UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SAWTEK INC.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction or incorporation or organization)
59-1864440
(I.R.S. Employer Identification Number)
1818 South Highway 441, Apopka, Florida 32703 (407) 886-8860
(Address including zip code, and telephone number including area code, of
registrant's principal executive offices)
Steven P. Miller, 1818 South Highway 441, Apopka,
Florida 32703 (407) 886-8860 (Name, address including zip code,
and telephone number including area code, of agent for service)
Copies to:
WILLIAM A. GRIMM, ESQ. ANDREI M. MANOLIU, ESQ.
Gray Harris & Robinson, P.A. L. KAY CHANDLER, ESQ.
201 East Pine Street Cooley Godward LLP
Suite 1200 Five Palo Alto Square
Orlando, Florida 32802 3000 El Camino Real
(407) 843-8880 Palo Alto, California 94306-2155
(415) 843-5000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
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Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Aggregate Price Per Aggregate Offering Amount of Registration
Registered Registered(1) Unit(2) Price Fee
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<S> <C> <C> <C> <C>
Common Stock 2,875,000 $30.5625 $87,867,188 $26,626
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<FN>
(1) Includes 375,000 shares that the Underwriters have the option to purchase
from certain Selling Shareholders to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 (c) under the Securities Act of 1933.
</FN>
</TABLE>
<PAGE>
[The following text will be placed along the left-hand margin, first
page to the prospectus - see next page]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 9, 1997
PROSPECTUS
2,500,000 Shares
[SAWTEK INC. LOGO]
SAWTEK INCORPORATED
Common Stock
Of the 2,500,000 shares of Common Stock offered hereby, 300,000 shares are
being sold by the Company and 2,200,000 shares are being sold by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol SAWS. On May 8, 1997, the last reported price was $32.75 per share.
See "Price Range of Common Stock."
------------------
The shares offered hereby involve a high degree of risk. See
"Risk Factors" commencing on page 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Underwriting Proceeds to Proceeds to Selling
Price to Public Discount (1) Company (2) Shareholders (3)
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<S> <C> <C> <C> <C>
Per Share . . . . . . . . $ $ $ $
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Total (4) . . . . . . . . $ $ $ $
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<FN>
(1) See "Underwriting" for indemnification arrangements with the several Underwriters.
(2) Before deducting expenses payable by the Company estimated at $60,000.
(3) Before deducting expenses payable by the Selling Shareholders estimated at $440,000.
(4) Certain Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock solely to cover over-allotments, if any. If all such
shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Selling
Shareholders will be $ , $ and $ , respectively. See "Underwriting."
</FN>
</TABLE>
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The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, receipt and acceptance by them and subject to the right
of the Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of the agent of Hambrecht & Quist
LLC in New York, New York.
HAMBRECHT & QUIST
OPPENHEIMER & CO., INC.
RAYMOND JAMES & ASSOCIATES, INC.
, 1997
<PAGE>
Color photos of a class 10 clean room, various Sawtek products and
Sawtek's high-volume production facility in Costa Rica]
[Text: The Sawtek Advantage / Class 10 Clean Room / Sawtek Products / High-
Volume Production Facility in Costa Rica]
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
--------------------
The Sawtek Incorporated logo is a trademark of the Company. All other
trademarks and registered trademarks used in this Prospectus are the property of
their respective owners.
<PAGE>
[Next page - Gatefold Color Photos]
Text: Serving a world of wireless applications
Telecommunications
Military and Space
Data Communications
Video Transmissions
Other Sawtek Markets
Color photos of wireless applications that use Sawtek products, including
cellular basestations, wireless PCS telephones, handheld data terminals,
satellite in space, helicopter in-flight, satellite dish, PCMCIA card for
personal computer, toll plaza, video transmission equipment.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
The Company
Sawtek Inc. ("Sawtek" or 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 products are
custom-designed, high performance bandpass filters, resonators, delay lines,
oscillators and SAW-based subsystems. These products are used in a variety of
microwave and radio frequency ("RF") systems, such as CDMA and GSM-based digital
wireless systems, digital microwave radios, wireless local area networks
("WLAN"), cable television equipment and various defense and satellite systems.
The Company's products offer key advantages such as lower distortion, reduced
size and weight, high reliability and precise frequency control compared to
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 precise SAW device design
and simulation, enabling Sawtek and its customers to achieve timely new product
development. The Company's commercial customer base accounts for approximately
85% of net sales and includes major telecommunications equipment producers such
as Ericsson, LGIC (Lucky GoldStar), Lucent Technologies, Motorola, Nokia and
Qualcomm.
The wireless communications industry is experiencing significant
worldwide growth. Improvements in wireless communications products such as
cellular, personal communications services ("PCS"), global satellite telephones
and wireless data systems are contributing to this growth. While eliminating the
need for costly and time consuming development of extensive wired
infrastructure, wireless communication systems offer the same functional
advantages as wired systems with the added benefits of reduced installation
costs and increased user convenience. In addition, new digital
telecommunications standards and technology are rapidly emerging to provide the
performance improvements necessary to address the overcrowding of existing
cellular systems. SAW technology is an enabling solution which meets the more
demanding performance, size and reliability requirements of these numerous and
developing wireless voice, data and video applications.
As a leading worldwide supplier of SAW-based components, Sawtek has
designed and manufactured more than 1,500 different SAW products that operate
from 10 MHz to nearly 3 GHz for both commercial and military applications. The
Company's products, comprising one of the broadest SAW product lines in the
industry, are used by diverse original equipment manufacturers in numerous
applications ranging from basestation and handheld telecommunications
applications in digital telephone systems to state-of-the-art, high performance
SAW-based subsystems.
Sawtek intends to leverage its advanced design and manufacturing
technology and strong customer relationships to become a leading worldwide
provider of SAW components for high volume, wireless communications systems
applications. Furthermore, the Company expects to continue to build its
leadership position in the development and production of both custom and
standard SAW devices for industrial and "high end" commercial market
applications and to remain the dominant supplier of custom-designed SAW
components and SAW-based subsystems to the military and space industry. The
markets and applications served by the Company demand a diverse mixture of SAW
products requiring a flexible manufacturing capability. Accordingly, the Company
intends to continue expanding its high volume, automated manufacturing capacity
as customer needs dictate.
The Company was incorporated in Florida in 1979. Unless the context
otherwise requires, all references in this Prospectus to the Company refer to
Sawtek Inc. and its wholly-owned subsidiaries. The Company's principal executive
offices are located at 1818 South Highway 441, Apopka, Florida, 32703, and its
telephone number is (407) 886-8860.
<PAGE>
The Offering
Common Stock offered by the Company ...................... 300,000 shares
Common Stock offered by the Selling Shareholders.......... 2,200,000 shares
Common Stock to be outstanding after the offering ........ 20,662,566 shares (1)
Use of proceeds .......................................... Capital expenditures
and general corporate
purposes, including
working capital
Nasdaq National Market symbol ............................ SAWS
<TABLE>
Summary Consolidated Financial Information
(in thousands, except per share data)
<CAPTION>
Six Months Ended
Years Ended September 30, March 31,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Income (Loss) Data:
Net sales $14,710 $14,428 $19,139 $31,317 $57,664 $24,738 $ 38,511
Gross profit 7,513 7,254 10,324 18,233 30,402 13,134 21,520
Income (loss) from operations 2,172 1,916 2,626 9,203 5,785 (3,069) 14,219
Net income (loss) (2) $ 948 $ 975 $ 1,485 $ 5,669 $ (340) $(5,629) $ 9,245
Net income (loss) per share (3) $ 0.05 $ 0.05 $ 0.08 $ 0.34 $ (0.02) $ (0.31) $ 0.43
Shares used in per share
calculations (3) 19,851 19,248 18,142 16,529 19,246 18,140 21,363
March 31, 1997
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Actual As Adjusted (4)
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<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $35,714
Working capital 42,702
Total assets 89,336
Long-term debt, less current maturities 3,262
Total shareholders' equity 72,273
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<FN>
(1) Based on shares outstanding as of March 31, 1997. Does not include
1,246,847 shares of Common Stock issuable upon the exercise of
outstanding options, which have a weighted average exercise price of
$6.01 per share. See "Capitalization" and Notes to Consolidated
Financial Statements.
(2) Includes an after tax charge for ESOP compensation expense of $12.3
million and $10.5 million for the year ended September 30, 1996 and the
six months ended March 31, 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Notes to Consolidated Financial Statements.
(3) Computed on the basis described in the Notes to Consolidated Financial
Statements.
(4) As adjusted to reflect the sale of 300,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of
$______ per share, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
</FN>
</TABLE>
------------------------------
Except as otherwise noted, all information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. In addition,
although the Company's first, second and third fiscal quarters end on the Sunday
closest to the last day of the last month of such fiscal quarter, such fiscal
periods are designated by calendar quarter end throughout this Prospectus for
presentation purposes. See "Underwriting" and Notes to Consolidated Financial
Statements.
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk. The following
risk factors, in addition to the other information in this Prospectus, should be
considered carefully before purchasing the shares of Common Stock offered
hereby. Except for the historical information contained herein, the discussion
in this Prospectus 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 Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. 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 Prospectus.
Dependence on Continuing Demand for Wireless Communications Services
and CDMA Technology. Approximately 62% of the Company's net sales for 1996 and
approximately 71% of net sales for the six months ended March 31, 1997 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 wireless 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. Approximately 59% of the Company's net
sales for fiscal 1996 and approximately 55% of net sales for the six months
ended March 31, 1997 were derived from basestation applications. 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.
Sales of products for CDMA-based systems, including basestations and
subscriber handset phones, accounted for approximately 24% of net sales in
fiscal 1996 and approximately 49% of net sales for the six months ended March
31, 1997. CDMA technology has recently been introduced in the marketplace and
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 or acceptance of CDMA technology. Such delay or
limitation would have a material adverse effect on the Company's business,
operating results and financial condition. See "Business---Markets and
Applications---Telecommunications."
Dependence on a Limited Number of Customers. Historically, a limited
number of customers have accounted for a significant portion of the Company's
net sales. In fiscal 1996 and fiscal 1995, sales to the Company's top 10
customers accounted for approximately 68% and 60% respectively, of net sales. In
1996, the Company's top three customers accounted for approximately 24%, 11% and
8% of net sales. For the six months ended March 31, 1997, sales to the top 10
customers accounted for 75% of net sales with the top four customers accounting
for approximately 14%, 13%, 12% and 12% 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 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
largely upon the decisions of the Company's current customers to continue to
purchase products from the Company, as well as the decisions of prospective
customers to develop and market systems that incorporate the Company's products.
Adverse developments relating to the wireless communications market
involving one or more of the Company's large customers, including litigation
among such customers, could have an adverse effect on the market price of the
Company's Common Stock even if the actual impact of such developments would be
immaterial to the Company's results of operations and financial condition. See
"Fluctuations in Quarterly Results; Backlog" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<PAGE>
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. There are a number of operating
factors that may cause fluctuations in quarterly results, one 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.
Purchase orders for the Company's products 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"---Quarterly Results of Operations" and "Business---Backlog."
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.
The markets for products offered by the Company are characterized by
rapidly changing technology and evolving industry standards. If technology
supported by the Company's products becomes obsolete or fails to gain widespread
commercial acceptance, the Company's business may be materially adversely
affected. Accordingly, the Company believes that continued significant
expenditures for research and development will be required. In the past, the
Company has depended on customer funded non-recurring engineering charges
("NRE") for a significant portion of its product development expenditures. There
can be no assurance that such customer funding will continue in the future,
which may require the Company either to reduce the scope of its product
development or allocate increased internal resources for such purposes. If the
Company is unable to design, develop and introduce competitive products on a
timely basis, its future financial condition and operating results could be
materially adversely affected. Competing technologies, including digital
filtering technology, could develop which could replace or reduce the use of SAW
technology for certain applications. Any development of a cost effective, new
technology that replaces SAW filtering technology could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business---Technology---Competition."
