UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended September 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 000-28276
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SAWTEK INC.
(Exact name of registrant as specified in its charter)
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Florida 59-1864440
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1818 S. Highway 441, Apopka, Florida 32703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 886-8860
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0005 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of October 30, 1998 was: Common Stock, $.0005 par value:
$239,024,300.
There were 20,858,597 shares of the registrant's Common Stock outstanding as of
October 30, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the registrant for the
registrant's Annual Meeting of the Shareholders for the fiscal year ended
September 30, 1998, which definitive proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the
registrant's fiscal year end of September 30, 1998, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
PART I
Page
Item 1. Business (including Risk Factors and Uncertainties).......... 3-19
Item 2. Properties................................................... 19
Item 3. Legal Proceedings............................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.......... 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................ 20-21
Item 6. Selected Financial Data...................................... 21-22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 22-28
Item 7a. Quantitative and Qualitative Disclosures about Market Risk... 28
Item 8. Financial Statements and Supplementary Data.................. 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 28
PART III
Item 10. Directors and Executive Officers of the Registrant........... 29-31
Item 11. Executive Compensation....................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 31
Item 13. Certain Relationships and Related Transactions............... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 32
Exhibit Index................................................ 32-36
Signatures................................................... 37
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PART I.
Except for the historical information contained in this Form 10-K, the
discussion includes certain forward-looking statements made pursuant to the Safe
Harbor provisions of the Private Securities Litigation Act of 1995. Investors
are cautioned that forward-looking statements such as statements of the
Company's plans, objectives, expectations and intentions involve risks and
uncertainties. The cautionary statements made in this Form 10-K should be read
as being applicable to all related forward-looking statements wherever they
appear. Statements containing terms such as "believes," "does not believe," "no
reason to believe," "expect," "plans," "projected," "intends," "estimates" or
"anticipates" are considered to contain uncertainty and are forward-looking
statements. The Company's actual results could differ materially from those
discussed. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed under the caption "Risk
Factors and Uncertainties."
ITEM 1. BUSINESS
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Sawtek 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 RF systems, such as Code
Division Multiple Access ("CDMA") and Global System for Mobile communications
("GSM")-based digital wireless mobile and fixed systems, digital microwave
radios, wireless local area networks ("WLAN"), cable television equipment,
various defense and satellite systems and chemical sensors. 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 92% of net sales
for the current fiscal year and includes major telecommunications equipment
producers such as Ericsson, LGIC, Lucent Technologies, Motorola, Nokia, Nortel,
Philips, Qualcomm, Samsung and Sony.
Industry Background
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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.
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The wireless communications industry is experiencing significant worldwide
growth. Cost reductions and technological improvements in such wireless
communications products as cellular, PCS, wireless local loop ("WLL"), 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 will provide increased functionality. Unless
carriers adopt the emerging digital standards, they will be forced to build new
cellular base station sites and continue to suffer from dropped calls due to the
overcrowding problem. These standards include CDMA, which is predominately
utilized in the United States, South Korea and is showing success in Japan and
other countries, and GSM, adopted throughout Europe and many other countries.
These new approaches are being utilized to provide cellular and PCS mobile
services as well as fixed 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.
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.
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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 and increasing bandwidths
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 relies 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 and are passive (no current
required). SAW devices are routinely manufactured for higher IF frequency ranges
and broader bandwidths 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.
Markets and Applications
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SAW devices may be utilized in most applications which transmit or receive
microwave or RF signals. Sawtek designs, manufactures and markets bandpass
filters, resonators, delay lines, oscillators and SAW-based subsystems to both
domestic and international original equipment manufacturers ("OEMs") that
integrate these products into receivers, transmitters and other equipment for
commercial, industrial, military and space applications. Sawtek provides
products to the following markets: communications, military and space systems
and other markets.
Communications
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Applications for the communications market accounted for approximately 81%
of Sawtek's net sales in 1998. The Company's communications product offerings
consist primarily of IF bandpass filters for CDMA and GSM base station equipment
and CDMA subscriber handsets. Additional applications include base station
repeaters, global satellite systems, digital radios, and data and video
applications. The Company offers many custom SAW components to serve these
market applications.
Cellular. In cellular applications, calls are placed through subscriber
handsets by establishing a connection with a base station via RF channels in the
800-1000 MHz frequency range. The Company supplies IF bandpass filters for CDMA
and GSM-based cellular base stations and for certain subscriber handset
applications.
5
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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 base station equipment, and bandpass filters for CDMA
subscriber handsets.
Wireless Local Loop ("WLL"). WLL systems eliminate the need for a wire
(loop) connecting users to the public switched telephone network by transmitting
voice messages over radio waves for the "last mile" connection between the
location of the customers' telephone and a base station connected to the network
equipment. The Company supplies bandpass filters to both base station and
subscriber handset applications for WLL.
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. These applications include digital radio,
wireless local area networks, handheld data terminals and global positioning
systems.
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 a variety of custom
SAW devices to serve the various standards required by the worldwide video
transmission market. Emerging technologies within the video transmission market
include digital high definition television ("HDTV") and interactive television.
The Company has designed custom products for both of these applications.
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 and subsystems can be found
in major applications that include electronic warfare, defense communications,
missile guidance, military and commercial space systems, radar and surveillance.
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.
6
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The Company has been developing SAW-based chemical sensors for several
years and has been a leading supplier of SAW resonators and delay lines used in
sensor development programs. In February 1998, the Company acquired Microsensor
Systems, Inc. of Bowling Green, Kentucky, a leading supplier in the developing
SAW-based chemical sensor instrument market.
Sawtek has a concentrated customer base with three customers that each
accounted for over 15% of net sales in 1998. They are, in alphabetical order,
Motorola, Nokia and Qualcomm. The Company's top 10 customers accounted for
approximately 76% of net sales in 1998 and in 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.
Products
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The Company has produced 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 sensors. While some product standardization exists, the vast
majority of the Company's products are custom developed for an individual
application or customer, for which a non-recurring engineering ("NRE") fee is
generally charged.
Bandpass Filters
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Sawtek currently offers three types of SAW bandpass filters: bi-directional
transversal, low loss transversal and coupled resonator filters.
Bi-directional Transversal Filters. This class of filters represents the
most widely used application of SAW technology. 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.
Low Loss Transversal Filters. Sawtek offers high performance, low loss
transversal filters for use in both infrastructure and subscriber applications
in CDMA and GSM-based digital cellular systems, wireless PBX, wireless handheld
data terminals and WLANs.
Coupled Resonator Filters. The Company offers coupled resonator filter
products which include in-line coupled, waveguide coupled and combined mode
resonator filters. The Company currently supplies filters of this type for use
in GSM, PCS and numerous other commercial and military telecommunications
systems.
7
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Resonators
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The Company currently offers two types of resonators: SAW and surface
transverse wave ("STW"). 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. 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
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Sawtek currently offers 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.
Oscillators
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Sawtek currently offers 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. The
Company's oscillators are used in high performance commercial and military
applications such as instrumentation, avionics and electronic warfare.
SAW-based Subsystems
--------------------
Among 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 Products
----------------------------
Through its wholly-owned subsidiary, Microsensor Systems, Inc., Sawtek has
a line of SAW-based chemical sensor instruments for the chemical warfare market.
The customer base for chemical agent detectors include the U.S. military,
various Federal agencies, and state and local municipalities. Microsensor
Systems also offers an ethylene oxide detector that is commonly used in the
hospital sterilization market and a fuel dilution meter for the oil analysis
market. In addition, Sawtek continues to be a leading supplier of SAW resonators
and delay lines used in sensor development programs throughout the world.
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New Product Development
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The Company's research and development and engineering teams are developing
new SAW-based products on an ongoing basis to serve the needs of our current and
potential customers. Much of the effort is involved in reducing the size and
increasing the performance of our devices. Examples of recent development
efforts that are generating new revenue for the Company include filters for
wireless LAN and WLL applications, and significantly smaller surface mount
filters for GSM and CDMA applications.
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 groundwater
contamination analysis, process control, incipient fire detection, biosensors
for medical applications, 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 through
its subsidiary, Microsensor Systems, Inc. To date, Sawtek scientists have made
fundamental improvements in three major technical areas necessary for product
development, namely temperature compensation, polymer development and metrology.
The SAW-based chemical sensor market is a developing market. For fiscal
year 1998, sales of chemical sensor-based products are less then 3% of Sawtek's
consolidated revenue. Sawtek successfully completed a Technology Reinvestment
Program ("TRP") project for a gas and industrial application that allowed Sawtek
to deliver a version of the instrument to a commercial chemical company. There
is no assurance that the Company will be successful in developing new sensing
products for commercial or military applications.
Technology
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SAW Technology. A simple SAW filter 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.
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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
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The manufacturing techniques utilized by the Company to produce its
products are very similar to those used by the integrated circuit industry. In
general, SAW devices are more straightforward to manufacture than most
integrated circuits but involve certain highly complex and precise processes
that are unique. While the Company controls a substantial portion of the
manufacturing process, some activities are outsourced. The primary raw materials
used to manufacture Sawtek's products, purchased from outside sources, 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.
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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 1998, the Costa Rican subsidiary accounted for
approximately 37.5% of net sales.
The Company has built a new SMP production facility in Orlando, Florida and
in Costa Rica 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.
Sales and Marketing
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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 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.
Foreign and Domestic Operations and Export Sales
- ------------------------------------------------
See Notes 11 and 12 to Consolidated Financial Statements on pages F-15 and
F-16.
Competition
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The markets for Sawtek's products are characterized by price competition,
rapid technological change, product obsolescence and heightened global
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:
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Andersen Laboratories (a unit of Sawgrass Microelectronics), Phonon, RF
Monolithics and Vectron. Competition from European companies principally
includes Siemens Matsushita Components and Thomson Microsonics. The Company
anticipates that it will experience increasing competition from Pacific Rim
companies as it expands into handheld and other high volume subscriber
applications. Major Asia suppliers of SAW-based products include Fujitsu,
Murada, NDK, and several other Japanese and Korean manufacturers principally for
their internal consumption. 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.
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 25 scientists, technicians and consultants in its
research and development efforts. In addition to its staff and consultants,
Sawtek is 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 larger than Sawtek's
internal staff, and to maintain a highly creative, stimulating intellectual
environment for its scientists.
Research and development expenses were $4.3 million in 1998, $3.8 million
for 1997 and $2.0 million in 1996. 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 13 U.S. patents (which
expire from 2003 to 2015), relating to SAW device, oscillator, packaging
technologies and SAW-based chemical sensors. 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 two years, 18 patent
applications were filed and six patents have been issued. 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.
12
<PAGE>
Sawtek also seeks to protect its trade secrets and proprietary technology,
in part, through confidentiality agreements with employees, consultants and
other parties. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by others. In addition, the laws of some foreign countries do not
offer protection of the Company's proprietary rights to the same extent as the
laws of the United States.
Backlog
- -------
Sawtek's backlog as of September 30, 1998 was approximately $15.8 million
compared to the backlog at September 30, 1997 of $27.4 million. The Company has
reduced customer delivery times significantly over the past two years through
its capacity expansion efforts. Customers are now placing orders based on this
reduced lead time resulting in a lower backlog compared to last year. The
Company includes in its backlog only customer orders and certain purchase
agreements with firmly scheduled deliveries within the subsequent 12 months. The
Company expects to ship substantially all of its backlog by the end of fiscal
1999. Shortly after September 30, 1998, the Company received an order from a
major customer for $4.6 million, which is to be shipped over a 27 month period.
The Company's backlog is not necessarily indicative of future product sales, and
the Company may be materially adversely affected by a delay or cancellation of a
small number of purchase orders. Backlog cancellations are negotiated with each
customer in writing and form a part of the contract with the customer.
Most of the orders from the Company's largest customers allow the customer
to cancel the order with a certain amount of required notice; and, from time to
time, the Company has experienced cancellations of orders in backlog. This
notice is negotiated with each customer and is generally related to the
manufacturing cycle time of the product which the customer ordered, typically 60
to 90 days. If there is any work in process at the time of cancellation, the
customer may be required to pay customary termination charges. If customers
over-order to secure delivery dates and eventually cancel orders, the customer
may be subject to price renegotiation as a result of the lower quantity of units
taken.
Employees
- ---------
As of September 30, 1998, the Company had a total of 549 employees,
including 370 in manufacturing and operations; 96 in research, development and
engineering; 29 in quality assurance; 19 in sales and marketing; and 35 in
administration. There are 151 employees located in San Jose, Costa Rica, 10
employees located in Bowling Green, Kentucky, and the remaining employees are
based in Orlando, Florida. The Company believes its future performance will
depend in large part on its ability to attract and retain highly skilled
employees. None of the Company's employees are represented by a labor union, and
the Company has not experienced any work stoppages. The Company considers its
employee relations to be good.
13
<PAGE>
RISK FACTORS AND UNCERTAINTIES
There are forward-looking statements in this report. Any statement relating
to plans, intentions, expectations or other forward-looking expression is a
forward-looking statement. The Company may make other forward-looking statements
either orally or in writing in the future. A reader of this Form 10-K should
understand that it is not possible to predict or identify all such risk factors.
Consequently, the reader should not consider this list to be a complete
statement of all potential risks or uncertainties. The Company does not assume
the obligation to update any forward-looking statement. The following "Risk
Factors and Uncertainties" are intended to be cautionary statements identifying
important factors that could cause actual results to differ materially from
those in the forward-looking statements.
Dependence on Continuing Demand for Wireless Communications Services and
CDMA Technology. Approximately 74% of the Company's net sales for 1998 and
approximately 71% of net sales for 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 base stations and
in the installation of new base stations, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Approximately 46% of the Company's net sales for fiscal 1998 and approximately
54% of net sales for the fiscal 1997 were derived from base station
applications. As base stations are installed and upgraded, domestically and
internationally, the market for SAW devices installed in such base stations may
ultimately become saturated. The life of SAW devices is typically in excess of
20 years, and a market for replacement devices for base stations may not
develop.
