UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
-------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended December 31, 1999
OR
- ----- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-28276
SAWTEK INC.
(Exact name of registrant as specified in its charter)
Florida 59-1864440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1818 South Highway 441
Apopka, Florida 32703
(Address of principal executive offices)
Telephone Number (407) 886-8860
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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
----- -----
As of February 10, 2000, there were 42,250,489 shares of the Registrant's
Common stock outstanding, par value $.0005.
<PAGE>
Sawtek Inc.
TABLE OF CONTENTS
Part I. Financial Information Page Number
--------------------- -----------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of December 31, 1999
and September 30, 1999............................. 3
Consolidated Statements of Income for the three
months ended December 31, 1999 and 1998............ 4
Consolidated Statements of Cash Flows for the three
months ended December 31, 1999 and 1998............ 5
Notes to Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 9
Item 3. Quantitative and Qualitative Disclosure of Market
Risk............................................... 25
Part II. Other Information
-----------------
Item 1. Legal Proceedings.................................. 26
Item 2. Changes in Securities............................... 26
Item 3. Defaults Upon Senior Securities.................... 26
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 26
Item 5. Other Information .................................. 26
Item 6. Exhibits and Reports on Form 8-K .................. 27
Signatures........................................................... 28
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SAWTEK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash, cash equivalents and short-term investments $ 119,262 $ 115,274
Accounts receivable, net 19,104 18,641
Inventories, net 8,941 8,052
Deferred income taxes 1,082 1,063
Other current assets 2,294 2,107
--------- ---------
Total current assets 150,683 145,137
Property, plant and equipment, net 53,710 46,442
--------- ---------
Total assets $ 204,393 $ 191,579
========= =========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 3,281 $ 4,055
Accrued liabilities 3,403 5,312
Current maturities of long-term debt 334 379
Income taxes payable 3,133 191
--------- ---------
Total current liabilities 10,151 9,937
Long-term debt, less current maturities 1,718 1,790
Deferred income taxes 23,599 21,453
Shareholders' equity:
Common stock; $.0005 par value; 120,000,000 authorized shares;
42,668,194 issued and outstanding shares 21 21
Capital surplus 74,067 74,755
Unearned ESOP compensation (781) (781)
Retained earnings 97,513 87,330
Less common stock held in treasury at cost; 283,471 shares at
December 31, 1999 and 437,705 shares at September 30, 1999 (1,895) (2,926)
--------- ---------
Total shareholders' equity 168,925 158,399
--------- ---------
Total liabilities and shareholders' equity $ 204,393 $ 191,579
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
SAWTEK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
December 31,
-----------------------
1999 1998
---- ----
(in thousands, except per share data)
<S> <C> <C>
Net sales $ 31,798 $ 22,219
Cost of sales 13,494 9,958
-------- --------
Gross profit 18,304 12,261
Operating expenses:
Selling expenses 1,239 1,385
General & administrative expenses 1,237 1,079
Research & development expenses 1,678 1,197
-------- --------
Total operating expenses 4,154 3,661
-------- --------
Operating income 14,150 8,600
Other income, net 1,456 1,119
-------- --------
Income before taxes 15,606 9,719
Income taxes 5,423 3,402
-------- --------
Net income $ 10,183 $ 6,317
======== ========
Net income per share:
Basic $ 0.24 $ 0.15
Diluted $ 0.23 $ 0.15
Shares used in per share calculation:
Basic 42,325 41,764
Diluted 43,657 42,462
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
SAWTEK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
December 31,
----------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Operating activities:
Net income $ 10,183 $ 6,317
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,893 1,601
Deferred income taxes 2,127 1,696
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (463) 1,629
Inventories (889) 803
Other current assets (191) (83)
Increase (decrease) in liabilities:
Accounts payable (774) (782)
Accrued liabilities (1,909) (1,944)
Income taxes payable 2,942 936
--------- --------
Net cash provided by operating activities 12,919 10,173
Investing activities:
Purchase of property, plant and equipment, net (9,157) (377)
Short-term investments -- 19,561
--------- --------
Net cash provided by (used in) investing activities (9,157) 19,184
Financing activities:
Principal payments on long-term debt (117) (117)
Net proceeds from sale of Common stock 343 320
Purchase of Common stock for treasury -- (1,713)
--------- --------
Net cash provided by (used in) financing activities 226 (1,510)
--------- --------
Increase in cash and cash equivalents 3,988 27,847
Cash and cash equivalents at beginning of period 50,640 42,132
Short-term investments 64,634 22,438
--------- --------
Cash, cash equivalents and short-term investments $ 119,262 $ 92,417
========= ========
Interest paid $ -- $ 42
Income taxes paid $ -- $ 770
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
SAWTEK INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended December 31, 1999 and 1998
NOTE 1 BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited, consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information in response to the requirements of Article 10 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited,
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation of
the Company's financial position as of December 31, 1999, and the results of its
operations and its cash flows for the three-months ended December 31, 1999 and
1998. These financial statements should be read in conjunction with our audited
financial statements as of September 30, 1999, including the notes thereto, and
the other information set forth therein included in our most recent annual
report on Form 10-K for the year ended September 30, 1999 (File No. 000-28276),
which was filed with the Securities and Exchange Commission, or SEC, on November
5, 1999, and our registration statement filed on Form S-3A on January 25, 2000.
The following discussion may contain forward looking statements which are
subject to the risk factors set forth in "Risks and Uncertainties" as stated in
Item 2 of this Form 10-Q.