<PAGE>
Risks Associated with Costa Rica Operations. The Company bears
significant manufacturing risks associated with its operations in San Jose,
Costa Rica. For the six months ended March 31, 1997, shipments from Costa Rica
accounted for approximately 35% of consolidated net sales. The Company is
currently expanding its operations in Costa Rica. Operating a production
facility in Costa Rica carries unknown risks of disruption resulting from
government intervention, wars, currency devaluation, labor disputes, earthquakes
and other events. Any delay in the completion of the Company's expansion or any
such disruptions could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business---Facilities."
Competition. The markets for the Company's products are intensely
competitive and are characterized by price competition, rapid technological
change, product obsolescence and heightened domestic and international
competition. In each of the markets for the Company's products, the Company
competes with large international companies 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
currently manufacture SAW devices for their own 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 Company expects competition
to increase from both established and emerging competitors, as well as from
internal capabilities developed by certain customers. The Company also believes
that a significant source of competition may come from alternative technological
approaches. See "---Dependence on New Products; Technological Change." 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 decreases, 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. See "Business---Competition."
Risks Associated with International Operations. The Company's
international sales have increased over the past three years, accounting for
approximately 40%, 49% and 54% of net sales for fiscal 1994, 1995 and 1996,
respectively, and 42% of net sales for the six months ended March 31, 1997.
Ericsson, based in Sweden, was the Company's largest customer in fiscal 1996,
accounting for approximately 24% of net sales. The sale of products in foreign
countries involves risks associated with currency exchange rate fluctuations and
restrictions, export-import regulations, customs matters, longer payment cycles,
foreign collection problems and political and transportation risks. The
Company's international sales are generally denominated in U.S. dollars.
However, the Company may be required in the future, due to competition, to
denominate sales in the foreign currencies of certain countries. As a result,
fluctuations in currency exchange rates may (in the future) have a significant
effect on the Company's sales, even in the absence of an increase or decrease of
unit sales to foreign customers. A strong U.S. dollar could have a material
adverse effect on the Company's ability to compete internationally. The Company
has not, to date, engaged in hedging a portion of its foreign exchange risk. If,
however, any of the Company's future international sales are denominated in
foreign currencies, the Company may find it necessary to engage in rate hedging
activities with respect to certain exchange rate risks. There can be no
assurance that the Company will engage in such exchange rate hedging or that any
such activities will successfully protect against such risks. In addition,
foreign sales involve uncertainties arising from local business practices and
cultural considerations, and risks associated with international trade
transactions. For a portion of foreign sales, the Company depends upon
independent sales representatives who are not subject to the Company's control
and are generally free to terminate their relationships with the Company on 30
days notice.
<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. 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. See
"Business---Manufacturing."
Manufacturing Risks. The Company's manufacture of SAW devices involves
processes that may have reduced yields from time to time, the causes of which
are often difficult to determine. While reduced yields have not been a
significant factor in limiting production capacity in the past, a material and
continuing reduction in yields at any stage of the manufacturing process would
have a material adverse effect on the Company's ability to meet its quoted
delivery times and cost of production, which would have a material adverse
effect on the operations of the Company. See "Business---Manufacturing."
Dependence on Key Managerial and Technical Personnel. The Company's
success depends to a significant extent on the performance of a number of key
management and technical personnel, the loss of one or more of whom could have a
material adverse effect on the Company. The Company's success will also depend
in part on its ability to attract and retain qualified professional, technical,
production, managerial and marketing personnel. Competition for such personnel
in the SAW industry is intense. There can be no assurance that the Company will
be successful in attracting and retaining the personnel it requires to develop
new and enhanced products and to conduct its operations successfully. See
"Business---Employees."
Intellectual Property and Proprietary Rights. Sawtek relies on a
combination of patents, copyrights and trade secrets to establish and protect
its proprietary rights. There can be no assurance that patents will issue from
any of its pending applications or that any claims allowed from existing or
pending patents will be sufficiently broad to protect the Company's technology.
In addition, there can be no assurance that any patents issued to Sawtek will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection 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 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, results of operations and financial
condition regardless of the final outcome of the litigation. The Company is not
currently engaged in any patent infringement suits nor has it threatened or been
threatened with any such suits in recent years. 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 in the future be
<PAGE>
notified 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. See "Business---Proprietary
Rights."
Environmental and Other Governmental Regulations. The Company is
subject to a variety of federal, state and local laws, rules and regulations
related to the discharge and disposal of toxic, volatile and other toxic
hazardous chemicals used in its manufacturing processes. The failure to comply
with present or future regulations could result in fines being imposed on the
Company, suspension of production or a cessation of operations. Such regulations
could require the Company to acquire significant equipment or to incur
substantial expenses in order to comply with environmental regulations. Any past
or future failure by the Company to control the use of, or to restrict
adequately the discharge of, toxic hazardous substances could subject the
Company to future liabilities and could have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, the increasing demand for wireless communications has
exerted pressure on regulatory bodies worldwide to adopt new standards for such
products and services, generally following extensive investigation of and
deliberation over competing technologies. The delays inherent in this
governmental approval process have in the past, and may in the future, cause the
cancellation, postponement or rescheduling of the installation of communications
systems by the Company's customers, which in turn may have a material adverse
effect on the sale of products by the Company to such customers.
Volatility of Stock Price. There has been significant volatility in the
market price of the Company's Common Stock, as well as in the market price of
securities of technology-based companies. Factors such as announcements of new
products by the Company or its competitors, variations in the quarterly
operating results of the Company and its customers and competitors, the gain or
loss of significant contracts, announcements of technological innovations or
acquisitions by the Company or its competitors, changes in analysts' financial
estimates of the Company's performance, governmental regulatory action, other
developments or disputes with respect to proprietary rights, general trends in
the industry, or general economic or stock market conditions unrelated to the
Company's operating performance may have a significant impact on the market
price of the Common Stock. See "Price Range of Common Stock and Dividend
Policy."
Certain Anti-Takeover Provisions. Certain anti-takeover provisions of
the Florida Business Corporation Act 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.
<PAGE>
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 this offering, shareholders holding
12,731,176 shares of Common Stock executed agreements (the "Lock-Up Agreements")
under which these shareholders, except for the ESOP, agreed not to sell their
shares until September 29, 1997. The ESOP, which will hold 7,811,259 shares
after this offering (assuming no exercise of the Underwriters' over-allotment
option), is subject to a Lock-Up Agreement except that the ESOP may distribute
shares without the lock-up restriction upon the death, retirement or disability
of a participant or, after August 15, 1997, for "in-service" distributions to
participants. The Company estimates that up to 100,000 shares could be issued as
in-service distributions during the remainder of the fiscal year. 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 September 29, 1997, 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 under the Securities Act. As of March 31, 1997, an
additional 1,246,847 shares were issuable upon exercise of outstanding options.
Of these shares, 462,598 shares will be vested and eligible for sale in the
public market upon expiration of the Lock-Up Agreements. See "Underwriting."
Absence of Dividends. The Company has historically 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.
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 300,000 shares of
Common Stock offered by the Company hereby at an assumed offering price of
$_____ per share are estimated to be $_____ million after deducting the
estimated underwriting discount and estimated offering expenses payable by the
Company. The Company intends to use a portion of the net proceeds for the
purchase of capital equipment, to complete the 28,000 square foot addition to
its primary facility in Orlando, Florida, and for general corporate purposes
including working capital and increased research and development expenses. The
Company may also use a portion of the net proceeds to acquire businesses,
products or technologies; however, it currently has no commitments or agreements
with respect to any such transactions. Pending such uses, the net proceeds will
be invested in investment grade, interest-bearing securities.
The net proceeds from the sale of the remaining 2,200,000 shares will
be paid directly to the Selling Shareholders of which the Sawtek Employee Stock
Ownership Plan and Trust (the "ESOP") will receive the proceeds from the sale of
2,000,000 shares. The ESOP will use these proceeds to permit investment
diversification of employees' retirement accounts and for liquidity needs. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
PRICE RANGE OF COMMON STOCK
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 Stock of the Company
as reported by the Nasdaq National Market for the periods indicated:
High Low
---- ---
Fiscal Year Ended September 30, 1996
3rd Quarter . . . . . . . . . . . . . $39.75 $16.50*
4th Quarter . . . . . . . . . . . . . 35.75 21.50
Fiscal Year Ended September 30, 1997
1st Quarter . . . . . . . . . . . . . 42.75 23.75
2nd Quarter . . . . . . . . . . . . . 46.50 28.00
3rd Quarter (through May 8, 1997) . . 37.75 24.00
*The Company sold shares in its May 1, 1996 initial public offering at
$13.00 per share; however, the first trade was at $16.50 which was the lowest
quoted price of Sawtek shares in fiscal 1996.
The last reported sale price of the Common Stock on the Nasdaq National
Market on May 8, 1997 was $32.75 per share.
As of March 31, 1997 there were 20,362,566 shares of the Company's
Common Stock outstanding held by approximately 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.
DIVIDEND POLICY
Historically, the Company has not paid dividends on its Common Stock.
Because the Company believes it may 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.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 as adjusted to reflect the sale by the Company of the 300,000
shares of the Common Stock offered hereby at an assumed public offering price of
$____ per share and the application of the estimated net proceeds therefrom. The
financial data in the following table should be read in conjunction with the
Company's unaudited Consolidated Financial Statements and Notes thereto at March
31, 1997 contained in this Prospectus or incorporated by reference herein.
<TABLE>
<CAPTION>
March 31, 1997
----------------------------
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Short-term debt, including current maturities of long-term debt $ 1,251
=======
Long-term debt, less current maturities $ 3,262
-------
Shareholders' equity:
Common Stock, $0.0005 par value, 120,000,000 shares authorized, 20,362,566
shares issued and outstanding, actual; 20,662,566 shares
issued and outstanding, as adjusted (1) 10
Capital surplus 54,207
Unearned ESOP compensation (1,171)
Retained earnings 19,227
-------
Total shareholders' equity 72,273
-------
Total capitalization $76,786
=======
- --------------------
<FN>
(1) Does not include 1,246,847 shares of Common Stock issuable upon the exercise of
outstanding options.
</FN>
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of September 30,
1995 and 1996 and for each of the three years in the period ended September 30,
1996 are derived from the Consolidated Financial Statements of the Company that
have been audited by Ernst & Young LLP, independent auditors, which are included
elsewhere in this Prospectus. The consolidated statement of income (loss) data
for the years ended September 30, 1992 and 1993 and the consolidated balance
sheet data at September 30, 1992, 1993 and 1994 are derived from the Company's
consolidated financial statements which were also audited by Ernst & Young LLP
and which are not included herein. The selected consolidated financial data for
the six months ended March 31, 1996 and 1997 are derived from unaudited
financial statements which, in the opinion of management of the Company, reflect
all adjustments, consisting only of normal recurring accruals, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the six months
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1997. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------------ ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Income (Loss)
Data:
Net sales $14,710 $14,428 $19,139 $31,317 $57,664 $24,738 $38,511
Cost of sales 7,197 7,174 8,815 13,084 27,262 11,604 16,991
------- ------- ------- ------- ------- ------- -------
Gross profit 7,513 7,254 10,324 18,233 30,402 13,134 21,520
Operating expenses:
Selling expenses 2,506 2,600 2,689 3,139 3,947 1,571 2,396
General and administrative expenses 1,201 1,408 3,283 3,440 5,791 2,649 2,920
ESOP compensation expense 434 499 610 782 12,925 11,079 392
Research and development expenses 1,200 831 1,116 1,669 1,954 904 1,593
------- ------- ------- ------- ------- ------- -------
Total operating expenses 5,341 5,338 7,698 9,030 24,617 16,203 7,301
------- ------- ------- ------- ------- ------- -------
Operating income (loss) 2,172 1,916 2,626 9,203 5,785 (3,069) 14,219
Interest expense 556 416 302 435 245 225 111
Other income (80) (51) (55) (291) (634) (20) (808)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 1,696 1,551 2,379 9,059 6,174 (3,274) 14,916
Income taxes 581 576 894 3,390 6,514 2,355 5,671
------- ------- ------- ------- ------- ------- -------
Income (loss) before cumulative effect
of change in accounting principle 1,115 975 1,485 5,669 (340) (5,629) 9,245
Cumulative effect of change in
accounting principle (1) (167)
------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 948 $ 975 $ 1,485 $ 5,669 $ (340) $(5,629) $ 9,245
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share (2) $ 0.05 $ 0.05 $ 0.08 $ 0.34 $ (0.02) $ (0.31) $ 0.43
======= ======= ======= ======= ======= ======= =======
Shares used in per share calculations 19,851 19,248 18,142 16,529 19,246 18,140 21,363
<CAPTION>
September 30, March 31,
------------------------------------------------ ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 3,185 $ 1,709 $ 2,675 $ 2,819 $27,743 $ 405 $35,714
Working capital 4,168 4,122 5,055 7,100 35,799 6,674 42,702
Total assets 10,637 10,784 11,250 23,124 74,594 34,488 89,336
Long-term debt, less current maturities 4,583 3,787 4,147 6,805 3,786 11,877 3,262
Total shareholders' equity (1,105) (1,098) (5,660) (20,605) 61,625 17,769 72,273
-----------------------------
<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>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
Except for the historical information contained herein, the discussion in this
Prospectus 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 Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere in this Prospectus.
