UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended September 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Commission File Number ____________________
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SAWTEK INC.
(Exact name of registrant as specified in its charter)
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Florida 59-1864440
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization) 327073
1818 S. Highway 441, Apopka, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (407) 886-8860
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0005 Par Value
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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 31, 1996 was:
Common Stock, $.0005 par value: $194,470,565
There were 19,854,102 shares of the registrant's Common Stock outstanding as of
October 31, 1996.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the registrant for the
registrant's Annual Meeting of the Shareholders for the fiscal year ended
September 30, 1996, which definitive proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the
registrant's fiscal year end of September 30, 1996, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
PART I
Page
Item 1. Business........................................................ 3-18
Item 2. Properties...................................................... 18
Item 3. Legal Proceedings............................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............. 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters. .......................................... 19
Item 6. Selected Financial Data......................................... 19-21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 21-27
Item 8. Financial Statements and Supplementary Data..................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 27
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 28-29
Item 11. Executive Compensation.......................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 30
Item 13. Certain Relationships and Related Transactions.................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 30
Exhibit Index................................................... 30-33
Signatures...................................................... 34
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PART I.
Except for the historical information contained herein, the discussion in this
Form 10-K contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-K
should be read as being applicable to all related forward-looking statements
wherever they appear in this Form 10-K. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Form 10-K.
ITEM 1. BUSINESS
General
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Sawtek Inc. (the "Company") designs, develops, manufactures and markets
a broad range of electronic signal processing components based on surface
acoustic wave ("SAW") technology. The Company's primary product focus is custom
designed, high performance bandpass filters, resonators, delay lines,
oscillators and SAW-based subsystems. These products are used in a wide array of
microwave and radio frequency ("RF") systems, such as Global System for Mobile
communications ("GSM") and Code Division Multiple Access ("CDMA") based digital
telephone systems, digital microwave radios, wireless local area networks
("WLAN"), cable television equipment and a variety of defense and satellite
systems. The Company's products offer key advantages over products based on
alternative technologies and address rapidly growing needs in
telecommunications, data communications, video transmission, military and space
systems and other markets. The Company's proprietary computer aided design
("CAD") and analysis software tools support rapid and highly accurate SAW device
design and simulation, enabling Sawtek and its customers to achieve timely new
product development. The Company's commercial customer base, which accounts for
85% of net sales, includes leading telecommunications equipment producers, such
as Alcatel, Ericsson, LGIC (Lucky GoldStar), Lucent Technologies, Motorola,
Nokia, Omnipoint and Qualcomm.
Industry Background
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Electronic systems that transmit or receive voice, data or video must
contain various signal processing components such as bandpass filters,
resonators, delay lines and oscillators. These components are used to modify and
condition the desired signals while rejecting unwanted signals that cause
distortion and interference. The frequency at which these systems actually
transmit and receive information is referred to as the microwave or radio
frequency. However, before the information can be used, the signal must
generally be converted to a lower intermediate frequency ("IF") and finally to
the lowest system frequency, commonly referred to as baseband. While the
microwave and RF frequencies at which voice, data and video systems operate are
generally dictated by regulatory bodies, such as the FCC, system designers have
considerable flexibility in selecting one or more IF frequencies which suit the
requirements of a specific application and design approach. Consequently, IF
components, particularly filters, must generally be developed specifically for
each customer and application, even though they frequently must be produced in
large quantities. The performance demands placed on these components by
increasingly complex systems have changed dramatically over the past few years,
particularly in wireless applications.
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The wireless communications industry is experiencing significant
worldwide growth. Cost reductions and technological improvements in such
wireless communications products as cellular, personal communications
services/networks ("PCS/PCN"), global satellite telephones and wireless data
systems are contributing to this growth. Wireless communications systems can
offer the functional advantages of wired communication systems without the
costly and time consuming development of an extensive wired infrastructure,
which is of particular importance in developing parts of the world. New digital
telecommunications standards and technology are rapidly emerging which will
provide the performance improvements necessary to address overcrowding of
existing cellular systems and to provide increased functionality. These include
GSM, adopted as the digital standard throughout Europe and many other countries,
and CDMA, an approach being commercialized by Qualcomm that is gaining
acceptance in the United States and worldwide for implementing cellular, PCS/PCN
and wireless local-loop ("WLL") networks. As business and consumer demands for
wireless communications subscriber services grow, service providers must offer
emerging digital handheld subscriber products and expand the associated
infrastructure. These factors, coupled with regulatory changes in the United
States and abroad, as well as advances in wireless communications technology,
are leading to substantial worldwide growth in existing wireless communications
systems and the emergence of new wireless markets and applications.
Telecommunications systems including cellular and PCS/PCN are rapidly
evolving from traditional analog to more efficient digital modulation techniques
to improve system performance and capacity. These emerging digital approaches
call for a wider range of bandwidths, higher frequencies and more precise
bandwidth control. Furthermore, for highly bandwidth-efficient digital
transmission systems to operate properly, all frequency components of the signal
must pass through the system with essentially the same time delay or severe
distortion may result.
The development of RF integrated circuits, coupled with surface mount
packaging ("SMP") technology, has facilitated a significant reduction in the
size of portable wireless products. These developments have, in turn, driven the
demand for rugged, miniature, surface mount IF signal processing components,
particularly for use in handheld applications such as cellular telephones.
Traditional signal processing technologies include lumped element
("LC"), ceramic and bulk acoustic wave ("BAW") crystal filters, resonators and
oscillators. While these basic approaches have been improved to address changing
demands, the improvements have been largely incremental and evolutionary, rather
than revolutionary. It is generally difficult to build traditional LC filters
with the high selectivity required by many new systems. In addition, most LC
filters tend to drift in frequency and degrade in performance with changes in
operating temperature. Conventional BAW crystal filters are difficult to build
in the higher IF frequency ranges required for many emerging communications
applications because the crystal elements of these filters must be made
increasingly thinner, resulting in a device that is both delicate and difficult
to manufacture. Many conventional types of filters, including both BAW crystal
and LC, which are suitable for filtering analog signals, may produce significant
distortion when used to filter digital signals.
Another inherent limitation of these traditional filter technologies is
the inability to adequately reduce their physical size to suit many emerging
applications. The SAW solution to signal processing represents a fundamentally
different approach, relying on the propagation and interaction of acoustic waves
on the surface of a piezoelectric crystal. SAW technology offers a number of key
advantages over current competing technologies, including highly precise
frequency control and selectivity, reduced size and weight, high reliability and
environmental stability and the ability to pass RF signals without significant
distortion. Perhaps the most significant benefit inherent in SAW technology is
the relative ease in producing large quantities of high precision components
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that are comparatively small in size. SAW devices can also be manufactured at
the higher IF frequency ranges required for emerging systems. The range of
signal bandwidths that can be accommodated with SAW technology is quite large,
permitting SAW components to address almost all viable applications.
As the use of wireless communications systems increases and new
wireless applications develop, the need for large quantities of IF signal
processing components that meet demanding performance, size and reliability
requirements grows. SAW technology is an enabling solution, possessing all of
these attributes, with applications in nearly all wireless communications
systems.
Markets and Applications
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SAW devices may be utilized in most applications which transmit or
receive microwave or RF signals. Sawtek markets and sells bandpass filters,
resonators, delay lines, oscillators and SAW-based subsystems to both domestic
and international original equipment manufacturers ("OEMs") that integrate these
products into receivers, transmitters and other equipment for commercial,
industrial, military and space applications. Sawtek provides products to the
following markets: telecommunications, data communications, video transmission,
military and space systems and other markets.
Telecommunications: The Company's telecommunications product offerings consist
primarily of IF bandpass filters for basestation equipment used in cellular,
PCS/PCN, cordless and WLL applications. Additional applications include
basestation repeaters and global satellite systems. The Company offers over 50
custom SAW components to serve these market applications. The Company is
leveraging its expertise in basestation applications to expand into subscriber
applications, such as GSM, CDMA, DECT and WLL networks.
- Cellular: In cellular applications, calls are placed through handheld
subscriber telephones by establishing a connection with a basestation via RF
channels allocated for this service in the 900 MHz frequency range. The Company
supplies IF bandpass filters for use in digital CDMA and GSM cellular
basestations, and for certain handheld subscriber applications.
- PCS/PCN: PCS/PCN are systems which operate in a frequency band of
1,800 to 2,000 MHz and provide a broad range of emerging telecommunications
services. The Company maintains a leadership position by supplying IF bandpass
filters to GSM and CDMA-based PCS/PCN basestation equipment, and recently began
shipments to subscriber OEMs.
- Cordless: DECT is the emerging European standard for voice and data
communications employing a third generation cordless telephone technology. The
Company supplies bandpass filters to DECT basestation and subscriber equipment
manufacturers.
- Satellite: A number of low earth orbiting ("LEO") satellite
telecommunications systems have been proposed by major communications companies
and consortia. The Company is a supplier of satellite and ground-based SAW
components to several of the developing systems. Sawtek is a leading producer of
high reliability, space qualified SAW components and is well positioned for
these applications.
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Data Communications: The data communications market encompasses a number of
applications involving the transmission and reception of data through wired,
wireless or satellite networks. As the usage of these networks increases, OEMs
are pursuing broader bandwidths and faster data rates to accommodate larger
quantities of data, transmitted in a shorter time span. Also, data
communications equipment manufacturers seek to improve data integrity by
minimizing a performance parameter known as "bit error rate." OEMs typically
specify custom SAW filters based on the system's bandwidth, data rate and bit
error rate requirements. As a result, the Company designs unique products for
each OEM. International standards are being adopted to meet these requirements,
and the Company intends to support both standard and custom requirements.
- Digital Radio: Digital radios were initially developed for the
military as a means to transmit secure data. This technology has expanded to
both commercial and industrial data and voice applications, including cellular
basestation radio links. SAW filters are typically utilized in the IF sections
as part of these conversion processes. Sawtek offers over 100 designs to support
these applications, including filters from the Company's three standard product
families.
- Wireless Local Area Networks: WLANs enable desktop and laptop
computer users to transmit and receive data via wireless microwave and RF links.
The SAW IF filter is typically integrated into a credit-card-sized circuit board
modem that slides into a PCMCIA slot. Sawtek has generated multiple custom
designs and intends to continue its support of this expanding application.
- Handheld Data Terminals: The Company supplies custom SAW products to
customers that build handheld equipment for a variety of data transmission
applications, including point-of-sale, inventory and tracking. Sawtek offers
numerous designs for these applications.
- Global Positioning System: Global positioning systems ("GPS") are
used in military, industrial and consumer applications to determine specific
geographic locations. Although GPS began as a military system to accurately
locate troops, aircraft, ships and other vehicles in four dimensions (latitude,
longitude, altitude and time), GPS applications have expanded to include
location and direction finding systems for recreational use as well as various
industrial applications, including a new generation of electronic survey
equipment. Sawtek currently sells to various OEMs that integrate SAW components
into portable and handheld GPS receivers.
Video Transmission: OEM products utilizing relatively low frequency SAW filter
designs for cable television ("CATV") head-end equipment are purchased worldwide
by cable operating companies. Sawtek actively manufactures over 30 custom SAW
devices to serve the various worldwide standards required by the video
transmission market. Emerging markets within the video transmission market
include high definition television ("HDTV") and interactive television. The
Company has designed custom products for both of these emerging markets and is
involved in limited production for interactive television applications.
Military and Space: Sawtek has been a provider to military and space systems
markets since the Company's inception in 1979. Sawtek's component designs can be
found in major applications that include electronic warfare, defense
communications, military and commercial space systems, radar and surveillance.
- Electronic Warfare: The Company supplies products for various
electronic warfare applications which include, among others, radar and
communication jamming and identification friend or foe ("IFF") systems.
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- Defense Communications: Defense communications equipment is used to
transmit and receive secure voice or data information. This equipment is
implemented in a variety of applications, including handheld battlefield radios,
command center communications and air, ship and vehicle communications. The
Company supplies numerous SAW designs to customers that support the defense
communications marketplace.
- Space: The Company has qualified over 100 high reliability SAW
components for satellite hardware applications. Within the military satellite
equipment market, most SAW devices are installed in classified hardware where
the application is unknown to the Company. Weather satellites, GPS satellites,
including those with nuclear blast detection capability, and various military
communications satellites utilize Sawtek's devices. The Company is also
delivering SAW components for various telecommunications satellite systems that
will further expand worldwide commercial wireless communications capabilities.
- Radar and Surveillance: Applications for SAW devices in radar
equipment include weather, air traffic control, ground tracking or mapping and
airborne threat detection and targeting systems. The Company also supplies SAW
components for use in military surveillance equipment. These applications
include enemy ground troop movement detection, communications detection and
submarine detection and tracking.
Other Markets: The Company designs and produces SAW components for additional
markets, including commercial avionics, test equipment and identification and
security systems. Commercial avionics applications include "on board" collision
avoidance transponders that transmit important location and identification
information to airport control towers and radar for line-of-flight weather
information. Sawtek's products are utilized in various test equipment
applications for circuit design and system performance analysis, such as signal
generators, spectrum analyzers and cellular telephone system test equipment. In
the identification and security industry, the Company's products enable OEMs to
provide totally passive SAW RF identification labels (or tags) for a variety of
applications, such as toll road vehicle identification and personnel monitoring.
The Company also markets three families of standard SAW filters and offers these
products for sale through a distribution network in North America and Europe.
Customers
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Sawtek has a highly diversified customer base with only two customers,
Ericsson and Lucent Technologies that each accounted for more than 10% of the
total net sales in fiscal 1996. The Company's top ten customers accounted for
approximately 68% of FY96 net sales and 60% of FY95 net sales. The loss of
these customers could have a material adverse effect on the Company's business,
operating results and financial condition. There is no assurance that the
Company will obtain future business from these customers.
Products
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The Company has produced more than 1,500 unique SAW products at
frequencies ranging from 10 MHz to nearly 3 GHz. Products are organized into six
product categories: bandpass filters, resonators, delay lines, oscillators,
SAW-based subsystems and SAW chemical sensor elements. While some product
standardization exists, the vast majority of the Company's products are custom
developed for an individual application or customer, for which a non-recurring
engineering ("NRE") fee is generally charged.
Bandpass Filters: Sawtek currently offers three types of SAW bandpass filters:
bi-directional transversal, low loss transversal and coupled resonator filters.