We maintain our records on a fiscal year ending on September 30 of each
year and all references to a year refer to the year ending on that date. Our
first, second and third quarters normally end on the Sunday closest to the last
day of the last month of such quarter, which was January 2, 2000, for the first
quarter of fiscal 2000. However, for convenience, the financial statements are
dated as of December 31, 1999. There were no material transactions from December
31, 1999 through January 2, 2000.
Operating results for the three months ended December 31, 1999 are not
necessarily indicative of the operating results that may be expected for the
year ending September 30, 2000. Certain historical accounts have been restated
to conform to the current year presentation.
Certain references made in this Form 10-Q to "Sawtek", "we", "our", and
"us" refer to Sawtek Inc., a Florida corporation.
6
<PAGE>
NOTE 2 EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted
earnings per share in accordance with the Statement of Financial Accounting
Standard Number 128:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------------
1999 1998
---- ----
(in thousands, except per share data)
<S> <C> <C>
Numerator:
Net income available to common stockholders $ 10,183 $ 6,317
========= ========
Denominator:
Denominator for basic earnings per share:
Weighted average shares 42,325 41,764
Effect of dilutive securities:
Employee stock options 1,332 698
--------- --------
Denominator for diluted earnings per share:
Adjusted weighted average shares and assumed conversions 43,657 42,462
========= ========
Earnings per share:
Basic $ 0.24 $ 0.15
========= ========
Diluted $ 0.23 $ 0.15
========= ========
</TABLE>
NOTE 3 INVENTORIES
- --------------------
Net inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999
----------------- ------------------
(in thousands)
<S> <C> <C>
Raw material $ 3,359 $ 2,984
Work in process 2,816 1,993
Finished goods 2,766 3,075
-------- --------
Total $ 8,941 $ 8,052
======== ========
</TABLE>
7
<PAGE>
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999
----------------- ------------------
(in thousands)
<S> <C> <C>
Land and Improvements $ 874 $ 830
Buildings 16,500 16,500
Production and Test Equipment 43,252 39,797
Computer Equipment 3,541 3,455
Furniture and Fixtures 2,858 2,865
Construction in Progress 15,168 9,589
------- -------
82,193 73,036
Less accumulated depreciation 28,483 26,594
------- -------
Total $53,710 $46,442
======= =======
</TABLE>
NOTE 5 SHAREHOLDERS' EQUITY
- -----------------------------
The consolidated changes in shareholders' equity for the three months ended
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Unearned
Common Stock Treasury Stock Capital ESOP Retained
Shares Amount Shares Amount Surplus Compensation Earnings Total
------ ------ ------ ------ ------- ------------ -------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 42,668 $21 438 $(2,926) $74,755 $(781) $87,330 $158,399
Net proceeds from exercise of
stock options (155) 1,031 (688) 343
Net income for the three months
ended December 31, 1999 10,183 10,183
------ --- --- ------- ------- ----- ------- --------
Balance at December 31, 1999 42,668 $21 283 $(1,895) $74,067 $(781) $97,513 $168,925
====== === === ======= ======= ===== ======= ========
</TABLE>
NOTE 6 RECLASSIFICATIONS
- --------------------------
Certain amounts in prior years have been reclassified to conform to current
year presentation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and Notes thereto included elsewhere in
this Form 10-Q. Except for the historical information contained herein, the
discussion in this Form 10-Q contains certain forward looking statements such as
statements of our plans, objectives, expectations and intentions that involve
risks and uncertainties. The cautionary statements made herein should be read as
being applicable to all related forward looking statements wherever they appear.
Our actual results could differ materially from those discussed here. Factors
that could cause or contribute to such differences include those discussed in
"Risks and Uncertainties," as well as those discussed elsewhere herein.
Overview
- --------
Sawtek designs, develops, manufactures and markets a broad range of
electronic signal processing components based on surface acoustic wave, or SAW,
technology primarily for use in the wireless communications industry. Our
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 CDMA and GSM digital
wireless communications systems, digital microwave radios, wireless local area
networks, cable television equipment, Internet infrastructure, various defense
and satellite systems, and chemical sensors..
We have a wide range of customers, but a significant percentage of our
revenue is derived from a limited number of customers. Our top three customers
during the three months ended December 31, 1999 and 1998, accounted for
approximately 42% and 50%, respectively, of total net sales. It is not uncommon
for our top three customers to change from quarter to quarter. We have
experienced significant growth in international markets over the last five
years, with international sales accounting for approximately 59% of net sales
during the first three months of fiscal 2000.
9
<PAGE>
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, information
derived from our statements of operations for those periods expressed as a
percentage of net sales, and the percentage change in such items from the
comparable prior year period. Any trends illustrated in the following table are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
Percent Increase (Decrease)
Over the Prior Period
Three Months Ended Three Months Ended
December 31, December 31,
1999 1998 1999 vs. 1998
---- ---- -------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 43.1%
Cost of sales 42.4 44.8 35.5
----- -----
Gross profit 57.6 55.2 49.3
Operating expenses:
Selling expenses 3.9 6.2 (10.5)
General & administrative expenses 3.9 4.9 14.6
Research & development expenses 5.3 5.4 40.1
----- -----
Total operating expenses 13.1 16.5 13.5
----- -----
Operating income 44.5 38.7 64.5
Other income - net 4.6 5.0 30.2
----- -----
Income before taxes 49.1 43.7 60.6
Income taxes 17.1 15.3 59.4
----- -----
Net income 32.0% 28.4% 61.2%
===== =====
</TABLE>
Net Sales. Net sales increased 43% from approximately $22.2 million in the
quarter ended December 31, 1998 to approximately $31.8 million in the quarter
ended December 31, 1999. This increase was primarily the result of increased
shipments of bandpass filters for code division multiple access, or CDMA,
digital wireless phones, including approximately $2.4 million of revenues
generated from the shipment of SAW radio frequency, or RF, filters. We first
began shipments of RF filters during the quarter ended December 31, 1999.