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 January 1979 to design, develop,
manufacture and market a broad range of electronic components based on SAW
technology and used in telecommunications, data communications, video
transmission, military and space systems and other applications. 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 over half of net sales in 1992
attributable to this market segment. Since then, the Company made a strategic
decision to target commercial markets, which accounted for approximately 85% of
its net sales in 1996 and for the six months ended March 31, 1997. The Company
has also witnessed significant growth in its international markets over the last
five years. International sales represented less than 20% of net sales in 1992,
54% of net sales in 1996 and approximately 42% of net sales for the six months
ended March 31, 1997.
The Company derives revenue from high-volume commercial production
components, military/industrial production components and engineering services
and products. Non-recurring engineering revenue is included in engineering
services and products and relates to the design and development of custom
devices 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, and 64% from 1994 to 1995.
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 $4 to $300. 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 is complete and production in the new wafer
fabrication and assembly areas has begun. The Company began operations in Costa
Rica in 1996 and on June 28, 1996, the Company purchased a 31,690 square-foot
facility for approximately $1.3 million. The facility, which will be used to
increase the Company's production capabilities, is expected to be operational in
late 1997.
For the six months ended March 31, 1997, net sales to the Company's
top 10 customers accounted for approximately 75% of net sales with the top four
customers accounting for approximately 51% 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.
<PAGE>
The Company achieved a 53% gross profit margin in 1996 and for the
first quarter of 1997. In the second quarter of 1997, the gross profit margin
increased to 58% reflecting higher yields and production efficiencies associated
with the Company's new manufacturing facilities. In addition, the Company's
Costa Rican subsidiary accounted for approximately 48% of the total net sales in
the second quarter of 1997. The Costa Rican subsidiary achieved a
higher-than-expected gross profit margin due to a combination of lower cost
labor and new production equipment. The Company believes the product mix will
shift to more high-volume production, and that profit margins will decline as
these components are more susceptible to pricing pressure.
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. 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 1994 loan was repaid
resulting in the allocation of the related shares to participants' accounts.
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 was a one-time, non-cash
charge (amounting to $0.59 per share). The Company does not anticipate
contributing additional shares of Common Stock beyond those that already have
been placed in trust for the ESOP. The remaining balance of $1.2 million will be
paid off over the life of the loan.
<PAGE>
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, the
percentage relationship of certain items from the Company's statements of income
to net sales:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
---------------------------------- ------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 46.1 41.8 47.3 46.9 44.1
----- ----- ----- ----- -----
Gross margin 53.9 58.2 52.7 53.1 55.9
Operating expenses:
Selling expenses 14.0 10.0 6.8 6.3 6.2
General and administrative expenses 17.2 11.0 10.0 10.7 7.6
ESOP compensation expense 3.2 2.5 22.4 44.8 1.0
Research and development expenses 5.8 5.3 3.4 3.7 4.1
----- ----- ----- ----- -----
Total operating expenses 40.2 28.8 42.6 65.5 18.9
----- ----- ----- ----- -----
Operating income (loss) 13.7 29.4 10.1 (12.4) 37.0
Interest expense 1.6 1.4 0.4 0.9 0.3
Other income (0.3) (1.0) (1.0) (0.1) (2.1)
----- ----- ----- ----- -----
Income (loss) before income taxes 12.4 29.0 10.7 (13.2) 38.8
Income taxes 4.6 10.9 11.3 9.6 14.8
----- ----- ----- ----- -----
Net income (loss) 7.8% 18.1% (0.6)% (22.8)% 24.0%
===== ===== ===== ===== =====
</TABLE>
Comparison of six months ended March 31, 1996 and 1997
- ------------------------------------------------------
Net Sales. Net sales increased 56% from $24.7 million in the first six
months of 1996 to $38.5 million in the first six months of 1997. The increase
was a result of increased product shipments to the wireless communications
market, specifically sales of high volume filters for basestation applications
and subscriber handsets based on CDMA technology for the telecommunications
industry. International sales increased by $3.2 million in the first six months
of 1997 compared to the first six months of 1996 principally due to increased
product shipments to Korea. Sales for military and space systems decreased from
14% of net sales in the first six months of 1996 to 13% of net sales in the
first six months of 1997 due to the increase in overall net sales. The dollar
volume of military sales, however, actually increased from $3.5 million to $5.0
million from the first six months of 1996 to the corresponding period in 1997.
Gross margin. Gross margin increased from 53.1% in the first six months
of 1996 to 55.9% in the first six months of 1997 primarily due to improved
yields, lower manufacturing costs associated with the Costa Rican operation and
economies of scale with the increased volume. As the Company shifts its product
mix to high volume production, it is anticipated that gross margins will decline
as these components are more susceptible to pricing pressure.
Selling expenses. Selling expenses increased 53% from $1.6 million in
the first six months of 1996 to $2.4 million in the first six months of 1997,
and remained relatively constant as a percentage of net sales at 6.2% in the
first six months of 1997 compared to 6.3% in the corresponding period in 1996.
The Company anticipates that selling expenses will increase as new employees are
added to support its sales and marketing effort in 1997 and as commission
expenses are incurred, but are not expected to increase as a percentage of net
sales.
<PAGE>
General and administrative expenses. General and administrative
expenses increased 10% from $2.7 million in the first six months of 1996 to $2.9
million in the first six months of 1997, but decreased as a percentage of net
sales from 10.7% to 7.6% for the same periods. The net increase in expenses was
primarily due to additional expenses incurred as a public company, higher wages
and salaries and compensatory stock option expense.
ESOP compensation expense. ESOP compensation expense decreased from
$11.1 million in the first six months of 1996 to $392,000 in the first six
months of 1997. This decrease of $10.7 million is a result of the release and
allocation of all ESOP shares acquired in 1994 to participants' accounts based
on their compensation earned in the first seven months of 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 committed to be released. The shares were acquired
at a cost of $1.03 per share compared to an average market value of $8.03 for
the first seven months of 1996. The charge for the six months ended March 31,
1997 is based on SOP 76-3 which uses cost as the basis of valuing the shares.
All remaining ESOP shares will be accounted for in accordance with SOP 76-3.
Research and Development Expenses. Research and development expenses
increased 76% from $904,000 in the first six months of 1996 to $1.6 million in
the first six months of 1997. These expenses increased due to additional
personnel and expanded research and development efforts. 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 are conducted in connection with the design and
development of custom devices, which are paid for by customers and are
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 from $225,000 in the first
six months of 1996 to $111,000 in the first six months of 1997 due to repayment
of debt with a portion of the funds from the Company's initial public offering.
Other income. Other income represents interest income and non-operating
expenses. Other income increased as the Company recorded increased interest
income earned on its cash balances in the first six months of 1997.
Income tax expense. The provision for income taxes as a percentage of
income before income taxes was 38% for the first six months of 1997. In the
first six months of 1996, the Company incurred a non-deductible charge for ESOP
compensation expense of approximately $9.6 million. Had it not been for this
charge, the tax provision would have been approximately 37% for this period. The
Company expects that its effective tax rate will remain at approximately 36% to
39% for 1997.
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.
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 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 allocation of all ESOP shares acquired in 1994 to participants'
accounts. 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.
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 interest income, increased in
1996 due to interest earned on the remaining proceeds of the Company's initial
public offering.
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.
<PAGE>
The average selling price per device declined from 1994 to 1995 due to
the large increase in high volume commercial production components which
generally have lower average selling prices. Although a large percentage of the
Company's sales are in international markets, the Company does not believe that
currency fluctuations had a material adverse effect on sales. However, the
Company believes that a strengthening of the U.S. dollar may have an adverse
impact on future sales.
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 5.0% 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
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 50.0% 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
decreased 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.
<PAGE>
Selected Quarterly Results of Operations
- ----------------------------------------
The following table sets forth certain unaudited statements of income
(loss) data for each of the eight quarters in the period ended March 31, 1997,
as well as such data expressed as a percentage of the Company's total net sales
for the periods indicated. This data has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of such information when read in conjunction with the Company's annual audited
consolidated statements and notes thereto. The results of operations for the
interim periods are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
Fiscal 1995 Fiscal 1996 Fiscal 1997
-------------------- -------------------------------------- -----------------
June 30, Sept.30, Dec.31, Mar.31, June 30, Sept.30, Dec.31, Mar.31,
1995 1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 7,698 $11,550 $10,809 $13,929 $14,926 $18,000 $18,502 $20,009
Cost of sales 3,014 4,930 5,092 6,512 6,986 8,672 8,678 8,313
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 4,684 6,620 5,717 7,417 7,940 9,328 9,824 11,696
Operating expenses:
Selling expenses 823 851 774 797 1,174 1,202 1,246 1,150
General & administrative
expenses 551 1,837 1,068 1,581 1,509 1,633 1,134 1,786
ESOP compensation expense 196 194 5,540 5,539 1,846 - 196 196
Research and development
expenses 559 409 418 486 467 583 681 912
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 2,129 3,291 7,800 8,403 4,996 3,418 3,257 4,044
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 2,555 3,329 (2,083) (986) 2,944 5,910 6,567 7,652
Interest expense net of
capitalized interest 145 107 138 87 114 (94) 41 70
Other (income) expense (90) (122) 6 (26) (240) (374) (355) (453)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes 2,500 3,344 (2,227) (1,047) 3,070 6,378 6,881 8,035
Income taxes 975 1,161 954 1,401 1,699 2,460 2,618 3,053
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,525 $ 2,183 $(3,181) $(2,448) $ 1,371 $ 3,918 $ 4,263 $ 4,982
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share $ 0.10 $ 0.13 $ (0.18) $ (0.14) $ 0.07 $ 0.18 $ 0.20 $ 0.23
======= ======= ======= ======= ======= ======= ======= =======
Shares used in computation of
net income (loss) per share 16,034 16,199 17,272 18,140 20,286 21,286 21,358 21,368
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As a Percentage of Net Sales
Quarter Ended
-----------------------------------------------------------------------------------------
Fiscal 1995 Fiscal 1996 Fiscal 1997
-------------------- ------------------------------------------ -------------------
June 30, Sept.30, Dec.31, Mar.31, June 30, Sept.30, Dec.31, Mar. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 39.2 42.7 47.1 46.8 46.8 48.2 46.9 41.6
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 60.8 57.3 52.9 53.2 53.2 51.8 53.1 58.4
Operating expenses:
Selling expenses 10.7 7.4 7.2 5.7 7.9 6.7 6.7 5.7
General & administrative
expenses 7.2 15.9 9.9 11.4 10.1 9.1 6.1 8.9
ESOP compensation
expense 2.5 1.7 51.2 39.7 12.4 1.1 1.0
Research and development
expenses 7.3 3.5 3.9 3.5 3.1 3.2 3.7 4.6
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 27.7 28.5 72.2 60.3 33.5 19.0 17.6 20.2
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) 33.1 28.8 (19.3) (7.1) 19.7 32.8 35.5 38.2
Interest expense 1.9 0.9 1.3 0.6 0.7 (0.5) 0.2 0.3
Other (income) expense (1.3) (1.1) 0.0 (0.2) (1.6) (2.1) (1.9) (2.3)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes 32.5 29.0 (20.6) (7.5) 20.6 35.4 37.2 40.2
Income taxes 12.7 10.1 8.8 10.1 11.4 13.7 14.2 15.3
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) 19.8% 18.9% (29.4)% (17.6)% 9.2% 21.7% 23.0% 24.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's results of operations have in the past fluctuated from
quarter to quarter, and the Company expects such fluctuations to continue as a
result of a variety of factors. Product mix, 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 products, increased
direct labor and overhead costs, delays in receiving equipment from suppliers,
customer over-ordering followed by order cancellations, and cancellation or
rescheduling of orders for any reason may be expected to cause significant
variations in the Company's quarterly operating results. As a result, the
results of operations for any quarter are not necessarily indicative of results
for any future period.