Sales of products for CDMA-based systems, including base stations and
subscriber handset phones, accounted for approximately 56% of net sales in
fiscal 1998 and approximately 48% of net sales for 1997. CDMA technology is
relatively new to 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.
Economic Turmoil in South Korea and Other Asian-Pacific Countries or Other
Geographic Areas of the World and Risks Associated with International
Operations. The South Korean economy and the economies of many other countries
in Asia and around the world have experienced economic turmoil and recession
over the past year. Sawtek has grown its revenues over the past several years in
part due to shipments to South Korean customers. In fiscal 1997, Sawtek's
revenue to South Korean customers was approximately $13.4 million, equal to 16%
of total revenue, and in fiscal 1998 it was approximately $14 million, or 14% of
revenue. However, in the last quarter of fiscal year 1998, revenue from South
Korean customers declined to $1.1 million or approximately 5% of total revenue.
Sawtek has been informed by its major customers in South Korea that they are
experiencing a slow down and that orders to Sawtek will be reduced in fiscal
1999 compared to fiscal 1998. Sawtek is uncertain, when or if, revenue from
South Korean customers will return to levels experienced over the past two
years.
Some of the Company's other major customers are relying on growth in
international markets, including Asia and Latin America, for sales of their
products. If the economies in these regions continue to decline, it is likely
that the demand for their products will be reduced, which will reduce the demand
for Sawtek's products.
14
<PAGE>
Overall, Sawtek's revenue from international sales account for
approximately 37%, 43% and 54% of net sales for fiscal 1998, 1997 and 1996,
respectively. Nokia, based in Finland, accounted for approximately 15% of net
sales. The sale of products in foreign countries involves risks associated with
currency exchange rate fluctuations and restrictions, import-export regulations,
customs matters, ability to secure credit and funding, longer payment cycles,
foreign collection problems, political and transportation risks, as well as the
previously mentioned economic turmoil. 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.
Fluctuations in the Value of Foreign Currency. Over the past year, the
valuations of many foreign currencies have devalued relative to the U.S. dollar.
The Korean won and Japanese yen, in particular, have fluctuated in value due in
part to the economic problems experienced by these countries over the past year.
The stronger U.S. dollar has made it more difficult for companies in these
countries to purchase U.S. products and it has made it more difficult for Sawtek
to compete against SAW producers based in these countries.
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 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.
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 both fiscal 1998 and fiscal 1997, sales to the Company's top 10
customers accounted for approximately 76% of net sales. In 1998, the Company's
top four customers accounted for approximately 17%, 15%, 15% and 9% of net
sales. In 1997, the Company's top four customers accounted for approximately
14%, 12%, 11% and 11% 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 though the actual impact of such developments could
be immaterial to the Company's results of operations and financial condition.
15
<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.
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 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.
16
<PAGE>
Pressure on Gross Profit Margins. 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. 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.
Lower Average Selling Prices on Sawtek's Products. There is a trend toward
lower average selling prices for base station filters due to competitive pricing
pressures and to the use of the newer surface mount package SAW filters for GSM
applications that are smaller and less expensive than previous generation
filters. The Company believes that the conversion to lower price, surface mount
package filters may also occur in the CDMA base station market in the future.
The Company believes that its revenue from base station filters will be lower in
fiscal 1999 compared to fiscal 1998. The Company believes that its sales of SAW
filters for subscriber handsets in the CDMA market will increase in fiscal 1999
compared to fiscal 1998, however, the Company is uncertain whether the
additional revenue from handset filters will offset the projected lower revenue
from base station filters in fiscal 1999. Handset filters typically produce
lower gross margins than the gross margins produced by base station filters.
Prices for handset filters will also decline as they become smaller and as
competitive pricing pressure increases.
Risks Associated with Costa Rica Operations. The Company bears significant
manufacturing risks associated with its operations in San Jose, Costa Rica.
During 1998, shipments from Sawtek's Costa Rican operation accounted for
approximately 37.5% of consolidated net sales, 38.8% of operating income and
29.8% of total fixed assets. Operating a production facility in Costa Rica
carries unknown risks of disruption resulting from government intervention,
wars, currency devaluation, labor disputes, earthquakes, volcanic eruption,
floods or other events. Any such disruptions could have a material adverse
effect on the Company's business, results of operations and financial condition.
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 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.
17
<PAGE>
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.
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 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.
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.
18
<PAGE>
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 and the U.S. stock market overall.
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.
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.
Absence of Dividends. The Company has historically 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.
ITEM 2. PROPERTIES
- -------------------
The Company's principal administrative, engineering and manufacturing
facilities are located in one owned building of approximately 93,000 square feet
and one leased building of approximately 1,365 square feet, both located in
Orlando, Florida. The Company also has a production facility in San Jose, Costa
Rica located in a 31,690 square foot Company-owned facility. The Company also
has a 7,600 square foot leased facility in Bowling Green, Kentucky used for its
chemical sensor development operation and a vacant 23,000 square foot leased
warehouse/office building in Pittsburgh, Pennsylvania that is being marketed to
potential tenants. The Company believes its facilities are 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.
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There were no material legal proceedings either by or against the Company
during fiscal 1998 or ongoing as of the date of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
The Securities and Exchange Commission recently amended Rule 14a-4, which
governs the use by the Company of discretionary voting authority with respect to
shareholder proposals. SEC Rule 14a-14(c)(1) provides that, if the proponent of
a shareholder proposal fails to notify the company at least 45 days prior to the
month and day of mailing the prior year's proxy statement, the proxies of the
company's management would be permitted to use their discretionary authority at
the company's next annual meeting of shareholders if the proposal were raised at
the meeting without any discussion of the matter in the proxy statement. For
purposes of the Company's 1999 Annual Meeting of Shareholders, this deadline is
October 28, 1998.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
- --------------------------------------------------------------------------
The shares of the Company are quoted on the Nasdaq National Market under
the symbol "SAWS." The 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:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended September 30, 1997
1st Quarter $42.75 $23.75
2nd Quarter 46.50 28.00
3rd Quarter 37.75 24.00
4th Quarter 49.875 32.75
Fiscal Year Ended September 30, 1998
1st Quarter 46.75 21.00
2nd Quarter 31.00 20.9375
3rd Quarter 32.50 12.375
4th Quarter 19.25 10.25
</TABLE>
20
<PAGE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on September 30, 1998 was $14.125 per share.
As of October 30, 1998 there were 20,858,597 shares of the Company's Common
Stock outstanding (net of 475,500 shares held in treasury stock) held by
approximately 150 shareholders of record. Many shareholders hold their shares in
"street name." The Company believes it has more than 6,000 beneficial owners of
its Common Stock.
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.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following is a summary of selected financial data of the Company and
its subsidiaries as of and for each of the five years ended September 30, 1998.
The historical consolidated financial data has been derived from the historical
financial statements of the Company, which financial statements have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
included elsewhere herein. These data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements appearing
elsewhere in this document.
Consolidated Statements of Income Data:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 97,700 $ 85,041 $ 59,173 $ 32,473 $ 20,301
Cost of sales 44,811 38,569 28,338 14,148 9,816
-------- -------- -------- -------- --------
Gross profit 52,889 46,472 30,835 18,325 10,485
Operating expenses:
Selling expenses 6,008 5,384 4,024 3,139 2,689
General and administrative expenses 4,497 5,646 5,927 3,462 3,302
ESOP compensation expense 196 196 12,925 782 610
Research and development expenses 4,285 3,756 1,954 1,669 1,116
-------- -------- -------- -------- --------
Total operating expenses 14,986 14,982 24,830 9,052 7,717
-------- -------- -------- -------- --------
Operating income 37,903 31,490 6,005 9,273 2,768
Interest expense 214 237 264 435 302
Other income (3,756) (2,022) (607) (291) (55)
-------- -------- -------- ------- --------
Income before income taxes 41,445 33,275 6,348 9,129 2,521
Income taxes 15,240 12,556 6,568 3,405 935
-------- -------- -------- ------- --------
Net income (loss) $ 26,205 $ 20,719 $ (220) $ 5,724 $ 1,586
======== ======== ======== ======= ========
Net income (loss) per share - basic (1) $ 1.24 $ 1.01 $ (0.01) $ 0.41 $ 0.10
======== ======== ======== ======= ========
Net income (loss) per share - diluted (1) $ 1.21 $ 0.97 $ (0.01) $ 0.31 $ 0.08
======== ======== ======== ======= ========
Shares used in per share calculations - basic 21,180 20,546 17,367 13,908 15,955
======== ======== ======== ======= ========
Shares used in per share calculations - diluted 21,678 21,334 20,243 18,271 19,464
======== ======== ======== ======= ========
<FN>
(1)Computed on the basis described in Notes to Consolidated Financial Statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term
investments $ 84,131 $ 58,073 $ 27,743 $ 2,821 $ 2,687
Working capital 98,929 68,658 36,307 7,490 5,353
Total assets 148,710 120,506 75,524 23,802 11,737
Long-term debt, less current maturities 2,169 2,868 3,907 6,916 4,235
Total shareholders' equity 123,877 98,218 62,086 (20,265) (5,374)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
- ---------------------------------------------------------------------
The Company maintains its records on a fiscal year ending on September 30
of each year and all references to a year refer to the fiscal year ending on
that date.
Overview
- --------
The Company was incorporated in 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,
SAW-based subsystems and chemical sensors. 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 92% of its net sales in 1998. 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, 43% of net
sales in 1997 and approximately 37% of net sales in 1998.
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 43.7% from 1996 to 1997, and 14.9% from 1997 to 1998.
The growth in net sales is attributable to growth in the wireless communications
market to which the Company supplies SAW bandpass filters for cellular and PCS
telephone base stations and handheld subscriber telephones. The Company has a
broad product line of SAW filters and other components with average selling
prices ranging from under $2 to more than $300.
22
<PAGE>
For both 1998 and 1997, net sales to the Company's top 10 customers
accounted for approximately 76% of net sales with the top four customers
accounting for approximately 56% of net sales in 1998, compared to 48% in 1997.
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.
During 1998, and in particular in the 4th quarter of the fiscal year, the
Company experienced the impact of several factors that caused it to have lower
revenue and profits than the Company originally contemplated. The factors
affecting the Company include the continued financial turmoil in South Korea,
Asia and other developing markets; currency fluctuations that have resulted in a
strong dollar compared to the Japanese yen, which affect the Company's ability
to compete with Japanese suppliers of surface acoustic wave devices; reduced
prices on GSM base station filters due to the conversion to next generation
products which are smaller, less expensive, surface mount filters; and a lowered
forecast for the fourth quarter of fiscal 1998 for CDMA filters for both base
station and handset filters from several of the Company's customers. As a
result, the Company took steps to match production capacity to anticipated
customer demand including: i) elimination of its weekend work shifts in June
1998, which were primarily staffed with temporary employees, ii) reduction of
certain general and administrative costs and iii) transition of more production
to the Costa Rica operation.
The Company believes that the financial turmoil in Asia will continue to
impact the Company in fiscal 1999 and that other factors may impact sales and
results of operations throughout the year. The Company is uncertain if the cost
savings measures enacted in late fiscal 1998 will be sufficient to offset the
impact of potential revenue reductions.
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>
Percentage of Net Sales
-----------------------
Year Ended September 30,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . 45.9 45.4 47.9
----- ----- -----
Gross margin . . . . . . . . . . . . . . . . . 54.1 54.6 52.1
Operating expenses:
Selling expenses . . . . . . . . . . . . . . 6.1 6.3 6.8
General and administrative expenses . . . . . 4.6 6.6 10.0
ESOP compensation expense . . . . . . . . . . 0.2 0.2 21.9
Research and development expenses . . . . . . 4.4 4.4 3.3
----- ----- -----
Total operating expenses . . . . . 15.3 17.5 42.0
----- ----- -----
Operating income . . . . . . . . . . . . . . . 38.8 37.1 10.1
Interest expense . . . . . . . . . . . . . . . 0.2 0.3 0.4
Other income . . . . . . . . . . . . . . . . . (3.8) (2.4) (1.0)
----- ----- -----
Income before income taxes . . . . . . . . . . 42.4 39.2 10.7
Income taxes . . . . . . . . . . . . . . . . . 15.6 14.8 11.1
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . . 26.8% 24.4% (0.4)%
===== ===== =====
</TABLE>
23
<PAGE>
Comparison of Years Ended September 30, 1997 and 1998
- -----------------------------------------------------
Net Sales. Net sales increased 14.9% from $85.0 million in 1997 to $97.7
million in 1998. The increase was due to an increase in shipments of CDMA
subscriber handset filters which increased from 16% of net sales in 1997 to 28%
of net sales in 1998. Sales of GSM base station filters declined from $16.1
million in 1997 to $14.8 million in 1998 due to the conversion to smaller, lower
cost, surface mount package filters in 1998 compared to larger, higher dollar,
dual-in-line package filters sold in 1997. Sales of CDMA base station filters
were essentially unchanged from last year. International sales decreased from
43% of total sales in 1997 to 37% of total sales in 1998 due to the economic
recession in Asia and reduced sales of GSM base station filters to European
customers. Sales to South Korean customers decreased from 16% of total revenue
in 1997 to 14% of total revenue in 1998 and sales in the fourth quarter of 1998
dropped to approximately 5% of total sales due to the economic turmoil
experienced in that country and the slow down in consumer and industrial
spending. Sales for military and space systems decreased from $9.8 million in
1997 to $8.8 million in 1998.
Gross Margin. Gross margin decreased slightly from 54.6% in 1997 to 54.1%
in 1998 due to lower gross profit margin on filters for subscriber handsets,
which increased as a percentage of overall revenue, lower gross profit margin on
surface mount GSM base station filters and competitive pricing pressure.