Numerous products of each type are available depending on the application and
specification. Prices for the Company's filter products vary widely depending
upon the product specifications, production volume and market application.
Surface mount filters for subscriber applications sell for unit prices under $10
while high precision filters for military applications may sell for hundreds of
dollars each.
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- Bi-directional Transversal Filters: This class of filters represents
the most widely used application of SAW technology, and the Company offers over
800 products of this type. Because these filters operate over a fairly wide and
useful frequency range (10 MHz to 2.5 GHz) and a relatively large range of
possible fractional bandwidths (0.1% to 67% of the center frequency), they are
the filter component of choice in many modern communications systems. The
largest emerging market for this product is in support of cellular and PCS/PCN
infrastructure and handheld subscriber applications. The Company currently
produces significant quantities of these filters for use in both the transmit
and receive sections of CDMA-based infrastructure systems. Numerous bi-direction
filter products, supplied in low profile surface mount packages, have also been
developed and produced for high volume subscriber applications such as
CDMA-based cellular and PCS/PCN, WLL, WLAN and handheld data terminals.
- Low Loss Transversal Filters: Sawtek produces over 180 high
performance, low loss transversal filters for those applications where system
noise figure, dynamic range or power consumption cannot accommodate the higher
loss that is typically associated with bi-directional transversal filters. Low
loss transversal filters are used in both infrastructure and subscriber
applications in systems such as GSM digital cellular systems, DECT, wireless
handheld data terminals and WLANs.
Sawtek has developed a new line of standard, low loss filter products
at 70 MHz in low profile, surface mount packages. These filters are suitable for
commercial microwave point-to-point radios, very small aperture satellite
terminals ("VSAT") and other commercial applications where wideband, low loss
SAW filters would simplify system architecture and reduce size and power
consumption.
- Coupled Resonator Filters: This broad class of SAW filters includes
in-line coupled, waveguide coupled and combined mode resonator filters and the
Company offers over 70 products of this type. Like transversal SAW filters,
coupled resonator filters can be built over a wide range of frequencies (50 MHz
to 1.5 GHz) but are limited to narrow fractional bandwidths (0.02% to 0.3% of
the center frequency). They are ideally suited to such narrowband applications
as pre-selector filters, oscillator spurious suppression filters, timing
recovery filters and cellular telephone filters. The Company currently supplies
filters of this type for use in GSM, PCS/PCN and numerous other commercial and
military telecommunications systems.
Resonators: The Company currently offers two types of resonators, SAW and
surface transverse wave ("STW"). More than 100 resonator products, operating
from 100 MHz to 1.5 GHz, are available and are generally used as stable, high Q
frequency control elements that determine the operating frequencies of
oscillators. SAW resonators can operate fundamentally at much higher frequencies
than BAW resonators, a feature that significantly reduces system complexity and
enhances system performance. The Company generally chooses to offer these
products for use in high performance commercial, military and space
applications, where the demand for more stringent electrical requirements is not
served by high volume SAW resonator manufacturers. In addition to offering these
products as individual components, Sawtek's resonators are also used by the
Company in the manufacture of its high performance oscillator products.
Delay Lines: Sawtek currently offers more than 190 SAW delay line products,
consisting of non-dispersive, dispersive and multi-tap delay line configura-
tions. Sawtek's delay line products are primarily used in military communica-
tions and electronic warfare applications, such as pulse expansion and
compression radar. However, they also find uses in commercial applications,
such as commercial avionics collision avoidance transponders, RF identification
tag systems and wireless handheld data terminal products. All SAW delay lines
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make use of the fact that a surface acoustic wave travels 100,000 times more
slowly than an electromagnetic wave. This permits SAW delay lines to be much
smaller for a given signal delay than those realized with most other competing
technologies. The useful ranges of center frequencies and fractional band-
widths, as well as typical unit prices for this product type are similar to the
Company's bi-directional filter products.
Oscillators: Sawtek currently offers over 100 fixed frequency and voltage
controlled oscillators based on both SAW and STW resonator technologies.
Oscillators are used to generate a pure RF tone or signal. This signal often
determines, directly or through frequency multiplication, the final operating
frequency of the system in which it is used. Oscillators, in conjunction with
additional circuitry, are also used in converting or mixing RF signals from one
frequency to another. SAW oscillators utilize the inherent benefits of SAW
resonators, with additional hybrid or discrete circuitry, to yield products that
operate over a range of 100 MHz to 1.5 GHz. The Company's oscillators are used
in high performance commercial and military applications such as
instrumentation, avionics and electronic warfare. The Company's oscillator
products are typically priced between $200 and $1,000 with certain specialized
models for military and space applications selling for substantially more.
SAW-based Subsystems: The Company's most complex and highly integrated products
are SAW-based subsystems. In general, these subsystems consist of key SAW
components, surrounded by additional circuitry, that provide a higher level of
system functionality than that provided by the SAW devices alone. These products
are highly specialized and are custom developed for specific applications.
Sawtek's subsystem products are largely used in military and space applications
and include channelized filter banks, switched filter and delay line modules and
pulse expansion and compression subsystems.
SAW Chemical Sensor Elements: SAW chemical vapor sensors have been under
development at research institutions for many years, and have been successfully
demonstrated by government, university and industrial laboratories in the United
States and overseas. Sawtek has been a leading supplier of SAW resonators and
delay lines used in these sensor development programs for over 11 years, with
more than 20 products available.
New Product Development
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In 1993, Sawtek strategically identified SAW chemical sensors and
subsystems as a promising technology for new product development. Substantial
market opportunities exist in applications that include in-situ groundwater
analysis, process control, incipient fire detection, electronic noses, soil gas
analysis, dry cleaning monitors, fugitive emission monitors, OSHA workplace
health and safety monitoring and respirator alarm systems. The Company believes
there is currently no widely available technology which meets all of the cost,
performance and applications requirements for most of these areas. Thus, there
is a real need for a cost-effective technology that can be customized for the
optimum cost-performance tradeoffs for a specific application. SAW chemical
sensor systems have the potential for costing a fraction of currently available
portable or transportable analytical vapor testing equipment, while providing a
suitable level of chemical selectivity and sensitivity, in an instrument that is
handheld. These sensor systems can also be fitted with sampling attachments for
sensing volatile organic compounds ("VOCs") in soil and water.
A majority of Sawtek's sensor development work is being conducted as
part of a Technology Reinvestment Program ("TRP") project which received a
cost-shared financial award (DE-FC07-95ID13343) in the 1994 TRP competition.
Sawtek is the lead company in this project, and is working cooperatively with
Sandia National Laboratories, Battelle Pacific Northwest Laboratories and
consortium members, General Atomics and Perkin-Elmer. To date, Sawtek
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scientists have made fundamental improvements over prior art in three major
technical areas necessary for product development, namely temperature
compensation, polymer development and metrology.
Sawtek's initial goal in developing SAW sensing technology is to
manufacture and market to instrument manufacturers a module that contains the
core elements necessary for proper VOC sensing: the SAW sensor array,
measurement electronics, temperature control, pre-concentration (if required),
communication capability and sufficient memory and processing power to
adequately provide the required calibration and pattern recognition functions.
This sensor module could be incorporated into any number of end-user systems,
based on the individual instrument manufacturer's market needs and preferences.
This product development strategy allows Sawtek to receive the maximum benefit
from its core competencies by allowing a wide range of instrument manufacturers
to utilize a common Sawtek sensing module, and by utilizing the existing sales,
marketing and distribution infrastructure in place at these firms, alleviating
the need for an extensive Sawtek sensor sales force. There can be no assurance
that Sawtek will be successful in developing sensing products for commercial or
defense applications.
Technology
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Saw Technology. A simple SAW filter is comprised of two transducers
which consist of interdigital arrays of thin metal electrodes
photolithographically defined on a highly polished piezoelectric wafer. A
piezoelectric material is one in which there exists a reciprocal, linear
relationship between the electric field in the material and the strain in the
material. When a signal of the proper frequency is applied across the
interdigital transducers ("IDTs"), the alternating electrode voltages cause the
surface of the device to expand and contract due to the varying electric fields
induced in the piezoelectric material. This causes the generation of a
mechanical (or acoustic) wave propagating at the surface of the device.
Reciprocally, the acoustic wave generates an electrostatic wave with potentials
at the surface of the device which can be detected by an IDT. The operating
frequency of the device is determined by the electrode spacing and the
material's surface acoustic wave velocity. This relationship places physical
limitations on the frequency of operation of practical SAW devices, due to
limitations in photolithographic resolution. The configuration of the IDTs and
properties of the material determine the signal processing function and response
characteristics of the device. The appeal of SAW devices as preferred signal
processing components for numerous applications is based on the inherent
advantages of the technology. SAW devices can provide complex signal processing
functions in a single compact device. One example of this is the outstanding
bandpass filter characteristics which can routinely be achieved using SAW
technology. Comparable performance utilizing LC filter technology would require
numerous components and could occupy many square inches of PC board space.
Because surface acoustic waves propagate with slower velocities than
electromagnetic waves (on the order of 10-5 times the speed of light), the
realization of relatively long electrical delays on devices of limited
dimensions is possible. Additional performance advantages of SAW technology,
which vary based on the application, include small size, linear phase, high
selectivity, excellent rejection and temperature stability. The ruggedness and
reliability of SAW devices are characteristic of the physical device structure.
Because device operating frequencies are determined by photolithographic
processes, SAW devices do not require complicated tuning procedures, nor do they
become detuned in the field. The semiconductor microfabrication techniques used
in manufacturing SAW components allow for the volume production of economical
and reproducible devices. The outstanding reproducibility of these devices makes
them ideal for military electronic warfare applications such as channelized
filter banks for spectral analysis. Small size and ruggedness make SAW devices
useful for cellular communications and related applications. Finally, the
relative radiation hardness of SAW devices makes them ideal for space-based
applications.
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Computer Aided Design and Analysis Software. Sawtek's versatile and
user-friendly proprietary software fully supports the design and simulation of a
broad range of SAW device structures, allowing Sawtek's design engineers to
select the optimum SAW device type for a particular application with respect to
performance, size and cost. Sawtek's next generation design and analysis
software will provide the Company's research and development and engineering
teams with the latest technological tools.
Manufacturing
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The manufacturing techniques utilized by the Company to produce its
products are very similar to those used by the integrated circuit industry. In
general, SAW devices are more straightforward to manufacture than most
integrated circuits but involve certain highly complex and precise processes
that are unique. While the Company controls a substantial portion of the
manufacturing process, some activities are outsourced. The primary raw materials
used to manufacture Sawtek's products include piezoelectric wafers and metal or
ceramic packages used to house and protect the SAW die. Manufacturing scheduling
and control is achieved through the use of a computer based manufacturing
resource planning ("MRP II") system. The Company segregates the manufacturing
process into two functional areas: wafer fabrication and assembly.
Wafer Fabrication. The wafer fabrication process involves the
deposition of a very thin and uniform coating of aluminum onto three or four
inch diameter piezoelectric wafers. These metallized wafers are then coated with
a thin layer of a light sensitive material known as photoresist. The wafer is
then exposed to light through a master glass plate, or photomask, which contains
multiple images of the SAW devices to be produced. Through a photolithographic
develop and etch process, the image from the photomask is replicated on the
wafer. Each device on the wafer is referred to as a SAW die and each wafer may
contain from two to 600 or more die, depending upon the design and performance
of the final product. The wafer is then cut into individual SAW die with high
precision, diamond wheel dicing saws.
Assembly. In assembly, which also takes place in a clean room
environment, the individual SAW die are placed in metal or ceramic packages. The
SAW die and other associated components, if any, are attached to the package
using various specialized adhesives; and, electrical connections are made
between the SAW die and the pins, pads or leads of the package, which is
accomplished with either manual or automatic wirebonding equipment.
The packages are hermetically sealed using specialized welding
equipment in a dry nitrogen atmosphere to ensure the long term reliability of
the device. After sealing, the units are tested for hermeticity and labeled
using a laser marking system. Finally, the units are tested using automated
network analyzers to ensure that the devices conform to the desired electrical
specifications.
The Company has constructed an SMP production facility and procured
robotic assembly equipment that has largely automated the assembly of SMP
products. The Company has automated the functions of SAW die attach, wire bond,
package seal, hermetic leak test, electrical test and package marking.
Customers typically ask for delivery times of less than ten weeks on
new orders, and the Company is currently quoting 8-12 weeks for delivery of most
wireless communications products, down from 39 weeks prior to the completion of
the capacity expansion in 1996.
11
<PAGE>
Manufacturing Control. In 1992, the Company instituted a "Manufacturing
Excellence" program which focuses on 12 key areas of performance throughout the
Company. These areas are measured and monitored on a daily, weekly and monthly
basis for continuous improvement. The Company began a statistical process
control ("SPC") program in 1994 in which critical process parameters throughout
manufacturing were identified and placed under continuous process control and
improvement. In addition, the Company intends to pursue ISO 9001 registration in
fiscal 1997.
Sales and Marketing
- -------------------
Due to OEM requirements for predominantly custom devices, the Company
uses a team-based sales approach to develop relationships at multiple levels of
the customer's organization, including management, engineering and purchasing.
The Company utilizes 13 domestic and nine international independent sales
representatives to identify opportunities which are managed by the Company's
internal sales force. Direct sales are handled by the Company's sales and
marketing personnel and management. The Company also utilizes two distributors
to generate sales for the Company's standard product families.
Once an opportunity is identified, members of the Company's engineering
design team and sales team coordinate close technical collaboration with the
customer during the design and qualification phase of their program. The
Company's executive officers are also involved in all aspects of the Company's
relationships with customers and work closely with their senior management.
Foreign and Domestic Operations and Export Sales
- ------------------------------------------------
The Company established a subsidiary in Costa Rica in 1996 and began
operations in the second fiscal quarter and commenced shipments in the third
quarter of 1996. As of September 30, 1996, the Company had invested
approximately $6.3 million in this operation and has recorded net sales of
approximately $4.8 million and earned an operating profit of approximately $1.1
million for 1996. The functional currency for the Costa Rican subsidiary is the
U.S. dollar as sales, most material cost and equipment are U.S. dollar
denominated. The effects of currency fluctuations of the local Costa Rican
currency are not considered significant and are not hedged.