Most of the Company's expenses do not follow seasonal or cyclical
patterns but vary either based on sales or as a function of staffing and other
factors such as research and development and most general and administrative
expenses. General and administrative expenses increased by $652,000 from the
first to second quarters of 1997, primarily due to compensatory stock options.
ESOP compensation expense went from approximately $196,000 per quarter in 1995
to $5.5 million per quarter in the first two quarters of 1996 due to the change
in accounting for ESOP shares at cost in accordance with SOP 76-3 in 1995 to
accounting for ESOP shares at market in accordance with SOP 96-3 in 1996. ESOP
compensation expense returned to $196,000 for each of the first two quarters of
1997 as all remaining shares were accounted for under SOP 76-3.
The Company's net sales have historically reflected some seasonality in
that sales growth typically tends to flatten or drop slightly in the first
quarter of the year, coincident with fewer business days in the quarter due to
the Thanksgiving and Christmas holidays.
<PAGE>
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 growth in 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 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 and a $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. For the six months
ended March 31, 1997, the Company generated net cash from operations of $16.3
million primarily from net income, depreciation and deferred taxes.
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 or at March 31, 1997.
The Company made capital expenditures of $24.3 million during 1996
compared to $5.6 million and $1.0 million in 1995 and 1994, respectively. For
the six months ended March 31, 1997, the Company made capital expenditures of
$8.4 million. The Company is in the process of expanding its Orlando, Florida
facilities for additional manufacturing, engineering and sales and
administrative space, and intends to make various capital expenditures for
production and test equipment and furniture and fixtures. In addition, the
Company intends to make various capital expenditures for its San Jose, Costa
Rica operation. The Company plans to spend approximately $20.0 million in 1997
on capital equipment and facilities of which approximately $4.6 million was
committed at March 31, 1997.
During 1996 the Company completed its initial public offering 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. At March 31, 1997, the Company had cash and cash equivalents
of $35.7 million.
The Company believes that its present cash position, together with its
credit facility and funds expected to be generated from operations and with the
net proceeds from this offering, 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. 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, began
operations in the second quarter and commenced shipments in the third quarter of
1996. As of March 31, 1997, the Company had a net investment of approximately
$3.1 million in this operation and recorded net sales of approximately $13.6
million with an operating profit of approximately $6.5 million for the six
months ended March 31, 1997. 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.
<PAGE>
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. For 1996 and for the six
months ended March 31, 1997, 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 and 42% for the six months ended March 31, 1997. Sales to
European markets represent 38%, 36%, 22% and 22% of net sales for these same
periods, respectively. The remaining international sales relate primarily to
Asian and Canadian markets. See Notes to Consolidated Financial Statements.
Recently Issued Accounting Standards
- ------------------------------------
In October 1995, the Financial Accounting Standards Board ("FASB")
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.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share,
which is effective for financial statements issued for periods ending after
December 15, 1997. This pronouncement establishes standards for computing and
presenting earnings per share ("EPS") for entities with publicly-held common
stock or potential common stock. SFAS 128 simplifies the standards for computing
EPS and makes them comparable to international EPS standards. Early application
of this statement is not permitted. The Company intends to adopt the provisions
of SFAS 128 in 1998 and does not expect their application to have a material
impact on the financial statements of the Company.
<PAGE>
BUSINESS
Sawtek designs, develops, manufactures and markets a broad range of
electronic signal processing components based on SAW technology. The Company's
primary products are custom-designed, high performance bandpass filters,
resonators, delay lines, oscillators and SAW-based subsystems. These products
are used in a variety of microwave and RF systems, such as Code Division
Multiple Access ("CDMA") and Global System for Mobile communications
("GSM")-based digital wireless systems, digital microwave radios, WLAN, cable
television equipment and various defense and satellite systems. The Company's
products offer key advantages such as lower distortion, reduced size and weight,
high reliability and precise frequency control compared to 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 CAD and analysis software
tools support rapid and precise SAW device design and simulation, enabling
Sawtek and its customers to achieve timely new product development. The
Company's commercial customer base accounts for approximately 85% of net sales
and includes major telecommunications equipment producers such as Ericsson,
LGIC, Lucent Technologies, Motorola, Nokia, and Qualcomm.
Industry Background
- -------------------
Electronic systems which transmit or receive voice, data or video must
contain various signal processing components such as bandpass filters,
resonators, delay lines and oscillators. These components modify and condition
the desired signals while rejecting unwanted signals which cause distortion and
interference. The frequency at which these systems transmit and receive
information is referred to as the microwave or RF 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, are 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.
The wireless communications industry is experiencing significant
worldwide growth. Cost reductions and technological improvements in such
wireless communications products as cellular, PCS, global satellite telephones
and wireless data systems are contributing to this growth. Wireless
communications systems can offer the functional advantages of wired systems
without the costly and time consuming development of an extensive wired
infrastructure, which is of particular importance in developing parts of the
world. Rapidly emerging digital telecommunications standards and technology will
provide the performance improvements necessary to address overcrowding of
existing cellular systems and to provide increased functionality. Unless
carriers adopt the emerging digital standards, they will be forced to build new
cellular basestation sites and continue to suffer from dropped calls due to the
overcrowding problem. These standards include CDMA, an approach being
commercialized by Qualcomm in the United States and worldwide, and GSM, adopted
throughout Europe and many other countries. These new approaches are being
utilized to provide cellular and PCS services as well as wireless local loop
("WLL") networks. As demands for wireless communications subscriber services
grow, service providers are offering digital handheld products and expanding 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 systems and
the emergence of new markets and applications.
<PAGE>
As the wireless telecommunications industry has expanded, previously
allocated frequency bands have become increasingly congested, and the need to
precisely control transmission frequencies and to filter unwanted signals
without distortion has become critically important. In response to this crowding
of existing frequency bands, regulatory agencies have allocated new blocks of
spectrum at higher frequencies and more stringently regulated allowable signal
bandwidths. Systems operating at these higher microwave and RF frequencies
require higher frequency IF components to simplify the overall system
architecture, thereby reducing cost, complexity and power consumption. To make
more efficient use of the crowded frequency bands, the spacing between adjacent
signal channels must be reduced, placing the desired signal very close to
unwanted interfering signals. Highly selective IF filters are required to pass
the desired signal without distortion, while rejecting interfering signals from
adjacent channels and other sources.
Telecommunications systems, including cellular and PCS, are rapidly
evolving from traditional analog to more efficient digital modulation techniques
to improve system performance and capacity. These 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 and precision 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
advantages over competing technologies, including precise frequency control and
selectivity, reduced size and weight, high reliability, 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 that are comparatively
small in size. SAW devices are routinely manufactured for 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
applications develop, there is a need for large quantities of IF signal
processing components which can meet demanding performance, size and reliability
requirements. SAW technology is an enabling solution, possessing all of these
attributes, with applications in nearly all wireless communications systems.
<PAGE>
The Sawtek Solution
- -------------------
Sawtek is a leading worldwide supplier of SAW products that address the
demanding and rapidly growing needs of modern wireless communications equipment
manufacturers. The Company has, over the last 18 years, designed and
manufactured more than 1,500 different SAW products that operate at frequencies
ranging from 10 MHz to nearly 3 GHz for both commercial and military
applications. The Company's products, comprising one of the broadest SAW product
lines in the industry, are used by diverse original equipment manufacturers
("OEMs") in numerous applications ranging from high volume telecommunications
applications in CDMA and GSM-based digital telephone systems to
state-of-the-art, high performance SAW channelized filter subsystems to be used
in the military's F-22 Advanced Tactical Fighter electronic warfare receiver.
The Company's products are sold worldwide to nearly every major company that
produces microwave and RF communications equipment.
The Company believes that its advanced technical capabilities permit
it to offer high performance products that enable its customers to differentiate
themselves competitively in their respective markets. The Company has developed
sophisticated proprietary CAD and analysis software to efficiently implement SAW
solutions that address individual customer needs. The Company's products offer
high levels of technical performance in a reduced package size on a
cost-effective basis. Sawtek has leveraged its experience in developing SAW
products for military applications, where high performance and proven
reliability and ruggedness are demanded, to expand into the commercial wireless
telecommunications, data communications, video transmission and other markets.
In addition to its proprietary design and analysis software and broad
product line, Sawtek's competitive strengths include personnel with extensive
depth and breadth in SAW technology, innovative SAW device structures that
provide high levels of technical performance, a flexible automated production
capability, manufacturing process expertise, rapid custom product development,
an offshore production capability and a "Manufacturing Excellence" program that
enhances the Company's ability to be responsive to its customers' needs. In
addition, Sawtek's research and development organization is continuing to
provide the innovative tools necessary for the Company to advance SAW
technological capabilities and is expanding the Company's product line into a
new market for SAW chemical sensors and subsystems. The Company believes that
these competitive strengths will enable it to benefit from the attractive growth
potential in wireless voice, data, video and other markets.
Company Strategy
- ----------------
Sawtek intends to leverage its advanced design and manufacturing
technology and strong customer relationships to become the leading provider of
SAW components for high volume, wireless communications system applications.
Furthermore, the Company expects to continue to build its leadership position in
the development and production of both custom and standard SAW devices for
industrial and "high end" commercial market applications and to remain the
dominant supplier of custom designed SAW components and SAW-based subsystems to
the military and space industries. The Company's strategy contains the following
elements:
Broaden Penetration of Wireless Markets and Applications. The Company
currently provides custom designed SAW components to suppliers of wireless
communications systems, primarily for digital telecommunications basestations
for CDMA and GSM-based wireless applications. The Company intends to further
penetrate this market by focusing on custom designed, high volume, low cost SAW
devices for use in handheld subscriber units and other applications where SAW
technology offers key advantages. Such applications include: WLL, point-to-point
digital radios, wireless PBX, WLAN and a number of other wireless voice, data
and video communications systems.
<PAGE>
Maintain and Enhance SAW Technology and Product Leadership. The Company
has developed a fundamental understanding of SAW design techniques, innovative
SAW device structures and proprietary design and analysis software to aid its
design engineers in meeting stringent technical specifications for
state-of-the-art SAW component requirements. The Company will continue to
advance SAW technology by supporting both internal and customer funded research
and development programs and cooperative research at outside institutions.
Sawtek believes that these activities will significantly enhance its
technological leadership and core competencies as well as expand the Company's
product line into additional business opportunities, such as SAW chemical
sensors and subsystems.
Expand Automated Manufacturing Capacity to Meet Diverse Product Demand.
In response to the increased demand for the Company's products, Sawtek has
rapidly increased its production capabilities by expanding its facilities in
Orlando, Florida and establishing an offshore production plant in San Jose,
Costa Rica. The Company intends to further expand its high volume automated
manufacturing capacity as customer needs dictate. The markets and applications
served by the Company demand a diverse mixture of SAW products, requiring a
flexible manufacturing approach. The Company's flexible manufacturing enables it
to simultaneously produce hundreds of different products for numerous commercial
and military customers in widely varying quantities while maintaining
competitive prices and favorable gross margins.
Cultivate Strong Customer Relationships. SAW components are
predominantly customized to specific OEM system applications. Because it is
common for electronic system designers working on the same application at
different OEMs to develop substantially different SAW device specifications, the
Company has had to become highly involved in the product definition phase of a
customer's design. Sawtek offers numerous device structures capable of
satisfying the unique performance specifications of each OEM and system
application. The Company intends to enhance its close working relationship with
its extensive group of current customers and to establish early program
involvement with new and existing customers to better understand next generation
product requirements. The Company also plans to increase its sales and marketing
staff, implement internal programs aimed at maximizing responsiveness to
customers, continue to provide a high level of technical service and support,
prioritize customer focused research and development activities and internally
fund product development.
