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, 2000
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the common stock held by non-affiliates of
the registrant as of October 27, 2000 was: common stock, $.0005 par value:
$1,601,705,956.
There were 42,567,358 shares of the registrant's common stock outstanding
as of October 27, 2000.
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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, 2000, 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, 2000, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
PART I
Page
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Item 1. Business (including Risk Factors and Uncertainties) 1 - 27
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for Registrant's Common Equity and Related 29
Shareholder Matters
Item 6. Selected Financial Data 29 - 30
Item 7. Management's Discussion and Analysis of Financial 31 - 38
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on 39
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 40 - 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and 43
Management
Item 13. Certain Relationships and Related Transactions 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports 44
on Form 8-K
Exhibit Index 44 - 46
Signatures 47
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PART I.
This Form 10-K contains 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
our 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," "projected," "intends," "estimates",
"anticipates" or similar terms are considered to contain uncertainty and are
forward-looking statements. Our 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
Overview
Incorporated in Florida in 1979, we design, develop, manufacture and market
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, oscillators and SAW-based subsystems.
These products are used in the following applications:
- base stations for digital wireless communications for Code Division
Multiple Access, or CDMA, Global System for Mobile communications, or
GSM, and Third Generation, or 3G, applications;
- wireless phones for CDMA, GSM, Time Division Multiple Access, or
TDMA and 3G applications;
- digital microwave radios;
- wireless local area networks, or WLAN;
- broadband access systems, including Local Multipoint Distribution
Service, or LMDS, and Wireless Local Loop, or WLL;
- defense and satellite systems;
- cable television equipment; equipment for Internet infrastructure;
- sensors; and
- global positioning systems, or GPS.
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We believe that our products offer key advantages such as steeper
selectivity, lower distortion, reduced size and weight, greater reliability and
more precise frequency control over products based on alternative technologies.
In addition, we believe that our products address rapidly growing needs in the
telecommunications, data and broadband access, military and space systems and
other markets. We sell our products to a wide range of telecommunications
equipment manufacturers, the U.S. government and other technology companies.
During fiscal year 2000 our top ten customers accounted for approximately 72% of
our total net sales and included, in alphabetical order, Avnet, Ericsson,
Hyundai, Kyocera, LGIC, Lucent Technologies, Motorola, Nokia, Samsung and
various subcontract manufacturers for Cisco.
Industry Background
Electronic systems which transmit or receive voice, data or video must
contain various signal processing components such as bandpass filters,
resonators, delay lines and oscillators. These components can be used to modify
and condition the desired signals and reject unwanted signals that cause
distortion and interference. The frequencies at which these systems transmit and
receive information are in the radio frequency range, known as the RF, or in the
microwave frequency range. However, before the information can be used, the
signal must generally be converted to a lower intermediate frequency, or IF, and
finally to the lowest system frequency, commonly referred to as baseband. While
regulatory bodies such as the Federal Communications Commission, or FCC,
generally dictate the RF and microwave frequencies at which voice, data and
video systems operate, system designers have considerable flexibility in
selecting one or more IF frequencies which suit the requirements of the specific
application and design approach. Consequently, IF components, particularly
filters, are developed specifically for each customer and application, even
though they frequently must be produced in large quantities. The performance
demands placed on these components by increasingly complex systems have changed
dramatically over the past few years, particularly in wireless applications.
The wireless communications industry is experiencing significant worldwide
growth. Cost reductions and technological improvements in wireless
communications products such as cellular, personal communications services, or
PCS, 3G, broadband access 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
are providing the performance improvements necessary to address overcrowding of
existing cellular systems as well as increased functionality. These standards
include CDMA, which is predominately utilized in the United States, South Korea,
South America, Japan, China and other countries, and GSM, adopted throughout
Europe and in many other countries worldwide. These new approaches are being
utilized to provide cellular, PCS and 3G mobile services. As demands for
wireless communications subscriber services grow, service providers are offering
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digital wireless phone 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. In order
to more efficiently use 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 RF and IF filters are required
to pass the desired signal without distortion, while rejecting interfering
signals from adjacent channels or frequency bands and other sources.