Offsetting these factors were improvements in manufacturing automation, improved
yields and higher productivity per worker in 1998 compared to 1997. The Company
believes that gross profit margins will decline in fiscal 1999 due to a shift in
product sales to lower profit margin subscriber handset filters and competitive
pricing pressure.
Selling Expenses. Selling expenses increased 11.6% from $5.4 million in
1997 to $6.0 million in 1998 due to commissions paid to independent sales
representatives and increased costs for the internal sales personnel and related
expenses. Selling expenses decreased as a percentage of overall sales from 6.3%
in 1997 to 6.1% in 1998.
General and Administrative Expenses. General and administrative expenses
decreased 20.4% from $5.6 million in 1997 to $4.5 million in 1998 due to reduced
corporate administrative staff in 1998 compared to 1997, lower bonus payments
and no grants of compensatory stock options in 1998 compared to 1997.
Research and Development Expenses. Research and development expenses
increased 14.1% from $3.8 million in 1997 to $4.3 million in 1998 due to
additional personnel and expanded research and development efforts, particularly
for the development of SAW-based chemical sensors. 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 and Other Income. Interest expense decreased from $237,000
in 1997 to $214,000 in 1998 due to repayment of debt. Other income increased in
1998 due to interest earned on the higher cash and investment balances in 1998
compared to 1997.
Income Tax Expense. The provision for income taxes as a percentage of
income before tax was 36.8% in 1998 compared to 37.7% in 1997. The slightly
lower effective tax rate for 1998 relates to increased interest earned on
tax-exempt securities, benefit from the Company's foreign sales corporation and
a lower effective rate for state income taxes. The Company expects that its
effective tax rate will be between 34% and 36% for fiscal 1999.
24
<PAGE>
Comparison of Years Ended September 30, 1996 and 1997
- -----------------------------------------------------
Net Sales. Net sales increased 43.7% from $59.2 million in 1996 to $85.0
million in 1997. The increase was a result of increased product shipments to the
wireless communications market, specifically sales of high volume filters for
base station applications and subscriber handsets based on CDMA technology for
the telecommunications industry. International sales increased by $5.2 million
in 1997 compared to 1996 principally due to increased product shipments to
Korea. Sales of military and space systems decreased from 15% of net sales in
1996 to 12% of net sales in 1997 due to the increase in overall net sales. The
dollar volume of military sales, however, actually increased from $8.7 million
to $9.8 million from 1996 to 1997.
Gross Margin. Gross margin increased from 52.1% in 1996 to 54.6% in 1997
primarily due to improved yields, lower manufacturing costs associated with the
Costa Rican operation and economies of scale with the increased volume.
Selling Expenses. Selling expenses increased 33.8% from $4.0 million in
1996 to $5.4 million in 1997, and decreased as a percentage of net sales at 6.3%
in 1997 compared to 6.8% in 1996. The increased cost is a result of commissions
paid to independent sales representatives associated with the higher sales
volume and increased cost for additional sales personnel and related expenses.
General and Administrative Expenses. General and administrative expenses
decreased 4.7% from $5.9 million in 1996 to $5.6 million in 1997, and decreased
as a percentage of net sales from 10.0% to 6.6% for the same periods. The net
decrease was due to higher expenses incurred in 1996 for start-up costs for the
Costa Rica operation and compensatory stock option expense.
ESOP Compensation Expense. ESOP compensation expense decreased from $12.9
million in 1996 to $196,000 in 1997. This decrease of $12.7 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. In the fourth quarter of FY97, the Company restructured its loan with
the ESOP providing for a repayment and allocation of shares over a seven-year
period ending in 2003. As a result, the remaining unearned ESOP compensation
expense at September 30, 1997 of $1,170,870 will be spread over this period. The
Company recorded ESOP compensation expense of $196,000 for the full fiscal year
of 1997 and a credit of $391,000 for the fourth quarter due to the loan
restructuring that was undertaken in that quarter.
Research and Development Expenses. Research and development expenses
increased 92.2% from $2.0 million in 1996 to $3.8 million in 1997. These
expenses increased due to additional personnel and expanded research and
development efforts. 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 and Other Income. Interest expense decreased from $264,000
in 1996 to $237,000 in 1997 due to repayment of debt. Other income represents
interest income and non-operating expenses. Other income increased as the
Company recorded increased interest income earned on its cash balances during
1997.
25
<PAGE>
Income Tax Expense. The provision for income taxes as a percentage of
income before income taxes was 37.7% for 1997. In 1996, the Company incurred a
non-deductible charge for ESOP compensation expense of approximately $12.9
million. Had it not been for this charge, the tax provision would have been
approximately 37% for this period.
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,
its May 1, 1996 initial public offering and the July 1, 1997 follow-on public
offering. The Company requires capital principally for equipment, financing of
growth in accounts receivable and inventory, investment in product development
activities and new technologies, repurchase of Common Stock and potential
acquisitions of new technologies or compatible companies. For 1998, the Company
generated net cash from operating activities of $39.4 million consisting
primarily of net income of $26.2 million, $6.0 million of depreciation and
amortization, $9.4 million of increases in current and deferred taxes, partially
offset by increases in inventory of $1.3 million and a decrease in accounts
payable and accrued liabilities of $2.0 million. Cash flow from operations was
$35.3 million and $13.6 million in 1997 and 1996, respectively.
The Company has a credit line agreement totaling $20.0 million from
SunTrust Bank, Central Florida, N.A. renewable annually. There was no balance
outstanding on this credit line at September 30, 1998.
The Company made capital expenditures of $7.9 million during 1998 compared
to $14.6 million and $24.4 million in 1997 and 1996, respectively. The Company
plans to spend between $8.0 million and $12.0 million in 1999 on capital
equipment and facilities.
The Company repurchased 385,500 shares of its Common Stock for $4.6 million
in the fourth quarter of fiscal 1998 through open market purchases. In August
1998, the Board of Directors authorized to repurchase up to 1,000,000 shares of
Common Stock which includes the 385,500 repurchased in fiscal 1998. The Company
expects to continue to repurchase shares of its Common Stock from time to time
in the future. The repurchased shares will be used to satisfy stock option
exercises and issuance of shares under other stock related benefit programs.
The Company believes that its present cash position, together with its
credit facility and funds expected to be generated from operations, will be
sufficient to meet its working capital and other cash requirements through 1999.
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 September 30, 1998, the Company had a net investment of
approximately $14.9 million in this operation and recorded net sales of
approximately $36.6 million with an operating profit of approximately $14.7
million for 1998 compared to a net investment of $13.4 million at September 30,
1997, net sales of $28.4 million for 1997 and an operating profit of $13.4
million for 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.
26
<PAGE>
In 1996, the Company established a "foreign sales corporation" pursuant to
the applicable provisions in the Internal Revenue Code to take advantage of
income tax reductions on export sales. Through September 30, 1998, 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 37%,
43% and 54% of net sales for the years ended September 30, 1998, 1997 and 1996,
respectively. Sales to the European market accounted for 18%, 22%, and 38% for
these same periods, respectively and sales to the Asian and Pacific Rim markets,
principally to South Korea were 16%, 17% and 9% for these same periods,
respectively. See Notes 11 and 12 to the Consolidated Financial Statements.
Recently Issued Accounting Standards
- ------------------------------------
Please see Note 1 to the Consolidated Financial Statements for a discussion
of new pronouncements.
Impact of Inflation on the Company
- ----------------------------------
Management does not believe that inflation has had a material impact on
operating costs and earnings of the Company.
Year 2000 Compliance
- --------------------
The Year 2000 issue relates to the method used by computer systems and
software for displaying dates using two digits to represent a four-digit year.
Computer hardware and software describes traditional information technology
systems such as enterprise resource planning systems, accounting systems, fax
servers, print servers, desktop computers and applications, telephone/PBX
systems, as well as other systems such as manufacturing equipment, facilities
equipment and security systems. Some of Sawtek's computer hardware and software
may recognize a year represented by "00" as 1900 instead of 2000. This could
result in unexpected behavior in the affected hardware or software. These
systems will need to be able to accept four-digit entries to distinguish years
beginning with 2000 from prior years. As a result, systems that do not accept
four-digit year entries will need to be upgraded or replaced to comply with such
"Year 2000" requirements.
Sawtek's State of Readiness
- ---------------------------
Sawtek's Year 2000 inventory, assessment, remediation and testing began in
January 1998 and is planned to be completed in June 1999. As of October 30,
1998, it is estimated that 50% of the issues that are necessary for a successful
Year 2000 transition are resolved. The remaining 50% of the issues are in
progress and are planned to be completed by June 1999.
To certify Year 2000 compliance, Sawtek employed two methods. Vendor
certification was the primary method utilized. In order for a system to be
considered compliant from vendor certification, Sawtek required a written
statement from the vendor, as well as a description of the testing methods used.
If this information was not available or was not considered thorough enough,
Sawtek performed an internal test. These tests include the use of a certified
hardware test program, the examination of the software source code by Sawtek's
Software Engineering department or Information Systems department and advancing
the date past January 1, 2000.
27
<PAGE>
Sawtek also surveyed key suppliers. As of October 30, 1998, 90% of those
surveyed have responded. Of those surveyed, 70% are either already compliant or
will be compliant by Q4 1998. The remainder expect to be compliant some time in
1999. No suppliers responded that they would fail to be Year 2000 compliant.
Sawtek is in the process of surveying key customers. The results of this
survey are expected to be completed by December 1998.
Costs to Address the Company's Year 2000 Issues
- -----------------------------------------------
The bulk of the Company's costs to address Year 2000 issues are internal
staff time estimated at less than $100,000 for the past fiscal year and the cost
to upgrade its main MRP software which is certified as Year 2000 compliant. The
cost of this upgrade, which was purchased in fiscal 1998, was $48,000. The
estimated cost to complete the Year 2000 compliance and transition is less than
$200,000 for fiscal 1999, which will be funded out of fiscal 1999 operating cash
flow.
The Risks of the Company's Year 2000 Issues
- -------------------------------------------
The Company's products are not date sensitive and therefore are not subject
to Year 2000 defects or problems. The Company believes that its primary
manufacturing, engineering, and financial and administrative systems are Year
2000 compliant. The greatest potential risk from Year 2000 issues relates to a
major supplier or customer whose systems are not Year 2000 compliant and who may
be unable to meet delivery requirements for an important raw material or
equipment or who may not be able to accept shipment of the Company's products
until they correct their Year 2000 problem.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely, there can be no assurance that the Year 2000 issue will not
materially adversely impact the Company's results of operations or adversely
affect relationships with customers, vendors, or others. Additionally, there can
be no assurance that the Year 2000 issues of other entities will not have a
material adverse impact on the Company's systems or results of operations.
The Company's Contingency Plans
- -------------------------------
The Company has begun, but not yet completed, a comprehensive analysis of
the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by June 30, 1999.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Index to Consolidated Financial Statements, which appears on page F-1
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
28
<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 Shareholders' Equity.............................F-5
Consolidated Statements of Cash Flows.......................................F-6
Notes to Consolidated Financial Statements..................................F-7
Financial Statement Schedules
- -----------------------------
All required information is included in the Notes to Consolidated Financial
Statements.
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Sawtek Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Sawtek
Inc. and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of income (loss), shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1998. 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 financial position of Sawtek Inc.