Additional improvements in net sales during the quarter ended December 31, 1999,
are attributable to an increased level of base station filter sales and
increased sales in both data communications and video transmission related
products. These increases were offset by a slight reduction in revenues
generated from military and space applications and other miscellaneous products.
A significant percentage of our revenues continue to be generated from
international markets. Sales to international customers accounted for
approximately, 59% and 33% of total revenues during the quarters ended December
31, 1999 and 1998, respectively. We believe that financial turmoil in
international markets, specifically, the Asian market, may impact us in the
future. Revenues generated from Asian customers continue to vary significantly
from quarter to quarter and could decline substantially with little or no
advance notice. Revenues generated from Asian customers accounted for
approximately 35% and 11% of total revenues during the quarters ended December
31, 1999 and 1998, respectively.
10
<PAGE>
We believe that prices for filters for CDMA base stations will decline in
the future due to the transition to smaller surface mount packages which would
reduce revenues and gross margins on these products. Sales of CDMA base station
filters accounted for approximately 21% of total revenue in the quarter ended
December 31, 1999.
We are experiencing increased unit orders from a number of our customers,
primarily for CDMA handset filters, which may, in the short term, create a
capacity problem. As a result, we may not be able to fill all of our orders in a
timely manner, which could impact our ability to grow revenue. We have initiated
an aggressive capital expenditure program to deal with this issue, however, it
will take several quarters before all of the new equipment and facilities are
operational. In addition, we recently experienced a shortage of ceramic surface
mount packages (which are used in the assembly of products and account for
approximately 50% of our revenue). If this is not resolved, it could impact our
ability to respond to customer requirements, which could impact our ability to
grow revenue.
Our growth in revenue is highly dependent on the overall growth of the
wireless telecommunications market and on our ability to offer new and improved
products for this market. Recently, we announced our intent to offer an expanded
line of SAW filters for this market, including SAW RF filters for handsets and
intermediate frequency, or IF, filters for global system mobile communication,
or GSM, handsets. To date, we have completed some designs for these RF filters
and we believe there is interest from our customers for these products. We have
ordered and begun to receive the materials and equipment necessary to enter this
market. We have received some orders for these products and have started
production. We shipped approximately $2.6 million of these filters to customers
in the quarter ended December 31, 1999. There is no assurance, however, that we
will be successful in introducing these new products for the wireless
telecommunications market.
Gross Margin. For the three months ended December 31, 1999 and 1998, gross
profit margins were 57.6% and 55.2%, respectively. The gross margin increase was
primarily due to higher than expected yields on new products, improved
productivity, and lower labor costs, resulting from more product being produced
in our production plant in Costa Rica. Our Costa Rican plant accounted for 52.2%
and 47.1% of consolidated sales during the three months ended December 31, 1999
and 1998, respectively.
While gross margins have increased compared to the year ago quarter, it did
decrease from the immediately preceding quarter ended September 30, 1999. We
continue to believe that gross margins will decline in the future as we shift
more of our product mix to handset filters, which are lower priced, have lower
profit margins, and are subject to more competitive pricing pressure than our
other products. In addition, the prices of ceramic surface mount packages, which
are in short supply, could increase in price, resulting in lower gross margins.
Selling Expenses. Selling expenses decreased 10.5% from approximately $1.4
million in the quarter ended December 31, 1998 to approximately $1.2 million in
the quarter ended December 31, 1999. As a percentage of net sales, selling
expenses decreased from 6.2% during the quarter ended December 31, 1998 to 3.9%
in the quarter ended December 31, 1999. This decrease in selling expenses is
attributable to a reduction in commissions paid to independent sales
representatives, primarily in South Korea. We opened a Korean sales office
during the second quarter of 1999, which reduced the cost of selling into the
Korean market.
11
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased 14.6% from approximately $1.1 million in the quarter ended December
31, 1998 to approximately $1.2 million in the quarter ended December 31, 1999.
As a percentage of net sales, general and administrative expenses decreased from
4.9% during the quarter ended December 31, 1998 to 3.9% in the quarter ended
December 31, 1999. The absolute dollar increase in general and administrative
expenses can be attributed to increased staffing and other related items
resulting from the capacity expansion currently under way.
Research and Development Expenses. Research and development expenses
increased 40.1% from approximately $1.2 million in the quarter ended December
31, 1998 to approximately $1.7 million in the quarter ended December 31, 1999.
As a percentage of net sales, research and development expenses decreased
slightly from 5.4% during the quarter ended December 31, 1998 to 5.3% in the
quarter ended December 31, 1999. The increase in research and development
expenses is the result of a higher level of new product development.
Other Income. Other income increased 30.2% from approximately $1.1 million
in the quarter ended December 31, 1998 to approximately $1.5 million in the
quarter ended December 31, 1999. The increase is the result of higher interest
income being earned on increased levels of cash, cash equivalents and short-term
investments.
Income Tax Expense. The provision for income taxes as a percentage of
income before income taxes was 34.8% and 35% for the quarters ended December 31,
1999 and 1998, respectively. The Company expects that its effective tax rate
will remain at approximately 34% to 35% during fiscal 2000.