Markets and Applications
- ------------------------
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 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
------------------
Telecommunications applications represent a majority of Sawtek's net
sales. The Company's telecommunications product offerings consist primarily of
IF bandpass filters for CDMA and GSM basestation equipment and CDMA subscriber
handsets. Additional applications include basestation repeaters and global
satellite systems. The Company offers over 75 custom SAW components to serve
these market applications.
Cellular. In cellular applications, calls are placed through subscriber
handsets by establishing a connection with a basestation via RF channels in the
900 MHz frequency range. The Company supplies IF bandpass filters for CDMA and
GSM-based cellular basestations and for certain subscriber handset applications.
<PAGE>
PCS. PCS systems are enhanced cellular networks which operate in a
frequency band of 1,800 to 2,000 MHz and provide a broad range of
telecommunications services. The Company supplies IF bandpass filters for CDMA
and GSM-based PCS basestation equipment, and bandpass filters for CDMA
subscriber handsets.
Wireless PBX. Wireless PBX, a more sophisticated form of cordless
telephony, is becoming increasingly popular in business environments for
intra-office communications. The Company supplies bandpass filters to both
basestation and subscriber handset manufacturers of wireless PBX systems.
Satellite. A number of satellite telecommunications systems have been
proposed by major communications companies and consortia. The Company supplies
satellite and ground-based SAW components for several of these developing
systems. For some time, Sawtek has been a leading producer of high reliability,
space qualified SAW components and is well positioned for these applications.
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, faster data rates and improved data integrity. OEMs
typically specify custom SAW filters based on these requirements and as a
result, the Company designs unique products for each OEM. As international
standards are adopted to meet these requirements, the Company will support both
standard and custom applications.
Digital Radios. Initially digital radios were developed for the
military as a means to transfer secure data. This technology has expanded to
both commercial and industrial data and voice applications, including cellular
basestation radio links. 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 supported this expanding application
with multiple custom designs.
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 and inventory tracking systems.
Global Positioning Systems. Global positioning systems ("GPS") are used
in military, industrial and consumer applications to determine specific
geographic locations. Although GPS began as a military system, 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 manufactures over 30 custom SAW devices to serve the
various standards required by the worldwide video transmission market. Emerging
technologies within the video transmission market include high definition
television ("HDTV") and interactive television. The Company has designed custom
products for both of these applications and is involved in limited production of
devices for interactive television.
<PAGE>
Military and Space
------------------
Sawtek has been a provider to the military and space systems markets
since the Company's inception in 1979. Sawtek's components can be found in major
applications that include electronic warfare, defense communications, military
and commercial space systems and radar and surveillance.
Electronic Warfare. The Company supplies products for various
electronic warfare applications such as radar, communication jamming and
identification friend or foe systems.
Defense Communications. Defense communications equipment is used to
transmit and receive secure voice or data information. Applications include
handheld battlefield radios, command center communications systems and air, ship
and vehicle communications systems. The Company supplies numerous SAW designs to
customers that support these applications.
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,
satellites 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 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 such as systems for troop movement
detection, communications detection and submarine detection and tracking.
Other Markets
-------------
The Company designs and produces SAW components for other markets,
including commercial avionics, test equipment and identification and security
systems. Commercial avionics applications include collision avoidance
transponders 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
system industry, the Company's products enable OEMs to provide 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
distribution networks in North America and Europe.
<PAGE>
Customers
- ---------
The following table identifies, by market, certain customers that
purchased SAW components from the Company in the last 12 months, with customers
listed in alphabetical order.
Telecommunications Data Communications
- ------------------ -------------------
Alcatel ITS Inc. 3Com Corporation
LG Information & Communications, Ltd. CellNet Data Systems, Inc.
LM Ericsson AB Digital Microwave Corporation
Lucent Technologies Harris Corporation
Motorola, Inc. LM Ericsson AB
Nokia Telecommunications Ltd. Rdc Communications Ltd.
Nortel Scientific-Atlanta, Inc.
Omnipoint Corporation Trimble Navigation
QUALCOMM Incorporated
QUALCOMM Personal Electronics Military and Space
Stanford Telecommunications, Inc. ------------------
Flightline Electronics
Video Transmission ITT Corporation
- ------------------ Hughes Aircraft Company
ALPS Electric Co., Ltd. Lockheed Martin Corporation
BARCO n.v. Motorola, Inc.
Century Electronics Ltd. Northrop Grumman Corporation
General Instrument Corporation Rockwell International Corporation
LARCAN INC. Texas Instruments Incorporated
R.L. Drake Company
Rohde & Schwartz GmbH & Co. KG
Scientific-Atlanta, Inc.
Triple Crown Electronics Inc.
Other Markets
- -------------
AlliedSignal, Inc.
BFI-IBEXSA SPA (Distributor-An AVNET Co.)
Hewlett-Packard Company
Hughes Network Systems, Inc.
Lucent Technologies
Penstock, Inc. (Distributor-An AVNET Co.)
Rockwell International Corporation
Silicon Graphics, Inc.
Sawtek has a diversified customer base with two customers, Ericsson and
Lucent Technologies, that each accounted for more than 10% of net sales in 1996.
For the six months ended March 31, 1997, four customers each accounted for over
10% of net sales. They are in alphabetical order: Ericsson, Lucent, Motorola and
Qualcomm. The Company's top 10 customers accounted for approximately 68% of net
sales in 1996 and 75% of net sales for the six months ended March 31, 1997. The
loss of any 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.
<PAGE>
Products
- --------
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 an NRE fee is
generally charged.
<TABLE>
----------------------
Sawtek's Markets
----------------------
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Sawtek's Product Data Video Military Other
Categories Product Types Telecommunications Communications Transmission and Space Markets
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bandpass Bi-directional
Filters transversal; Low x x x x x
loss transversal;
Coupled resonator
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Resonators Surface acoustic
wave (SAW); Surface x x N/A x x
transverse wave (STW)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Delay Lines Non-dispersive;
Dispersive; Multi-tap x x N/A x x
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Oscillators Fixed frequency;
Voltage controlled N/A N/A N/A x x
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
SAW-based Channelized filter
Subsystems banks; Switched
filter/delay modules; N/A N/A N/A x N/A
Pulse expansion/
compression
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
SAW Chemical Resonators; Delay
Sensor Lines N/A N/A N/A x x
Elements
- -------------------------------------------------------------------------------------------------------------------
<FN>
N/A = Application not applicable or the Company does not supply product to
that market.
</FN>
</TABLE>
Bandpass Filters
----------------
Sawtek currently offers three types of SAW bandpass filters:
bi-directional transversal, low loss transversal and coupled resonator filters.
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 under $10 depending on the application
while high precision filters for military applications may sell for hundreds of
dollars each.
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
infrastructure and handheld subscriber applications. Numerous bi-directional
filter products, supplied in low profile surface mount packages, have been
produced for high volume subscriber applications such as CDMA-based cellular and
PCS, WLL, WLAN and handheld data terminals.
<PAGE>
Low Loss Transversal Filters. Sawtek offers 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 CDMA and GSM-based digital cellular systems, wireless PBX, wireless handheld
data terminals and WLANs.
Sawtek has developed a line of standard, low loss filter products at 70
MHz in surface mount packages. These filters are suitable for commercial
microwave point-to-point radios, very small aperture satellite terminals and
other commercial applications where wideband, low loss SAW filters simplify
system architecture and reduce size and power consumption.
Coupled Resonator Filters. The Company offers over 70 products in this
broad class of SAW filters which includes in-line coupled, waveguide coupled and
combined mode resonator 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
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
configurations. Sawtek's delay line products are primarily used in military
communications 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 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 of most competing technologies. The useful
ranges of center frequencies and fractional bandwidths, 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.
<PAGE>
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 12 years, with more than 20
products available.
New Product Development
- -----------------------
Sawtek has identified SAW chemical sensors and subsystems as a
strategically promising technology for new product development. Substantial
market opportunities exist in applications that include in-situ groundwater
contamination analysis, process control, incipient fire detection, electronic
noses, soil gas analysis, dry cleaning monitors, fugitive emission monitors,
analysis of gases in bulk chemical storage containers, OSHA workplace health and
safety monitoring and respirator alarm systems, and chemical warfare agent
detection. 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 need for a cost-effective
technology that can be customized for specific applications. SAW chemical sensor
systems have the potential for costing a fraction of currently available
transportable analytical vapor testing equipment, while providing a suitable
level of chemical selectivity and sensitivity, in an instrument that is
handheld. These sensor systems could 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 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,
however, that Sawtek will be successful in developing sensing products for
commercial or defense applications. No commercial sales of SAW chemical sensor
systems have been made by the Company to date.
<PAGE>
Technology
- ----------
[Illustration of a SAW device and an acoustic wave. Words
include: electromagnetic wave, acoustic energy, electromagnetic energy, input,
output, input transducer, output transducer, piezoelectric materials.]
SAW Technology. A simple SAW filter (see illustration) has 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 substrate material determine the signal processing function
and response characteristics of the device.
The appeal of SAW devices as preferred signal processing components 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 100,000 times slower
than electromagnetic waves, 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.
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.
Manufacturing
- -------------
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, uniform coating of aluminum onto piezoelectric
wafers. These metallized wafers are coated with a light sensitive material known
as photoresist. The wafer is exposed to light through a master glass plate, or
photomask, which contains multiple images of the SAW devices to be produced. The
image from the photomask is replicated on the wafer through a photolithographic
develop and etch process. 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. All of the Company's fabrication
processes are conducted at the Company's principal facility in Orlando, Florida.
Assembly. In assembly, the wafer is cut into the individual SAW die
with high precision, diamond wheel dicing saws and placed in metal or ceramic
packages. The SAW die and associated components, if any, are attached to the
base of the package using specialized adhesives. Electrical connections are made
between the SAW die and the pins, pads or leads of the package using 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 with a laser marking system. Finally, the units are
tested with automated network analyzers to ensure that the devices conform to
the desired electrical specifications.
In 1996, the Company established a subsidiary in Costa Rica for the
production of SAW components. In the first six months of fiscal 1997, the Costa
Rican subsidiary accounted for approximately 35% of net sales.
The Company has built a new SMP production facility in Orlando, Florida
to automate, in large part, the assembly process of SMP products. Utilizing
robotic assembly equipment, the Company has automated the functions of SAW die
attach, wire bond, package seal, hermetic leak test, electrical test and package
marking.
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 or monthly
basis for continuous improvement. The Company began a statistical process
control program in 1994 in which critical process parameters throughout
manufacturing were identified and placed under continuous process control and
improvement. In addition, the Company is currently pursuing ISO 9001
registration.
Sales and Marketing
- -------------------
Due to OEM requirements for 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 15 domestic and 10 international independent sales
representatives to identify opportunities which are then 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 additional 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 actively involved in all aspects of the
sales and marketing process working closely with the senior management of its
customers.
<PAGE>
Foreign and Domestic Operations and Export Sales
- ------------------------------------------------
The Company established a subsidiary in Costa Rica in 1996, began
operations in the second quarter and commenced shipments in the third quarter of
1996. As of March 31, 1997, the Company had a net investment of approximately
$3.1 million in this operation and recorded net sales of approximately $13.6
million and an operating profit of approximately $6.5 million for the six months
ended March 31, 1997. The functional currency for the Costa Rican subsidiary is
the U.S. dollar as sales, most raw materials 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. For fiscal 1996 and the six
months ended March 31, 1997, 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 and 42% for the six months ended March 31, 1997. Sales to
European markets represent 38%, 36%, 22% and 22% of net sales for these same
periods, respectively. The remaining international sales relate primarily to
Asian and Canadian markets. See Notes to Consolidated Financial Statements.
Competition
- -----------
The markets for Sawtek's products are characterized by price
competition, rapid technological change, product obsolescence and heightened
domestic and international competition. Historically, the NRE investment
required to produce a SAW design and technical incompatibility issues between
various SAW suppliers has led many SAW customers to single source their
requirements. 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 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 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 reductions, 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, 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.
<PAGE>
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. 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 generally not 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.
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 communications infrastructure and handheld subscriber applications in
the near future.