and subsidiaries at September 30, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Orlando, Florida
October 23, 1998
F-2
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except per share data)
ASSETS
<CAPTION>
September 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash, cash equivalents, and short-term investments $ 84,131 $ 58,073
Accounts receivable net of allowance for doubtful accounts and
returns of $1,399 at September 30, 1998 and $684 at September 30, 1997 11,569 12,327
Inventories 8,453 7,120
Deferred income taxes 1,179 1,275
Other current assets 1,075 671
-------- --------
Total current assets 106,407 79,466
Other assets 109 150
Property, plant and equipment, net 42,194 40,890
-------- --------
Total assets $148,710 $120,506
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,830 $ 2,887
Accrued wages and benefits 3,198 3,391
Other accrued liabilities 1,912 2,672
Current maturities of long-term debt 469 1,790
Income taxes payable 69 68
-------- --------
Total current liabilities 7,478 10,808
Long-term debt, less current maturities 2,169 2,868
Deferred income taxes 15,186 8,612
Shareholders' Equity:
Common Stock; $.0005 par value; 120,000,000 authorized shares;
issued and outstanding shares 21,334,097 at September 30, 1998
and 20,931,616 at September 30, 1997 11 11
Capital surplus 72,816 68,937
Unearned ESOP compensation (975) (1,171)
Retained earnings 56,646 30,441
Less Common Stock held in treasury, at cost; 385,500 shares at
September 30, 1998, none at September 30, 1997 (4,621)
-------- --------
Total shareholders' equity 123,877 98,218
Total liabilities and shareholders' equity $148,710 $120,506
======== ========
See notes to consolidated financial statements
</TABLE>
F-3
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(in thousands, except per share data)
<CAPTION>
Year Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 97,700 $ 85,041 $ 59,173
Cost of sales 44,811 38,569 28,338
-------- -------- --------
Gross profit 52,889 46,472 30,835
Operating expenses:
Selling expenses 6,008 5,384 4,024
General and administrative expenses 4,497 5,646 5,927
ESOP compensation expense 196 196 12,925
Research and development expenses 4,285 3,756 1,954
-------- -------- --------
Total operating expenses 14,986 14,982 24,830
-------- -------- --------
Operating income 37,903 31,490 6,005
Interest expense 214 237 264
Other income (3,756) (2,022) (607)
-------- -------- --------
Income before income taxes 41,445 33,275 6,348
Income taxes 15,240 12,556 6,568
-------- -------- --------
Net income (loss) $ 26,205 $ 20,719 $ (220)
======== ======== ========
Net income (loss) per share - basic $ 1.24 $ 1.01 $ (0.01)
======== ======== ========
Net income (loss) per share - diluted $ 1.21 $ 0.97 $ (0.01)
======== ======== ========
Shares used in per share calculations - basic 21,180 20,546 17,367
======== ======== ========
Shares used in per share calculations - diluted 21,678 21,334 20,243
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands)
<CAPTION>
6% Cumulative Unearned Retained
Preferred Common Stock Capital ESOP Earnings Treasury Stock
Shares Amount Shares Amount Surplus Compensation (Deficit) Shares Amount
------ ------ ------ ------ ------- ------------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 150 $ 300 5,415 $ 4 $ 1,942 $(22,502)
Net loss (220)
Reclassification of
redeemable ESOP
Common Stock in
connection with the
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 3,000 2 35,218
offering
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 Sept. 30, 1996 20,024 11 53,057 (1,367) 10,393
Net Income 20,719
Sale of Common Stock 908 10,627
Compensatory stock option
tax benefit 4,700
Stock option compensation 553
ESOP allocation 196
Adjustment for the net loss
of MSI for the three
months ended
September 30, 1997 (671)
---- ------ ------ ---- ------- -------- -------- ------ -------
Balance at Sept. 30, 1997 20,932 11 68,937 (1,171) 30,441
Net income 26,205
Sale of Common Stock 402 1,171
Compensatory stock option
tax benefit 2,708
Purchase of treasury stock 386 $(4,621)
ESOP allocation 196
---- ------ ------ ---- ------- -------- -------- ------ -------
Balance at Sept. 30, 1998 21,334 $ 11 $72,816 $ ( 975) $ 56,646 386 $(4,621)
==== ====== ====== ==== ======= ======== ======== ====== =======
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Year Ended September 30,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 26,205 $ 20,719 $ (220)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,036 3,995 2,179
Deferred income taxes 6,670 7,646 402
ESOP allocation 196 196 12,925
Stock option compensation 553 195
Loss on disposal of fixed assets 616 87
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 758 (3,656) (2,959)
Inventories (1,333) (464) (3,288)
Other current assets (404) (155) (370)
Increase (decrease) in liabilities:
Accounts payable (1,057) 764 1,064
Accrued liabilities (953) 1,701 1,427
Income taxes payable 2,709 3,923 2,202
-------- -------- -------
Net cash provided by operating activities 39,443 35,309 13,557
Investing activities:
Purchase of property, plant and equipment (7,915) (14,641) (24,397)
Increase in Industrial Revenue Bond assets (48)
Reduction in Industrial Revenue Bond assets 2,654
Short-term investments (26,235) (15,764)
Other 17 2
-------- -------- -------
Net cash used in investing activities (34,150) (30,388) (21,789)
Financing activities:
Proceeds from long-term debt 146 309 8,241
Principal payments on long-term debt (2,166) (1,279) (10,406)
Sale of Common Stock 1,171 10,627 35,602
Purchase of Common Stock for treasury (4,621) (166)
Redemption of preferred stock (100)
Preferred stock dividends paid (27)
-------- -------- -------
Net cash provided by (used in) financing activities (5,470) 9,657 33,144
-------- -------- -------
Increase (decrease) in cash and cash equivalents (177) 14,578 24,912
Cash and cash equivalents at beginning of period 42,309 27,731 2,819
-------- -------- -------
Cash and cash equivalents at end of period 42,132 42,309 27,731
Short-term investments 41,999 15,764
-------- -------- -------
Cash, cash equivalents and short-term investments $ 84,131 $ 58,073 $27,731
======== ======== =======
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
Sawtek Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Description of Business. Sawtek Inc. and subsidiaries (the "Company")
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, SAW-based subsystems and chemical
sensors. These products are used in a variety of microwave and RF systems, such
as Code Division Multiple Access and Global System for Mobile
communications-based digital wireless systems, digital microwave radios, WLAN,
cable television equipment and various defense and satellite systems. In fiscal
1998, the Company acquired Microsensor Systems, Inc. ("MSI"), a manufacturer of
SAW-based chemical sensors, in a transaction accounted for as a
pooling-of-interests. The Company's consolidated financial statements for all
periods prior to this acquisition have been restated to include MSI's financial
position, results of operations and cash flows.
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 increased the authorized number of
shares to 40,000,000 shares of Common Stock which was again increased to
120,000,000 shares in 1997. All share, per share, ESOP, and stock option
information in the accompanying financial statements have 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 generally 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.
Financial Instruments. The Company considers all liquid interest-earning
investments with a maturity of three months or less at the date of purchase to
be cash equivalents. Short-term investments generally mature between three
months and 18 months from the purchase date. All cash equivalents and short-term
investments are classified as held to maturity and are recorded at cost, which
approximates market.
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
manufacturing overhead. Market is defined principally as net realizable value.
Property, Plant and Equipment. Property, plant and equipment are valued at
cost (less accumulated depreciation) computed using the straight line method.
The estimated useful lives used in computing depreciation expense are as
follows:
<TABLE>
<S> <C>
Building and Improvements 10 - 30 years
Production and Test Equipment 4 - 8 years
Computer Equipment 4 - 8 years
Furniture and Fixtures 5 - 10 years
</TABLE>
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.
Intangibles. Various fees incurred in the acquisition of two Industrial
Revenue Bonds were capitalized and were 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 were amortized using the
interest method over the lives of the related debt.
Earnings Per Share. The Company has adopted Statement of Financial
Accounting Standard (SFAS) No. 128, Earnings per Share, which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. All earnings per share amounts have been presented,
and where appropriate, restated to conform to SFAS 128 requirements.
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, earnings of the Costa Rican subsidiary not
currently subject to tax, 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.
ESOP Compensation Expense. ESOP shares acquired after December 31, 1992 are
accounted for according to the provisions of Statement of Position (SOP) 93-6.
This SOP requires that compensation expense be measured using a fair market
value basis when the shares are committed to be released to the employees. The
Company accounts for ESOP shares acquired prior to January 1, 1993 in accordance
with SOP 76-3, which requires compensation expense be measured using the cost
basis of the shares when the shares are committed to be released to employees.
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") and related interpretations.
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. The Company provides
additional pro forma disclosures as required under SFAS No. 123, "Accounting for
Stock-Based Compensation."
Impairment of Long Lived Assets. In the event that facts and circumstances
indicate that the cost of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required.
SFAS No. 130, "Reporting Comprehensive Income." In June 1997, the FASB
issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting and displaying comprehensive income and its components in
financial statements. The Company will adopt SFAS 130 in the first quarter of
fiscal 1999. The application of the new rules is not expected to have a material
impact on the Company's financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Also in June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. SFAS 131 changes the way public
companies report segment information in annual financial statements and requires
those companies to report selected segment information in quarterly reports to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt SFAS 131 in fiscal 1999 and the adoption may result in additional
disclosures. The application of SFAS 131 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
Reclassifications. Certain amounts in prior years have been reclassified to
conform to current year presentation.
Note 2 - Acquisition of MSI
- ---------------------------
On February 25, 1998, the Company acquired all of the outstanding shares of
MSI, a manufacturer of chemical sensors, in exchange for 169,811 shares of the
Company's Common Stock plus assumption of approximately $900,000 of debt. The
business combination was recorded as a pooling-of-interests. Prior to the
combination, MSI's fiscal year ended on June 30 of each year. In recording the
business combination, MSI's financial statements for the fiscal years ended June
30, 1996 and 1997 were combined with Sawtek's for the fiscal years ended
September 30, 1996 and 1997, respectively. MSI's unaudited net sales and net
loss for the three months period ended September 30, 1997 were approximately
$423,000 and ($671,000), respectively. In accordance with APB 16, MSI's results
of operations and cash flows for the three-month period ended September 30, 1997
have been added directly to the retained earnings and cash flows of the Company
and excluded from reported fiscal 1998 results of operations and cash flows.
MSI's revenue and net loss for the period from October 1, 1997 through the date
of acquisition were approximately $792,000 and ($438,000), respectively.
F-9
<PAGE>
Note 3 - Cash, Cash Equivalents and Short-Term Investments
- ----------------------------------------------------------
Cash, cash equivalents and short-term investments are composed of the
following:
<TABLE>
<CAPTION>
September 30,
--------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash and equivalents:
Cash $ 2,390 $ 1,846
Commercial paper and bankers acceptance under 90 days 39,742 40,463
------- -------
Cash and equivalents 42,132 42,309
Short-term investments:
Bankers acceptance over 90 days 8,761
Municipal securities 7,775 5,766
Certificates of deposit 11,401 4,998
Government agency securities 14,062 5,000
------- -------
Short-term investments 41,999 15,764
------- -------
Cash, cash equivalents and short-term investments $84,131 $58,073
======= =======
</TABLE>
Note 4 - Allowance for Doubtful Accounts and Sales Returns
- ----------------------------------------------------------
The allowance for doubtful accounts and sales returns is composed of the
following:
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period $ 684 $ 654 $ 277
Provision for doubtful accounts and sales returns 1,396 821 820
Sales returns and uncollectible accounts written off (681) (791) (443)
------ ------ ------
Balance, end of period $1,399 $ 684 $ 654
====== ====== ======
</TABLE>
Note 5 - Inventories
- --------------------
Net inventories are composed of the following:
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Raw material $ 3,809 $ 3,154
Work in process 1,969 2,216
Finished goods 2,675 1,750
------- -------
Total $ 8,453 $ 7,120
======= =======
</TABLE>
F-10
<PAGE>
The allowance for obsolete and slow moving inventory is composed of the
following:
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period $1,935 $1,705 $ 887
Charged to cost of sales 345 270 931
Disposal of inventory (162) (40) (113)
------ ------ ------
Balance, end of period $2,118 $1,935 $1,705
====== ====== ======
</TABLE>
Note 6 - Property, Plant and Equipment
- --------------------------------------
Property, plant and equipment are composed of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Land and improvements $ 830 $ 671
Buildings 16,595 14,076
Production and test equipment 37,235 29,530
Computer equipment 3,239 2,997
Furniture and fixtures 2,666 1,862
Construction in progress 1,043 5,507
------- -------
61,608 54,643
Less accumulated depreciation 19,414 13,753
------- -------
Total $42,194 $40,890
======= =======
</TABLE>
Approximately $98,000, $159,000 and $380,000 of interest costs were
capitalized as part of property, plant and equipment in 1998, 1997 and 1996,
respectively.
Note 7 - 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 $20,000,000
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, 1998 and 1997.
There were no borrowings against the line of credit at September 30, 1998
and 1997.
F-11
<PAGE>
Note 8 - Long-Term Debt and Lease Obligations
- ---------------------------------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Industrial Revenue Bond (a) $ 375 $ 490
ESOP Note (b) 780
Industrial Revenue Bond (c) 2,263 2,617
Other (d) 771
------ ------
2,638 4,658
Less Current Maturities 469 1,790
------ ------
$2,169 $2,868
====== ======
</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 $738,000 at September 30, 1998 and $780,000 at September
30, 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 loan balance was repaid in 1998.
(c) In 1995, the Company obtained $3,500,000 in financing through the
Orange County Industrial Development Authority. The obligation is secured by a
building expansion and related equipment with a carrying value of approximately
$7,023,000 at September 30, 1998 and $7,505,000 at September 30, 1997. The
obligation is payable in quarterly installments of $88,334 through March 2000,
thereafter in quarterly installments of $43,334 through March 2010, both plus
interest at LIBOR plus 150 basis points.
(d) Relates to debt of MSI which was repaid in 1998.
The Company leases equipment under a noncancelable agreement that expires
in 1998. Rental expense was approximately $843,000, $461,000 and $481,000 in
1998, 1997 and 1996, respectively.
Required future payments for long-term debt and operating leases are as
follows:
<TABLE>
<CAPTION>
Debt Leases
---- ------
(in thousands)
<C> <C> <C>
1999 $ 469 $ 433
2000 379 352
2001 288 119
2002 202 89
2003 173 68
Thereafter 1,127 0
------ ------
$2,638 $1,061
====== ======
</TABLE>
F-12
<PAGE>
The Company made interest payments of approximately $228,000, $313,000 and
$550,000 on long-term debt in 1998, 1997 and 1996, respectively.
The fair value of the Company's long-term debt approximates the carrying
amount.
Note 9 - Income Taxes
- ---------------------
The income tax provision is composed of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 7,908 $ 4,537 $ 5,230
State 662 373 936
------- ------- -------
8,570 4,910 6,166
Deferred:
Federal 6,024 6,554 343
State 646 1,092 59
------- ------- -------
6,670 7,646 402
------- ------- -------
Total Income Tax Provision $15,240 $12,556 $ 6,568
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant temporary differences giving rise to year-end deferred tax balances
were as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Current:
Accruals not currently deductible $ 481 $ 381
Inventory costs capitalized for tax purposes 120 195
Inventory loss provision 578 699
-------- --------
Deferred Tax Asset $ 1,179 $ 1,275
======== ========
Non-Current:
Stock option compensation not currently deductible $ 245 $ 664
Earnings of subsidiary not currently taxed (12,630) (6,940)
Excess tax over book depreciation (2,801) (2,336)
-------- --------
Deferred Tax Liability $(15,186) $ (8,612)
======== =========
</TABLE>
F-13
<PAGE>
A reconciliation of statutory Federal income taxes to reported income taxes
is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income taxes computed at the Federal
statutory rate of 35% $ 14,506 $ 11,652 $ 2,215
State income taxes, net of Federal benefit 850 952 646
Non-deductible ESOP compensation expense 3,944
Other (116) (48) (237)
-------- -------- -------
Total Income Tax Provision $ 15,240 $ 12,556 $ 6,568
======== ======== =======
</TABLE>
In 1998 and 1997, the Company's tax liability was reduced and its capital
surplus was increased by $2,708,000 and $4,700,000, respectively, as a result of
transactions involving stock options.