Telecommunications systems, including cellular and PCS, have rapidly
evolved from traditional analog to more efficient digital-based systems to
improve system performance and capacity. These digital systems require 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, or SMP, and flip-chip 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 and flip-chip RF
and IF signal processing components, particularly for use in wireless phone
applications such as cellular telephones.
Traditional signal processing technologies include lumped constant, or LC,
filters, ceramic filters and bulk acoustic wave, or 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 RF and 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.
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The SAW Solution
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
with minimal 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 generally manufactured at the higher RF and IF
frequency ranges and broader bandwidths required for existing and emerging
systems. The range of frequencies that can be accommodated with SAW technology
ranges from 10 MHz to 3 GHz, permitting SAW components to address most viable
wireless applications.
As the use of wireless communications systems increases and new
applications develop, there is a need for large quantities of both IF and RF
signal processing components that 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.
Sawtek Strategy
Our goal is to be a leading supplier of SAW devices used in wireless
communications and other applications. To accomplish this goal, we have a very
focused strategy. The key elements are:
- Expand our product offerings for wireless phones. We have recently
introduced SAW RF filters for CDMA, GSM and TDMA wireless phones and SAW
IF filters for GSM wireless phones. In the future, we plan to offer SAW
duplexer filters for CDMA, TDMA and 3G applications and other new
products. We believe that this broad product offering will augment our
core business consisting of CDMA IF filters for wireless phones and IF
filters for CDMA and GSM base stations. This expanded product offering
will enable us to offer our customers a total SAW solution for wireless
communications.
- Enhance our relationships with major telecommunications equipment
manufacturers. We plan to focus our attention on the major
telecommunication manufacturers and to further strengthen our
relationships with them by developing a product-based sales force,
working closely with them in the design phase and by expanding our
production capacity in advance of their requirements.
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- Continue to target new or emerging markets for SAW applications. We plan
to continue to develop products to meet the needs of a changing
marketplace, including filters for head-end equipment for cable modems
for the Internet, RF and IF filters for wireless LAN, Bluetooth wireless
data, oscillators for wireless internet infrastructure such as LMDS,
SAW-based sensors and other applications for bringing voice, data and
video into the home.
- Expand our manufacturing capacity. We have spent approximately $27.1
million during fiscal 2000 to increase our manufacturing capacity. This
plan includes increasing the manufacturing capacity and capability at our
Orlando wafer fabrication facility, adding six new automated production
lines to our Orlando and Costa Rican operations and increasing the size
of our Costa Rican facility from approximately 32,000 square feet to
approximately 62,000 square feet. Upon completion, our production
capacity will be more than four times greater in units compared to
previous production capabilities. This capacity expansion plan will
continue in fiscal 2001, with approximately $15 million budgeted for
capital expenditures.
Markets and Applications
SAW devices may be utilized in most applications that transmit or receive
microwave or RF signals. We provide products to the following markets:
communications, military and space systems and other markets.
Communications
Applications for the communications market accounted for approximately 85%
of our net sales in 2000, compared to approximately 82% and 81% in 1999 and
1998, respectively. Our communications product offerings consist primarily of IF
bandpass filters for CDMA and GSM base station equipment and RF and IF bandpass
filters for CDMA, GSM, TDMA and 3G wireless phones. Additional applications
include base station repeaters, global satellite systems, digital backhaul
radios and data and broadband access applications. We offer many custom SAW
components to serve these market applications.
It is important to clarify the role of the SAW filter as systems evolve
from analog to digital. CDMA and GSM are digital technologies because the final
signal processing which occurs to maximize the frequency spectrum (allowing
multiple subscribers to talk at the same time within allocated frequency bands),
is performed digitally. The actual transmission from a phone to a base station
through the air, however, must still be done through analog radio frequency
signals. A SAW filter is a passive analog component that rejects the unwanted RF
signals and passes the desired signals for later digital signal processing.
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Cellular. In cellular applications, calls are placed through wireless
phones by establishing a connection with a base station through RF channels in
the 800-1,000 MHz frequency range. We supply IF bandpass filters for CDMA and
GSM-based cellular base stations and for CDMA wireless phones. We have also
recently introduced SAW RF filters for cellular CDMA and TDMA wireless phones
and SAW RF and IF filters for GSM wireless phones.