Research and Development
- ------------------------
Sawtek's research and development efforts are primarily aimed at
discovering new 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 currently employs 20 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 individuals, research 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.
<PAGE>
Research and development expenses were $2.0 million in 1996 and $1.6
million for the six months ended March 31, 1997. 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.
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. Over the past 18 months, 10 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.
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 in the future be
notified 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 March 31, 1997 was approximately $24.7 million
compared to the backlog at September 30, 1996 of $27.8 million. The Company has
reduced customer delivery times from over 30 weeks one year ago to approximately
eight to 12 weeks through its capacity expansion efforts. Customers are now
placing orders based on this reduced lead time resulting in a slightly lower
backlog compared to six months ago. The Company includes in its backlog only
customer orders and certain purchase agreements with firmly scheduled deliveries
within the subsequent 12 months. Of the $24.7 million backlog at March 31, 1997,
the Company could potentially ship all of this backlog by the end of 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.
<PAGE>
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 orders the customer
may be subject to price renegotiation as a result of the lower quantity of units
taken.
Employees
- ---------
As of March 31, 1997, the Company had a total of 549 employees,
including 401 in manufacturing and operations; 75 in research, development and
engineering; 24 in quality assurance; 17 in sales and marketing; and 32 in
administration. With the exception of 98 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 is represented
by a labor union, and the Company has not experienced any work stoppages. The
Company considers its employee relations to be good.
Facilities and Environmental Matters
- ------------------------------------
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. The
Company plans to vacate this facility and move into a 31,690 square foot
Company-owned facility in San Jose, Costa Rica in late 1997. The Company will
spend approximately $3.0 million to upgrade this building. The Company is
building a 28,000 square foot expansion to its Orlando facility to be used
primarily for research and development, sales and administrative purposes. Upon
completion of these facilities, the Company believes its 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.
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.
<PAGE>
MANAGEMENT
Executive Officers and Directors
- --------------------------------
The executive officers and directors of the Company and their ages as
of April 30, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Steven P. Miller . . . . . . 49 Chairman, Chief Executive Officer and Director
Gary A. Monetti . . . . . . 37 President and Chief Operating Officer
Neal J. Tolar (1) . . . . . 55 Senior Vice President, Chief Technical Officer and Director
Thomas L. Shoquist . . . . . 50 Vice President, Quality
Raymond A. Link. . . . . . . 43 Vice President, Finance and Chief Financial Officer
Robert C. Strandberg (1)(2). 39 Director
Bruce S. White (2) . . . . . 64 Director
Willis C. Young (1)(2) . . . 56 Director
- ---------------------
<FN>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
</FN>
</TABLE>
Steven P. Miller co-founded the Company, has served as a Director since
1979, Chief Executive Officer since 1986, Chairman since February 1996 and
served as President from 1979 to April 1997. 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.
Gary A. Monetti joined the Company in 1982, has served as President
since April 1997 and Chief Operating Officer since July 1995 and served as Vice
President-Operations from July 1995 to April 1997. 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.
Neal J. Tolar co-founded 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.
<PAGE>
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. Mr. Shoquist has announced he is
retiring from Sawtek and will be leaving in late 1997.
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 is Executive Vice President of PSC Inc., a manufacturer of
bar code readers since November 1996. From May 1996 to October 1996, he was
self-employed as a business consultant. From September 1991 to April 1996, 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 1988 to 1991, he was Vice President-Finance of Datamax. From
1986 to 1988, he worked for GTECH, a lottery management 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 are no family relationships between any of the Company's
executive officers or directors.
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the number and percentage of outstanding
shares of Common Stock beneficially owned (as defined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934) as of March 31, 1997 and after
completion of this offering by (i) all persons known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each Director of
the Company, (iii) each Executive Officer of the Company and (iv) all Directors
and Executive Officers as a group. Unless otherwise indicated, all persons
listed hold sole voting and investment power with respect to the shares listed
opposite their respective names.
<TABLE>
<CAPTION>
Shares to Shares Beneficially
Shares Beneficially Owned be sold in Owned after the
Prior to the Offering the Offering(1) Offering (1)
--------------------- --------------- -------------------
Number Percent Number Percent
5% Shareholders: ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Employee Stock Ownership Plan and Trust for Employees of
Sawtek Inc. (2) 9,811,259 48.18% 2,000,000 7,811,259 37.80%
Pilgrim Baxter & Associates, Ltd. (3)
1255 Drummers Lane, Suite 300
Wayne, PA 14087-1590 1,139,700 5.60% - 1,139,700 5.52%
Nicholas Applegate Capital Management (3)
600 W. Broadway, 29th Floor
San Diego, CA 92101 1,113,800 5.47% - 1,113,800 5.39%
Executive Officers and Directors:
Steven P. Miller (4) 1,321,346 6.49% 100,000 1,221,346 5.91%
Neal J. Tolar (5) 1,201,386 5.90% 100,000 1,101,386 5.33%
Gary A. Monetti (6) 200,980 1.00% - 200,980 *
Thomas L. Shoquist (7) 80,340 * - 80,340 *
Raymond A. Link (8) 21,648 * - 21,648 *
Robert C. Stranberg (9) 3,467 * - 3,467 *
Bruce S. White (10) 16,667 * - 16,667 *
Willis C. Young (10) 6,667 * - 6,667 *
All directors and executive officers as a group(8 persons) 2,852,501 14.01% 200,000 2,652,501 12.84%
- ------------------------------------
<FN>
* Less than 1% of the outstanding Common Stock.
(1) Assumes no exercise of the Underwriters' over-allotment option to
purchase up to an aggregate of 375,000 shares of Common Stock from the
selling shareholders. Messrs. Miller, Tolar and Reece Porter, an
employee of Sawtek Inc. who owns less than 1% of the outstanding
shares, have granted the Underwriters an option for 30 days to purchase
375,000 shares of Common Stock. The Trustee of the ESOP, pursuant to
the direction of the ESOP participants, may elect to sell ESOP shares
in place of these individuals. If the ESOP Trustee elects to take their
place and if the option is exercised in full, the total number of
shares held by the ESOP after the offering will be reduced to 7,436,259
(35.99%). If the ESOP Trustee does not elect to take their place and if
the option is exercised in full, the total number of shares held by
Messrs. Miller and Tolar after the offering will be reduced to
1,041,346 (5.04%) and 921,386 (4.46%), respectively. Mr. Porter has
agreed to sell up to 15,000 shares if the over-allotment option is
exercised in full. Mr. Porter owns 100 shares with an option to
purchase 15,000 shares.
(2) Marine Midland Bank is the Trustee of the ESOP. The ESOP, through its
Trustee, exercises sole dispositive and voting control over these
shares, all of which are held by the ESOP as record owner. Includes
6,774,828 shares allocated to participants' accounts and 3,036,431
shares not yet allocated to participants' accounts. Each ESOP
participant controls the voting of shares allocated to his or her
account by instructing the Trustee how such shares shall be voted. The
Trustee controls the voting of all unallocated shares and shares not
voted by the participants.
<PAGE>
(3) The Company has relied on information supplied by these entities on
their Schedules 13G filed with the Securities and Exchange Commission.
(4) Includes 406,323 shares held by Sawmill Investment Limited Partnership
and 891,835 shares held by Via Capri Investment Limited Partnership of
which Mr. Miller has indirect voting control, and 23,188 shares held in
trust for his children. Excludes 206,400 shares owned by the ESOP but
allocated to his account.
(5) Includes 59,559 shares owned by his majority age children. Excludes
202,703 shares owned by the ESOP but allocated to his account. Includes
331,201 shares held by MOP Investment Limited Partnership and 810,626
held by MOPNJT Investment Limited Partnership of which Dr. Tolar has
indirect voting control.
(6) Includes options to purchase 164,730 shares of Common Stock exercisable
within 60 days of March 31, 1997. Excludes 184,142 shares owned by the
ESOP but allocated to his account.
(7) Includes 80,340 shares held in the Thomas L. Shoquist Family Trust of
which Mr. Shoquist is a co-trustee. Excludes 202,047 shares owned by
the ESOP but allocated to his account.
(8) Includes options to purchase 15,000 shares of Common Stock exercisable
within 60 days of March 31, 1997. Excludes 15,842 shares owned by the
ESOP but allocated to his account.
(9) Includes options to purchase 2,667 shares of Common Stock exercisable
within 60 days of March 31, 1997.
(10) Includes options to purchase 6,667 shares of Common Stock exercisable
within 60 days of March 31, 1997.
</FN>
</TABLE>
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is SunTrust Bank,
Central Florida, N.A.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters") through their Representatives,
Hambrecht & Quist LLC, Oppenheimer & Co., Inc. and Raymond James & Associates,
Inc. have severally agreed to purchase from the Company and the Selling
Shareholders the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC
Oppenheimer & Co., Inc.
Raymond James & Associates, Inc.
---------
Total 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $_____ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $_____ per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may be
changed by the Representatives.
Certain Selling Shareholders have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to an aggregate of 375,000 additional shares of Common Stock at the
public offering price, less the underwriting discount, set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total number
of shares of Common Stock offered hereby. The Selling Shareholders will be
obligated, pursuant to the option, to sell shares to the Underwriters to the
extent the option is exercised. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of shares of Common
Stock offered hereby.
The offering of the shares is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
<PAGE>
The Company and certain Selling Shareholders have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
Certain beneficial owners of shares of the Company, including the
executive officers, Directors and the Selling Shareholders, who will own in the
aggregate 12,731,176 shares of Common Stock after the offering, have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock owned by them during the 90-day period
following the date of this Prospectus. The Company has agreed that it will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell, grant
any option to purchase or otherwise dispose of any shares of Common Stock or any
securities exchangeable for or convertible into Common Stock during the 90-day
period following the date of this Prospectus, except that the Company may issue,
and grant options to purchase, shares of Common Stock under its stock option and
employee stock purchase plans and under currently outstanding options. Sales of
such shares in the future could adversely affect the market price of the Common
Stock.
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the
Company's Common Stock during the "cooling-off" period immediately preceding the
commencement of sales in this offering. The Commission has, however, adopted
exemptions from these rules that permit passive market making under certain
conditions. These rules permit an Underwriter to continue to make a market
subject to the conditions, among others, that its bid not exceed the highest bid
by a market maker not connected with this offering and that its net purchases on
any one trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters, selling group members (if any) or their respective
affiliates intend to engage in passive market making in the Common Stock during
the "cooling-off" period.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. Such transactions may
be effected on the Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
The Underwriters do not intend to confirm sales to accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby and certain other legal matters will be passed upon for the Company by
Gray, Harris & Robinson, P.A., Orlando, Florida. William A. Grimm, a shareholder
in Gray, Harris & Robinson, P.A. and Secretary of the Company has an option to
purchase 30,000 shares of Common Stock at $11.05 per share. Certain legal
matters will be passed upon for the Underwriters by Cooley Godward LLP, Palo
Alto, California. Cooley Godward LLP may rely upon Gray, Harris & Robinson, P.A.
with respect to the laws of Florida.
<PAGE>
EXPERTS
The consolidated financial statements of Sawtek at September 30, 1996
and 1995, and for each of the three years in the period ended September 30,
1996, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing. The
report of Ernst & Young LLP on Sawtek's September 30, 1996 consolidated
financial statements refers to a change in accounting for ESOP shares.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities of
the Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at
prescribed rates. In addition, the Commission maintains a World Wide Web site
that contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's Web site is http://www.sec.gov. The Company's Common Stock is
quoted for trading on the Nasdaq National Market and reports, proxy statements
and other information concerning the Company may also be inspected at the
offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
<PAGE>
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act with respect to the Common Stock offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered by
this Prospectus, reference is made to the Registration Statement, including the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, together with exhibits and schedules thereto, may be inspected at the
public reference facilities of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, without charge and copies of the material
contained therein may be obtained at prescribed rates from the Commission's
public reference facilities in Washington, D.C.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company
with the Commission (File No. 0-28276) are incorporated herein by reference: (1)
the Company's Annual Report on Form 10-K for the year ended September 30, 1996,
including information from the Company's Proxy Statement for 1997 incorporated
therein, (2) the Company's Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1996 and March 31, 1997, (3) the description of the Company's
Common Stock contained in the Company's Registration Statement on Form 8-A,
effective as of April 29, 1996, including any amendment or report filed for the
purpose of updating such description, and (4) the Company's Form 8-K filed on
March 24, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of this offering shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such
documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained in this Prospectus modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into the document). Requests for copies should be directed to
Raymond A. Link, Vice President and Chief Financial Officer, Sawtek Inc., 1818
South Highway 441, Apopka, Florida 32703, telephone (407) 886-8860.