Liquidity and Capital Resources
- -------------------------------
To date, we have financed our business through cash generated from
operations, bank borrowings, lease financing, the private sale of securities,
our May 1, 1996 initial public offering and the July 1, 1997 follow-on public
offering. We require capital principally for equipment, financing of accounts
receivable and inventory, investment in product development activities and new
technologies, expansion of our operations in Orlando and Costa Rica and
potential acquisitions of new technologies or compatible companies. For the
three months ended December 31, 1999, we generated net cash from operating
activities of approximately $12.9 million. Cash generated from operations
consisted primarily of net income of $10.2 million, $1.9 million of depreciation
and amortization and an increase of $5.1 million in deferred taxes and income
taxes payable, partially offset by decreases in accrued liabilities and accounts
payable totaling $2.7 million and increases in accounts receivable, inventory
and other current assets totaling $1.5 million.
We have a revolving credit agreement totaling $30.0 million from SunTrust
Bank, Central Florida, N.A. available through March 31, 2001. There were no
borrowings against the line of credit as of December 31, 1999.
12
<PAGE>
We spent approximately $9.2 million in the quarter ended December 31, 1999,
on new equipment and facilities. We intend to spend an additional $13 million to
$21 million during the remainder of fiscal year 2000 on capital equipment and
facilities to increase capacity. It is also our intention to order additional
equipment in late 2000, which will utilize next generation manufacturing
techniques.
In the fourth quarter of 1998, the Board of Directors authorized us to
repurchase up to 2,000,000 shares of common stock. To date, 1,129,810 shares
have been repurchased under this program. We expect to continue to repurchase
shares of 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.
We believe that our present cash position and funds expected to be
generated from operations will be sufficient to meet our projected working
capital and other cash requirements for 2000. Thereafter, we may require
additional equity or debt financing to address our working capital needs or to
provide funding for capital expenditures. There can be no assurance that events
in the future will not require us to seek additional capital sooner or, if so
required, that it will be available on acceptable terms, if at all.
Foreign Operations, Export Sales and Foreign Currency
- -----------------------------------------------------
We established a subsidiary in Costa Rica in 1996. As of December 31, 1999,
we had a net investment in fixed assets of approximately $22.4 million in this
operation and for the quarter ended December 31, 1999, we recorded net sales of
approximately $16.6 million with an operating profit of approximately $7.4
million. The functional currency for the Costa Rican subsidiary is the U.S.
dollar since sales and most material cost and equipment are U.S. dollar
denominated. The effects of currency fluctuations of the local Costa Rican
currency are not considered significant and are not hedged.
In 1996, we established a "foreign sales corporation" pursuant to the
applicable provisions of the Internal Revenue Code to take advantage of income
tax reductions on export sales. The cost to operate this subsidiary is nominal.
In 1999, we opened a sales and service office in Seoul, South Korea to
assist in our Asian sales efforts. The cost to operate this subsidiary is
minimal.
International sales are denominated in U.S. dollars and represented
approximately 59% and 33% of net sales for the three months ended December 31,
1999 and 1998, respectively. Sales to the European market accounted for
approximately 14% and 20% of net sales for these same periods, respectively, and
sales to the Asian and Pacific Rim markets, principally to South Korea were
approximately 35% and 11% of net sales, respectively, for these same periods.
Over the past several years, the value of many foreign currencies have
fluctuated relative to the U.S. dollar. The Korean won and Japanese yen, in
particular, have fluctuated in value due in part to the economic events
experienced by these countries over the past year. A stronger U.S. dollar makes
it more difficult for us to sell our products to customers in these countries
and makes it more difficult for us to compete against SAW producers based in
these countries. A weaker U.S. dollar may make it more expensive for us to buy
certain raw materials and equipment from Japanese suppliers.
13
<PAGE>
The new common European currency, the euro, made its debut in January 1999.
During the first quarter ended December 31, 1999, approximately 14% of our sales
were to European customers. To date, none of our customers or suppliers has
requested us to transact business in the euro. At this time, the impact of this
new currency is not determinable.
Recently Issued Accounting Standards
- ------------------------------------
Please see Note 1 to the Consolidated Financial Statements included in our
report on Form 10-K for the year ended September 30, 1999, for a discussion of
new pronouncements.
Impact of Inflation
- -------------------
We believe that inflation has not had a material impact on operating costs
and earnings.
Year 2000 Readiness
- -------------------
The Year 2000 issue relates to the method used by computer hardware and
software for recognizing a year represented by "00" as 1900, instead of 2000.
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 and imbedded hardware. Some 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 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 need to be upgraded or replaced to comply with Year 2000
requirements.
Our State of Readiness--Year 2000
---------------------------------
Our Year 2000 inventory, assessment, remediation and testing began in
January 1998. We believe that we have completed the tasks necessary for a
successful Year 2000 transition.
To certify Year 2000 compliance, we employed two methods. Vendor
certification was the primary method utilized. In order for a system from a
vendor to be considered compliant, we required a written statement from that
vendor, as well as a description of the testing methods used. If this
information was not available or was not otherwise considered adequate, we
performed internal tests. These tests included the use of a certified hardware
test program, the examination of the software source code by our Software
Engineering Department or Information Systems Department and advancing the date
past January 1, 2000.
We also surveyed key suppliers. As of November 30, 1999, 100% of those
surveyed had responded. Of those surveyed, all stated that they are compliant.
No suppliers responded that they would fail to be Year 2000 compliant.
We believe, based on surveys of our key customers, that all of them have
achieved full Year 2000 compliance.
14
<PAGE>
Costs to Address the Year 2000 Issues
-------------------------------------
The bulk of our costs to address Year 2000 issues were internal staff time
estimated at less than $200,000 and the cost to upgrade our main MRP software,
which is certified as Year 2000 compliant. The cost of this upgrade, which was
purchased in 1998, was $48,000. The cost to complete the Year 2000 compliance
was funded out of 1998 and 1999 operating cash flow.