In 1996, the Company also established a "foreign sales corporation"
pursuant to the applicable provisions in the Internal Revenue Code to take
advantage of income tax reductions on export sales. Through September 30, 1996,
the cost to operate this subsidiary was less than $10,000, and it has less than
$10,000 in identifiable assets.
International sales are denominated in U.S. dollars and represented
54%, 49% and 40% of net sales for the years ended September 30, 1996, 1995 and
1994, respectively. Sales to European markets represent 38%, 36% and 22% of net
sales for these same periods, respectively. The remaining international sales
relate primarily to Asian and Canadian markets.
Competition
- -----------
The markets for Sawtek's products are intensely competitive and are
characterized by price competition, rapid technological change, product
obsolescence and heightened domestic and international competition.
Historically, the NRE investment required to tool a SAW design and technical
incompatibility issues between various SAW suppliers led many of the Company's
customers to single source their requirements. However, some customers are
pursuing dual sourcing. In each of the markets for Sawtek's products, the
Company competes with large international firms that have substantially greater
financial, technical, sales, marketing, distribution and other resources than
the Company. In addition, the Company may face competition from companies that
12
<PAGE>
currently produce SAW devices for their internal requirements, as well as from a
number of the Company's customers that have the potential to develop an internal
supply capability for SAW devices. The following North American companies
compete with the Company to a greater or lesser degree depending on the
strengths and product focuses of each company: Andersen Laboratories, Phonon
and RF Monolithics. Competition from European companies principally includes
Siemens Matsushita Components and Thomson. The Company anticipates that it will
experience increasing competition from Pacific Rim SAW companies as it expands
into handheld and other high volume subscriber applications. The Company
expects competition to increase from both established and emerging competitors
as well as from internal capabilities developed by certain customers.
Additional competition could have a material adverse effect on the Company's
business, results of operations and financial condition through price reduc-
tions, loss of market share and delays in the timing of customers' orders.
The Company's ability to compete effectively in its target markets
depends on a variety of factors both within and outside of the Company's
control, including timing and success of new product introductions by the
Company and its competitors, availability of manufacturing capacity, the rate at
which customers incorporate the Company's components into their products, the
Company's ability to respond to price competition by reducing cost of sales,
availability of technical personnel, sufficient supplies of raw materials, the
quality, reliability and price of products and general economic conditions.
There can be no assurance that the Company will be able to compete successfully
in the future.
Several alternative technologies which are potentially capable of
providing signal processing functions currently realized by SAW devices exist
and may compete with the Company's products. Traditional piezoelectric BAW
crystal devices, LC devices, dielectric resonators and filters and digital
circuits each have the capability to provide specific functions. For many
applications, however, these alternative technologies have substantial
disadvantages when compared to SAW implementation. Traditional piezoelectric
BAW crystal devices have resonant frequencies determined primarily by the
crystal thickness, with thinner crystals producing higher operating frequencies.
Precise polishing and thickness control is required for accurate adjustment of
the resonant frequency, and the crystals become quite thin and fragile when
designed for high frequency operation (above 200 MHz). Additionally, BAW
crystal resonators are inherently narrowband and are unsuitable for many of the
current digital modulation equipment approaches.
LC resonators and filters, consisting of combinations of capacitors and
inductors, are often substantially larger than a SAW device providing equivalent
performance. In some instances, it may not be practical to obtain acceptable
frequency selectivity using LC devices. Also, careful design procedures and
shielding may be required with LC assemblies to avoid degraded performance due
to parasitics at operating frequencies. Such assemblies often require
considerable labor to assemble and manually tune, and may be subject to
de-tuning in the field.
Dielectric resonators and filters are precisely sized and shaped
components that take advantage of the high dielectric constants of certain
ceramic materials to achieve the desired performance. Dielectric filters are
used for RF filtering applications, but are not generally suitable for precision
IF filtering of digitally modulated waveforms. Dielectric resonators and filters
are not as temperature stable as quartz BAW crystals or quartz SAW devices, and
can be larger and more costly for the high volume applications in which SAW
devices are used.
13
<PAGE>
Digital filter technology is currently used for very narrowband
applications without stringent power restrictions. SAW filters are generally
preferred for extremely low power applications such as pagers, due to their
passive operation. For wider bandwidth applications, digital filtering requires
substantial computation and signal conversion circuitry, and high speed
operation, leading to high power consumption, circuit complexity and large size.
A digital filter equivalent to a typical SAW IF filter for wireless
communications applications would require roughly four watts of power and
several boards of circuits to implement using currently available digital
technology. While high-speed digital filtering technology continues to evolve
rapidly, the Company believes it is unlikely that this technology will impact
wireless communication infrastructure and handheld subscriber applications in
the next ten years.
Research and Development
- ------------------------
Sawtek's research and development efforts are primarily aimed at
deriving new, proprietary, and innovative SAW device structures and SAW-based
technologies that uniquely address market needs in those areas selected as
strategic by the Company. The goal of the Company's research and development
group is to develop the technological tools necessary to meet emerging market
requirements.
Sawtek's research and development department has doubled in size during
the past three years. Sawtek currently employs 19 scientists, technicians and
consultants in its research and development efforts. In addition to its staff
and consultants, Sawtek is actively involved in cooperative research with
outside organizations, including individual researchers or groups, universities,
institutes and national laboratories. This approach allows Sawtek's research and
development group to benefit from the ideas and talents of a group of scientists
more than twice as large as Sawtek's internal staff, and to maintain a highly
creative, stimulating intellectual environment for its scientists.
Sawtek's internal research and development expenditures during fiscal
1996, 1995 and 1994 were approximately $2.0 million, $1.7 million and $1.1
million, respectively, and are expected to increase in fiscal 1997. A portion of
the Company's development activities are conducted in connection with the
provision of customer-reimbursed NRE services. The revenue generated from these
services is included in net sales and the cost is reflected in cost of sales
rather than in research and development expenses. Sawtek recognized net sales
from NRE services of approximately $3 million, $1.5 million and $2 million, in
fiscal 1996, 1995 and 1994, respectively. In addition, the Company received
$219,000 from the U.S. Government for work on SAW-based chemical sensors in
1996. This grant was included as a reduction in research and development
expenses for the year.
Proprietary Rights
- ------------------
Sawtek relies on a combination of patents, copyrights and trade secrets
to establish and protect its proprietary rights. Sawtek owns eight U.S. patents
(which expire from 2003 to 2013), relating to SAW device, oscillator and
packaging technologies. Sawtek also owns a substantial body of proprietary
techniques and trade secrets. Sawtek recognizes the benefits associated with
developing a portfolio of corporate intellectual property, particularly during
the new product development process, and is aggressively pursuing patents on
several technologies. During 1996, six patent applications were filed. There can
be no assurance that patents will issue from any of the pending applications, or
that any claims allowed from existing or pending patents will be sufficiently
broad to protect the Company's technology. While Sawtek intends to vigorously
protect its intellectual property rights, there can be no assurance that any
patents held by the Company will not be challenged, invalidated, or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. Litigation may be necessary to enforce Sawtek's
patents, trade secrets and other intellectual property rights, to determine the
validity and scope of the proprietary rights of others or to defend against
14
<PAGE>
claims of infringement. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the Company's
business and results of operations regardless of the final outcome of the liti-
gation. Despite Sawtek's efforts to maintain and safeguard its proprietary
rights, there can be no assurances that the Company will be successful in doing
so or that the Company's competitors will not independently develop or patent
technologies that are substantially equivalent or superior to Sawtek's
technologies.
The SAW industry is characterized by uncertain and conflicting
intellectual property claims. Sawtek has in the past and may in the future
become aware of the intellectual property rights of others that it may be
infringing, although it does not believe that it is infringing any third party
proprietary rights at this time. To the extent that it deemed necessary, Sawtek
has licensed the right to use certain technology patented by others in certain
of its products. There can be no assurance that Sawtek will not be notified in
the future that it is infringing other patent and/or intellectual property
rights of third parties. In the event of such infringement, there can be no
assurance that a license to the technology in question could be obtained on
commercially reasonable terms, if at all, that litigation will not occur or that
the outcome of such litigation will not be adverse to Sawtek. The failure to
obtain necessary licenses or other rights, the occurrence of litigation arising
out of such claims or an adverse outcome from such litigation could have a
material adverse effect on Sawtek's business. In any event, patent litigation is
expensive, and Sawtek's operating results could be materially adversely affected
by any such litigation, regardless of its outcome.
Sawtek also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others. In addition, the laws of some foreign
countries do not offer protection of the Company's proprietary rights to the
same extent as the laws of the United States.
Backlog
- -------
Sawtek's backlog as of September 30, 1996 was approximately $27.8
million compared to the backlog at September 30, 1995 of $36.0 million. The
lower backlog is attributed to reduced lead times at September 30, 1996
resulting from the Company's 1996 manufacturing expansion and customers
currently placing orders based on 8-12 week lead times, compared to one year
blanket purchase orders typical of the period at the end of last fiscal year.
The Company includes in its backlog only customer orders and certain purchase
agreements with firmly scheduled deliveries within the subsequent 12 months. Of
the $27.8 million backlog at September 30, 1996, the Company could potentially
ship all of this backlog by the end of fiscal 1997. The Company's backlog is
used in the MRP II scheduling system to plan and schedule all work orders. The
Company's backlog is not necessarily indicative of future product sales, and the
Company may be materially adversely affected by a delay or cancellation of a
small number of purchase orders. Backlog cancellations are negotiated with each
customer in writing and form a part of the contract with the customer. Most of
the orders from the Company's largest customers allow the customer to cancel the
order with a certain amount of required notice, and from time to time the
Company has experienced cancellations of orders in backlog. This notice is
negotiated with each customer and is generally related to the manufacturing
cycle time of the product which the customer ordered, typically 60 to 90 days.
If there is any work in process at the time of cancellation, the customer may be
required to pay customary termination charges. If customers over-order to secure
delivery dates and eventually cancel these over-ordered amounts, the customer
may be subject to price renegotiation as a result of the lower quantity of units
taken.
15
<PAGE>
Employees
- ---------
As of September 30, 1996, the Company had a total of 560 employees,
including 406 in manufacturing and operations; 80 in research, development and
engineering; 27 in quality assurance; 16 in sales and marketing; and 31 in
administration. Included in the total employee count are 51 individuals the
Company employs through a temporary staffing company. With the exception of 79
employees located in San Jose, Costa Rica, all of the employees of the Company
are based at the Company's headquarters and two other sites in Orlando, Florida.
The Company believes its future performance will depend in a large part on its
ability to attract and retain highly skilled employees. None of the Company's
employees are represented by a labor union, and the Company has not experienced
any work stoppage. The Company considers its employee relations to be good.
Effects of Compliance with Environmental Regulations
- ----------------------------------------------------
Federal, state and local laws and regulations pertaining to the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, have not had and are not expected to have a
material effect on capital expenditures, earnings or the competitive position of
the Company.
RISK FACTORS AND UNCERTAINTIES
- ------------------------------
The forward-looking statements in this Form 10-K involve risks and
uncertainties. The following risks and uncertainties, as well as those discussed
elsewhere in this Form 10-K, should be considered:
Fluctuations in Quarterly Results; Backlog. The Company's quarterly
operating results have fluctuated in the past and are expected to fluctuate in
the future as a result of a variety of factors. Historically, the first quarter
of each fiscal year for the Company has been lower in net sales and net income
than the previous quarter (the fourth quarter of the previous fiscal year).
There are a number of operating factors that may cause fluctuations in quarterly
results, the most significant of which is product mix, which is determined by
different customer requirements. If the product mix changes, the average selling
price and gross margin may be lower. Other factors that may affect quarterly
results are delays in production caused by the installation of new equipment,
the level of orders that are received and can be shipped in any quarter, price
competition, fluctuations in manufacturing yields, availability of manufacturing
capacity, market acceptance of product, increased direct labor and overhead,
delays in receiving equipment from suppliers, customer over-ordering followed by
order cancellations, and cancellation or rescheduling of orders for any reason.
The Company's purchase orders may be terminated by the Company's
customers with prior notice, typically 60 to 90 days. Such orders may be large
and intended to satisfy customers' long-term needs. Accordingly, the Company's
backlog is not necessarily indicative of future product sales, and the Company
may be materially adversely affected by a delay or cancellation of a small
number of purchase orders. In addition, the Company's expense levels are based
in significant part on the Company's expectations of future product sales and
therefore are relatively fixed in the short term. If net sales are below
expectations, operating results would be materially adversely affected.
Consequently, the Company's results of operations for any quarter are not
necessarily indicative of results for any future period. Furthermore, the
Company's results of operations may be subject to economic downturns in the
electronics industry. Due to the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Common
Stock would likely be materially adversely affected.
16
<PAGE>
Limited Sources of Supply. The Company has a limited number of
suppliers for certain critical raw materials, components and equipment used by
the Company in manufacturing SAW devices. While historically the Company has not
experienced difficulty in obtaining needed supplies and equipment, synthetic
crystal material and wafer fabrication equipment could potentially be difficult
to obtain. The synthetic quartz material used by the Company, and purchased from
third parties, may require up to six months to grow. Currently, few wafer
producers have the expertise and capacity necessary to satisfy the Company's
wafer requirements. A failure by the Company to anticipate its needs for high
quality quartz could result in a shortage of quartz material available to the
Company. The Company purchases semiconductor fabrication equipment, which it
modifies for its needs. If the Company is unable to satisfy its requirements for
quartz or other raw materials or to obtain and maintain appropriate fabrication
equipment, the Company's business, financial condition and results of operations
would be materially adversely affected. There can be no assurance that the
Company will be able to secure adequate supplies of materials.
Dependence on Continuing Demand for Wireless Communications Services
and CDMA Technology. Approximately 62% of the Company's net sales for fiscal
1996 were derived from sales of SAW devices for applications in wireless
communications systems. Any economic, technological or other force that causes a
reduction in demand for telecommunications services may cause a reduction in the
need for performance upgrades to existing basestations and in the installation
of new basestations, which would have a material adverse effect on the Company's
business, financial condition and results of operations. As basestations are
installed and upgraded, domestically and internationally, the market for SAW
devices installed in such basestations may ultimately become saturated. The life
of SAW devices is typically in excess of 20 years, and a market for replacement
devices for basestations may not develop.
