.9 million, the total balance under an
outstanding note.
12. BUSINESS AND TECHNOLOGY ACQUISITIONS
During December 1996, the Company acquired
Silicon Design Experts, Inc. (SDE). In connection
with the transaction, the Company issued an
aggregate of 86,730 shares of its common stock
valued at $3,000,000 to SDE's shareholders, and
agreed to issue additional shares of Common Stock
in the future to SDE's shareholders and employees,
with the amount to be contingent upon the extent of
sales of products developed by SDE and Level One's
stock price. The total purchase price of
$3,000,000 was allocated as follows: $500,000 to
goodwill, and $2,500,000 for purchased research and
development. The purchased research and
development of $2,500,000 was reported as a one-
time charge. The transaction was accounted for
under the purchase method of accounting.
Accordingly, SDE's operating results after the date
of the acquisition are included in the Consolidated
Statements of Income.
On June 6, 1995, the Company acquired San
Francisco Telecom, Inc. ("SFT"). SFT operates as a
wholly-owned subsidiary of the Company. In
connection with the transaction, the Company issued
an aggregate 135,360 shares of its common stock to
SFT's shareholders, assumed existing SFT stock
options, which will be exercisable for a total of
24,951 shares of Common Stock, and agreed to issue
additional shares of Common Stock in the future to
SFT's shareholders and employees, with the amount
to be contingent upon the extent of sales of
products developed by SFT. The transaction was
accounted for under the purchase method of
accounting. Accordingly, SFT's operating results
after the date of the acquisition are included in
the Consolidated Statements of Income.
13. RISK FACTORS
The Company does not manufacture the wafers
used for its products. To date, the Company's
wafers have been manufactured by foundries located
in the United States, Europe, and Asia. The
Company depends upon these suppliers to produce
wafers at acceptable yields and to deliver them to
the Company in a timely manner at competitive
prices. The Company may sustain an adverse impact
on operating results from problems with the cost,
timeliness, yield and quality of wafer deliveries
from suppliers. From time to time, the available
industry-wide foundry capacity fluctuates
significantly. During periods of constrained
supply, the Company may experience difficulty in
securing an adequate supply of wafers, and/or its
suppliers may increase wafer prices which must be
paid by the Company. The Company's operating
results depend in substantial part on its ability
to maintain and to increase the capacity available
to it from existing or new foundries. Although the
Company believes that it has planned appropriately
to meet customer demand, there can be no assurances
that unforeseen demand or unforeseen changes in the
conditions under which the Company does business
with its foundries will not have a material impact
on the Company's business in the future.
The Company is also dependent upon third-party
assembly companies that package the semiconductor
die. The Company depends upon these suppliers to
produce products in a timely manner and at
competitive prices. The Company may sustain adverse
financial impact from problems with the cost,
timeliness, yield and quality of product deliveries
from these suppliers.
The Company relies upon patent, trademark,
trade secret and copyright law to protect its
intellectual property. There can be no assurance
that such intellectual property rights can be
successfully asserted in the future or will not be
invalidated, circumvented or challenged.
Litigation, regardless of its outcome, could result
in substantial cost and diversion of resources of
the Company. Any infringement claim or other
litigation against or by the Company could have a
material effect on the Company's financial
condition and results of operations. In November
1995 the Company commenced infringement litigation
against a competitor. There are no other material
pending legal proceedings, other than routine
litigation incidental to the Company's business, to
which the Company is a party or of which any of its
property is the subject.
14. FOUNDRY COMMITMENTS
The Company's current wafer requirements are
supplied primarily by six foundries. During 1995,
the Company entered into five-year agreements with
three of its suppliers for committed foundry
capacity in consideration of equipment financing or
a cash deposit. During 1995 and 1996, the Company
provided an aggregate of $14.6 million in capital
equipment financing and/or cash deposits to these
three foundries in connection with such activities.
The Company has remaining funding commitments not
to exceed $18,000,000.
SCHEDULE II
LEVEL ONE COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
YEAR ENDED DECEMBER 29, 1996:
Allowance for doubtful accounts 300 --- 144 156
YEAR ENDED DECEMBER 30, 1995:
Allowance for doubtful accounts 90 210 --- 300
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful accounts 85 5 --- 90
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE COUNTY OF SACRAMENTO, STATE OF
CALIFORNIA, ON THE 29TH DAY OF MARCH, 1996.
LEVEL ONE COMMUNICATIONS, INCORPORATED
By: /S/ ROBERT S. PEPPER
Robert S. Pepper
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each of the officers and directors of Level
One Communications, Incorporated whose signature
appears below hereby constitutes and appoints
Robert S. Pepper and John Kehoe, and each of them,
their true and lawful attorneys-in-fact and agents,
with full power of substitution, each with power to
act alone, to sign and execute on behalf of the
undersigned any amendment or amendments to this
Annual Report, and does hereby ratify and confirm
all that said attorneys-in-fact and agents shall do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES
EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED
BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED.
Dated: March 29, 1996
/S/ ROBERT S. PEPPER
Robert S. Pepper,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
AND CHAIRMAN OF THE BOARD OF DIRECTORS
Dated: March 29, 1996
/S/ THOMAS J. CONNORS
Thomas J. Connors,
DIRECTOR
Dated: March 29, 1996
Paul Gray,
DIRECTOR
Dated: March 29, 1996
/S/ MARTIN JURICK
Martin Jurick,
DIRECTOR
Dated: March 29, 1996
/S/ HENRY KRESSEL
Henry Kressel,
DIRECTOR
Dated: March 29, 1996
/S/ JOSEPH P. LANDY
Joseph P. Landy,
DIRECTOR
Dated: March 29, 1996
/S/ JOHN KEHOE
John Kehoe,
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
(PRINCIPAL ACCOUNTING OFFICER)
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EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
Registrant has four wholly-owned subsidiaries,
Level One Communications International,
Incorporated, which is incorporated in Barbados,
and which does business under the name Level One
Communications International, Incorporated; San
Francisco Telecom, Inc., which is incorporated in
California, and which does business under the name
San Francisco Telecom, Inc.; Silicon Design
Experts, Inc. California, which is incorporated in
California and does business under the name Level
One Communications, Incorporated; and Level One
Communications Europe SARL, which is incorporated
in France and does business under the name Level
One Communications Europe.
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EXHIBIT 24.1
LEVEL ONE COMMUNICATIONS, INCORPORATED
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby
consent to the incorporation of our report included
in this Form 10-K, into the Company's previously
filed Registration Statements File Nos. 33-65810,
33-72398, 33-93360, 33-95590 and 333-06300.
/S/ ARTHUR ANDERSEN LLP
Sacramento, California
March 28, 1997
S3