<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
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated 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, March 31,
1995 1996 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,819 $27,743 $35,714
Accounts receivable net of allowance for doubtful
accounts and returns of $277 at September 30, 1995,
$654 at September 30, 1996 and $875 at March 31, 1997 5,253 7,938 7,653
Inventories 3,242 6,509 7,094
Deferred income taxes 460 1,266 1,237
Other current assets 129 528 716
------- ------- -------
Total current assets 11,903 43,984 52,414
Other assets 273 186 142
Deferred income taxes 210
Property, plant and equipment, net 10,738 30,424 36,780
------- ------- -------
Total assets $23,124 $74,594 $89,336
======= ======= =======
LIABILITIES AND NON-REDEEMABLE SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 778 $ 1,801 $ 1,874
Accrued wages and benefits 2,434 3,109 2,286
Other accrued liabilities 334 1,068 1,670
Current maturities of long-term debt 543 1,363 1,251
Income taxes payable 714 844 2,631
------- ------- -------
Total current liabilities 4,803 8,185 9,712
Long-term debt, less current maturities 6,805 3,786 3,262
Deferred income taxes 998 4,089
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; 120,000,000
authorized shares; issued and outstanding shares
5,245,000 at September 30, 1995; 19,854,102 at
September 30, 1996; and 20,362,566 at March 31, 1997 3 10 10
Capital surplus 1,885 53,000 54,207
Unearned ESOP compensation (1,367) (1,171)
Retained earnings (deficit) (22,793) 9,982 19,227
------- ------- -------
Total non-redeemable shareholders' equity (20,605) 61,625 72,273
------- ------- -------
Total liabilities and non-redeemable
shareholders' equity $23,124 $74,594 $89,336
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(in thousands, except per share data)
<CAPTION>
Year Ended Six Months Ended
September 30, March 31,
---------------------------------- --------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $19,139 $31,317 $57,664 $24,738 $38,511
Cost of sales 8,815 13,084 27,262 11,604 16,991
------- ------- ------- ------- -------
Gross profit 10,324 18,233 30,402 13,134 21,520
Operating expenses:
Selling expenses 2,689 3,139 3,947 1,571 2,396
General and administrative expenses 3,283 3,440 5,791 2,649 2,920
ESOP compensation expense 610 782 12,925 11,079 392
Research and development expenses 1,116 1,669 1,954 904 1,593
------- ------- ------- ------- -------
Total operating expenses 7,698 9,030 24,617 16,203 7,301
------- ------- ------- ------- -------
Operating income (loss) 2,626 9,203 5,785 (3,069) 14,219
Interest expense 302 435 245 225 111
Other income (55) (291) (634) (20) (808)
------- ------- ------- ------- -------
Income (loss) before taxes 2,379 9,059 6,174 (3,274) 14,916
Income taxes 894 3,390 6,514 2,355 5,671
------- ------- ------- ------- -------
Net income (loss) $ 1,485 $ 5,669 $ (340) $(5,629) $ 9,245
======= ======= ======= ======= =======
Net income (loss) per share $ 0.08 $ 0.34 $ (0.02) $ (0.31) $ 0.43
======= ======= ======= ======= =======
Shares used in per share calculations 18,142 16,529 19,246 18,140 21,363
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Non-Redeemable Shareholders' Equity
(in thousands)
<CAPTION>
6% Cumulative Unearned Retained
Preferred Stock Common Stock Capital ESOP Earnings
Shares Amount Shares Amount Surplus Compensation (deficit)
------ ------ ------ ------ ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at 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
Net income 9,245
Sale of common stock 509 654
Compensatory stock options granted 553
ESOP allocation 196
------ ------ ------ ---- ------- ------- -------
Balance at March 31, 1997 (unaudited) -- $ -- 20,363 $ 10 $54,207 $(1,171) $19,227
====== ====== ====== ==== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
---------------------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 1,485 $ 5,669 $ (340) $(5,629) $ 9,245
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 601 790 2,141 732 1,800
Deferred income taxes (284) (415) 402 34 3,120
ESOP allocation 610 782 12,925 11,079 196
Stock option compensation 1,010 1,229 195 553
Loss on sale of fixed assets 269
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 782 (2,434) (2,685) 518 285
Inventories 184 (1,494) (3,267) (2,025) (585)
Other current assets 11 (17) (399) (390) (187)
Increase (decrease) in liabilities:
Accounts payable (178) 435 1,023 1,422 73
Accrued liabilities (483) 1,522 1,409 (635) (221)
Income taxes payable (126) 709 2,151 16 1,787
------- ------- ------- ------- -------
Net cash provided by operating activities 3,612 6,776 13,555 5,122 16,335
Investing activities:
Purchase of property, plant and equipment (1,003) (5,551) (24,347) (15,254) (8,436)
Increase in Industrial Revenue Bond assets (3,574) (48)
Reduction in Industrial Revenue Bond assets 968 2,654 2,606
Industrial Revenue Bond acquisition costs (87)
ESOP acquisition costs (85)
Proceeds from sales of fixed assets 54
-------- ------- ------- ------- -------
Net cash used in investing activities (1,088) (8,244) (21,741) (12,648) (8,382)
Financing activities:
Proceeds from long-term debt 2,405 3,500 8,200 8,200
Principal payments on long-term debt (1,720) (1,409) (10,399) (3,128) (636)
Sale of common stock 1,678 52 35,602 358 654
Increase in unearned ESOP compensation expense (1,656)
Purchase of common stock (2,247) (513) (166) (191)
Redemption of preferred stock (100) (100)
Preferred stock dividends paid (18) (18) (27) (27)
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities (1,558) 1,612 33,110 5,112 18
------- ------- ------- ------- --------
Increase (decrease) in cash and cash equivalents 966 144 24,924 (2,414) 7,971
Cash and cash equivalents at beginning of period 1,709 2,675 2,819 2,819 27,743
------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 2,675 $ 2,819 $27,743 $ 405 $35,714
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Sawtek Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the six months
ended March 31, 1996 and 1997 is unaudited)
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 custom and 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.
Interim Financial Information. The consolidated financial statements as
of March 31, 1997 and for the six months ended March 31, 1996 and 1997 are
unaudited but reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of financial position and results of operations. Operating results
for the six months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending September 30, 1997.
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.
F-7
<PAGE>
Inventories. Inventories are stated at the lower of cost (first-in,
first-out method) or market. Cost includes materials, direct labor and manu-
facturing overhead. Market is defined principally as net realizable value.
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 and
for the six months ended March 31, 1996 since they were committed to be released
in 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 ("FASB") 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. 128, "Earnings per Share." In February 1997, the FASB issued
SFAS No. 128, "Earnings Per Share," which is effective for financial statements
issued for periods ending after December 15, 1997. This pronouncement
establishes standards for computing and presenting earnings per share (EPS) for
entities with publicly-held common stock or potential common stock. SFAS 128
simplifies the standards for computing EPS and makes them comparable to
international EPS standards. Early application of this statement is not
permitted. The Company intends to adopt the provisions of SFAS 128 in 1998 and
does not expect their application 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.
F-9
<PAGE>
Note 3 - Allowance for Doubtful Accounts and Sales Returns
- ----------------------------------------------------------
The allowance for doubtful accounts and sales returns is composed of
the following:
<TABLE>
<CAPTION>
September 30, March 31,
-------------------------------- ---------
1994 1995 1996 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 103 $ 88 $ 277 $ 654
Provision for doubtful accounts and sales returns 326 364 820 718
Sales returns and uncollectible accounts written off (341) (175) (443) (497)
----- ----- ----- -----
Balance, end of period $ 88 $ 277 $ 654 $ 875
===== ===== ===== =====
</TABLE>
Note 4 - Inventories
- --------------------
Inventories are composed of the following:
<TABLE>
<CAPTION>
September 30, March 31,
-------------------- ---------
1995 1996 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Raw Material $1,454 $1,976 $2,401
Work in Process 1,359 2,341 2,058
Finished Goods 429 2,192 2,635
------ ------ ------
Total $3,242 $6,509 $7,094
====== ====== ======
</TABLE>
The allowance for obsolete and slow moving inventory is composed of the
following:
<TABLE>
<CAPTION>
September 30, March 31,
-------------------------------- ---------
1994 1995 1996 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 796 $ 680 $ 887 $1,705
Charged to cost of sales 52 245 931 251
Disposal of inventory (168) (38) (113) (25)
----- ----- ------ ------
Balance, end of period $ 680 $ 887 $1,705 $1,931
===== ===== ====== ======
</TABLE>
F-10
<PAGE>
Note 5 - Property, Plant and Equipment
- --------------------------------------
Property, plant and equipment are composed of the following:
<TABLE>
<CAPTION>
September 30, March 31,
------------------ ---------
1995 1996 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Land and Improvements $ 523 $ 671 $ 671
Buildings 1,959 9,829 9,566
Production and Test Equipment 9,291 21,459 26,478
Computer Equipment 2,140 2,734 2,803
Furniture and Fixtures 877 1,533 1,569
Construction in Progress 1,879 4,774 7,505
------- ------- -------
16,669 41,000 48,592
Less Accumulated Depreciation 8,537 10,576 11,812
------- ------- -------
8,132 30,424 36,780
Unexpended Funds from Industrial Revenue Bond 2,606 - -
------- ------- -------
Total $10,738 $30,424 $36,780
======= ======= =======
</TABLE>
Approximately $18,000, $82,000 and $380,000 of interest costs were
capitalized as part of property, plant and equipment in 1994, 1995 and 1996,
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 March 31, 1997.
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.
F-11
<PAGE>
Note 7 - Long-Term Debt and Lease Obligations
- ---------------------------------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, March 31,
------------------ ---------
1995 1996 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Industrial Revenue Bond (a) $ 658 $ 593 $ 549
ESOP Note (b) 1,367 1,367 1,171
Industrial Revenue Bond (c) 3,323 2,970 2,793
ESOP Note (d) 1,656 - -
Term Loan (e) 344 219 -
------ ------ ------
7,348 5,149 4,513
Less Current Maturities 543 1,363 1,251
------ ------ ------
$6,805 $3,786 $3,262
====== ====== ======
</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 $865,000 at September 30, 1995 and $823,000 at September 30, 1996,
and $802,000 at March 31, 1997. 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 plus
interest at the prime rate through June 1998. The Company will service the debt
through contributions to the Plan.
(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
$2,914,000 at September 30, 1995 and $7,939,000 at September 30, 1996 and
$7,772,000 at March 31, 1997. 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 LIBOR plus 150
basis points.
(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. It was repaid in 1997.
The Company leases equipment under a noncancelable agreement that
expires in 1998. Rental expense was approximately $10,000, $168,000 and $481,000
in 1994, 1995 and 1996, respectively, and $214,000 and $232,000 for the six
months ended March 31, 1996 and 1997, respectively.
Required future payments for long-term debt and operating leases are as
follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1997
----------------------- ---------------------
Debt Leases Debt Leases
---- ------ ---- ------
(in thousands)
<C> <C> <C> <C> <C>
1997 $ 1,363 $ 389 $ 625 $ 195
1998 1,147 317 1,249 317
1999 469 33 469 33
2000 379 7 379 7
2001 288 - 288 -
Thereafter 1,503 - 1,503 -
------- ----- ------ -----
$ 5,149 $ 746 $4,513 $ 552
======= ===== ====== =====
</TABLE>
The Company made interest payments of approximately $394,000, $456,000 and
$550,000 on long-term debt in 1994, 1995 and 1996, respectively, and
approximately $289,000 and $169,000 for the six months ended March 31, 1996 and
1997, respectively.
The fair value of the Company's long-term debt approximates the
carrying amount.
Note 8 - Common Stock
- ---------------------
The ESOP owns an aggregate of 9,896,540 and 9,824,634 shares of the
Company's Common Stock at September 30, 1995 and 1996, 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.