Although the Company's SAW devices are being used in GSM basestations,
a significant portion of the Company's SAW devices are being installed in
CDMA-based systems including subscriber handsets. CDMA technology has not yet
been implemented on a commercial scale in fully operational cellular, PCS/PCN or
wireless local loop ("WLL") systems. There can be no assurance that unforeseen
complications will not arise in the scale-up and operation of CDMA-based systems
that could materially delay or limit the commercial use of CDMA technology. Such
delay or limitation would have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on a Limited Number of Customers. A relatively limited
number of customers have historically accounted for a significant portion of the
Company's net sales. In fiscal 1996 and 1995, net sales to the Company's top 10
customers accounted for approximately 68% and 60% respectively, of total net
sales. In fiscal 1996, the Company's top three customers accounted for
approximately 24%, 11% and 8% of total net sales. The Company expects that sales
of its products to a limited number of customers will continue to account for a
high percentage of its net sales in the foreseeable future. In addition, a
substantial portion of the Company's products are designed to address the needs
of individual customers. Accordingly, the Company's future success depends in
part upon the decision of the Company's current customers to continue to
purchase products from the Company, as well as the decision of prospective
customers to develop and market systems that incorporate the Company's products.
Dependence on New Products; Technological Change. Future growth of the
Company's business is dependent on the Company's ability to develop new or
improved SAW devices on a timely basis. The Company's product development
resources are limited, requiring the Company to allocate such resources among a
limited number of product development projects. Failure by the Company to
allocate its product development resources to products that meet market needs
could have a material adverse effect on the Company's future growth. The success
of new products may also depend on timely completion of new product designs,
quality of new products and market acceptance of customer products.
17
<PAGE>
Control by Existing Shareholders; Certain Anti-Takeover Provisions. The
Company's directors, officers and principal (5% or more) shareholders, as a
group, beneficially own in the aggregate approximately 68% of the outstanding
Common Stock, which includes approximately 49% of the outstanding Common Stock
that the Company's Employee Stock Ownership Plan and Trust ("ESOP") owns. As a
result of such ownership by the ESOP, the trustees of the ESOP may be able to
control certain matters that require approval by shareholders of the Company,
and the combination of the trustees and the participants with allocated shares
can control the election of directors. The trustees of the ESOP consist of two
executive officers and directors of the Company and two outside directors of the
Company. Certain anti-takeover provisions of the Florida Business Corporation
Act (the "Control Share Statute" and the "Affiliated Transactions Statute")
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit or depress the price that certain investors
might be willing to pay in the future for shares of Common Stock. The Company is
also authorized to issue preferred stock with rights senior to the Common Stock,
without the necessity of shareholder approval and with such rights, preferences
and privileges as the Company's Board of Directors may determine. Although the
Company has no present plans to issue these shares of preferred stock, such
issuance, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.
Shares Eligible for Future Sale. Sales of substantial numbers of shares
of Common Stock in the public market could materially adversely affect the
market price for the Common Stock. Prior to the Company's initial public
offering, shareholders holding 16,284,320 shares of Common Stock executed
agreements (the "Lock-Up Agreements") under which they agreed not to sell their
shares until October 29, 1996. The Lock-Up Agreements provide that Hambrecht &
Quist LLC may, in its sole discretion and at any time without notice to the
Company's shareholders or the public market, release all or a portion of the
shares subject to the Lock-Up Agreements. Beginning on October 29, 1996, all
shares subject to the Lock-up Agreements will become eligible for sale in the
public market, subject in certain cases to compliance with Rule 144 or Rule 701
under the Securities Act. As of September 30, 1996, an additional 1,545,460
shares were issuable upon exercise of outstanding options. Of these shares,
564,960 shares are vested and eligible for sale in the public market upon
expiration of the Lock-Up Agreements.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering and manufacturing
facilities are located in three buildings aggregating approximately 86,000
square feet in Orlando, Florida, consisting of one 65,000 square foot facility
owned by the Company and two leased facilities, pursuant to leases which are
renewable over one and five years. The Company also has a production facility in
San Jose, Costa Rica located in an 11,800 square foot leased facility, pursuant
to a lease that expires in 2000. On June 28, 1996, the Company purchased a
31,690 square foot facility in San Jose, Costa Rica for approximately $1.3
million which will be used to increase the Company's production capabilities in
Costa Rica. The Company intends to spend an additional $2.9 million to upgrade
this facility for production in fiscal 1997. The Company is also planning a
28,000 square foot expansion to its Orlando facility in fiscal 1997 to be used
primarily for research and development, sales and administrative purposes. Upon
completion of these fiscal 1997 programs, the Company believes the completed
facilities will be adequate to meet its current needs and that suitable
additional or alternative space will be available, as needed, on commercially
reasonable terms. The Company's Orlando facility is encumbered by an Industrial
Development Revenue Bond maturing in 2010.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings either by or against the
Company during fiscal 1996 or ongoing as of the date of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1996.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The shares of the Company are quoted on the NASDAQ National Market
under the symbol "SAWS." The Company went public on May 1, 1996, and
accordingly, no public price data is available prior to this date. The following
table sets forth the high and low sales price per share of the common shares of
the Company as reported by the NASDAQ National Market for the periods indicated:
Fiscal 1996 High Low
------------ ---- ---
May 1, 1996 - June 30, 1996 $39 3/4 $16 1/2*
July 1, 1996 - September 30, 1996 $35 3/4 $21 1/2
*The Company sold shares in the May 1, 1996 initial public offering at $13 per
share, however, the first trade was at $16.50 which was the lowest quoted
price of Sawtek Inc. shares in fiscal 1996.
Closing price September 30, 1996: $26
As of October 31, 1996 there were 19,854,102 shares of the Company's
Common Stock outstanding held by 94 shareholders of record. Many shareholders
hold their shares in "street name." The Company believes it has more than
2,000 beneficial owners of its common stock.
Historically, the Company has not paid dividends on its Common Stock.
Because the Company believes it will require additional capital in the future,
the Company currently intends to retain its earnings and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data of the Company
and its subsidiaries as of and for the five years ended September 30, 1996. The
historical consolidated financial data has been derived from the historical
financial statements of the Company, which financial statements have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
included elsewhere herein. These data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements appearing
elsewhere in this document.
19
<PAGE>
<TABLE>
Consolidated Statements of Income Data:
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 57,664 $ 31,317 $ 19,139 $ 14,428 $ 14,710
Cost of sales 27,262 13,084 8,815 7,174 7,197
------ ------ ------ ------ ------
Gross profit 30,402 18,233 10,324 7,254 7,513
Operating expenses:
Selling expenses 3,947 3,139 2,689 2,600 2,506
General and administrative expenses 5,791 3,440 3,283 1,408 1,201
ESOP compensation expense 12,925 782 610 499 434
Research and development expenses 1,954 1,669 1,116 831 1,200
------ ------ ------ ------ ------
Total operating expenses 24,617 9,030 7,698 5,338 5,341
------ ------ ------ ------ ------
Operating income 5,785 9,203 2,626 1,916 2,172
Interest expense 245 435 302 416 556
Other income (634) (291) (55) (51) (80)
------ ------ ------ ------ ------
Income before income taxes 6,174 9,059 2,379 1,551 1,696
Income taxes 6,514 3,390 894 576 581
------ ------ ------ ------ ------
Income (loss) before cumulative effect
of change in accounting principle (340) 5,669 1,485 975 1,115
Cumulative effect of change in
accounting principle (1) (167)
------ ------ ------ ------ ------
Net income (loss) $ (340) $ 5,669 $ 1,485 $ 975 $ 948
====== ====== ====== ====== ======
Net income (loss) per share (2) $ (0.02) $ 0.34 $ 0.08 $ 0.05 $ 0.05
====== ====== ====== ====== ======
Shares used in per share calculations 19,246 16,529 18,142 19,248 19,851
====== ====== ====== ====== ======
- -----------------------------
<FN>
(1) Relates to the adoption of Financial Accounting Standards No.109.
(2) Computed on the basis described in Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 27,743 $ 2,819 $ 2,675 $ 1,709 $ 3,185
Working capital 35,799 7,100 5,055 4,122 4,168
Total assets 74,594 23,124 11,250 10,784 10,637
Long-term debt, less current maturities 3,786 6,805 4,147 3,787 4,583
Total shareholders' equity 61,625 (20,605) (5,660) (1,098) (1,105)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company maintains its records on a fiscal year ending on September
30 of each year and all references to a year refer to the fiscal year ending on
that date.
Overview
- --------
The Company was incorporated in 1979 to design, develop, manufacture
and market a broad range of electronic components based on surface acoustic wave
("SAW") technology and used in telecommunications, data communications, video
transmission, military and space systems and other markets. The Company's focus
has been on the high-end performance spectrum of the market, and its primary
products are SAW bandpass filters, resonators, delay lines, oscillators and
SAW-based subsystems. The Company's products were initially concentrated in the
military and space systems market, with approximately 61% of net sales in 1991
attributable to this market segment. Since then, the Company has shifted its
attention to commercial markets, which accounted for 85% of its net sales in
1996. The Company has also witnessed significant growth in its international
markets over the last five years. While international sales represented
approximately 20% of net sales in 1991, they represented approximately 54% of
net sales in 1996.
The Company derives revenue from high-volume commercial production
components, military/industrial production components and engineering services
and products. Non-recurring engineering ("NRE") revenue is included in
engineering services and products and relates to the design and development of a
custom device and delivery of one or more prototype parts. In all cases, revenue
is recognized when the parts or services have been completed and units,
including prototypes, have been shipped.
Net sales increased 84% from 1995 to 1996. The growth in net sales is
mainly attributable to growth in the wireless communications market to which the
Company supplies SAW bandpass filters for cellular telephone basestations and,
to a lesser extent, for handheld subscriber telephones. The Company has a broad
product line of SAW filters and other components with average selling prices
ranging from $5 to $300. Gross profit has also grown over the past three years
as a result of higher sales. The Company is committed to substantially
increasing its ability to service the wireless communications market and is
presently undergoing an expansion of its operations in both Florida and in San
Jose, Costa Rica. Phase one of the manufacturing building expansion in Orlando
21
<PAGE>
is complete and production in the new wafer fabrication area began in the
quarter ended September 30, 1996. On June 28, 1996, the Company purchased a
31,690 square foot facility in San Jose, Costa Rica for approximately $1.3
million which will be used to increase the Company's production capabilities in
Costa Rica.
For 1996, net sales to the Company's top ten customers accounted for
approximately 68% of net sales with the top three customers accounting for
approximately 44% of net sales. The Company expects that sales of its products
to a limited number of customers will continue to account for a high percentage
of its net sales in the foreseeable future.
In 1991, the Company established an Employee Stock Ownership Plan
("ESOP"). At that time, the Company borrowed $4.0 million from its commercial
bank and loaned it to the ESOP to finance the purchase of 8,888,880 shares of
the Company's common stock. The unpaid balance of the loan, $1.4 million as of
September 30, 1996, matures in 1998 and is payable in quarterly installments
beginning in December 1996. These ESOP shares are accounted for in accordance
with the American Institute of Certified Public Accountants (AICPA) Statement of
Position ("SOP") 76-3, which uses cost as the basis for valuing shares as they
are released and allocated to participants' accounts. In 1994, the Company
borrowed an additional $1.7 million and loaned it to the ESOP to enable it to
purchase 1,610,600 shares of common stock. In 1996, the Company repaid the 1994
loan and allocated all of the related shares to participants' accounts for
services rendered. These shares are accounted for in accordance with the AICPA's
SOP 93-6, which uses market value as the basis of valuing shares. The impact of
this was a charge to ESOP compensation expense of $12.9 million reflected in the
financial results for 1996. Of the $12.9 million, $11.3 million is a one-time,
non-cash charge (amounting to $0.59 per share). Beginning with the quarter
ending December 1996 and continuing for the next six quarters, the Company will
record an ESOP compensation expense of approximately $195,000 per quarter which
represents the remaining payments on the original loan, which is accounted for
on the cost basis for valuing shares.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, the
percentage relationship of certain items from the Company's statement of
operations to net sales, and the percentage change in the dollar amount of such
items compared to the prior comparable period:
22
<PAGE>
<TABLE>
Percentage Increase
(Decrease)
Year Ended September 30, 1996 over 1995 over
------------------------ --------- ---------
1996 1995 1994 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 84.1% 63.6%
Cost of sales 47.3 41.8 46.1 108.4 48.4
----- ----- -----
Gross margin 52.7 58.2 53.9 66.7 76.6
Operating expenses:
Selling expenses 6.8 10.0 14.0 25.7 16.7
General and administrative expenses 10.0 11.0 17.2 68.3 4.8
ESOP compensation expense 22.4 2.5 3.2 * 28.2
Research and development expenses 3.4 5.3 5.8 17.1 49.6
----- ----- -----
Total operating expenses 42.6 28.8 40.2 172.6 17.3
----- ----- -----
Operating income 10.1 29.4 13.7 (37.1) 250.5
Interest expense .4 1.4 1.6 (43.7) 44.0
Other income (1.0) (1.0) (0.3) 117.9 429.1
----- ----- -----
Income before income taxes 10.7 29.0 12.4 (31.8) 280.8
Income taxes 11.3 10.9 4.6 92.2 279.2
----- ----- -----
Net income (loss) (.6%) 18.1% 7.8% * 281.8
===== ===== =====
- ---------------
<FN>
*Not meaningful
</FN>
</TABLE>
Comparison of Years Ended September 30, 1995 and 1996
- -----------------------------------------------------
Net Sales. Net sales increased 84% from $31.3 million in 1995 to $57.7
million in 1996. The increase was a result of increased product shipments to the
wireless communication market, specifically sales of high volume filters for
basestation applications for the telecommunication industry. Sales of high
volume commercial production components were up over 129% in 1996 compared to
1995. International sales increased from approximately 49% in 1995 to 54% of net
sales for 1996.
Gross Margin. Gross margin declined from 58.2% of net sales in 1995 to
52.7% in 1996 primarily due to a shift in the product mix to high volume
production components, which typically have lower unit prices and somewhat lower
gross margins. Throughout 1996, the Company added additional equipment and
increased indirect labor, supplies, depreciation and other fixed overhead
expenses in anticipation of higher sales volume. This additional fixed overhead
cost was not fully absorbed by the sales level in 1996, which further reduced
the gross margin.