The Risks of the Year 2000 Issues
---------------------------------
Our products generally are not date sensitive and, therefore, are not
subject to Year 2000 defects or problems. We believe that our primary
manufacturing, engineering, financial and administrative systems are Year 2000
compliant. We believe that the greatest potential risk from Year 2000 issues
relates to the possibility that a major supplier or customer whose systems are
not Year 2000 compliant may be unable to meet delivery requirements for
important raw materials or equipment or may not be able to accept shipment of
our products until they correct their Year 2000 problem.
We believe that the Year 2000 issue will not pose significant operational
problems. However, if all Year 2000 issues are not properly identified, or
assessment, remediation and testing are not effected in a timely fashion, there
can be no assurance that the Year 2000 issue will not materially adversely
impact our results of operations or adversely affect relationships with
customers, vendors or other relevant parties. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on our systems or results of operations.
Our Contingency Plans--Year 2000
--------------------------------
In anticipation of the Year 2000 issue, we completed a comprehensive
analysis of the operational problems and costs (including loss of revenues) that
could reasonably occur from any failure by us or third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has been developed for dealing with the most likely, worst-case
scenario. This worst-case scenario includes difficulties in customer billing,
order processing, disruptions in our receipt of raw material, loss of power and
equipment malfunction. If this worst-case scenario occurred it would harm our
business. Depending on the systems affected, these plans include increased work
hours for our personnel or the use of contract personnel to correct (on an
accelerated schedule) any Year 2000 problems that may arise and use of manual
workarounds for information systems. However, because of our large power
requirements, it is not practical to establish emergency power systems should
our electrical suppliers encounter disruptions in service.
15
<PAGE>
Risk Factors and Uncertainties
- ------------------------------
This Form 10-Q contains certain forward-looking statements which are 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 report
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," "expects," "plans," "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
the following:
A decline either in the growth of wireless communications or in the continued
acceptance of CDMA technology would have an adverse impact on us.
Approximately 74% of our net sales for 1999 and 1998 were derived from
sales of SAW devices for applications in wireless communications systems. This
trend continued during the first quarter of 2000, with approximately 76% of our
total net sales being derived from sales of SAW devices for applications in
wireless communications systems. Any economic, technological or other
development resulting in a reduction in demand for wireless services would have
a material adverse effect on our business, financial condition and results of
operations.
Sales of our products for CDMA-based systems, including base stations and
subscriber handsets, accounted for approximately 56% of our net sales in 1999
and 1998. During the first quarter of 2000, approximately 61% of our net sales
were generated from sales for CDMA-based systems. CDMA technology is relatively
new to the marketplace and there can be no assurance that emerging markets will
adopt this technology. Our business and financial results would be adversely
impacted if CDMA technology does not continue to gain acceptance.
If we are unable to successfully develop and bring new products to market, our
operating results will be adversely affected.
Recently, we announced our intent to offer an expanded line of SAW filters
for the wireless handset market, including SAW RF and GSM IF filters. To date,
we have completed some designs for these filters, and we have received orders
from some customers for these products. We have also ordered and begun to
receive the materials and equipment necessary to enter this market. However, to
date, we have produced these new filters only in limited volumes and have just
begun to ship SAW RF filters to customers. Expanding our product line and sales
of these filters is an important part of our growth strategy. There is no
assurance that we will be successful in our efforts to introduce these and other
new filters for the wireless telecommunications market.
16
<PAGE>
Sustained growth of our business is dependent on our ability to develop new
or improved SAW devices in a timely fashion. Our product development resources
are limited, requiring us to allocate resources among a limited number of
product development projects. Failure by us to efficiently allocate our product
development resources to products that meet market needs could have a material
adverse effect on our future growth. The success of new products also depends on
timely completion of new product designs, quality of new products and market
acceptance of these products.
If we are unable to successfully increase our production capacity, we will not
be able to grow our revenue as planned.
We have initiated a capital expenditure program, estimated at $22 million
to $32 million for fiscal year 2000, to increase our manufacturing output to
enable us to grow our revenue. This plan includes new wafer fabrication capacity
and capability in Orlando, new assembly capacity in Orlando and Costa Rica and
expanding our building in Costa Rica. Any delay in increasing our capacity will
have a material adverse impact on our ability to meet the anticipated demand for
our new products and on our ability to grow revenue.
Because we rely on a limited number of suppliers, our operating results would be
adversely affected if a few suppliers were unable to meet our needs.
We have a limited number of suppliers for certain critical raw materials,
components, services and equipment. There are only a few ceramic package
manufacturers and wafer producers worldwide who have the expertise and capacity
necessary to satisfy our requirements. Most of these suppliers are based in
Japan. Recently, we have experienced difficulty in obtaining ceramic surface
mount packages used in the production of bandpass filters. A failure by us to
anticipate demand for materials, or of our suppliers to provide sufficient
amounts of material, could result in raw material shortages. There can be no
assurance that we will be able to secure adequate supplies of materials,
components, services or equipment. If we are unable to satisfy our requirements
for raw materials or to obtain and maintain appropriate equipment, our business,
financial condition and results of operations would be materially adversely
affected.
17
<PAGE>
Risks associated with international sales could adversely affect our operating
results.
Overall, our net sales from international sales accounted for approximately
41%, 37% and 43% of net sales for 1999, 1998 and 1997, respectively. During the
first quarter of 2000, international sales accounted for approximately 59% of
net sales. The sale of products in foreign countries involves a number of risks
that can arise from international trade transactions, local business practices
and cultural considerations, including:
o currency exchange rate fluctuations and restrictions;
o import-export regulations;
o customs requirements;
o ability to secure credit and funding;
o longer payment cycles;
o foreign collection problems;
o political and transportation risks; and
o economic turmoil.