PCS. PCS systems are enhanced cellular networks that operate in a frequency
band of 1,800 to 2,000 MHz and provide a broad range of telecommunications
services. We supply IF bandpass filters for CDMA and GSM-based PCS base station
equipment, as well as IF and RF bandpass filters for CDMA, TDMA and GSM based
wireless phones.
Data Communication and Broadband Access. The data communication and
broadband access markets encompass a number of applications involving the
transmission and reception of data through wired, wireless or satellite
networks. As the usage of these networks increases, original equipment
manufacturers, or 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, we frequently design unique products for
each OEM. As international standards have been adopted to meet these
requirements, we have developed standard products to meet these needs.
Applications include digital radios, wireless local area networks, handheld data
terminals, wireless personal digital assistants, global positioning systems and
high speed internet access equipment such as cable modems and LMDS.
Military and Space
We have been a provider to the military and space systems markets since our
inception. Our 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
We custom design products that are utilized in other markets, such as
commercial avionics and test equipment applications for circuit design and
system performance analysis including signal generators, spectrum analyzers and
cellular telephone system test equipment. In addition, we market multiple
families of standard SAW filters and offer these products for sale through
distribution networks in North America and Europe.
We have been developing SAW-based sensors for several years, and have
become a leading supplier of SAW components used in sensor development programs.
In February 1998, we acquired Microsensor Systems, Inc. of Bowling Green,
Kentucky, a supplier in the developing SAW-based sensor instrument market to
assist us in expanding into this market.
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Products
We produce unique SAW products at frequencies ranging from 10 MHz to nearly
3 GHz. Products are organized into five product categories: bandpass filters,
resonators, oscillators, SAW-based subsystems and SAW-based sensor products.
Bandpass Filters
Although the basic functions of SAW bandpass filters are similar for
various applications, the actual specifications for each of these products are
very different depending upon their usage as an RF front-end filter, an image
reject filter or an IF filter. For example, while rejection is more important in
a base station filter, insertion loss is more important in a wireless phone RF
filter, and group delay variation and passband flatness are critical in wireless
data filters. Our sales and engineering personnel work closely with our
customers to determine not only the specifications needed, but also the relative
importance of each specification. We then select a SAW structure that best
matches each customer's application and design a specific filter to meet their
unique requirements. Typical filter structures and their corresponding
applications are described below.
Bi-directional Transversal Filters. This traditional SAW filter structure
is characterized by very steep shape factors and relatively high insertion loss.
These types of filters operate over a wide range of frequencies and fractional
bandwidths. They are commonly used in applications such as military
communications, cable television or CDMA base stations that require very steep
rejection, but that can accept more insertion loss and a larger package size.
Low-loss Transversal Filters. We have improved upon the bi-directional
filter structure by utilizing techniques to lower the insertion loss while
maintaining good selectivity. We offer low loss structures for both moderate and
wide fractional bandwidth filters. Applications for these low loss, IF surface
mount devices include CDMA wireless phones, digital radios, WLL, 3G base
stations, WLAN and GPS.
Reflective Low-loss Filters. To suit the narrower fractional bandwidths of
GSM-based systems, we utilize a reflective low loss design approach. We have
utilized this design approach to reduce the size of GSM base station IF filters
in order to move from larger leaded packages to smaller surface mount packages,
thereby offering continuous price reductions to our customers. Recent
development of the reflective low-loss technology has made a significant impact
in the CDMA wireless phone market as well. This approach has enabled us to
produce these complex devices at a fraction of the size of the older, low-loss
transversal filters, while offering the same or better performance.
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Resonator Filters. As we enter the wireless phone market for RF filters and
GSM IF filters, we have expanded our resonator-based filter technology to
include combined mode, in-line coupled, waveguide coupled and ladder structures.
This filter technology features very low insertion loss that is critical in
these applications. These filters are ideally suited for pre-selector and image
reject functions in wireless phone or home wireless applications.
Resonators
We offer two types of resonators: SAW and surface transverse wave, or STW.