Selling Expenses. Selling expenses increased in 1996 compared to 1995,
but decreased as a percentage of net sales. The decrease as a percentage of net
sales was a result of the Company's expanding net sales with substantially the
same level of sales and marketing personnel in 1996 as in 1995. As a result,
most of the selling expenses remained relatively constant with commission
expenses paid to outside sales representatives as the only component that
increased significantly with the higher sales level. The Company anticipates
that selling expenses will continue to increase as new employees are added to
support its sales and marketing effort in 1997 and as commissions are incurred.
23
<PAGE>
General and Administrative Expenses. General and administrative
expenses increased from $3.4 million in 1995 to $5.8 million in 1996 due to
start-up costs for the new Costa Rica operations, one-time executive bonuses
granted in 1996 and costs for non-compensatory stock options.
ESOP Compensation Expense. ESOP compensation expense increased from
$782,000 in 1995 to $12.9 million in 1996. This increase of $12.1 million is a
result of the Company allocating all ESOP shares acquired in 1994 to employees'
accounts for services rendered in 1996. These shares are accounted for in
accordance with SOP 93-6 which uses market value as the basis of valuing shares
as they are allocated. The shares were acquired at a cost of $1.03 per share
compared to an average market value of $8.03 during the period of allocation in
1996. The charge for ESOP shares allocated in 1995 is based on SOP 76-3 which
uses the cost basis of the shares. All remaining ESOP shares are accounted for
in accordance with SOP 76-3. The Company will incur ESOP compensation expense of
approximately $782,000 in 1997 and approximately $585,000 in 1998.
Research and Development Expenses. Research and development expenses
increased from $1.7 million in 1995, to $2.0 million in 1996, but decreased as a
percentage of net sales from 5.3% to 3.4% for the same period. These expenses
increased due to additional personnel and expanded research and development
efforts, but increased at a slower rate than the sales increase. The Company
anticipates that research and development expenses will continue to increase in
total dollars as personnel and programs are added. A significant portion of the
Company's development activities is conducted in connection with the design and
development of custom devices, which is paid for by customers and classified as
NRE items. The revenue generated from these items is included in net sales and
the cost is reflected in cost of sales rather than in research and development
expenses.
Interest Expense. Interest expense decreased in 1996 compared to 1995
due to repayment of debt and interest capitalized of approximately $380,000 as
part of the facilities expansion program in 1996.
Other Income. Other income, primarily made up of interest income,
increased in 1996 due to interest earned on the remaining proceeds of the
Company's IPO.
Income Tax Expense. The provision for income taxes as a percentage of
income before income taxes was 37.4% for 1995. In 1996, the Company incurred a
non-deductible charge for ESOP compensation expense of $11.3 million. Had it not
been for this charge, the tax provision would have been approximately 37.3% for
1996. The Company expects that its effective tax rate will remain at
approximately 36% to 39% in the future.
Comparison of Years Ended September 30, 1994 and 1995
- -----------------------------------------------------
Net Sales. Net sales increased 64% from $19.1 million in 1994 to $31.3
million in 1995 primarily as a result of increased sales of bandpass filters in
the wireless communications markets. Sales to foreign customers increased from
$7.6 million in 1994 to $15.3 million in 1995 and accounted for approximately
49% of net sales in 1995. Sales to customers for the design, development and
production of custom engineering products declined by 11% from $7.4 million in
1994 to $6.6 million in 1995. This was more than offset by the increase in sales
of high volume commercial production components from $3.0 million in 1994 to
$13.4 million in 1995.
24
<PAGE>
Sales to customers for military, space and other U.S. government
related applications decreased from $6.3 million or 33% of net sales in 1994 to
$5.3 million or 17% of net sales in 1995. The decline in the dollar value of
government sales has been consistent with reductions in these government
programs in recent years, and the percentage decline is expected to continue as
the Company shifts its emphasis to the high volume commercial production market.
Gross Margin. Gross profit increased 77% from $10.3 million in 1994 to
$18.2 million in 1995 while gross margin increased from 53.9% to 58.2% in the
same periods. The increase in gross profit is due to the increase in sales, and
the increase in gross margin is due to greater absorption of overhead costs in
1995 as the Company increased operations to near full capacity in the latter
part of the year. Cost of sales increased from $8.8 million in 1994 to $13.1
million in 1995.
Selling Expenses. Selling expenses increased by 17% from $2.7 million
in 1994 to $3.1 million in 1995 due primarily to commissions paid to sales
representatives and the cost of expanding the Company's internal sales staff
associated with the increase in net sales.
General and Administrative Expenses. General and administrative
expenses increased 5% from $3.3 million in 1994 to $3.4 million in 1995 but
decreased from 17.2% of net sales in 1994 to 11.0% of net sales in 1995. This
percentage reduction is primarily due to incentive bonuses paid to certain
executives in 1994 under a 1991 restructuring agreement to redeem all of the
common stock holdings of certain shareholders. The dollar increase relates to
non-compensatory stock options granted in 1995.
ESOP Compensation Expense. ESOP compensation expense increased from
$610,000 in 1994 to $782,000 in 1995 due to the release of additional shares as
part of the scheduled amortization of the ESOP loan.
Research and Development Expenses. Research and development expenses
increased 50% from $1.1 million in 1994 to $1.7 million in 1995 due to an
increase in research and development personnel and programs. These expenses fell
slightly as a percentage of net sales from 5.8% in 1994 to 5.3% in 1995 due to
the increase in sales volume.
Interest Expense. Interest expense increased from $302,000 in 1994 to
$435,000 in 1995 due to additional long-term debt associated with the Industrial
Revenue Bond financing acquired for the expansion of the Company's Orlando,
Florida facility.
Other Income. Other income increased from $55,000 in 1994 to $291,000
in 1995 due to interest income on cash resources.
Income Tax Expense. The provision for income taxes as a percentage of
income before income taxes decreased from 37.6% in 1994 to 37.4% in 1995.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its operations to date through cash generated
from operations, bank borrowings, lease financing, the private sale of
securities, and its May 1, 1996 initial public offering. The Company requires
capital principally for equipment, expansion of its primary facility, financing
of accounts receivable and inventory, investment in product development
activities and new technologies and for its new operation in Costa Rica. For
1996, the Company generated net cash from operating activities of $13.6 million
25
<PAGE>
consisting primarily of the net loss of $340,000, adjusted for ESOP
compensation expense of $12.9 million, $2.1 million of depreciation and
amortization, $2.4 million of increases in accounts payable and accrued
liabilities, $2.2 million increase in taxes payable, offset by increases in
accounts receivable and inventory of $6.0 million. Cash flow from operations was
$6.8 million and $3.6 million in 1995 and 1994, respectively.
The Company has a credit line agreement totaling $15.0 million from
SunTrust Bank, Central Florida, N.A. renewable annually. There were no balances
outstanding on this credit line at September 30, 1996.
The Company made capital expenditures of $24.3 million during 1996
compared to $5.6 million and $1 million in 1995 and 1994, respectively. The
Company is in the process of expanding its Orlando, Florida facilities for
additional manufacturing, engineering and sales and administrative space, is
committed to numerous capital expenditures for production and test equipment and
furniture and fixtures, and is committed to various capital expenditures for its
San Jose, Costa Rica operation. The Company intends to spend approximately $23
million in 1997 on capital equipment and facilities.
During 1996 the Company completed its IPO and raised net cash of $35.2
million. After repayment of debt on the credit line, the balance was invested in
high grade, short-term, interest-bearing securities. The Company's cash and cash
equivalents at September 30, 1996 totaled $27.7 million compared to $2.8 million
and $2.7 million at September 30, 1995 and 1994, respectively.
The Company believes that its present cash position, together with its
credit facility and funds expected to be generated from operations, will be
sufficient to meet its working capital and other cash requirements through 1997.
Thereafter, the Company may require additional equity or debt financing to
address its working capital needs or to provide funding for capital
expenditures. The Company may consider a follow-on public offering in late
fiscal 1997 to fund its capital expenditure and working capital needs in the
future if, among other factors, the market conditions are favorable. There can
be no assurance that events in the future will not require the Company to seek
additional capital sooner or, if so required, that it will be available on terms
acceptable to the Company, if at all.
Foreign Operations and Export Sales
- -----------------------------------
The Company established a subsidiary in Costa Rica in 1996 and began
operations in the second fiscal quarter and commenced shipments in the third
quarter of 1996. As of September 30, 1996, the Company had invested
approximately $6.3 million in this operation and has recorded net sales of
approximately $4.8 million and earned an operating profit of approximately $1.1
million for 1996. The functional currency for the Costa Rican subsidiary is the
U.S. dollar as sales, most material cost and equipment are U.S. dollar
denominated. The effects of currency fluctuations of the local Costa Rican
currency are not considered significant and are not hedged.
In 1996, the Company also established a "foreign sales corporation"
pursuant to the applicable provisions in the Internal Revenue Code to take
advantage of income tax reductions on export sales. Through September 30, 1996,
the cost to operate this subsidiary was less than $10,000, and it has less than
$10,000 in identifiable assets.
26
<PAGE>
International sales are denominated in U.S. dollars and represented
54%, 49% and 40% of net sales for the years ended September 30, 1996, 1995 and
1994, respectively. Sales to European markets represent 38%, 36% and 22% of net
sales for these same periods, respectively. The remaining international sales
relate primarily to Asian and Canadian markets.
Recently Issued Accounting Standards
- ------------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company intends to adopt the provisions for pro
forma disclosure requirements of SFAS 123 in 1997. Such pro forma disclosures do
not impact the financial condition or the operating results of the Company.
SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and
Long Lived Assets to be Disposed Of," is effective for years beginning after
December 15, 1995. This pronouncement requires that long-lived assets and
certain intangibles to be held and used by the Company be reviewed for
impairment. This pronouncement is not expected to have a material impact on the
financial statements of the Company.
Impact of Inflation on the Company
- ----------------------------------
Management does not believe that inflation has had a material impact on
operating costs and earnings of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements, which appears on page
F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
Index to Consolidated Financial Statements
- ------------------------------------------
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Income (Loss)................................ F-4
Consolidated Statements of Non-Redeemable Shareholders' Equity.......... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Financial Statement Schedules
- -----------------------------
All required information is included in the Notes to Consolidated
Financial Statements.
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Sawtek Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Sawtek
Inc. and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of income (loss), non-redeemable shareholders' equity
and cash flows for each of the three years in the period ended September 30,
1996. 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 Sawtek Inc. and
subsidiaries at September 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective October
1, 1994, the Company adopted the provisions of Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans.
ERNST & YOUNG LLP
Orlando, Florida
October 25, 1996
F-2
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except per share data)
ASSETS
<CAPTION>
September 30,
-------------
Current Assets: 1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $27,743 $ 2,819
Accounts receivable net of allowance for
doubtful accounts and returns of $654 at
September 30, 1996 and $277 at September 30, 1995 7,938 5,253
Inventories 6,509 3,242
Deferred income taxes 1,266 460
Other current assets 528 129
------ ------
Total current assets 43,984 11,903
Other assets 186 273
Deferred income taxes 210
Property, plant and equipment, net 30,424 10,738
------ ------
Total assets $74,594 $23,124
====== ======
</TABLE>
<TABLE>
LIABILITIES AND NON-REDEEMABLE SHAREHOLDERS' EQUITY
<CAPTION>
September 30,
-------------
Current Liabilities:
1996 1995
---- ----
<S> <C> <C>
Accounts payable $ 1,801 $ 778
Accrued wages and benefits 3,109 2,434
Other accrued liabilities 1,068 334
Current maturities of long-term debt 1,363 543
Income taxes payble 844 714
------ -----
Total current liabilities 8,185 4,803
Long-term debt, less current maturities 3,786 6,805
Deferred income taxes 998
Redeemable ESOP common stock 35,144
Unearned ESOP compensation (3,023)
------
Total redeemable ESOP common stock 32,121
Non-redeemable shareholders' equity:
6% cumulative preferred stock, $2 stated value; 150,000 shares authorized, issued
and outstanding at September 30, 1995 300
Common stock; $.0005 par value; 40,000,000 authorized shares; issued and out-
standing shares 19,854,102 at September 30, 1996 and 5,245,000 at September 30, 1995 10 3
Capital surplus 53,000 1,885
Unearned ESOP compensation (1,367)
Retained earnings (deficit) 9,982 (22,793)
------ ------
Total non-redeemable shareholders' equity 61,625 (20,605)
------ ------
Total liabilities and non-redeemable shareholders' equity $74,594 $23,124
====== ======
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(in thousands, except per share data)
<CAPTION>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 57,664 $ 31,317 $ 19,139
Cost of sales 27,262 13,084 8,815
------ ------ ------
Gross profit 30,402 18,233 10,324
Operating expenses:
Selling expenses 3,947 3,139 2,689
General and administrative expenses 5,791 3,440 3,283
ESOP compensation expense 12,925 782 610
Research and development expenses 1,954 1,669 1,116
------ ------ ------
Total operating expenses 24,617 9,030 7,698
------ ------ ------
Operating income 5,785 9,203 2,626
Interest expense 245 435 302
Other income (634) (291) (55)
------ ------ ------
Income before taxes 6,174 9,059 2,379
Income taxes 6,514 3,390 894
------ ------ ------
Net income (loss) $ (340) $ 5,669 $ 1,485
====== ====== ======
Net income (loss) per share $ (0.02) $ 0.34 $ 0.08
====== ====== ======
Shares used in per share calculations 19,246 16,529 18,142
====== ====== ======
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Non-Redeemable Shareholders' Equity
(in thousands)
<CAPTION>
6% Cumulative
Preferred Stock Common Stock Unearned Retained
--------------- ------------ Capital ESOP Earnings
Shares Amount Shares Amount Surplus Compensation (deficit)
------ ------ ------ ------ ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance October 1, 1993 150 $ 300 7,927 $ 4 $ 332 $ (1,734)
Net income 1,485
Sale of common stock 201 22
Purchase of common stock (2,786) (1) (659) (1,095)
Market value adjustment to
redeemable ESOP common stock (5,306)
Stock option compensation 1,010
Preferred stock dividends (18)
---- ---- ------ -- ------ ------
Balance at September 30, 1994 150 300 5,342 3 705 (6,668)
Net income 5,669
Sale of common stock 330 52
Purchase of common stock (427) (101) (478)
Market value adjustment to redeemable
ESOP common stock (21,298)
Stock option compensation 1,229
Preferred stock dividends (18)
---- ---- ------ -- ------ -------
Balance at September 30, 1995 150 300 5,245 3 1,885 (22,793)
Net loss (340)
Reclassification of redeemable ESOP
common stock in connection with
initial public offering 9,843 5 1,851 (3,023) 33,287
ESOP Allocation 11,269 1,656
Sale of common stock in the initial
public offering 3,000 2 35,218
Sale of common stock other than in the
initial public offering 1,813 382
Purchase of common stock (56) (21) (145)
Compensatory stock option tax benefit 2,021
Stock option compensation 195
Preferred stock dividends (27)
Redemption of preferred stock (150) (300) 9 200
----- ------ ------ --- ------ ------- ------
Balance at September 30, 1996 -- $ -- 19,854 $10 $53,000 $ (1,367) $ 9,982
===== ====== ====== === ====== ======= ======
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (340) $ 5,669 $ 1,485
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,141 790 601
Deferred income taxes 402 (415) (284)
ESOP allocation 12,925 782 610
Stock option compensation 195 1,229 1,010
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (2,685) (2,434) 782
Inventories (3,267) (1,494) 184
Other current assets (399) (17) 11
Increase (decrease) in liabilities:
Accounts payable 1,023 435 (178)
Accrued liabilities 1,409 1,522 (483)
Income taxes payable 2,151 709 (126)
------ ----- -----
Net cash provided by operating activities 13,555 6,776 3,612
Investing activities:
Purchase of property, plant and equipment (24,347) (5,551) (1,003)
Increase in Industrial Revenue Bond assets (48) (3,574)
Reduction in Industrial Revenue Bond assets 2,654 968
Industrial Revenue Bond acquisition costs (87)
ESOP acquisition costs (85)
------ ----- -----
Net cash used in investing activities (21,741) (8,244) (1,088)
Financing activities:
Proceeds from long-term debt 8,200 3,500 2,405
Principal payments on long-term debt (10,399) (1,409) (1,720)
Sale of common stock 35,602 52 1,678
Increase in unearned ESOP compensation expense (1,656)
Purchase of common stock (166) (513) (2,247)
Redemption of preferred stock (100)
Preferred stock dividends paid (27) (18) (18)
------ ----- -----
Net cash provided by (used in) financing activities 33,110 1,612 (1,558)
------ ----- -----
Increase in cash and cash equivalents 24,924 144 966
Cash and cash equivalents at beginning of period 2,819 2,675 1,709
------ ----- -----
Cash and cash equivalents at end of period $ 27,743 $ 2,819 $ 2,675
====== ====== ======
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
Sawtek Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Description of Business. Sawtek Inc. and subsidiaries (the "Company")
produces surface acoustic wave devices for both low and high volume programs in
communications, cellular telephones, modems, wireless data transmission, radar,
electronic warfare, cable television, security systems, and other signal
processing applications. In addition to providing technical assistance for new
design and production requirements, the Company offers many standard bandpass
filters, voltage controlled oscillators and other products.