The Company made income tax payments of approximately $6,276,000,
$1,007,000 and $3,959,000 in 1998, 1997 and 1996, respectively.
The Company provides for deferred taxes on the non-repatriated earnings of
its subsidiary in Costa Rica. The subsidiary benefits from a complete exemption
from Costa Rican income taxes through 2003 and a 50% exemption thereafter
through 2007.
Note 10 - Earnings Per Share (in thousands, except per share data)
- ------------------------------------------------------------------
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) available to Common stockholders $26,205 $20,719 $ (220)
======= ======= =======
Weighted average Common Stock outstanding
for basic earnings per share 21,180 20,546 17,367
Dilutive effect of employee stock options 498 788 2,876
------- ------- -------
Weighted average Common Stock outstanding,
for diluted earnings per share 21,678 21,334 20,243
======= ======= =======
Basic earnings (loss) per share $ 1.24 $ 1.01 ($ 0.01)
Diluted earnings (loss) per share $ 1.21 $ 0.97 ($ 0.01)
</TABLE>
The weighted average Common Stock outstanding includes all ESOP shares
outstanding. In accordance with Security and Exchange Commission staff
accounting bulletins, Common and common equivalent shares issued by the Company
at prices below the public offering price during the one-year period 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).
F-14
<PAGE>
Note 11 - Significant Customers
- -------------------------------
Sales to the United States government (both as a prime contractor and on a
subcontract basis) to foreign markets and to significant customers as a percent
of the Company's total revenues were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Government (Inclusive of Significant Customers) * 11% 15%
Foreign Markets (Inclusive of Significant Customers 37% 43% 54%
European Market (Inclusive of Significant Customers) 18% 22% 38%
Asian and Pacific Rim Market 16% 17% *
Significant Customer A 17% 14% *
Significant Customer B * 12% 24%
Significant Customer C * 11% 11%
Significant Customer D 15% 11% *
Significant Customer E 15% * *
<FN>
*Less than 10%
</FN>
</TABLE>
Note 12 - Segment Information
- -----------------------------
The Company operates predominately in one segment, the manufacture and sale
of SAW-based products as described in Note 1. 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 price of the products. Prior to
1996, all sales, operating profit and assets were attributable to the United
States operation.
<TABLE>
<CAPTION>
Net Sales Operating Income Assets
------------------------- ------------------------- --------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 70,960 $ 63,795 $ 55,712 $ 23,181 $18,096 $ 4,900 $117,973 $104,715 $ 73,627
Costa Rica 36,612 28,438 4,793 14,722 13,424 1,105 30,737 15,821 8,222
Transfers/Eliminations (9,872) (7,192) (1,332) - (30) - - (30) (6,325)
-------- -------- -------- -------- ------- ------- -------- -------- --------
Consolidated Results $ 97,700 $ 85,041 $ 59,173 $ 37,903 $31,490 $ 6,005 $148,710 $120,506 $ 75,524
======== ======== ======== ======== ======= ======= ======== ======== ========
</TABLE>
Transfers from the U.S. to Costa Rica are accounted for at amounts that are
above cost and are consistent with rules and regulations of taxing authorities.
Such transfers are eliminated in the consolidated financial statements.
F-15
<PAGE>
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 impact of currency fluctuations of
the local Costa Rican currency is not considered significant and is not hedged.
In 1996, the Company 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 1998, 1997 and 1996, the cost to
operate this subsidiary was less than $10,000, and it had less than $10,000 in
identifiable assets for all years.
Note 13 - Employee Benefit Plans
- --------------------------------
In 1997, the Company merged the Sawtek Inc. Code Section 401(k) Profit
Sharing Plan into the Employee Stock Ownership Plan for Employees of Sawtek Inc.
and renamed the combined plan the Sawtek Inc. Employee Stock Ownership and
401(k) Plan. The merged plan has two principal elements: i) a profit sharing and
401(k) element and ii) an employee stock ownership ("ESOP") element.
Profit Sharing and 401(k) Element. In 1981, the Company established a
profit sharing plan covering substantially all U.S. employees who work 500 hours
or more per year. A 401(k) feature was added to the plan in 1991 and a Company
matching feature was added effective October 1, 1997. There have been no profit
sharing contributions by the Company to the plan since 1990. The 401(k)
contribution expense in 1998 was approximately $368,000.
Employee Stock Ownership Element. In 1991, the Company established an
Employee Stock Ownership Plan covering substantially all U.S. 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
the Company. The Company accounts for these ESOP shares in accordance with
Statement of Position 76-3. As of September 30, 1998, 2,048,161 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 the Company. In April 1996, the Company amended the
ESOP and allocated the ESOP's 1,610,600 shares of Common Stock of the Company
acquired in 1994 to employees for services rendered in the period October 1,
1995 to April 28, 1996. As these shares were accounted for in accordance with
SOP 93-6, which the Company adopted October 1, 1994, the Company recorded a
charge to operating income of approximately $12,925,000 for 1996. The effect of
the adoption of SOP 93-6 was to reduce net income by $11,269,000 ($0.56 per
diluted share) for fiscal 1996.
The Company restructured the remaining balance of its loan with the ESOP in
1997 providing for a repayment of the loan and allocation of the related shares
through fiscal year 2003.
The Company made contributions of approximately $279,000, $293,000 and
$1,783,000 to the ESOP in 1998, 1997 and 1996, respectively. Allocations to
participants' accounts were 482,063, 506,207 and 1,610,600 shares in 1998, 1997
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.
F-16
<PAGE>
Costa Rica Profit Sharing Plan. Effective October 1, 1997, the Company
adopted a Profit Sharing Plan for its Costa Rica subsidiary covering
substantially all employees of this subsidiary. The Company contributed
approximately $70,000 to this plan for 1998.
Note 14 - Stock Options
- -----------------------
The Company has granted incentive stock options and non-qualified stock
options under the 1983 Stock Option Plan, the Second Stock Option Plan and the
Stock Option Plan for Acquired Companies. 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 and the Stock Option Plan for Acquired Companies was
approved by shareholders in 1998 with up to 1,000,000 shares of Common Stock
available for options. Incentive options granted are exercisable over a ten-year
period, generally in four equal annual installments commencing one year after
the date of grant. A majority of the non-qualified options granted are
exercisable from the date of grant over a ten-year period, while the remainder
become exercisable in three or four equal annual installments.
Information concerning options under these plans is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Under Option Price Range of Options Exercise Price
------------------- ---------------------- -----------------
<S> <C> <C> <C>
Balance at October 1, 1995 3,133,100 $ 0.13 - $ 1.34 $ 0.44
Granted 175,000 $ 3.55 - $24.75 $13.16
Terminated (8,140) $ 0.74 - $ 1.34 $ 1.12
Exercised (1,754,500) $ 0.13 - $ 1.34 $ 0.23
----------
Balance at September 30, 1996 1,545,460 $ 0.13 - $24.75 $ 2.13
Granted 249,500 $11.05 - $33.25 $25.47
Terminated (11,580) $ 0.74 - $24.75 $11.25
Exercised (568,250) $ 0.13 - $11.05 $ 0.98
----------
Balance at September 30, 1997 1,215,130 $ 0.13 - $33.25 $ 7.37
Granted 258,000 $13.28 - $35.00 $21.93
Terminated (71,750) $ 0.13 - $28.75 $11.33
Exercised (373,734) $ 0.13 - $26.875 $ 1.90
----------
Balance at September 30, 1998 1,027,646 $ 0.13 - $35.00 $12.73
==========
Exercisable at September 30, 1998 373,023 $ 0.13 - $33.25 $ 6.57
==========
</TABLE>
The weighted-average contractual life of stock options outstanding as of
September 30, 1998 was 7.71 years.
F-17
<PAGE>
The following table summarizes information about fixed stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Weighted-Avg. Number
Range of Number Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices Outstanding Contractual Life Exercise Price at Sept. 30, 1998 Exercise Price
--------------- ----------- ---------------- -------------- ----------------- --------------
<C> <C> <C> <C> <C> <C>
$ 0.13 - $ 3.55 441,646 6.4 $ 0.80 249,980 $ 0.66
$11.05 - $35.00 586,000 8.7 $21.72 123,043 $18.57
--------- -------
1,027,646 373,023
========= =======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost was recognized to the extent the exercise
price of the stock options equaled the fair value. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income (loss) and income (loss)
per share would be the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) as reported $26,205 $20,719 $ (220)
Pro forma net income (loss) $24,376 $19,657 $ (222)
Pro forma basic earnings (loss) per share $ 1.15 $ 0.96 $(0.01)
Pro forma diluted earnings (loss) per share $ 1.14 $ 0.92 $(0.01)
</TABLE>
The weighted-average fair value of options granted during the year ended
September 30, 1998, 1997 and 1996 was $13.91, $19.62 and $7.87, respectively,
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: 1998 --- expected volatility of 78%, risk-free interest rate of
5.71%, no expected dividends and an expected life of 4.79 years; 1997 ---
expected volatility of 74%, risk-free interest rate of 6.45%, no expected
dividends and an expected life of 4.5 years; 1996 --- expected volatility of
76%, risk-free interest rate of 6.03%, no expected dividends and an expected
life of four years.
The pro forma net income (loss) reflects only options granted in 1998, 1997
and 1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income (loss)
amounts presented above because compensation cost is reflected over the option
vesting periods of up to four years and compensation cost for options granted
prior to October 1, 1995 is not considered.
F-18
<PAGE>
Note 15 - Capital Structure
- ---------------------------
The Company is authorized to issue up to 120,000,000 shares of Common
Stock. Holders of Common Stock i) are entitled to receive such dividends as may
from time to time be declared by the Board of Directors of the Company out of
funds legally available to pay dividends, ii) are entitled to one vote per share
on all matters that are subject to shareholder voting and do not have any
cumulative voting rights, iii) have no preemptive, conversion, redemption or
sinking fund rights, and iv) in the event of a liquidation, dissolution or
winding up of the Company, are entitled to share equally and ratably in the
assets of the Company, if any, remaining after payment of all debts and
liabilities of the Company and the liquidation preference of any outstanding
class or series of preferred stock.
On August 31, 1998, the Board of Directors approved a Common Stock
repurchase program for up to 1,000,000 shares of Common Stock in open market
transactions. The repurchased shares will be used to satisfy stock option
exercises and issuance of shares under other stock related benefit programs.
The Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock, par value $0.01 per share, in one or more series and to fix the
number of shares constituting any such series, and the voting powers,
designations, preferences, and relative participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including the
dividend rights, dividend rate, terms of redemption, redemption prices,
conversion and voting rights, and liquidation preferences, without any further
vote or action by the holders of Common Stock. To date, no shares of the
preferred stock have been issued.
F-19
<PAGE>
Note 16 - Quarterly Financial Information (unaudited)
- --------------------------------------------------------
Selected quarterly financial data is summarized below:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------------
Fiscal 1998 Fiscal 1997
--------------------------------------------- ------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1998 1998 1998 1997 1997 1997 1997 1996
--------- -------- -------- -------- --------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 21,522 $ 26,301 $ 25,183 $ 24,694 $ 23,623 $ 21,771 $ 20,577 $ 19,070
Cost of sales 9,665 12,585 11,190 11,371 11,075 9,643 8,743 9,108
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 11,857 13,716 13,993 13,323 12,548 12,128 11,834 9,962
Operating expenses:
Selling expenses 1,295 1,436 1,508 1,769 1,596 1,232 1,230 1,326
General & administrative
expenses 481 1,178 1,460 1,378 1,254 1,352 1,846 1,194
ESOP compensation
expense 46 48 49 53 (391) 195 196 196
Research and development
expenses 1,544 923 950 868 1,075 1,088 912 681
-------- -------- -------- -------- ------- -------- -------- --------
Total operating expenses 3,366 3,585 3,967 4,068 3,534 3,867 4,184 3,397
-------- -------- -------- -------- ------- -------- -------- --------
Operating income 8,491 10,131 10,026 9,255 9,014 8,261 7,650 6,565
Interest expense 32 30 74 78 55 51 80 51
Other income (1,041) (951) (868) (896) (660) (556) (452) (354)
-------- -------- -------- -------- ------- -------- -------- --------
Income before income taxes 9,500 11,052 10,820 10,073 9,619 8,766 8,022 6,868
Income taxes 3,420 4,089 4,004 3,727 3,561 3,330 3,050 2,615
-------- -------- -------- -------- ------- -------- -------- --------
Net income $ 6,080 $ 6,963 $ 6,816 $ 6,346 $ 6,058 $ 5,436 $ 4,972 $ 4,253
======== ======== ======== ======== ======= ======== ======== ========
Net income per share -
basic (1) $ 0.29 $ 0.33 $ 0.32 $ 0.30 $ 0.29 $ 0.26 $ 0.24 $ 0.21
======== ======== ======== ======== ======= ======== ======== ========
Net income per share -
diluted (1) $ 0.28 $ 0.32 $ 0.31 $ 0.29 $ 0.28 $ 0.26 $ 0.23 $ 0.20
======= ======== ======== ======== ======= ======== ======== ========
Shares used in per share
calculations - basic 21,251 21,271 21,177 21,023 20,910 20,569 20,498 20,208
Shares used in per share
calculations - diluted 21,566 21,762 21,651 21,733 21,620 21,268 21,329 21,118
<FN>
(1) Earnings per share for each quarter are calculated as a discrete
period; the sum of the four quarters may not equal the calculated full year
amount. The fiscal 1997 earnings per share amounts have been restated to comply
with SFAS 128.