Some of our major customers are relying on growth in international markets,
including Asia and Latin America, for sales of their products. The demand for
our products will be reduced if the economies in these regions decline.
We have grown our net sales over the past several years partly from
shipments to South Korean customers. In 1999, our net sales from South Korean
customers was approximately $16.8 million, equal to 17% of total net sales, and
in 1998 it was approximately $14 million, or 14% of net sales. However, net
sales from South Korean customers fluctuates greatly as experienced in the last
quarter of 1998 when those net sales declined to $1.1 million, or approximately
5% of total net sales, compared to $4.8 million, or approximately 18% of total
net sales, in the immediately preceding quarter. During the first quarter of
2000, sales to South Korean customers approximated $10.2 million or 32.2% of
total net sales. The South Korean economy and the economies of many other
countries in Asia and around the world have experienced economic turmoil and
recession during the past 18 months and may continue to face economic problems
which would adversely impact our sales in these regions.
18
<PAGE>
Because we depend on a few large customers, our operating results would be
adversely affected by the loss of one or two customers.
A few large customers have accounted for a significant portion of our net
sales. Sales to our top 10 customers accounted for approximately 70% of net
sales in 1999 and 76% in 1998. Motorola, our largest customer, accounted for 23%
of net sales in 1999 and 17% of net sales in 1998 and we believe it will
continue to account for a high percentage of net sales in 2000. During the first
quarter of 2000, sales to our top 10 customers accounted for approximately 73%
or our total net sales. We expect that sales of our products to a limited number
of customers will continue to account for a high percentage of our net sales in
the foreseeable future. Our future success depends largely upon the decisions of
our current customers to continue to purchase our products, as well as the
decisions of prospective customers to develop and market systems that
incorporate our products.
A disruption in our Costa Rican operations could have an adverse impact on our
operating results.
During 1999, net sales from our Costa Rican operation accounted for
approximately 47% of our total net sales and 40% of our operating income. During
the first quarter of 2000, net sales from our Costa Rican operation generated
approximately 52% of our total net sales and operating income. We expect our
Costa Rican operations to account for an increasing proportion of our overall
operations in the future. Operating a production facility in Costa Rica presents
potential risks of disruption, including:
o government intervention;
o wars;
o currency fluctuations;
o limited supplies of labor;
o labor disputes;
o earthquakes;
o volcanic eruptions;
o hurricanes;
o floods; and
o mud slides.
Any such disruptions could have a material adverse effect on our business,
results of operations and financial condition.
19
<PAGE>
A continued decline in selling prices for some of our key products could have an
adverse impact on our operating results.
Selling prices for our products have declined due to competitive pricing
pressures and to the use of newer surface mount package devices that are smaller
and less expensive than previous generation filters. We have experienced
declines in prices for filters for GSM base stations due to the use of surface
mount packages, and we expect this will occur in filters for CDMA base stations.
In addition, we expect prices for handset filters to continue to decline as they
become smaller and as competitive pricing pressure increases. A continued
decline in prices could have a material adverse impact on both our revenues and
margins.
If we experience a decline in our manufacturing yields, our operating results
will be adversely affected.
The manufacture of SAW devices involves complex processes that may result
in reduced yields from time to time, the causes of which are often difficult to
determine. A reduction in yields at any stage of the manufacturing process would
have a material adverse effect on our ability to meet our quoted delivery times
and cost of production, which would have an adverse impact on our operations and
profitability.
If one or more customers cancel or terminate purchase orders or delay deliveries
with short notice, our operating results would be adversely affected.
Our customers' orders are typically subject to cancellation or modification
with very short notice. In addition, purchase orders for our products may be
large and intended to satisfy customers' long-term needs. Accordingly, our
backlog is not necessarily indicative of future product sales, and a delay or
cancellation of a small number of purchase orders may adversely impact our
operations. In addition, our expense levels are based, in part, on our
expectations of future product sales and therefore are relatively fixed in the
short term. If we were unable to reduce our expense levels correspondingly with
a reduction in sales levels, our results of operations would be further harmed.
New competitive products or technologies may be developed which could reduce
demand for our products.
Our business is dependent upon the application of SAW-based technology.
Competing technologies, including digital filtering technology, direct
conversion or any other technology that could be developed, could replace or
reduce the use of SAW filters for certain applications. Direct conversion is a
process that converts an RF signal to baseband without the need for a SAW IF
filter. Any development of a cost-effective technology that replaces SAW
filtering technology or reduces the need for SAW filtering technology could have
a material adverse effect on our business, financial condition and results of
operations.
20
<PAGE>
We expect competition to increase which could result in lower selling prices and
have an adverse effect on our operating results.
Competition in the markets for our products is intense. We compete against
large international companies that have substantially greater financial,
technical, sales, marketing, distribution and other resources than us. In
addition, we may face competition from companies that currently manufacture SAW
devices for their own internal requirements, as well as from a number of our
customers that have the potential to develop an internal supply capability for
SAW devices. We expect competition to increase from both established and
emerging competitors, as well as from internal capabilities developed by certain
customers. Our ability to compete effectively in our target markets depends on a
variety of factors both within and outside of our control, including timing and
success of new product introductions, availability of manufacturing capacity,
the rate at which customers incorporate our components into their products, our
ability to respond to competitive pricing pressures, 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 we will be able to compete successfully in the future.
If we are not able to protect our intellectual property or if we infringe
on the intellectual property of others, our business and operating results could
be adversely affected.