Products operating from 100 MHz to 2.5 GHz are available and are generally used
as stable, high-Q frequency control elements that determine the operating
frequencies of oscillators. We offer these products for use in high performance
commercial, military and space and new broadband access applications, where the
demand for more stringent electrical performance is not served by high volume
SAW resonator manufacturers. In addition to offering these products as
individual components, we use our resonators in the manufacture of high
performance oscillator products.
Oscillators
We offer 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. Our oscillators
are used in high performance commercial and military applications such as
instrumentation, avionics and electronic warfare. Additionally, new software
radio architecture for mobile infrastructure and wireless broadband access
applications require the superior phase noise performance that our oscillators
provide.
SAW-based Subsystems
SAW-based subsystems are among our most complex and highly integrated
products. 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. Our subsystem
products are mainly used in military and space applications and include
channelized filter banks, switched filter and delay line modules and pulse
expansion and compression subsystems.
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SAW-based Sensor Products
We offer a line of SAW-based sensor instruments for chemical agent
detection and other applications through our wholly owned subsidiary,
Microsensor Systems, Inc. The customer base for chemical agent detectors
includes the U.S. military, various Federal agencies and state and local
governments. We also offer an ethylene oxide detector that is commonly used in
the hospital sterilization market and a fuel dilution meter for the oil analysis
market. In fiscal 2000, we entered into an exclusive agreement allowing us to
manufacture SAW sensors for automotive tire pressure and torque applications
utilizing a patented technology from a third-party. In fiscal 2000, we
introduced a new product, Hazmatcad(TM), which is a handheld, battery operated
device that can be configured to detect a variety of hazardous chemical
compounds for use in commercial and governmental applications. In addition, we
continue to be a leading supplier of SAW components used in sensor development
programs throughout the world.
New Product Development
Our research and development and engineering teams are developing new
SAW-based products to serve the needs of our current and potential customers.
Much of the effort is directed toward reducing the size and increasing the
performance of our devices. Examples of recent development efforts that are
generating revenue include the development of filters for WLAN and WLL
applications and the development of significantly smaller surface mount RF and
IF filters for CDMA, GSM and TDMA applications.
We are currently developing a number of new products and processes which
are expected to begin generating revenues over the next twelve to twenty-four
months. One of these products is a cellular RF SAW duplexer. The duplexer is an
RF component located after the antenna that is a combination of filters
separating transmit and receive signals, and allows for simultaneous
transmission and reception in full duplex radios. Duplexers are used in most
CDMA wireless phones.
Another development initiative is the miniaturization of our standard RF
and IF filter products through "flip-chip" technology. Flip-chip packaging
technology is a manufacturing technique whereby the SAW die is mounted directly
on the ceramic package and electrically connected to the mounting surface. This
allows for substantial reduction in surface area, package height and cost due to
the elimination of traditional bonding techniques and multi-layered packages.
This processing technology is opening up a vast array of new market
opportunities through integration in Multi-Chip Module, or MCM, devices with
surrounding "non-SAW" active components in the radio chain.
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Other new markets include applications for "Bluetooth" and fiber optics.
Bluetooth is a developing global short-range wireless communications standard
allowing instant voice and data connections between various devices such as
wireless phones, notebook computers, printers and other peripheral devices.
Bluetooth operates in the 2.4GHz Industrial, Scientific & Medical, or ISM, band
requiring RF filtering. We are also developing state-of-the-art modular "clocks"
to meet the exacting standards of the fiber optic infrastructure backbone.
Additionally, we have identified SAW-based sensors and subsystems as a
promising technology for new product development. A majority of our sensor
development work is being conducted through our subsidiary, Microsensor Systems,
Inc. To date, our scientists have made fundamental improvements in three major
technical areas necessary for product development, namely, temperature
compensation, polymer development and metrology. The market for SAW based
sensors is in the early stages of development. For fiscal years 2000 and 1999,
sales of sensor products accounted for less than 3% of our consolidated revenue.
There is no assurance that we will be successful in developing new sensor
products for commercial or military applications.