Initial Public Offering. The Company completed an initial public
offering ("IPO") in May 1996, whereby 3,000,000 shares of common stock, par
value $.0005 per share were issued and sold at $13 per share. The Company raised
a net amount of $35,220,000 which was used for debt repayment, capital
expenditures, working capital and other general corporate purposes.
Prior to the IPO, the Company effected a twenty-for-one stock split of
issued and outstanding common shares and changed the authorized number of shares
to 40,000,000 shares of common stock. All share, per share, ESOP, and stock
option information in the accompanying financial statements has been restated to
reflect the split and change in authorized shares. Also, prior to the IPO the
Company redeemed the 6% cumulative preferred stock for $100,000 and 9,087 shares
of common stock.
Basis of Presentation. The consolidated financial statements include
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. The Company's fiscal year ends
on September 30 of each year, but its fiscal quarters end on the Sunday nearest
the close of a quarter. For convenience, the accompanying financial statements
reflect the end of the fiscal quarter as the last day of that fiscal quarter.
Use of Estimates. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
The Company's cash and cash equivalents are primarily cash equivalents carried
at cost and consist of repurchase agreements, high grade commercial paper, and
U.S. government agency securities.
Accounts Receivable. Potential credit losses are recognized as they are
identified and are reported as an increase to sales expenses. Concentrations of
credit risk with respect to the receivables are limited due to the large number
of customers, generally short payment terms and their dispersion across
geographic areas and markets.
Inventories. Inventories are stated at the lower of cost (first-in,
first-out method) or market. Cost includes materials, direct labor and man-
ufacturing overhead. Market is defined principally as net realizable value.
F-7
<PAGE>
Property, Plant and Equipment. Property, plant and equipment is valued
at cost less accumulated depreciation computed using the straight line method.
The estimated useful lives used in computing depreciation expense are
as follows:
Building and Improvements 10 - 30 years
Production and Test Equipment 4 - 8 years
Computer Equipment 4 - 8 years
Furniture and Fixtures 5 - 10 years
Expenditures for maintenance, repairs and renewals of minor items are
expensed as incurred. Major renewals and improvements are capitalized. Upon
disposition, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is reflected in operations for the
period.
Unexpended funds from the Industrial Revenue Bond include restricted
cash balances and cash equivalents which represent the unexpended proceeds from
industrial revenue bond obligations which were committed to purchase additional
plant and equipment.
Intangibles. Various fees incurred in the acquisition of two Industrial
Revenue Bonds and a line of credit were capitalized and are being amortized
using the interest method over the lives of the agreements. Various fees
incurred in the establishment of an Employee Stock Ownership Plan were also
capitalized and are being amortized using the interest method over the lives of
the related debt.
Earnings Per Share. Earnings per share ("EPS") is computed based on the
weighted average number of common shares, common stock options (using the
treasury stock method) and all ESOP shares outstanding. Certain shares
considered outstanding for EPS purposes in 1994 were no longer considered
outstanding in 1995 due to the implementation of SOP 93-6. See Notes 2 and 10.
The weighted average number of those shares was 603,975 for 1994 and 1,610,100
for 1995. These shares were considered outstanding for EPS purposes for 1996
since they were committed to be released in fiscal 1996. In accordance with
Securities and Exchange Commission staff accounting bulletins, common and common
equivalent shares issued by the Company at prices below the public offering
price during the period beginning one year prior to the filing date of the
initial public offering have been included in the calculation as if they were
outstanding for all periods prior to the offering (using the treasury stock
method and the initial public offering price).
Revenue Recognition. Revenues from production contracts are recorded
when the product is completed and shipped. Revenues from non-recurring
engineering ("NRE") are recognized when the parts or services have been
completed and units, including prototypes, have been shipped. Revenues from NRE
are less than 10% of total net sales for the periods reported.
Income Taxes. The provision for income taxes includes Federal and State
taxes currently payable and deferred taxes arising from temporary differences
between income for financial and tax reporting purposes. These temporary
differences result principally from the use of accelerated methods of
depreciation for tax purposes, the provisions for losses on inventories and
accounts receivable, and the accounting for stock compensation. Research and
development tax credits are applied as a reduction to the provision for income
taxes in the year in which they are utilized.
F-8
<PAGE>
Stock-Based Compensation. The Company accounts for compensation cost
related to employee stock options and other forms of employee stock-based
compensation plans other than the ESOP in accordance with the requirements of
Accounting Principles Board Opinion 25 ("APB 25"). APB 25 requires compensation
cost for stock-based compensation plans to be recognized based on the
difference, if any, between the fair market value of the stock on the date of
grant and the option exercise price. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 established a
fair value-based method of accounting for compensation cost related to stock
options and other forms of stock-based compensation plans. However, SFAS 123
allows an entity to continue to measure compensation costs using the principles
of APB 25 if certain pro forma disclosures are made. SFAS 123 is effective for
fiscal years beginning after December 15, 1995. The Company intends to adopt the
provisions for pro forma disclosure requirements of SFAS 123 in fiscal 1997.
Such pro forma disclosures do not impact the financial condition or the
operating results of the Company.
SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to be Disposed Of." This new pronouncement is effective
for years beginning after December 15, 1995. This statement requires that
long-lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment. This pronouncement is not expected to have a material
impact on the financial statements of the Company.
Reclassifications. Certain amounts in prior years have been reclassi-
fied to conform to current year presentation.
Note 2 - Accounting Change
- --------------------------
Effective October 1, 1994, the Company adopted, as required, Statement
of Position (SOP) 93-6 of the Accounting Standards Division of the American
Institute of Certified Public Accountants in accounting for ESOP shares acquired
after December 31, 1992. This change requires that compensation expense be
measured using the fair market value rather than the cost of the shares when the
shares are committed to be released to the employees. The Company elected to
continue accounting for ESOP shares acquired prior to January 1, 1993, in
accordance with Statement of Position 76-3. Since no shares accounted for under
SOP 93-6 were committed to be released during fiscal 1995, there was no effect
on net income for the year for this accounting change. The effect of the
adoption was to reduce net income by $11,269,000 ($0.59 per share) for fiscal
1996.
Note 3 - Allowance for Doubtful Accounts and Sales Returns
- ----------------------------------------------------------
The allowance for doubtful accounts and sales returns is composed of
the following:
<TABLE>
September 30,
-------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period $ 277 $ 88 $ 103
Provision for doubtful accounts and sales returns 820 364 326
Sales returns and uncollectible accounts written off (443) (175) (341)
---- ---- ----
Balance, end of period $ 654 $ 277 $ 88
==== ==== ====
</TABLE>
F-9
<PAGE>
Note 4 - Inventories
- --------------------
Inventories are composed of the following:
<TABLE>
September 30,
-------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Raw Material $ 1,976 $ 1,454
Work in Process 2,341 1,359
Finished Goods 2,192 429
----- ------
Total $ 6,509 $ 3,242
===== =====
</TABLE>
The allowance for obsolete and slow moving inventory is composed of the
following:
<TABLE>
September 30,
-------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period $ 887 $ 680 $ 796
Charged to cost of sales 931 245 52
Disposal of inventory (113) (38) (168)
----- ----- -----
Balance, end of period $1,705 $ 887 $ 680
===== ===== =====
</TABLE>
Note 5 - Property, Plant and Equipment
- --------------------------------------
Property, plant and equipment are composed of the following:
<TABLE>
September 30
------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Land and Improvements $ 671 $ 523
Buildings 9,829 1,959
Production and Test Equipment 21,459 9,291
Computer Equipment 2,734 2,140
Furniture and Fixtures 1,533 877
Construction in Progress 4,774 1,879
------ ------
41,000 16,669
Less Accumulated Depreciation 10,576 8,537
------ ------
30,424 8,132
Unexpended Funds from Industrial Revenue Bond 2,606
------ ------
Total $30,424 $10,738
====== ======
</TABLE>
F-10
<PAGE>
Approximately $380,000, $82,000 and $18,000 of interest costs were
capitalized as part of property, plant and equipment in 1996, 1995 and 1994,
respectively.
Note 6 - Line of Credit
- -----------------------
The Company has a line of credit with a bank for working capital,
equipment purchases, plant expansion and other general business purposes of
$15,000,000 with interest at LIBOR plus 125 basis points. The line of credit is
unsecured and renewable annually. Covenants in connection with the line of
credit and with long-term debt agreements impose restrictions with respect to,
among other things, the maintenance of certain financial ratios, additional
indebtedness and disposition of assets. The Company was in compliance with the
covenants as of September 30, 1996 and 1995.
There were no borrowings against the line of credit at September 30,
1995. In 1996, the Company borrowed $7,000,000 and repaid all of this with a
portion of the proceeds from the IPO.
Note 7 - Long-Term Debt and Lease Obligations
- ---------------------------------------------
Long-term debt consists of the following:
<TABLE>
September 30,
-------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Industrial Revenue Bond (a) $ 593 $ 658
ESOP Note (b) 1,367 1,367
Industrial Revenue Bond (c) 2,970 3,323
ESOP Note (d) 1,656
Term Loan (e) 219 344
----- -----
5,149 7,348
Less Current Maturities 1,363 543
----- -----
$3,786 $6,805
===== =====
</TABLE>
a) In 1982, the Company obtained $1,800,000 in financing through the Orange
County Industrial Development Authority. The obligation is secured by land and
land improvements, the building and related equipment with a carrying value of
approximately $823,000 at September 30, 1996 and $865,000 at September 30, 1995.
The obligation is payable in varying quarterly installments through 2001 plus
interest at 68% of the prime rate.
(b) In 1991, the Company established an Employee Stock Ownership Plan (ESOP).
The Company borrowed $4,000,000 from a bank and loaned it to the ESOP. The
remaining obligation is payable in quarterly installments of $195,521, beginning
December 1996, plus interest at the prime rate through June 1998. The Company
will service the debt through contributions to the Plan.
F-11
<PAGE>
(c) In 1995, the Company obtained $3,500,000 in financing through the Orange
County Industrial Development Authority. The obligation is secured by a building
expansion and related equipment with a carrying value of approximately
$7,939,000 at September 30, 1996 and $2,914,000 at September 30, 1995. In
addition, there were approximately $2,606,000 in unexpended funds at September
30, 1995. The obligation is payable in quarterly installments of $88,334 through
March 2000, then in quarterly installments of $43,334 through March 2010, both
plus interest at the prime rate.
(d) In 1994, the Company borrowed $1,656,000 from a bank and loaned it to the
ESOP which used the proceeds to purchase Common Stock from the Company. The
Company repaid this loan in early 1996 through a draw on the line of credit.
(e) The term loan is payable in quarterly installments of $31,250 with
interest at the prime rate.
The Company leases equipment under a noncancelable agreement that
expires in 1998. Rental expense was approximately $481,000, $168,000 and $10,000
in 1996, 1995 and 1994, respectively.
Required future payments for long-term debt and operating leases are as
follows:
<TABLE>
Debt Leases
---- ------
(in thousands)
<C> <C> <C>
1997 $ 1,363 $ 389
1998 1,147 317
1999 469 33
2000 379 7
2001 288
Thereafter 1,503
----- -----
$ 5,149 $ 746
===== =====
</TABLE>
The Company made interest payments of approximately $550,000,
$456,000 and $394,000 on long-term debt in 1996, 1995 and 1994, respectively.
The fair value of the Company's long-term debt approximates the
carrying amount.