We rely on a combination of patents, copyrights and trade secrets to
establish and protect our intellectual property rights. There can be no
assurance that patents will issue from any of our pending applications or that
any claims allowed from existing or pending patents will be sufficiently broad
to protect our technology. In addition, there can be no assurance that any
patents issued to us will not be challenged, invalidated or circumvented, or
that the rights granted will provide proprietary protection. Litigation may be
necessary to enforce our 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 our business, results of operations and financial condition regardless
of the final outcome of the litigation. We are not currently engaged in any
patent infringement suits nor have we been threatened with any such suits in
recent years. We recently received a letter from a large Canadian telephone
equipment manufacturer claiming that it believes we are infringing on a patent
it owns that issued in 1987 and offering a license on preferred terms, without
stating the proposed terms of the license. It is our position that this patent
is unenforceable because we sold devices commercially utilizing the invention
claimed in the patent at least two years before the application for this patent
was filed and the patent owner did not attempt to exercise its rights to enforce
this patent for over 12 years. If we are incorrect in our position in this
matter and this patent is found to be enforceable, we could be required to pay a
license fee or pay damages related to sales of devices utilizing this invention
sold for the past six years and an injunction against further alleged
infringement could issue, either of which could have a material adverse effect
on our operating results. Despite our efforts to maintain and safeguard our
proprietary rights, there can be no assurances that we will be successful in
21
<PAGE>
doing so or that our competitors will not independently develop or patent
technologies that are substantially equivalent or superior to our technologies.
If any of the holders of these patents assert claims that we are infringing such
patents, we could be forced to incur substantial litigation expenses. In
addition, if we were found to infringe, we would be required to pay substantial
damages, pay royalties in the future or be enjoined from infringing on such
patents in the future.
A failure to attract and retain qualified individuals for critical positions
could have an adverse impact on our business, financial condition and results of
operations.
Our success depends, in part, on the performance of a number of key
management and technical personnel, the loss of one or more of whom could have a
material adverse effect on our business. Our success also depends, in part, on
our ability to attract and retain qualified professional, technical, production,
managerial and marketing personnel, both domestically and internationally.
Competition for such personnel in our industry is very intense. While we have
not yet experienced significant problems in recruiting or retaining qualified
personnel, we cannot be certain that such problems will not arise in the future.
Our operating results could be adversely affected by fluctuations in the value
of foreign currencies.
Our international sales are generally denominated in U.S. dollars. However,
we may be required in the future to denominate sales in the foreign currencies
of certain countries or in the new euro for some of our European customers. As a
result, fluctuations in currency exchange rates may have a significant effect on
our sales, even in the absence of an increase or decrease in unit sales to
foreign customers. A strong U.S. dollar could make our products more expensive
for foreign customers, which could have a material adverse effect on our ability
to compete internationally. We also purchase a great deal of our key raw
materials and equipment from foreign countries, primarily Japan. A weak U.S.
dollar could make our purchases more expensive.
Over the past two years, the valuations of many foreign currencies have
fluctuated significantly 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.
We have not, to date, engaged in substantial hedging transactions for our
foreign exchange risks. If any of our future international sales or purchases
are denominated in foreign currencies, we may find it necessary to engage in
rate hedging activities with respect to certain exchange rate risks. There can
be no assurance that we will engage in such exchange rate hedging or that any
such activities will successfully protect against such risks.
22
<PAGE>
We could be subject to fines, suspension of production or cessation of
operations if we fail to comply with the many laws and government regulations
applicable to our business.
We are subject to a variety of federal, state and local laws, rules and
regulations relating to the discharge and disposal of toxic, volatile and other
hazardous chemicals used in our manufacturing processes and to export controls.
A failure by us to comply with present or future regulations could result in the
imposition of fines, suspension of production or a cessation of operations. Such
regulations could require us to acquire significant equipment or to incur
substantial expense in order to comply with such regulations. Any past or future
failure to control the use of or the discharge of toxic or hazardous substances
or to comply with export regulations could subject us to future liabilities and
could have a material adverse effect on our business, results of operations and
financial condition.
A number of factors affecting our customers may result in the cancellation of
orders or delays in deliveries of our products to these customers.
The increasing demand for wireless communications has exerted pressure on
regulatory bodies worldwide to adopt new standards for wireless communications
products and services. 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 our customers. Any
such delays may have a material adverse effect on the sale of our products to
these customers. In addition, our customers may have difficulty in obtaining
parts from other suppliers, such as flash memory for wireless handsets, causing
these customers to cancel or delay orders for our products.
Our manufacturing facilities are located in areas prone to natural disasters.
Our main facility is located in Orlando, Florida and we also have a
production facility in San Jose, Costa Rica. Hurricanes, tropical storms,
flooding, tornadoes, and other natural disasters are common events for the
southeastern part of the United States and in Costa Rica. We could suffer
disruptions due to natural disasters that could have an adverse effect on our
operations. Our Costa Rican facility is also prone to these disasters as well as
mud slides, earthquakes and volcanic eruptions. Any disruptions from these or
other events would have a material adverse impact on our operations and
financial results.
Year 2000 problems could have an adverse effect on our operations.
We are subject to potential Year 2000 problems affecting our internal
systems, the systems of our suppliers and our customers. If any of these were
not corrected for Year 2000 problems, our operations could be materially
impacted. We have completed an examination of these systems and a summary of our
results is included elsewhere in this Form 10-Q.
23
<PAGE>
Our stock price has been volatile.