Increase in authorized shares. In March 1997 the shareholders approved
an amendment to the Company's Articles of Incorporation to increase the
authorized shares of Common Stock from 40,000,000 shares to 120,000,000 shares.
The accompanying financial statements have been restated to reflect the change
in authorized shares.
Note 9 - Income Taxes
- ---------------------
The income tax provision is composed of the following:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
---------------------------------- -------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Current:
Federal $1,002 $3,263 $5,176 $1,982 $2,182
State 176 542 936 339 369
------ ------ ------ ------ ------
1,178 3,805 6,112 2,321 2,551
Deferred:
Federal (242) (354) 343 29 2,668
State (42) (61) 59 5 452
------ ------ ------ ------ ------
(284) (415) 402 34 3,120
------ ------ ------ ------ ------
Total Income Tax Provision $ 894 $3,390 $6,514 $2,355 $5,671
====== ====== ====== ====== ======
</TABLE>
F-13
<PAGE>
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>
<CAPTION>
September 30, March 31,
---------------- ---------
1995 1996 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Accruals not currently deductible $ 94 $ 475 $ 317
Inventory costs capitalized for tax purposes 64 210 209
Inventory loss provision 302 581 711
----- ------- -------
Deferred Tax Asset $ 460 $ 1,266 $ 1,237
===== ======= =======
Non-Current:
Stock option compensation not currently deductible $ 805 $ 568 $ 712
Earnings of subsidiary not currently taxed - (328) (3,017)
Excess tax over book depreciation (595) (1,238) (1,784)
----- ------- -------
Deferred Tax Asset (Liability) $ 210 $ (998) $(4,089)
===== ======= =======
</TABLE>
A reconciliation of statutory Federal income taxes to reported income
taxes is as follows:
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended March 31,
-------------------------------- --------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Income taxes computed at the Federal
statutory rate of 34% (35% in 1996 and 1997) $ 809 $ 3,080 $ 2,161 $(1,113) $ 5,220
State income taxes, net of Federal benefit 86 329 646 (119) 533
Non-deductible ESOP compensation expense - - 3,944 3,635 -
Foreign Sales Corporation tax benefit - - (200) - (100)
Other (1) (19) (37) (48) 18
----- ------- ------- ------- -------
Total Income Tax Provision $ 894 $ 3,390 $ 6,514 $ 2,355 $ 5,671
===== ======= ======= ======= =======
</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 $1,300,000,
$3,105,000 and $3,959,000 in 1994, 1995 and 1996, respectively, and $2,660,000
and $765,000 for the six months ended March 31, 1996 and 1997, 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.
F-14
<PAGE>
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 1994, 1995 or 1996.
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.
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 participants
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. For the six months ended March 31,
1996, this charge equalled $11,079,000. The charge for the six months ended
March 31, 1997 was $392,000 as these shares are accounted for in accordance with
SOP 76-3, which uses cost as the basis of valuing the shares.
The Company made payments of approximately $556,000, $836,000 and
$1,656,000 in principal and $210,000, $259,000 and $127,000 in interest for the
ESOP in 1994, 1995 and 1996, respectively. The Company made payments of
approximately $1,656,000 and $196,000 in principal and $78,000 and $47,000 in
interest for the ESOP for the six months ended March 31, 1996 and 1997,
respectively. Allocations to participants' accounts were 1,354,540; 1,737,960
and 1,610,600 shares in 1994, 1995 and 1996, 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:
F-15
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------ ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. Government (Inclusive of Significant Customers) 33% 17% 15% 13% 12%
Foreign Markets (Inclusive of Significant Customers
and European Market) 40% 49% 54% 53% 42%
European Market 22% 36% 38% 43% 22%
Significant Customer A 8% 23% 24% 33% 13%
Significant Customer B 2% 10% 11% 18% 14%
</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>
<CAPTION>
Year Ended Balance at Six Months Ended Balance at
September 30, 1996 September 30, 1996 March 31, 1997 March 31, 1997
------------------ ------------------ ----------------- --------------
Net Operating Net Operating
Sales Income Assets Sales Income Assets
----- --------- ------ ----- --------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
United States $54,203 $4,680 $72,697 $28,947 $ 7,719 $80,521
Costa Rica 4,793 1,105 8,222 13,570 6,500 11,948
Eliminations (1,332) - (6,325) (4,006) - (3,133)
------- ------ ------- ------- ------- -------
Consolidated Results $57,664 $5,785 $74,594 $38,511 $14,219 $89,336
======= ====== ======= ======= ======= =======
</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.
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.
F-16
<PAGE>
Information concerning options under this plan is as follows:
<TABLE>
<CAPTION>
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
Granted 178,000 $11.05 - $30.63
Terminated (10,330) $ 0.74 - $24.75
Exercised (477,140) $ 0.13 - $ 3.55
----------
Balance at March 31, 1997 1,235,990 $ 0.13 - $30.63
==========
Exercisable at September 30, 1996 564,960 $ 0.13 - $ 1.34
==========
Exercisable at March 31, 1997 297,991 $ 0.13 - $13.00
==========
</TABLE>
F-17
<PAGE>
[INSIDE BACK COVER]
[Blank]
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, any Selling Shareholder
or any Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation would be unlawful or to any offer to buy to any person in any
jurisdiction in which such offer or solicitation would be unlawful or to any
person to whom it is unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company or that information
contained herein is correct as of any time subsequent to the date hereof.
------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...........................................
Risk Factors.................................................
Use of Proceeds..............................................
Price Range of Common Stock..................................
Dividend Policy..............................................
Capitalization...............................................
Selected Consolidated Financial Data.........................
Management's Discussion and Analysis
of Financial Condition and Results of
Operations..................................................
Business.....................................................
Management...................................................
Principal and Selling Shareholders...........................
Underwriting.................................................
Legal Matters................................................
Experts......................................................
Available Information........................................
Incorporation of Certain Documents by
Reference...................................................
Index to Consolidated Financial Statements...................
<PAGE>
2,500,000 Shares
SAWTEK INCORPORATED
Common Stock
------------------------
PROSPECTUS
------------------------
Hambrecht & Quist
Oppenheimer & Co., Inc.
Raymond James & Associates, Inc.
,1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
- -----------------------------------------------------
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<CAPTION>
Estimated
---------
<S> <C>
Securities and Exchange Commission Registration $ 27,000
NASD Filing Fee 15,000
Blue Sky Fee and Expenses
(including attorney's fees and expenses) 15,000
Printing and Engraving Expenses 100,000
Transfer agent Fees and Expenses 5,000
Accounting Fees and Expenses 35,000
Legal Fees and Expenses 225,000
Miscellaneous Expense 78,000
--------
Total $500,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers.
- ---------------------------------------------------
The Registrant, a Florida corporation, is empowered by Section 607.0850
of the Florida Business Corporation Act, subject to the procedures and
limitations stated therein, to indemnify any person who was or is a party to any
proceeding (other than an action by, or in the right of, the corporation), by
reason of the fact that he is or was a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other enterprise
against liability incurred in connection with such proceeding, including any
appeal thereof, if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
Section 607.0850 also empowers a Florida corporation to indemnify any
person who was or is a party to any proceeding by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, or other
enterprise, against expenses and amounts paid in settlement not exceeding, in
the judgment of the board of directors, the estimated expense of litigating the
proceeding to conclusion, actually and reasonably incurred in connection with
the defense or settlement of such proceeding, including any appeal thereof, if
he acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudicated to be liable unless, and only to the
extent that, the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper. To the extent that a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in
defense of any proceeding referred to above, or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses actually and
reasonably incurred by him in connection therewith.
<PAGE>
The indemnification and advancement of expenses provided pursuant to
Section 607.0850 are not exclusive, and a corporation may make any other or
further indemnification or advancement of expenses of any of its directors,
officers, employees or agents, under any bylaw, agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
However, a director, officer, employee or agent is not entitled to
indemnification or advancement of expenses if a judgment or other final
adjudication establishes that his action or omissions to act were material to
the cause of action so adjudicated and constitute (a) a violation of the
criminal law, unless the director, officer, employee or agent had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful; (b) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (c) in the case of a
director, a circumstance under which the liability provisions of Section
607.0834 of the Business Corporation Act, relating to a director's liability for
voting in favor of or asserting to an unlawful distribution, are applicable; or
(d) willful misconduct or a conscious disregard for the best interests of the
corporation in a proceeding by or in the right of the corporation to procure a
judgment in its favor or in a proceeding by or in the right of a shareholder.
The Registrant's Articles of Incorporation provides that the Company
shall indemnify its officers and directors to the extent permitted by Section
607.0850.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act of 1933, as amended.
The Registrant maintains an insurance policy covering directors and
officers of the Registrant for the wrongful act for which they become legally
obligated to pay or for which the Registrant is required to indemnify its
directors or officers.
Item 16. Exhibits.
- ------------------
1.1 Underwriting agreement (to be filed by amendment).
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).
3.11 Amendment to Articles of Incorporation of Sawtek Inc.(incorporated
by reference to Form 8-K, File No. 000-28276).
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.
5.1 Opinion regarding legality (to be filed by amendment).
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 (included on signature page).
*Incorporated by reference to Registration Statement on Form S-1, File
No.333-1860.
<PAGE>
Item 17. Undertakings.
- ----------------------
The Company hereby undertakes:
(1) For purposes of determining any liability under the Securites Act
of 1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15 or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceedings) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy and as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Apopka, State of Florida, on the 9th day of May,
1997.
SAWTEK INC.
By:/s/Steven P. Miller
Steven P. Miller
Chairman 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
We, the undersigned, officers and directors of SAWTEK INC., hereby
severally constitute Steven P. Miller and/or Raymond A. Link, and each of them
singly, our true and lawful attorneys with full power to any of them, and to
each of them singly, to sign for us and in our names in the capacities indicated
below the Registration Statement on Form S-3 filed herewith and any and all
amendments to said Registration Statement and generally to do all such things in
our name and behalf in our capacities as officers and directors to enable SAWTEK
INC. to comply with the provisions of the Securities Act and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to said
Registration Statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1933,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 9th day of May, 1997.
/s/Neal J. Tolar /s/Steven P. Miller
Neal J. Tolar Steven P. Miller
Senior Vice President and Director Chairman, CEO and Director
/s/Robert C. Strandberg /s/Willis C. Young
Robert C. Strandberg Willis C. Young
Director Director
/s/Bruce S. White
Bruce S. White
Director
<PAGE>
<TABLE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
<CAPTION>
Year ended Six Months Ended
September 30, March 31,
----------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Primary Earnings Per Share:
Weighted average number of shares of Common
Stock outstanding 15,785 13,738 17,197 15,837 20,183
Net effect of dilutive stock options based
on the Treasury stock method using the average
fair market value in effect for the period 2,305 2,638 2,012 2,257 1,163
------- ------- ------- ------- -------
Total shares outstanding for Primary EPS 18,090 16,376 19,209 18,094 21,346
======= ======= ======= ======= =======
Fully Diluted Earnings Per Share:
Weighted average number of shares of Common
Stock outstanding 15,785 13,738 17,197 15,837 20,183
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 2,357 2,791 2,049 2,303 1,180
------- ------- ------- ------- -------
Total shares outstanding for Fully
Diluted EPS 18,142 16,529 19,246 18,140 21,363
======= ======= ======= ======= =======
Net income (loss) $ 1,485 $ 5,669 $ (340) $(5,629) $ 9,245
Less preferred stock dividends 18 18 27
------- ------- ------- ------- -------
Net income (loss) applicable to common
shareholders $ 1,467 $ 5,651 $ (367) $(5,629) $ 9,245
======= ======= ======= ======= =======
Earnings (loss) per share: Primary $ .08 $ 0.35 $ (0.02) $ (0.31) $ 0.43
Fully Diluted $ .08 $ 0.34 $ (0.02) $ (0.31) $ 0.43
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated
October 25, 1996, in the Registration Statement (Form S-3 No. 33-00000)
and related Prospectus of Sawtek Inc. for the registration of 2,500,000
shares of its common stock.
/s/Ernst & Young LLP
Ernst & Young LLP
Orlando, Florida
May 8, 1997