</FN>
</TABLE>
F-20
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Management - Executive Officers and Directors
The executive officers and directors of the Company and their ages as of
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven P.Miller 50 Chairman, Chief Executive Officer and Director
Gary A. Monetti 39 President, Chief Operating Officer and Director
Neal J. Tolar (1) 57 Senior Vice President, Chief Technical Officer and Director
Kimon Anemogiannis 36 Vice President - Engineering
Brian P. Balut 33 Vice President - Sales and Marketing
John K. Bitzer 48 Vice President - Operations Support
Raymond A. Link 44 Vice President - Finance, Treasurer and Chief Financial Officer
Azhar Waseem 45 Vice President - Manufacturing
Robert C. Strandberg (1)(2) 41 Director
Bruce S. White (2) 65 Director
Willis C. Young (1) 2) 57 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. Mr.
Monetti was appointed to the Board of Directors in April 1998.
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.
29
<PAGE>
Kimon Anemogiannis joined Sawtek in July 1995 as Director of Engineering
and was promoted to Vice President-Engineering in April 1998. Prior to joining
Sawtek, Dr. Anemogiannis was in various engineering positions for the surface
acoustic wave (SAW) group at Siemens Matsushita based in Munich, Germany from
August 1986 to July 1995. Dr. Anemogiannis has a Ph.D. and a M.S. degree in
Electrical Engineering from the Technical University of Munich.
Brian P. Balut joined Sawtek in October 1994 as a Sales Manager, was
promoted to Director of Sales and Marketing in November 1996 and promoted to
Vice President Sales and Marketing in September 1998. From 1987 to 1994, Mr.
Balut was in various sales, marketing and engineering positions with REMEC, a
manufacturer of electronic components. Mr. Balut has a B.S. degree in Electrical
Engineering from the Massachusetts Institute of Technology and a M.B.A. degree
from Rollins College.
John K. Bitzer joined Sawtek in August 1991 as Director of Operations
Support and was promoted to Vice President-Operations Support in April 1998.
From December 1988 to July 1991, Mr. Bitzer was the Director of Operations for
the ESCO unit of Emerson Electric. From 1974 to December 1988, Mr. Bitzer was in
various operations and management positions with the General Electric Company.
Mr. Bitzer has a B.S. degree in Mechanical Engineering from West Virginia
University.
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. From 1980 to 1987,
he was with Harris Corporation, an electronics manufacturer, in various
financial capacities. Mr. Link has a 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.
Azhar Waseem joined Sawtek in March 1995 as Director of Wafer Fabrication
and was promoted to Vice President-Manufacturing in April 1998. From 1989-1994,
Mr. Waseem was in various operation and engineering positions of Siliconix,
Inc., a microelectronics manufacturer, based in Santa Clara, California and from
1986-1989 he was in various engineering positions with the General Electric
Company. Mr. Waseem has a B.S. and M.S. degree in Electrical Engineering and a
M.B.A. all from the University of Minnesota.
Robert C. Strandberg has been a Director of the Company since October 1995.
Mr. Strandberg is President and CEO of PSC Inc., a manufacturer of bar code
readers, since June 1997 and served as Executive Vice President from November
1996 to June 1997. Mr. Strandberg is also a Director of Merix Corporation. 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 a 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.
30
<PAGE>
Bruce S. White has been a Director of the Company since April 1996. Mr.
White was a Corporate Vice President of AVNET Inc., a distributor of electronic
components from January 1996 to January 1998 and the President of the Penstock
Division of AVNET Inc. from July 1994 to January 1998. 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. Mr. White is now
retired from both AVNET and Penstock. AVNET is a distributor of certain products
manufactured by Sawtek. In fiscal 1998, sales from Sawtek to AVNET were
approximately $4.3 million. Mr. White has a B.A. degree in Mathematics from
Colgate University and a B.S. and M.S. degree 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.
ITEM 11. EXECUTIVE COMPENSATION
- ---------------------------------
The information required by this item is incorporated herein by reference
to the Company's proxy statement to be filed not later than 120 days after the
end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- ------------------------------------------------------------
The information required by this item is incorporated herein by reference
to the Company's proxy statement to be filed not later than 120 days after the
end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is incorporated herein by reference
to the Company's proxy statement to be filed not later than 120 days after the
end of the fiscal year.
31
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
- ------------------------------------------------------------------------
(A) The following documents are filed as part of this report:
1. Financial statements - see index to Consolidated Financial Statements on
page F-1 hereof.
2. Financial statement schedules: All schedules have been omitted because
they are inapplicable or not material, or the information called for
thereby is included in the Consolidated Financial Statements and notes
thereto.
3. Exhibits required by Item 601 of Regulation S-K:
(a) See Exhibit Index in (c) below.
(b) Reports on Form 8K: the Company did not file any report on Form 8K
during the quarter ended September 30, 1998.
(c) Exhibits:
3.1 Amended and Restated Articles of Incorporation of Sawtek Inc.
(incorporated by reference to Registration Statement on Form
S-8, File No. 333-10579).
3.2 1996 Bylaws of Sawtek Inc.
4.1* Specimen stock certificate.
10.1 Sawtek Inc. 1983 Incentive Stock Option Plan (incorporated by
reference to Registration Statement on Form S-8, File No.
333-10579).
10.2 Sawtek Inc. Second Stock Option Plan (incorporated by
reference to Registration Statement on Form S-8, File No.
333-11523).
10.3 Sawtek Inc. Employee Stock Purchase Plan (incorporated by
reference to Registration Statement on Form S-8, File No.
333-11701).
10.4* Incentive Stock Option Agreement, dated December 12, 1994,
between the Company and Ronald M. Hays.
10.5* Incentive Stock Option Agreement, dated December 19, 1994,
between the Company and Neal J. Tolar.
10.6* Incentive Stock Option Agreement, dated December 19, 1994,
between the Company and Steven P. Miller.
32
<PAGE>
10.7 Employee Stock Ownership Plan and Trust Agreement for
Employees of Sawtek Inc. (the "ESOP") (incorporated by
reference to Registration Statement on Form S-8, File No.
333-08281).
10.8* Sawtek Inc. 1994 Stockholders Agreement.
10.9* Restructuring Agreement, dated January 11, 1991, by and
between the Company, certain shareholders of the Company and
the ESOP.
10.10* Agreement with respect to Stock Options, dated June 29, 1994,
between the Company and the ESOP.
10.11* Second ESOP Loan Agreement, dated June 29, 1994.
10.12* Second Amendment to ESOP Loan Agreement, dated June 29, 1994.
10.13* Commercial Lease, dated March 1, 1994, between the Company as
Tenant and Piezo Technology, Inc. as Landlord.
10.14* Lease, dated August 2, 1995, between the Company as Tenant
and Dr. Phillips, Inc. as Landlord.
10.15* Lease Agreement dated November 19, 1995, between Sawtek, S.A.
as Lessee and Centro de Ciencia y Tecnolgia Ultrapark, S.A.
as Lessor.
10.16* Master Lease Agreement, dated as of March 21, 1995, between
the Company as Lessee and General Electric Capital
Corporation, as Lessor.
10.17* Company Loan Agreement dated January 11, 1991, between the
Company and Sun Bank, National Association ("Sun Bank").
10.18* Company Note, dated January 11, 1991.
10.19* Security Agreement dated January 11, 1991, between the
Company and Sun Bank.
10.20* Company Pledge Agreement dated January 11, 1991.
10.21* Mortgage and Security Agreement, dated January 9, 1991, by
and between the Company, the Orange County Industrial
Development Authority ("OCIDA"), and Sun Bank.
10.22* Fourth Amendment to Installment Sales and Security Agreement,
dated January 8, 1991, by and between the Company, OCIDA, and
Sun Bank.
33
<PAGE>
10.23* ESOP Pledge Agreement, dated January 11, 1991, by and between
the Company, ESOP, and Southeast Bank, National Association
("Southeast").
10.24* ESOP Loan Agreement, dated January 11, 1991, by and between
the Company and Southeast.
10.25* ESOP Note dated January 11, 1991.
10.26* Amended and Restated Loan and Security Agreement, dated
November 15, 1995, between the Company and SunTrust Bank,
Central Florida, National Association ("SunTrust").
10.27* Increase Promissory Note dated November 10, 1995.
10.28* Renewal, Increase and Consolidation Promissory Note, dated
November 10, 1995.
10.29* Promissory Demand Note, dated November 10, 1995.
10.30* Fifth Amendment to Installment Sale and Security Agreement,
dated as of March 1, 1995, between the Company, Sun Bank and
OCIDA.
10.31* Fourth Supplemental Trust Indenture, dated as of March 1,
1995, between the Company, Sun Bank and OCIDA.
10.32* Construction Loan Agreement, dated as of March 1, 1995,
between the Company and Sun Bank.
10.33* Eighth Amendment to Loan and Security Agreement, Fourth
Amendment to Company Loan Agreement and First Amendment to
Second Company Loan Agreement, dated as of March 11, 1995,
between the Company and Sun Bank.
10.34* Bond Purchase Agreement dated as of December 1, 1981, between
OCIDA and the Company.
10.35* Installment Sale and Security Agreement, dated as of December
1, 1981, between OCIDA and the Company and accepted by the
Guarantors.
10.36* Guaranty Agreement dated as of December 1, 1981, among the
Guarantors and OCIDA.
10.37* Trust Indenture dated as of December 1, 1981, between OCIDA
and the Trustee and accepted by the Company and the
Guarantors.
34
<PAGE>
10.38* Sawtek Inc. Code ss.401(k) Profit Sharing Plan and Trust
Agreement, dated February 15, 1995.
10.39 Letter from SunTrust Bank, Central Florida, N.A. for renewal
and pricing of unsecured line of credit for Sawtek Inc. dated
July 9, 1998 (incorporated by reference to Form 10-Q filed
July 20, 1998).
10.40 First Amendment to Amended and Restated Loan and Security
Agreement dated December 9, 1996 between the Company and
SunTrust Bank, Central Florida, N.A. (incorporated by
reference to Form 10-Q filed January 21, 1997).
10.41 First Amendment to Fourth Supplemental Trust Indenture dated
November 19, 1996 by and among the Company, SunTrust Bank,
Central Florida, N.A., and the Orange County Industrial
Development Authority (incorporated by reference to Form
10-Q filed April 21, 1997).
10.42 Amendment to Employee Stock Ownership Plan and Trust
Agreement for Employees of Sawtek Inc.
10.43 Modification of ESOP Loan Agreement dated as of September 26,
1997 between the Company and Marine Midland Bank. (1)
10.44 Modification of ESOP Pledge Agreement dated as of September
26, 1997 between the Company and Marine Midland Bank. (1)
10.45 Renewal ESOP Note dated as of September 26, 1997. (1)
10.46 Implementation Agreement dated September 26, 1997 between the
Company and Marine Midland Bank that forms a part of the
Sawtek Inc. Employee Stock Ownership and 401(k) Plan and
Trust. (1)
10.47 Sawtek Inc. Employee Stock Ownership and 401(k) Plan dated as
of July 16, 1997. (1)
10.48 Sawtek Inc. Employee Stock Ownership and 401(k) Trust
Agreement dated July 16, 1997 between the Company and Marine
Midland Bank. (1)
10.49 Sawtek Inc. Stock Option Plan for Acquired Companies
(incorporated by reference to proxy filed for 1998
shareholders meeting filed on Form 14A filed on
December 3, 1997).
21.1 List of subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
35
<PAGE>
24.1 Power of attorney. Reference is made to page 37.
27.0 Financial Data Schedule.
* Incorporated by reference to Registration Statement on
Form S-1, File No. 333-1860.
# Incorporated by reference to Registration Statement on
Form S-3, File No. 333-26747.
(1) Incorporated by reference to Form 10-K for 1997 filed on
November 12, 1997.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 2nd day of
November, 1998.
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 and
Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS , that each person whose signature
appears on the following page constitutes and appoints Steven P. Miller and or
Raymond A. Link to sign any amendments to this report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that the said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 2nd day of November, 1998.
/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 /s/Gary A. Monetti
Bruce S. White Gary A. Monetti
Director President and Director
37
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of our report dated October 23, 1998, with respect to the
consolidated financial statements of Sawtek Inc. included in its Annual Report
(Form 10-K) for the year ended September 30, 1998.
<TABLE>
<CAPTION>
Registration
Statement
Number Description
- --------- --------------------------------------------------------------
<S> <C>
333-11701 Form S-8 re: Sawtek Inc. Employee Stock Purchase Plan
333-11523 Form S-8 re: Sawtek Inc. Second Stock Option Plan
333-47773 Form S-8 re: Sawtek Inc. Second Stock Option Plan (amendment)
333-10579 Form S-8 re: Sawtek Inc. Amended and Restated 1983 Incentive
Stock Option Plan
333-08281 Form S-8 re: Sawtek Inc. Employee Stock Ownership and 401(k)
Plan, formerly known as the Employee Stock Ownership Plan for
Employees of Sawtek Inc.
333-47771 Form S-8 re: Sawtek Inc. Stock Option Plan for Acquired
Companies
</TABLE>
/s/Ernst & Young, LLP
Ernst & Young LLP
Orlando, Florida
November 9, 1998
<PAGE>
Exhibit 21.1
Sawtek Inc.
List of Subsidiaries
As of September 30, 1998
<TABLE>
<CAPTION>
Entity Name State of Other Jurisdiction of Incorporation
----------- --------------------------------------------
<S> <C>
Sawtek S.A. Costa Rica
Sawtek International, Inc. Barbados
Microsensor Sensor Systems, Inc. Kentucky
Analytix, Inc. Pennsylvania
</TABLE>
All of the above listed entities are 100% directly or indirectly owned
by Sawtek Inc. and their results of operations are included in the consolidated
financial statements.
<PAGE>
Exhibit 10.42
SAWTEK INC.