Note 8 - Redeemable Common Stock
- --------------------------------
The ESOP owns an aggregate of 9,824,634 and 9,896,540 shares of the
Company's Common Stock at September 30, 1996 and 1995, respectively. At
September 30, 1995, these shares were redeemable under certain circumstances by
former employees at the fair market value of the Common Stock and were
classified apart from non-redeemable shareholders' equity. After completion of
the IPO, these shares were no longer redeemable. Accordingly, at September 30,
1996 these shares are classified as part of non-redeemable shareholders' equity.
F-12
<PAGE>
Note 9 - Income Taxes
- ---------------------
The income tax provision is composed of the following:
<TABLE>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 5,176 $ 3,263 $ 1,002
State 936 542 176
----- ------ ------
6,112 3,805 1,178
Deferred:
Federal 343 (354) (242)
State 59 (61) (42)
----- ------ ------
402 (415) (284)
----- ------ ------
Total Income Tax Provision $ 6,514 $ 3,390 $ 894
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant temporary differences giving rise to year-end deferred tax
balances were as follows:
<TABLE>
September 30,
-------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Current:
Accruals not currently deductible $ 475 $ 94
Inventory costs capitalized for tax purposes 210 64
Inventory loss provision 581 302
----- -----
Deferred Tax Asset $ 1,266 $ 460
===== =====
Non-Current:
Stock option compensation not currently deductible $ 568 $ 805
Earnings of subsidiary not currently taxed (328)
Excess tax over book depreciation (1,238) (595)
------ -----
Deferred Tax Asset (Liability) $ (998) $ 210
====== =====
</TABLE>
F-13
<PAGE>
A reconciliation of statutory Federal income taxes to reported
income taxes is as follows:
<TABLE>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income taxes computed at the Federal
statutory rate of 34% (35% in 1996) $ 2,161 $ 3,080 $ 809
State income taxes, net of Federal benefit 646 329 86
Non-deductible ESOP compensation expense 3,944
Foreign Sales Corporation tax benefit (200)
Other (37) (19) (1)
------ ------ ----
Total Income Tax Provision $ 6,514 $ 3,390 $ 894
====== ====== ====
</TABLE>
In 1996, the Company's tax liability was reduced and its capital
surplus was increased by $2,021,000 as a result of the exercise of non-qualified
stock options.
The Company made income tax payments of approximately $3,959,000,
$3,105,000 and $1,300,000 in 1996, 1995 and 1994, respectively.
The Company provides for deferred taxes on the non-repatriated earnings
of its subsidiary in Costa Rica. The subsidiary benefits from a complete
exemption from Costa Rican income taxes through 2003 and a 50% exemption
thereafter through 2007.
Note 10 - Employee Benefit Plans
- --------------------------------
Profit Sharing Plan. In 1981, the Company established a profit sharing
plan covering substantially all employees who work 500 hours or more per year. A
401(k) feature was added to the plan in 1991. There were no contributions by the
Company to the plan in 1996, 1995 or 1994.
Employee Stock Ownership Plan. In 1991, the Company established an
Employee Stock Ownership Plan covering substantially all employees. The ESOP
purchased 3,376,640 shares of Common Stock from substantially all of the common
shareholders and 5,512,240 shares of Common Stock from the Company in 1991. The
transaction was financed from the proceeds of a $4,000,000 loan from a bank. The
Company accounts for these ESOP shares in accordance with Statement of Position
76-3. As of September 30, 1996, 3,036,431 of these shares remain unallocated. In
1994, the ESOP purchased an additional 1,610,600 shares of Common Stock from the
Company. The transaction was financed from the proceeds of a $1,656,000 loan
from a bank. The Company accounts for these ESOP shares in accordance with
Statement of Position 93-6. In accordance with the terms described in Note 7,
the Company makes contributions to service the related ESOP debt. The ESOP
shares pledged as collateral for the debt are reported as unearned ESOP
compensation in the balance sheet. As the debt is repaid, shares are released
from collateral and allocated (earned) to active employees, based on the
proportion of debt service paid during the year. As those shares accounted for
in accordance with Statement of Position 93-6 are committed to be released to
participants, the Company reports compensation expense equal to the current
estimated value of the shares, and the shares become outstanding for
earnings-per-share (EPS) computation.
F-14
<PAGE>
In April 1996, the Company amended the ESOP and allocated the ESOP's
1,610,600 shares of Common Stock of the Company acquired in 1994 to employees
for services rendered in the period October 1, 1995 to April 28, 1996. As these
shares are accounted for in accordance with SOP 93-6, the Company recorded a
charge to operating income of approximately $12,925,000 for 1996.
The Company made payments of approximately $1,656,000, $836,000 and
$556,000 in principal and $127,000, $259,000 and $210,000 in interest for the
ESOP in 1996, 1995 and 1994, respectively. Allocations to participants' accounts
were 1,610,600; 1,737,960 and 1,354,540 shares in 1996, 1995 and 1994,
respectively.
Employee Stock Purchase Plan. In February 1996, the Board of Directors
approved an employee stock purchase plan and allotted 500,000 shares of common
stock to the plan. The plan enables eligible employees who have completed a
service requirement to purchase shares of common stock at a 15% discount from
the fair market value of the stock, up to a maximum of 10% of their
compensation. The plan commenced with the IPO.
Note 11 - Significant Customers
- -------------------------------
Sales to the United States government (both as a prime contractor and
on a subcontract basis), to foreign markets and to significant customers as a
percent of the Company's total revenues were as follows:
<TABLE>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Government (Inclusive of Significant Customers) 15% 17% 33%
Foreign Markets (Inclusive of Significant Customers
and European Market) 54% 49% 40%
European Market 38% 36% 22%
Significant Customer A 24% 23% 8%
Significant Customer B 11% 10% 2%
</TABLE>
Note 12 - Geographic Segments
- -----------------------------
Sales are reported in the geographic area where they originate.
Transfers from the U.S. to Costa Rica are made on a basis intended to reflect
the market of the products. Prior to 1996, all sales, operating profit and
assets were attributable to the United States operation.
<TABLE>
Net Sales Operating Income Assets
--------- ---------------- ------
(in thousands)
<S> <C> <C> <C>
United States $ 54,203 $ 4,680 $ 72,697
Costa Rica 4,793 1,105 8,222
Eliminations (1,332) - (6,325)
------- ------ -------
Consolidated Results $ 57,664 $ 5,785 $ 74,594
======= ====== =======
</TABLE>
All sales are denominated in U.S. dollars. The functional currency
for the Costa Rican operation is the U.S. dollar as sales, most material cost,
and equipment are U.S. dollar denominated. The currency fluctuations of the
local Costa Rican currency are not considered significant and are not hedged.
F-15
<PAGE>
Note 13 - Stock Options
-----------------------
The Company has granted incentive stock options and non-qualified stock
options under the 1983 Stock Option Plan and the Second Stock Option Plan. The
Second Stock Option Plan was approved by the shareholders in 1996 with up to
2,000,000 shares of Common Stock available for options. Incentive options
granted are exercisable over a ten year period, generally in four equal annual
installments commencing one year after the date of grant. A majority of the
non-qualified options granted are exercisable from the date of grant over a ten
year period, while the remainder become exercisable in three or four equal
annual installments.
Information concerning options under this plan is as follows:
<TABLE>
Shares Under
Option Option Price
------ ------------
<S> <C> <C>
Balance at October 1, 1993 1,454,860 $0.13 - $ 0.74
Granted 1,263,440 $0.13 - $ 0.79
Exercised (160,700) $0.13
---------
Balance at September 30, 1994 2,557,600 $0.13 - $ 0.79
Granted 1,012,980 $0.13 - $ 1.34
Terminated (107,250) $0.51 - $ 0.74
Exercised (330,230) $0.13 - $ 0.79
---------
Balance at September 30, 1995 3,133,100 $0.13 - $ 1.34
Granted 175,000 $3.55 - $24.75
Terminated (8,140) $0.74 - $ 1.34
Exercised (1,754,500) $0.13 - $ 1.34
---------
Balance at September 30, 1996 1,545,460 $0.13 - $24.75
=========
Exercisable at September 30, 1996 564,960 $0.13 - $ 1.34
=========
</TABLE>
F-16
<PAGE>
Note 14 - Quarterly Financial Information (unaudited)
- -----------------------------------------------------
Selected quarterly financial data is summarized below:
<TABLE>
Quarter Ended
-------------
Fiscal 1996 Fiscal 1995
------------------------------------------ ------------------------------------------
Sept.30, June 30, Mar.31, Dec.31, Sept.30, June 30, Mar.31, Dec.31,
1996 1996 1996 1995 1995 1995 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 18,000 $ 14,926 $ 13,929 $ 10,809 $ 11,550 $ 7,698 $ 6,824 $ 5,245
Cost of sales 8,672 6,986 6,512 5,092 4,930 3,014 2,792 2,349
------- ------- ------- ------- ------- ------ ------ ------
Gross Profit 9,328 7,940 7,417 5,717 6,620 4,684 4,032 2,896
Operating expenses:
Selling expenses 1,202 1,174 797 774 851 823 772 692
General & administrative
expenses 1,633 1,509 1,581 1,068 1,837 551 519 533
ESOP compensation
expense 1,846 5,539 5,540 194 196 196 196
Research and development
expenses 583 467 486 418 409 559 422 279
------- ------- ------- ------- ------- ------ ------ ------
Total operating expenses 3,418 4,996 8,403 7,800 3,291 2,129 1,909 1,700
------- ------- ------- ------- ------- ------- ------- ------
Operating income (loss) 5,910 2,944 (986) (2,083) 3,329 2,555 2,123 1,196
Interest expense net of
capitalized interest (94) 114 87 138 107 145 91 91
Other (income) expense (374) (240) (26) 6 (122) (90) (49) (30)
------- ------- ------- ------- ------- ------ ------- ------
Income (loss) before
income taxes 6,378 3,070 (1,047) (2,227) 3,344 2,500 2,081 1,135
Income taxes 2,460 1,699 1,401 954 1,161 975 812 443
------- ------- ------- ------- ------- ------ ------- ------
Net income (loss) $ 3,918 $ 1,371 $ (2,448) $ (3,181) $ 2,183 $ 1,525 $ 1,269 $ 692
======= ====== ======= ======= ======= ====== ======= ======
Net income (loss) per
share (1) $ 0.18 $ 0.07 $ (0.14) $ (0.18) $ 0.13 $ 0.10 $ 0.08 $ 0.04
======= ====== ======= ======= ======= ====== ======= ======
Shares used in computation
of net income per share 21,286 20,286 18,140 17,272 16,199 16,034 16,546 16,540
- -------------------
<FN>
(1) Earnings per share for each quarter is calculated as a discrete period; the
sum of the four quarters may not equal the calculated full-year amount.
</FN>
</TABLE>
F-17
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Management - Executive Officers and Directors
- ---------------------------------------------
The executive officers and directors of the Company and their ages as
of September 30, 1996 are as follows:
Name Age Position
- ---- --- --------
Steven P. Miller 48 Chairman, President, and Chief Executive Officer
Neal J. Tolar (1) 55 Senior Vice President, Chief Technical Officer
and Director
Thomas L. Shoquist 50 Vice President, Quality
Gary A. Monetti 37 Vice President, Operations and Chief Operating
Officer
Raymond A. Link 42 Vice President, Finance and Chief Financial
Officer
Robert C. Strandberg (1)(2) 39 Director
Bruce S. White (2) 63 Director
Willis C. Young (1)(2) 55 Director
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Steven P. Miller was a co-founder of the Company and has served as
President and a Director since 1979, Chief Executive Officer since 1986 and
Chairman since February 1996. Prior to joining the Company, he was manager of
the SAW Device Engineering and Development Laboratory at Texas Instruments
Incorporated ("TI"), an electronics manufacturer. He joined TI in 1969. Mr.
Miller has a B.S. degree in Electrical Engineering from the South Dakota School
of Mines and Technology.
Neal J. Tolar was a co-founder of the Company and has served as Senior
Vice President and Chief Technical Officer since June 1995 and a Director since
1979. He served as Vice President, Operations and Engineering from 1979 to June
1995. Prior to joining the Company, he was a member of the technical staff in
the RF Technology Group of the Corporate Research Laboratory at TI. He joined TI
in 1967. Dr. Tolar has a Ph.D. in Ceramic Engineering from the University of
Utah and a B.S. degree in Ceramic Engineering from Mississippi State University.
Thomas L. Shoquist joined the Company in 1979 and has served as Vice
President, Quality, since October 1993 and a Director from 1989 to March 1996.
From 1987 to October 1993, he was Vice President, Operations Support and
Manufacturing. Prior to that he held various positions at Sawtek, including Vice
President, Operations Support, Production Manager, Director of Engineering and
Vice President, Program Management. Prior to joining Sawtek, Mr. Shoquist was
with TI from 1972 to 1979 in various design and research capacities involving
surface acoustic wave applications. Mr. Shoquist has a B.A. degree (Physics)
from the University of Texas at Dallas.
Gary A. Monetti joined the Company in 1982 and has served as Vice
President, Operations and Chief Operating Officer since July 1995. He has
served in various positions, since 1982, at the Company, including Filter Design
Engineer, Manager of Filter Technology, Vice President, Sales and Marketing and
Vice President, Engineering. Mr. Monetti has an M.B.A. degree from Rollins
College and a B.S. degree in Electrical Engineering from the University of
Illinois.
28
<PAGE>
Raymond A. Link joined the Company in September 1995 as Vice President,
Finance and Chief Financial Officer. From 1987 to September 1995, Mr. Link was
Vice President, Finance and Chief Financial Officer of Hubbard Construction
Company, a heavy/highway construction company. Prior to joining Hubbard
Construction Company, Mr. Link was with Harris Corporation, an electronics
manufacturer, in various financial capacities from 1980 to 1987. Mr. Link has
an M.B.A. degree from the Wharton School at the University of Pennsylvania and a
B.S. degree in Accounting from the State University of New York at Buffalo. He
is a Certified Public Accountant.