There has been significant volatility in the market price of our common
stock, as well as in the market price of securities of technology-based
companies and the U.S. stock markets overall. Some of the factors that could
affect our stock price include:
o variations in our operating results or the operating results of our
customers or competitors;
o announcements of new products by us or by our competitors;
o gain or loss of significant contracts;
o announcements of technological innovations;
o acquisitions by us or our competitors;
o changes in analysts' estimates of our financial performance;
o government regulatory action;
o developments or disputes regarding proprietary rights;
o general trends in the industry; and
o general economic or stock market conditions.
Additionally, in the past, securities class action litigation often has
been brought against companies following periods of volatility in the market
price of their securities. We may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and damages
and divert management's attention and resources.
Certain considerations could make it more difficult for others to acquire us.
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
us or of discouraging a third party from attempting to acquire us. These
anti-takeover measures could result in a lower value to be received by our
shareholders if an acquisition was not approved by our Board of Directors. Such
provisions could limit or depress the price that certain investors might be
willing to pay in the future for shares of our stock. We are also authorized to
issue preferred stock, with rights senior to our common stock, without the
necessity of shareholder approval. We have no present plans to issue shares of
preferred stock. However, issuance of preferred stock could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
24
<PAGE>
In addition, the Sawtek Employee Stock Ownership and 401(k) Plan, or the
ESOP, owns approximately 23% of our outstanding common stock. The ESOP trustee
has the right to vote all of these shares. The ESOP trustee generally votes the
shares allocated to participants' accounts in accordance with their voting
directions and votes in its sole discretion with respect to the unallocated
shares. If the ESOP trustee were to vote against or oppose a proposed
acquisition of us, a potential acquirer might be discouraged from acquiring us
even though the holders of a majority of the shares of our common stock were in
favor of the acquisition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market and interest rate risk. We manage the
sensitivity of our results of operations to these risks by maintaining a
conservative investment portfolio, which is comprised solely of highly rated,
short-term investments. We do not hold or issue derivative securities,
derivative commodity instruments or other financial instruments for trading
purposes. We are exposed to currency exchange fluctuations since we sell our
products internationally and we purchase raw materials and equipment from
foreign suppliers. We are also exposed to currency fluctuations associated with
our Costa Rican operation. We manage the sensitivity of our international sales,
purchases of raw materials and equipment and our Costa Rican operation by
denominating most transactions in U.S. dollars. We do engage in limited foreign
currency hedging transactions, principally to lock in the cost of purchase
commitments that are not denominated in U.S. dollars.
We are exposed to minimal interest rate risk on debt instruments as our
outstanding debt is less than $3 million, and we do not plan to use additional
debt-based financing to fund capital expenditures in 2000.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not subject to any legal proceedings that, if adversely
determined, would cause a material adverse effect on the Company's
financial condition, business or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS IN SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 1, 2000, at our annual meeting of shareholders, the
following individuals were elected to the Board of Directors:
Votes For Withheld Abstain
--------- -------- -------
Steven P. Miller 33,205,411 396,246 279,139
Gary A. Monetti 33,205,411 239,931 279,139
Robert C. Strandberg 33,205,411 39,333 279,139
Neal J. Tolar 33,205,411 395,926 279,139
Bruce S. White 33,205,411 240,212 279,139
Willis C. Young 33,205,411 39,333 279,139
ITEM 5. OTHER INFORMATION
Not applicable.
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Index to Exhibits
Exhibit
Number
-------
10.39 Renewal of unsecured $30,000,000 credit line agreement
with SunTrust Bank, extending agreement maturity date to
January 31, 2001.
27 Financial Data Schedule (filed electronically only with
the SEC)
b) Reports on Form 8-K
On January 4, 2000, we filed with the Commission a
Current Report on Form 8-K regarding the press release
issued by us dated January 4, 2000, announcing
preliminary results for the quarter ended December 31,
1999.
On January 27, 2000, we filed with the Commission a
Current Report on Form 8-K regarding the press release
issued by us dated January 27, 2000, announcing record
net sales and profit for the quarter ended December 31,
1999.
27
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 10, 2000
SAWTEK INC.
(Registrant)
/S/ Raymond A. Link
Raymond A. Link
Senior Vice President Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
28
<PAGE>
EXHIBIT 10.39
SunTrust Bank, Central Florida, N.A.
Post Office Box 3833
Orlando, FL 32803
Tel (407) 237-4303
SUNTRUST
January 26, 2000
Mr. Raymond A. Link
Senior Vice President / CFO
Sawtek, Inc.
Post Office Box 609501
Orlando, Florida 32860-9501
Dear Ray:
It is my pleasure to advise you that SunTrust Bank, Central Florida has
approved the renewal of our $30,000,000 unsecured line of credit to Sawtek, Inc.
The new maturity date will be January 31, 2001. An unused fee of 10 basis points
shall only apply to the $15 million currently evidenced by the note dated
December 9, 1996.
As before, the existing loan documentation will be left in place in order
to avoid the expenses associated with modifying our paperwork. Therefore, should
you need to draw more than $15,000,000 on the line, we will need some lead time
in order to prepare a note and loan agreement amendment. Until such time, the
original terms and conditions outlined in that certain First Amendment to the
Amended and Restated Loan and Security Agreement, dated December 9, 1996 by and
between SunTrust Bank, Central Florida, N.A. and Sawtek, Inc., shall remain in
full force and effect in all respects except for the expiration date as per the
above referenced approval.
We certainly appreciate all of the business that you do with SunTrust and
look forward to serving Sawtek's needs well into the future. Please let me know
of any opportunity to be of assistance.
Sincerely,
/S/Douglas A. Woodman
Douglas A. Woodman
First Vice President
<PAGE>
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