CERTIFIED CORPORATE RESOLUTIONS
The undersigned, being the duly elected Secretary and President of
Sawtek Inc., a Florida corporation (the "Company"), hereby certify that the
following resolutions were duly adopted by the Board of Directors of the Company
at a meeting held on July 20, 1998:
Amendment of KSOP
-----------------
RESOLVED, that the Company hereby amends Section 6.6(b) of the Sawtek
Inc. Employee Stock Ownership and 401(k) Plan by deleting it in its
entirety and amending it to read as follows:
6.6(b) The ESOP Account. With respect to the distribution of
the Participant's ESOP Account, effective February 15, 1996,
distribution on account of retirement (Section 6.1) or Total
and Permanent Disability (Section 6.3) shall be made in cash
or in kind (as determined by the Administrator, but subject to
Section 6.8) in one lump sum, or in a fixed number of
quarterly, semiannual or annual installments over a period not
to exceed the Participant's life expectancy (or the life
expectancy of the Participant and his designated Beneficiary).
The Participant shall have the right to determine whether such
distribution is in one lump sum or installments. Furthermore,
the Participant shall have the right to modify, from time to
time, the amount and frequency of the installments and the
period over which such installments will be made in accordance
with procedures established by the Administrator. A
Participant may make separate payment elections under this
paragraph with respect to his Company Stock Account, ESOP
Investment Account and Qualified Directed Investment Account.
With respect to distributions to Participants that have
terminated employment and have requested a distribution
pursuant to Section 6.4, unless the Participant elects in
writing a longer distribution period, such distribution of the
Participant's ESOP Account, including the Company Stock
Account, ESOP Investment Account and Qualified Directed
Investment Account, made pursuant to Section 6.4, may be
distributed in cash or in kind, (as determined by the
Administrator, but subject to Section 6.8) in substantially
equal periodic payments (not less frequently than annually)
over a period of five years. In the case of a Participant with
a Participant's ESOP Account in excess of $500,000, the five
year period shall be extended one additional year (up to an
additional five) for each $100,000, or fraction thereof, by
which such account exceeds $500,000. Such dollar amounts shall
be adjusted at the same time in the same manner as provided in
Code ss. 415(d).
The Other Accounts. With respect to the Participant's Deferral
Account, Participant's Matching Account, Participant's Profit
Sharing Account and Participant's Rollover Account, in the
event a Participant is entitled to a lifetime distribution in
accordance with Sections 6.1, 6.3, 6.4 or 6.5, the
Administrator, pursuant to the election of the Participant,
shall direct the Trustee to distribute to the participant or
Former Participant, the Vested portion of his Participant's
Deferral Account, Participant's Matching Account,
Participant's Profit Sharing Account, and/or Participant's
Rollover Account, in one of the following methods selected by
the Participant or Terminated Participant;
<PAGE>
(1) One lump sum payment in cash or in kind;
(2) Payments over a period certain (not to exceed the
life expectancy of the Participant or the joint life
expectancy of the Participant and his Beneficiary) in
monthly, quarterly, semiannual or annual
installments. Furthermore, the Participant shall have
the right to modify, from time to time, the amount
and frequency of the installments and the period over
which such installments will be made in accordance
with procedures established by the Administrator. A
Participant's election under this paragraph shall
apply to his Participant's Deferral Account,
Participant's Matching Account, Participant's Profit
Sharing Account and Participant's Rollover Account.
In order to provide such installment payments, the
Administrator may (A) segregate the Participant's
Deferral Account, Participant's Matching Account,
Participant's Profit Sharing Account, and
Participant's Rollover Account in a separate,
federally insured savings account, certificate of
deposit in a bank or savings and loan association,
money market certificate or other liquid short-term
security or (B) purchase a nontransferable annuity
contract for a term certain (with no life
contingencies) providing for such payment;
contract for a term certain (with no life contingencies)
providing for such payment;
(3) A single life annuity (payable over the lifetime
of the Participant) with or without a term certain;
or
(4) A joint and survivor annuity (with the survivor
benefit being 50%, 75% or 100%).
/s/William A. Grimm
July 20, 1998 William A. Grimm, Secretary
/s/Gary Monetti
Gary Monetti, President
<PAGE>
SAWTEK INC.
CERTIFIED CORPORATE RESOLUTION
The undersigned, being the duly elected Secretary and President of
Sawtek Inc., a Florida corporation (the "Company), hereby certify that the
following resolutions were duly adopted by the Board of Directors of the Company
at a meeting held on August 31, 1998.
Amendment of KSOP
-----------------
RESOLVED, that effective immediately, the Company hereby amends Section
1.51 ("Normal Retirement Date") of the Sawtek Inc. Employee Stock
Ownership and 401(k) Plan (the "KSOP") by deleting such section in its
entirety, and amending it to read as follows:
1.51 "Normal Retirement Date" means the first day of the month
coinciding with or next following the Participant's Normal
Retirement Age. For purposes of this Section, Normal
Retirement Age means the earlier of the Participant's
attainment of (i) age 65 with five (5) years or more of
participation in the Plan or (ii) age 55 with seven (7) or
more Years of Service. A Participant shall become 100% Vested
in his Aggregate Account upon attaining his Normal Retirement
Age.
RESOLVED, that effective for the current Plan Year ending September 30,
1998 and thereafter, the Company hereby amends Section 1.35
("Forfeiture") of the KSOP by deleting such section in its entirety,
and amending it to read as follows:
1.35 "Forfeiture" means that portion of a Participant's ESOP
Account, Participant's Matching Account or Participant's
Profit Sharing Account that is not Vested, and occurs on the
earlier of:
(a) The distribution of the entire Vested portion of
a Participant's ESOP Account, Participant's Matching
Account or Participant's Profit Sharing Account; or
(b) The last day of the second (2nd) Plan Year after
the Plan Year in which the Participant terminates
employment with the Employer or Affiliated Employer.
For purposes of paragraph (a) above, in the case of a
Terminated Participant whose Vested interest in his
Participant's ESOP Account, Participant's Matching Account or
Participant's Profit Sharing Account is zero, such Terminated
Participant shall be deemed to have received a distribution of
his Vested interest in such account(s) upon the effective date
of his termination of employment. Restoration of such amounts
shall occur pursuant to Section 3.4.
<PAGE>
RESOLVED, that effective immediately, the Company hereby amends Section
6.9(a) ("In Service Distribution") of the KSOP by deleting such section
in its entirety, and amending it to read as follows:
6.9 IN SERVICE DISTRIBUTION
(a) At such time as a Participant (but not a Former
Participant or Terminated Participant) becomes 100% Vested,
such Participant may request once each Plan Year a
distribution not to exceed five percent (5%) (ten percent
(10%) for Participants with ten (10) or more Years of Service)
of such Participant's Company Stock Account, determined as of
the Anniversary Date or Valuation Date immediately preceding
such request. For those Participants (but not Former
Participants or Terminated Participants) that are not 100%
Vested, such Participant may request once each Plan Year a
distribution not to exceed five percent (5%) of the Vested
portion of the Participant's Company Stock Account, determined
as of the Anniversary Date or Valuation Date immediately
preceding such request, that has been allocated to the
Participant's Company Stock Account at least two (2) years as
of the date of such distribution. Such Participant shall
continue to participate in the Plan provided the Participant
continues to meet the eligibility requirements of Article II.
RESOLVED, that effective immediately, the Company hereby amends Section
6.16 ("Loans to Participants") of the KSOP by adding new paragraph (i)
at the end thereof to read as follows:
(i) In the event a Participant defaults on the repayment of a
Plan loan as provided in paragraph (g) above or in the event a
Plan loan becomes due and payable upon a Participant's
termination of employment, the Administrator shall have the
authority to determine the Participant accounts that will be
reduced and offset to satisfy such Plan loan, provided that
the Administrator makes such determination in a consistent and
nondiscriminatory manner. In the event it is necessary to
reduce and offset all or any portion of the Participant's ESOP
Account to satisfy such Plan loan, then notwithstanding the
deferred distribution provisions of Section 6.4(b) that apply
to the Participant's ESOP Account, the Administrator may then
treat the satisfaction of such Plan loan as an immediate
distribution of the corresponding portion of such
Participant's ESOP Account.
/s/William A. Grimm
Dated: August 31, 1998 William A. Grimm, Secretary
Attest:
/s/Gary Monetti
Gary Monetti, President
<PAGE>
Exhibit 3.2
1996
BYLAWS
OF
SAWTEK INC.
ARTICLE I
Shareholders
------------
1. Shareholder Meetings. The annual meeting shall be held on the date fixed
from time to time by the directors. A special meeting shall be held on the date
fixed from time to time by the directors except when the Florida Business
Corporation Act ("Business Corporation Act") confers the right to call a special
meeting upon the shareholders.
2. Place and Call of Shareholder Meetings. Annual meetings and special
meetings shall be held at such place within or without the State of Florida as
shall be stated in the notice of any such meeting. Annual meetings may be called
by the directors or the President or the Secretary or by any officer instructed
by the directors or the President to call the meeting. Special meetings may be
called in like manner or by the holders of at least one-tenth of the shares
issued and outstanding and entitled to vote thereat.
3. Notice. Written notice stating the place, day and hour of the meeting
and, in case of a special meeting, the purpose or purposes for which the meeting
is called, shall be delivered to each shareholder not less than ten days (or as
prescribed by the Business Corporation Act) nor more than sixty days before the
date of the meeting, either personally or by first class mail, by or at the
direction of the President, the Secretary, or the officer or persons calling the
meeting. The notice of any annual or special meeting shall also include, or be
accompanied by, any additional statements, information, or documents prescribed
by the Business Corporation Act. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail addressed to the shareholder
at his address as it appears on the stock transfer books of the Corporation,
with postage thereon prepaid. When a meeting is adjourned to another time or
place, it shall not be necessary to give any notice of the adjourned meeting if
the time and place to which the meeting is adjourned are announced at the
meeting at which the adjournment is taken; and at the adjourned meeting any
business may be transacted that might have been transacted on the original date
of the meeting. If, however, the Board of Directors shall fix a new record date
for the adjourned meeting, notice of the adjourned meeting shall be given each
shareholder of record on the new record date. Whenever any notice is required to
be given to any shareholder, a waiver thereof in writing signed by him, whether
before or after the time stated therein, shall be equivalent to the giving of
such notice. Attendance of a shareholder at a meeting shall constitute a waiver
of notice of the meeting, except where the shareholder attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
4. Voting List. The officer or agent having charge of the stock transfer
books for shares of the corporation shall make, at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting or any adjournment thereof, with the address of and the number and
class and series, if any, of shares held by each. Such list, for a period of ten
days prior to such meeting, shall be kept on file at the registered office of
the corporation in the State of Florida, at the principal place of business of
the corporation, or at the office of the transfer agent or registrar of the
corporation, and shall be subject to inspection by any shareholder at any time
during usual business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of any
shareholder at any time during the meeting. The original stock transfer books
shall be prima facie evidence as to who are the shareholders entitled to examine
such list or transfer books or to vote at any meeting of shareholders.
<PAGE>
5. Record Date for Shareholders. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other purpose, the Board
of Directors of the corporation may provide that the stock transfer books shall
be closed for a stated period but not to exceed, in any case, sixty days. If the
stock transfer books shall be closed for the purpose of determining the
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than sixty days and, in case of a meeting
of shareholders, not less than ten days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken.
If the stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for the determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, the determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record date under this section for the adjourned meeting.
6. Meaning of Certain Terms. As used herein in respect of the right to
notice of a meeting of shareholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "shareholder" or "shareholders"
refers to an outstanding share or shares and to a holder or holders of record of
outstanding shares when the corporation is authorized to issue only one class of
shares, and said reference is also intended to include any outstanding share or
shares and any holder or holders of record of outstanding shares of any class
upon which or upon whom the Articles of Incorporation confer such rights where
there are two or more classes or series of shares or upon whom the Business
Corporation Act confers such rights notwithstanding that the Articles of
Incorporation may provide for more than one class or series of shares, one or
more of which are limited or denied such rights thereunder.
7. Conduct of Meeting. Meetings of shareholders shall be presided over by
one of the following officers in the order of seniority and if present and
acting: the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, or, if none of the foregoing is in office and present and
acting, by a chairman to be chosen by the shareholders. The Secretary of the
corporation, or in his absence, an Assistant Secretary, shall act as secretary
of every meeting, but, if neither the Secretary nor an Assistant Secretary is
present, the Chairman of the meeting shall appoint a secretary of the meeting.
8. Proxy Representation. Every shareholder or his duly authorized
attorney-in-fact may authorize another person or persons to act for him by proxy
in all matters in which a shareholder is entitled to participate, whether for
the purposes of determining his presence at a meeting, or whether by waiving
notice of any meeting, voting or participating at a meeting, or expressing
consent or dissent without a meeting or otherwise. Every proxy shall be signed
by the shareholder or by his duly authorized attorney-in-fact and filed with the
Secretary of the corporation. No proxy shall be valid after eleven months from
the date thereof, unless otherwise provided in the proxy. Except as may
otherwise be provided by the Business Corporation Act, any proxy may be revoked.
9. Quorum and Voting. A majority of the shares entitled to vote shall
constitute a quorum. Except as the Business Corporation Act, the Articles of
Incorporation, or these Bylaws shall otherwise provide, the affirmative vote of
the majority of the shares represented at the meeting, a quorum being present,
shall be the act of the shareholders. After a quorum has been established at a
shareholders' meeting, the subsequent withdrawal of shareholders, so as to
reduce the number of shareholders at the meeting below the number required for a
quorum, shall not affect the validity of any action taken at the meeting or any
adjournment thereof.
10. Written Action. Any action required to be taken or which may be taken
at a meeting of the shareholders may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by all of the shareholders and shall be filed with the
Secretary of the corporation. Less than all shareholders may act in like manner
upon compliance with the provisions of Section 607.0704 of the Business
Corporation Act.