Robert C. Strandberg has been a Director of the Company since October
1995. Mr. Strandberg was the Chairman of the Board of Directors, President and
Chief Executive Officer of Datamax International Corporation, a manufacturer of
bar code printers, from September 1991 to April 1996. He is currently self-
employed as a management consultant. From 1988 to 1991, he was Vice President,
Finance of Datamax. From 1986 to 1988, he worked for GTECH, a lottery manage-
ment company, in the areas of finance and strategic planning. Mr. Strandberg
has an M.B.A. degree from Harvard Graduate School of Business Administration
and a B.S. degree in Operations Research and Industrial Engineering from Cornell
University.
Bruce S. White has been a Director of the Company since April 1996.
Mr. White has been a Corporate Vice President of AVNET Inc., a distributor of
electronic components, since January 1996 and the President of the Penstock
Division of AVNET Inc. since July 1994. From 1974 to July 1994, Mr. White was
the President and Chief Executive Officer of Penstock Inc., a company he founded
to distribute RF and microwave components. Penstock is a distributor of certain
products manufactured by Sawtek. In fiscal 1996, sales from Sawtek to Penstock
were approximately $1.9 million. Mr. White has a B.A. degree in Mathematics
from Colgate University and B.S. and M.S. degrees in Electrical Engineering from
Michigan State University.
Willis C. Young has been a Director of the Company since February 1996.
He has been a Senior Partner of the Atlanta office of BDO Seidman, LLP, an
international accounting and consulting firm, since January 1996. From April
1995 to December 1995, Mr. Young was the Chief Financial Officer for Hayes
Microcomputer Products, Inc., a manufacturer of modems and communication
equipment, where he was engaged to assist in the implementation of Hayes'
restructuring in bankruptcy. From 1965 to March 1995, Mr. Young held various
positions with BDO Seidman, LLP, and from 1988 to March 1995 he was a Vice
Chairman and a member of the Executive Committee. Mr. Young has a B.S. degree in
Accounting from Ferris State University. He is a Certified Public Accountant.
Members of the Company's Board of Directors are each elected for one
year terms at the annual shareholders meeting. Officers are elected at the first
Board of Directors meeting following the shareholders meeting at which directors
are elected and serve at the discretion of the Board of Directors.
There is no family relationship between any of the Company's executive
officers or directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Company's proxy statement to be filed not later than 120 days
after the end of the fiscal year.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein by
reference to the Company's proxy statement to be filed not later than 120 days
after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the Company's proxy statement to be filed not later than 120 days
after the end of the fiscal year.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(A) The following documents are filed as part of this report:
1. Financial statements - see index to Consolidated Financial
Statements on page F-1 hereof.
2. Financial statement schedules: All schedules have been omitted
because they are inapplicable or not material, or the infor-
mation called for thereby is included in the Consolidated
Financial Statements and notes thereto.
3. Exhibits required by Item 601 of Regulation S-K:
(a) See Exhibit Index in (c) below.
(b) Reports on Form 8K: the Company did not file any report
on Form 8K during the quarter ended September 30, 1996.
(c) Exhibits:
3.1 Amended and Restated Articles of Incorporation of
Sawtek Inc. (incorporated by reference to
Registration Statement on Form S-8, File
No. 333-10579).
3.2 1996 Bylaws of Sawtek Inc. (incorporated by
reference to Registration Statement on Form S-8,
File No. 333-11523).
4.1 * Specimen stock certificate.
30
<PAGE>
10.1 Sawtek Inc. 1983 Incentive Stock Option Plan (incor-
porated by reference to Registration Statement on
Form S-8, File No. 333-10579).
10.2 Sawtek In. Second Stock Option Plan (incorporated by
reference to Registration Statement on Form S-8,
File No. 333-11523).
10.3 Sawtek Inc. Employee Stock Purchase Plan (incorpor-
ated by reference to Registration Statement on Form
S-8, File No. 333-11701).
10.4 * Incentive Stock Option Agreement, dated December
12, 1994, between the Company and Ronald M. Hays.
10.5 * Incentive Stock Option Agreement, dated December
19, 1994, between the Company and Neal J. Tolar.
10.6 * Stock Option Agreement, dated December 19, 1994,
between the Company and Steven P. Miller.
10.7 Employee Stock Ownership Plan and Trust Agreement
for Employees of Sawtek Inc. (the "ESOP") (incorpor-
ated by reference to Registration Statement on Form
S-8, File No. 333-08281).
10.8 * Sawtek Inc. 1994 Stockholders Agreement.
10.9 * Restructuring Agreement, dated January 11, 1991,
by and between the Company, certain shareholders of
the Company and the ESOP.
10.10 * Agreement with respect to Stock Options, dated
June 29, 1994, between the Company and the ESOP.
10.11 * Second ESOP Loan Agreement, dated June 29, 1994.
10.12 * Second Amendment to ESOP Loan Agreement, dated
June 29, 1994.
10.13 * Commercial Lease, dated March 1, 1994, between the
Company as Tenant and Piezo Technology, Inc. as
Landlord.
10.14 * Lease, dated August 2, 1995, between the Company
as Tenant and Dr. Phillips, Inc. as Landlord.
10.15 * Lease Agreement dated November 19, 1995, between
Sawtek, S.A. as Lessee and Centro de Ciencia y
Tecnolgia Ultrapark, S.A. as Lessor.
10.16 * Master Lease Agreement, dated as of March 21, 1995
between the Company as Lessor and General Electric
Capital Corporation, as Lessor.
31
<PAGE>
10.17 * Company Loan Agreement dated January 11, 1991,
between the Company and Sun Bank, National
Association ("Sun Bank").
10.18 * Company Note, dated January 11, 1991.
10.19 * Security Agreement dated January 11, 1991, between
the Company and Sun Bank.
10.20 * Company Pledge Agreement dated January 11, 1991.
10.21 * Mortgage and Security Agreement, dated January 9,
1991, by and between the Company, the Orange County
Industrial Development Authority ("OCIDA"), and Sun
Bank.
10.22 * Fourth Amendment to Installment Sales and
Security Agreement, dated January 8, 1991, by and
between the Company, OCIDA, and Sun Bank.
10.23 * ESOP Pledge Agreement, dated January 11, 1991, by
and between the Company, ESOP, and Southeast Bank,
National Association ("Southeast").
10.24 * ESOP Loan Agreement, dated January 11, 1991, by
and between the Company and Southeast.
10.25 * ESOP Note dated January 11, 1991.
10.26 * Amended and Restated Loan and Security Agreement,
dated November 15, 1995, between the Company and
SunTrust Bank, Central Florida, National Association
("SunTrust").
10.27 * Increase Promissory Note dated November 10, 1995.
10.28 * Renewal, Increase and Consolidation Promissory
Note, dated November 10, 1995.
10.29 * Promissory Demand Note, dated November 10, 1995.
10.30 * Fifth Amendment to Installment Sale and Security
Agreement, dated as of March 1, 1995, between the
Company, Sun Bank and OCIDA.
10.31 * Fourth Supplemental Trust Indenture, dated as of
March 1, 1995, between the Company, Sun Bank and
OCIDA.
10.32 * Construction Loan Agreement, dated as of March 1,
1995, between the Company and Sun Bank.
32
<PAGE>
10.33 * Eighth Amendment to Loan and Security Agreement,
Fourth Amendment to Company Loan Agreement and First
Amendment to Second Company Loan Agreement, dated
as of March 11, 1995, between the Company and Sun
Bank.
10.34 * Bond Purchase Agreement dated as of December 1,
1981, between OCIDA and the Company.
10.35 * Installment Sale and Security Agreement, dated as
of December 1, 1981, between OCIDA and the Company
and accepted by the Guarantors.
10.36 * Guaranty Agreement dated as of December 1, 1981,
among the Guarantors and OCIDA.
10.37 * Trust Indenture dated as of December 1, 1981,
between OCIDA and the Trustee and accepted by the
Company and the Guarantors.
10.38 * Sawtek Inc. Code ss.401(k) Profit Sharing Plan
and Trust Agreement, dated February 15, 1995.
10.39 Letter from SunTrust Bank, Central Florida, N.A.
for renewal and repricing of unsecured line of
credit for Sawtek Inc. dated September 27, 1996.
11.1 Statement regarding computation of per share
earnings.
21.1 * List of subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
24.1 Power of attorney. Reference is made to page 34.
* Incorporated by reference to Registration Statement on Form S-1, File No.
333-1860.
33
<PAGE>
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 on the 4th day of
November, 1996.
SAWTEK INC.
By:/s/Steven P. Miller
Steven P. Miller
Chairman, President and Chief Executive Officer
By:/s/Raymond A. Link
Raymond A. Link
Vice President Finance and
Chief Financial Officer
By:/s/Ronald A. Stribling
Ronald A. Stribling
Controller and Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS , that each person whose signature
appears on the following page constitutes and appoints Steven P. Miller and or
Raymond A. Link to sign any amendments to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that the said attorney-in-fact, or his substitute or substitutes, may 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 below by the following persons on behalf of the
Registrant and in the capacities indicated on the 4th day of November, 1996.
/s/Neal J. Tolar /s/Steven P. Miller
Neal J. Tolar Steven P. Miller
Senior Vice President and Director Chairman, CEO, President and Director
/s/Robert C. Strandberg /s/Willis C. Young
Robert C. Strandberg Willis C. Young
Director Director
Bruce S. White
Director
34
<PAGE>
EXHIBIT 11.1
<TABLE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
as reported on Form 10-K
(in thousands, except per share data)
<CAPTION>
Three months ended Year ended
September 30, September 30,
-------------------- --------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Primary Earnings Per Share:
Weighted average number of shares of Common Stock outstanding 19,854 13,485 17,197 13,738 15,785
Net effect of dilutive stock options based on the Treasury
stock method using the average fair market value in effect
for the period 1,432 2,714 2,012 2,638 2,305
------ ------ ------ ------ ------
Total shares outstanding for Primary EPS 21,286 16,199 19,209 16,376 18,090
====== ====== ====== ====== ======
Fully Diluted Earnings Per Share:
Weighted average number of shares of Common Stock outstanding 19,854 13,485 17,197 13,738 15,785
Net effect of dilutive stock options based on the Treasury
stock method using the higher of the fair market value at the
end of the period or the average during the period 1,432 2,714 2,049 2,791 2,357
------ ------ ------ ------ ------
Total shares outstanding for Fully Diluted EPS 21,286 16,199 19,246 16,529 18,142
====== ====== ====== ====== ======
Net income (loss) $ 3,918 $ 2,183 ($340) $ 5,669 $ 1,485
Less preferred stock dividends 27 18 18
------ ------ ------ ------ ------
Net income (loss) applicable to common shareholders $ 3,918 $ 2,183 ($367) $ 5,651 $ 1,467
====== ====== ====== ====== ======
Earnings (loss) per share:
Primary $ 0.18 $ 0.13 ($0.02) $ 0.35 $ 0.08
Fully Diluted $ 0.18 $ 0.13 ($0.02) $ 0.34 $ 0.08
</TABLE>
35
<PAGE>
EXHIBIT 10.39
SunTrust Bank, Central Florida, N.A. Douglas A. Woodman
Post Office Box 3833 Vice President
Orlando, Florida 32802
Tel (407) 237-4303
- -------------------------------------------------------------------------------
SunTrust
September 27, 1996
Mr. Raymond A. Link
Chief Financial Officer
Sawtek Inc.
Post Office Box 609501
Orlando, Florida 32860-9501
Dear Ray:
We are pleased to inform you that SunTrust Bank, Central Florida, N.A. has
approved a $15,000,000 Unsecured Line of Credit for Sawtek Inc. Additionally, we
have approved rate and structural changes to some of your existing credit
facilities with the bank. These changes reflect our continued confidence in
Sawtek and our support for the company. As Charles Brumback will be handling a
formal commitment letter and the documentation for implementing the changes,
this letter will briefly cover the basic details of our new structure and
pricing for Sawtek Inc.
Pricing - As we have discussed, the line of credit will be priced at LIBOR plus
125 bps. with a 10 bp. fee on the unused portion, payable quarterly in arrears.
At this point, the unused fee will only be applied to the $11.5 million portion
of the line that is currently in place. The 1995 IDB will be amended to call for
a taxable bps. It will be your responsibility to let us know the effective date
of the change from tax free to taxable status based upon the capital expenditure
violation.
Collateral - As mentioned above, the $15 million line will be unsecured and can
be utilized for general corporate purposes. The collateral base for the IDB's
and ESOP loan will not change.
Covenants and Conditions - In an effort to simplify and update our existing loan
covenant package, we will be asking Sawtek to comply with only two loan
covenants, as follows:
Minimum Tangible Net Worth to be greater than or equal to $50,000,000.
Total Liabilities divided by Tangible Net Worth to be less than or
equal to 1.
We look forward to formalizing the above changes in the next few weeks. If,
during this process, we notice any other logical adjustments, we will certainly
be open to discussing them with you. Hopefully, we can lay the foundation for
future credit enhancements to Sawtek's capital base.
Very truly yours,
/s/Douglas A. Woodman
Douglas A. Woodman
36
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of our report dated October 25, 1996, with respect to the
consolidated financial statements of Sawtek Inc. and subsidiaries included in
its Annual Report (Form 10-K) for the year ended September 30, 1996.
Registration
Statement
Number
Description
333-11701 Form S-8 re: Sawtek Inc. Employee Stock Purchase Plan
333-11523 Form S-8 re: Sawtek Inc. Second Stock Option Plan
333-10579 Form S-8 re: Sawtek Inc. Amended and Restated 1983 Incentive Stock
Option Plan
333-08281 Form S-8 re: Employee Stock Ownership Plan for Employees of Sawtek
Inc.
/s/Ernst & Young, LLP
Ernst & Young LLP
Orlando, Florida
November 4, 1996
37
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 27,743
<SECURITIES> 0
<RECEIVABLES> 8,592
<ALLOWANCES> 654
<INVENTORY> 6,509
<CURRENT-ASSETS> 43,984
<PP&E> 41,000
<DEPRECIATION> 10,576
<TOTAL-ASSETS> 74,594
<CURRENT-LIABILITIES> 8,185
<BONDS> 3,786
0
0
<COMMON> 10
<OTHER-SE> 61,615
<TOTAL-LIABILITY-AND-EQUITY> 74,594
<SALES> 57,664
<TOTAL-REVENUES> 57,664
<CGS> 27,262
<TOTAL-COSTS> 27,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 245
<INCOME-PRETAX> 6,174
<INCOME-TAX> 6,514
<INCOME-CONTINUING> (340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (340)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