<PAGE>
11. Share Certificates. The shares of the corporation shall be represented
by certificates which shall set forth thereon the statements prescribed by
Section 607.0625 of the Business Corporation Act and by any other applicable
provision of law, and which shall be signed by the President or a Vice President
and the Secretary or an Assistant Secretary of the corporation and may be sealed
with the seal of the corporation or a facsimile thereof. The signatures of the
President or a Vice President and the Secretary or an Assistant Secretary upon a
certificate may be facsimiles if the certificate is manually signed on his
behalf by a transfer agent or a registrar, other than the corporation itself or
an employee of the corporation. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer at the date of its
issuance.
12. Fractional Share Interests or Scrip. The corporation may, when
necessary or desirable in order to effect share transfers, share distributions
or reclassifications, mergers, consolidations, or reorganizations, issue a
fraction of a share, make arrangements or provide reasonable opportunity for any
person entitled to a fractional interest in a share to sell such fractional
interest or to purchase such additional fractional interests as may be necessary
to acquire a full share, pay in cash the fair value of fractions of a share as
of the time when those entitled to receive such fractions are determined, or
issue scrip in registered or bearer form, over the manual or facsimile signature
of an officer of the corporation or its agent, which shall entitle the holder to
receive a certificate for a full share upon the surrender of such scrip
aggregating a full share. A certificate for a fractional share shall, but scrip
shall not unless otherwise provided therein, entitle the holder to exercise
voting rights, to receive dividends thereon, and to participate in any of the
assets of the corporation in the event of liquidation.
The Board of Directors may cause scrip to be issued subject to the
condition that it shall become void if not exchanged for certificates
representing full shares before a specified date, or subject to the condition
that the shares for which scrip is exchangeable may be sold by the corporation
and the proceeds thereof distributed to the holders of scrip, or subject to any
other conditions which the Board of Directors may deem advisable. Such
conditions shall be stated or fairly summarized on the face of the certificate.
13. Lost, Stolen or Destroyed Certificates. The Board of Directors may
direct that a new share certificate or certificates be issued in place of any
certificate or certificates theretofore issued by the corporation which have
been mutilated or which are alleged to have been lost, stolen, or destroyed,
upon presentation of each such mutilated certificate or the making by the person
claiming any such certificate to have been lost, stolen, or destroyed of an
affidavit as to the fact and circumstances of the loss, theft, or destruction
thereof. The Board of Directors, in its discretion and as a condition precedent
to the issuance of any new certificate, may require the owner of any certificate
alleged to have been lost, stolen, or destroyed, or his legal representative, to
furnish the corporation with a bond, in such sum and with such surety or
sureties as it may direct, as indemnity against any claim that may be made
against the corporation in respect of such lost, stolen, or destroyed
certificate.
14. Share Transfers. Upon compliance with any provisions restricting the
transferability of shares that may be set forth in the Articles of
Incorporation, these Bylaws, or any written agreement in respect thereof,
transfers of shares of the corporation shall be made only on the books of the
corporation by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the corporation or with a transfer agent or a registrar and on surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon, if any. Except as may be otherwise provided by law, the
person in whose name shares stand on the books of the corporation shall be
deemed the owner thereof for all purposes as regards the corporation; provided
that whenever any transfer of shares shall be made for collateral security, and
not absolutely, such fact, if known to the Secretary of the corporation, shall
be so expressed in the entry of transfer.
<PAGE>
ARTICLE II
Board of Directors
------------------
1. Functions Generally - Compensation. All corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
corporation shall be managed under the direction of, its Board of Directors. The
Board may fix the compensation of directors.
2. Qualifications and Number. Each director shall be a natural person of
not less than 18 years of age. A director need not be a shareholder, a citizen
of the United States, or a resident of the State of Florida, but directors shall
be required to execute and deliver a trade secrets agreement in form
satisfactory to counsel for the corporation. The Board of Directors shall
consist of not less than five (5) nor more than ten (10) persons. The number of
directors may be increased or decreased by an amendment of these Bylaws or by
resolution of the Board of Directors, but no decrease in the number of directors
shall have the effect of shortening the term of any incumbent director.
3. Election and Term. Each member of the Board of Directors shall hold
office until the next annual meeting of shareholders following his election and
until his successor has been elected and qualified or until his earlier
resignation, removal from office, or death. Thereafter, each director who is
elected at an annual meeting of shareholders, and any director who is elected in
the interim to fill a vacancy or a newly-created directorship, shall hold office
until the next succeeding annual meeting of shareholders and until his successor
has been elected and qualified or until his earlier resignation, removal from
office, or death. In the interim between annual meetings of shareholders or of
special meetings of shareholders called for the election of directors, any
vacancies in the Board of Directors, including vacancies created by reason of an
increase in the number of directors, and including vacancies resulting from the
removal of directors by the shareholders which have not been filled by said
shareholders, may be filled by the affirmative vote of a majority of the
remaining directors, although less than a quorum exists.
4. Meetings. Meetings shall be held at such time as the Board shall fix,
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors may conveniently assemble. Meetings shall be
held at such place within or without the State of Florida as shall be fixed by
the Board. No call shall be required for regular meetings for which the time and
place have been fixed. Special meetings may be called by the Chairman of the
Board, if any, the Vice Chairman of the Board, if any, or the President, or by
any two directors.
5. Notice. No notice shall be required for regular meetings for which the
time and place have been fixed. Written, oral, or any other mode of notice of
the time and place shall be given for special meetings in sufficient time for
the convenient assembly of the directors thereat. The notice or waiver of notice
of any meeting need not specify the business to be transacted or the purpose of
the meeting. Any requirement of furnishing a notice shall be waived by any
director who signs a waiver of notice before or after the meeting. Attendance of
a director at a meeting shall constitute a waiver of notice of such meeting and
a waiver of any and all objections to the place of a meeting, the time of the
meeting, or the manner in which it has been called or convened, except when a
director states, at the beginning of the meeting, any objection to the
transaction of business because the meeting is not lawfully called or convened.
6. Quorum and Action. A majority of the full Board of Directors shall
constitute a quorum, except as may be otherwise provided in the Articles of
Incorporation. Except as herein otherwise provided, and except as may be
otherwise provided by the Business Corporation Act or the Articles of
Incorporation, the act of the Board shall be the act of a majority of the
directors present at a meeting at which a quorum is present. Members of the
Board of Directors may participate in a meeting of said Board by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other at the same time, and
participation by such means shall be deemed to constitute presence in person at
a meeting. A majority of the directors present, whether or not a quorum exists,
may adjourn any meeting of the Board of Directors to another time and place.
Notice of any such adjourned meeting shall be given to the directors who were
not present at the time of the adjournment and, unless the time and place of the
adjourned meeting are announced at the time of the adjournment, to the other
directors.
<PAGE>
(a) Quorum and Action/Classified Information. A majority of the members of
the Board of Directors possessing security clearance to the level of the
Corporation, shall constitute a quorum for any action to be considered at a
meeting of the Board of Directors relating to the security of classified
information in possession of the Corporation. Classified information shall mean
information released to the Corporation by the Department of Defense, or any
classified contracts or programs for the Department of Defense and other User
Agencies.
7. Chairman of the Meeting. Meetings of the Board of Directors shall be
presided over by the following directors in the order of seniority and if
present and acting: the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, the President, or any other person chosen by the Board.
8. Removal of Directors. At a meeting of shareholders called expressly for
that purpose, the entire Board of Directors or any individual director may be
removed from office with or without cause by the vote of the shareholders
holding at least a majority of the shares of Common Stock. In case the entire
Board or any one or more directors is so removed, new directors may be elected
at the same meeting.
9. Committees. Whenever the number of directors shall consist of three or
more, the Board of Directors may, by resolution adopted by a unanimous vote of
the full Board, designate from among its members an Executive Committee and one
or more other committees, each of which, to the extent provided in the
resolution, shall have and may exercise all of the authority of the Board of
Directors except such authority as may not be delegated under the Business
Corporation Act.
10. Written Action. Any action required to be taken at a meeting of
directors, or any action which may be taken at a meeting of directors or of a
committee thereof, if any, may be taken without a meeting if a consent in
writing, setting forth the action to be taken, shall be signed by all of the
directors or all of the members of the committee, as the case may be.
ARTICLE III
Officers
--------
The corporation shall have a Chairman of the Board, a President, a
Secretary, and a Treasurer, each of whom shall be elected by the directors from
time to time, and may have one or more Vice Presidents and such other officers
and assistant officers and agents as may be deemed necessary, each or any of
whom may be elected or appointed by the directors or may be chosen in such
manner as the directors shall determine. Any two or more offices may be held by
the same person.
Unless otherwise provided in the resolution of election or appointment,
each officer shall hold office until the meeting of the Board of Directors
following the next annual meeting of shareholders and until his successor has
been elected and qualified.
The officers and agents of the corporation shall have the authority and
perform the duties in the management of the corporation as determined by the
resolution electing or appointing them, as the case may be.
The Board of Directors may remove any officer or agent whenever, in its
judgment, the best interests of the corporation will be served thereby.
The Board of Directors may authorize employment contracts with officers and
other employees of this corporation for periods of more than one year.
ARTICLE IV
Registered Office and Agent - Shareholders Record
-------------------------------------------------
The address of the registered office of the corporation is 300 East Park
Avenue, c/o The Prentice Hall Corporation System, Inc., City of Tallahassee
32301, County of Leon; and the name of the registered agent of the corporation
is The Prentice Hall Corporation System, Inc., whose address is the same as that
of the registered office.
<PAGE>
The corporation shall keep at its registered office in the State of Florida
or at its principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving the names and addresses of all
shareholders and the number, class, and series, if any, of the shares held by
each shareholder, and shall keep on file at said registered office the voting
list of shareholders for a period of at least ten days prior to any meeting of
shareholders.
ARTICLE V
Corporate Seal
--------------
The corporate seal shall have inscribed thereon the name of the corporation
and shall be in such form and contain such other words and/or figures as the
Board of Directors shall determine or the law require.
ARTICLE VI
Fiscal Year
-----------
The fiscal year of the corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
ARTICLE VII
Control Over Bylaws
-------------------
The Board of Directors shall have power to adopt, alter, amend, or repeal
the Bylaws.
ARTICLE VIII
Director Deadlocks; Arbitration
-------------------------------
If the Board of Directors shall be equally divided respecting the
management of the property, business, and affairs of the corporation, or any
aspect thereof or any transaction involved therein, or shall be equally divided
on any question, dispute, or controversy, and such equal division concerns a
proper subject for action by the Board, no shareholder or director shall have
the right to have the corporation dissolved or shall have any other legal right
in a suit at law or in equity because of such deadlock. Any such equal division
shall be submitted to arbitration in the following manner:
(1) Upon written request by any director submitted at a duly organized
meeting of the Board of Directors, the Board shall select two arbitrators, each
director having in such selection the right to two (2) votes under a system of
cumulative voting, whereupon such two arbitrators shall select a third
arbitrator; but if they shall be unable to agree within 15 days upon the third
arbitrator, he shall be appointed by them from the Panel of Arbitrators of the
American Arbitration Association in accordance with its rules then in effect.
(2) The arbitrators shall decide, resolve, and determine the matters
respecting which the Board may be equally divided, including (but not limited
to) all collateral matters such as whether such matter is a proper subject for
action by the Board of Directors, whether such matters have been properly
submitted to them for decision, whether the Board is actually equally divided,
and whether this section and the provisions for arbitration hereunder are
properly invoked and applicable, to the end that all questions, disputes and
controversies be resolved, determined and adjudged by the arbitrators; and the
decision of such arbitrators on all matters submitted to them hereunder shall be
conclusive and binding upon the Board of Directors, the corporation, and the
parties.
(3) The arbitrators shall conduct the arbitration proceedings in accordance
with the rules of the American Arbitration Association, as then in effect,
insofar as such rules are not in conflict with this section.
<PAGE>
(4) The decision of the arbitrators shall be final and conclusive, shall be
the equivalent of a resolution unanimously passed by the full Board at a meeting
duly convened, and shall not be revoked or amended or overruled, except by
unanimous action of the Board of Directors or the shareholders of the
corporation. Such decision shall be forthwith filed with the Secretary of the
corporation; and judgment on such decision may be entered in the highest court
of the forum having jurisdiction.
The denial in this section of the Bylaws of the right to have the
corporation dissolved, and of other legal rights, shall be inoperative in the
event that any shareholder of the corporation shall have given written notice to
the members of the Board of Directors that he intends to seek dissolution of the
corporation or other legal remedy because of deadlock among the Board of
Directors, and such notice remains unrevoked for two years from the date it was
given. If such notice is given and (a) no such proceedings are commenced within
three years thereafter, or (b) such notice is revoked, or (c) proceedings are
commenced and are determined adversely to the party seeking dissolution or other
legal remedy because of such deadlock, the said denial of rights in this section
shall again become fully operative as before.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001009675
<NAME> Sawtek Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 84,131
<SECURITIES> 0
<RECEIVABLES> 12,968
<ALLOWANCES> 1,399
<INVENTORY> 8,453
<CURRENT-ASSETS> 106,407
<PP&E> 61,608
<DEPRECIATION> 19,414
<TOTAL-ASSETS> 148,710
<CURRENT-LIABILITIES> 7,478
<BONDS> 2,169
0
0
<COMMON> 11
<OTHER-SE> 123,866
<TOTAL-LIABILITY-AND-EQUITY> 148,710
<SALES> 97,700
<TOTAL-REVENUES> 97,700
<CGS> 44,811
<TOTAL-COSTS> 44,811
<OTHER-EXPENSES> 14,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> 41,445
<INCOME-TAX> 15,240
<INCOME-CONTINUING> 26,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,205
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.21
</TABLE>