Technology
SAW Technology. A simple SAW filter has two transducers that consist of
inter-digital 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 mechanical strain in the material. When a signal of the proper
frequency is applied across the interdigital transducers, or 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
that can be detected by an IDT. The electrode spacing and the material's surface
acoustic wave velocity determine the operating frequency of the device. This
relationship places physical limitations on the frequency of operation of
practical SAW devices due to limitations in photolithographic resolution. The
configuration of the IDT and properties of the substrate material determine the
signal processing function and response characteristics of the device.
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SAW devices provide complex signal processing functions in a single,
compact device. One example is the outstanding bandpass filter characteristics
that can be achieved using SAW technology. Comparable performance utilizing LC
filter technology would require numerous components and would generally occupy
more space on a PC board. Because surface acoustic waves propagate 100,000 times
more slowly 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 photolithographic
processes determine device operating frequencies, 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 high volume production of economical and reproducible devices. 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. Our versatile and
user-friendly proprietary software supports the design and simulation of a broad
range of SAW device structures, allowing our design engineers to optimize the
SAW design for a particular application with respect to performance, size and
cost.
Manufacturing
The manufacturing techniques used to produce our 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 we control a
substantial portion of the manufacturing process, some activities are
outsourced. The primary raw materials used to manufacture our products are
purchased from outside sources and 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 system. We segregate 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 metal, generally aluminum, onto piezoelectric
wafers. The metallized wafer is then 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 up to 3,300 die, depending upon the
design and performance requirements of the final product. All of our fabrication
processes are conducted at our main 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 any associated components 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 generally
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. Our assembly operations are
located in Orlando, Florida and San Jose, Costa Rica.
In 1996, we established a subsidiary in Costa Rica for the production of
SAW components. In 2000, our Costa Rican subsidiary accounted for approximately
51% of net sales, compared to 47% of net sales in 1999, and accounted for
approximately 50% and 36% of consolidated net fixed assets at September 30, 2000
and 1999, respectively.
We have spent approximately $27 million during fiscal 2000 in our plan to
increase our manufacturing capacity. This plan included increasing the
manufacturing capacity and capability at our Orlando wafer fabrication facility,
adding six new automated production lines to our Orlando and Costa Rican
operations and increasing the size of our Costa Rican facility from
approximately 32,000 square feet to approximately 62,000 square feet. Upon
completion, our production capacity will be more than four times greater in
units compared to our previous production capabilities. The capacity expansion
plan will continue in fiscal 2001, with approximately $15 million budgeted for
capital expenditures. This expansion will provide the necessary capacity to
pursue the high-volume SAW RF filter market as well as other opportunities.
Raw Materials and Sources of Supply
We generally maintain alternative sources for our principal raw materials
to reduce the risk of supply interruptions or price increases. We purchase these
materials on a purchase order basis. We use several raw materials in
manufacturing SAW components, including wafers made from quartz, lithium niobate
or lithium tantalate and ceramic or metal packages used in final assembly.
Relatively few companies produce these piezoelectric wafers and metal and
ceramic packages. At times in the past, we have experienced difficulties in
obtaining ceramic packages used in the production of bandpass filters. Our most
significant suppliers of ceramic surface mount packages are three companies
based in Japan. This reliance on a limited number of suppliers involves several
risks, including reduced control over the price, foreign currency exposure,
timely delivery, reliability and quality of the material. In an attempt to
minimize this problem, we have utilized multiple sources of supply, negotiated
long-term agreements, and have increased our raw material inventories.
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Sales and Marketing
We use a team-based sales approach to develop relationships at multiple
levels within each customer's organization, including management, engineering
and purchasing. We have 15 domestic and 16 international, independent sales
representatives to identify opportunities that are then managed by our internal
sales force. Our sales and marketing personnel and management handle direct
sales. We also utilize distributors to generate additional sales for our
standard product families and we have a sales and service office in Seoul, South
Korea to assist with our Asian sales effort. Once an opportunity is identified,
members of our engineering design team and sales team coordinate close technical
collaboration with the customer during the design and qualification phase of
their program. Our executive officers are actively involved in all aspects of
the sales and marketing process, working closely with the senior management of
our customers.
Customers
We have a concentrated customer base with our top five customers accounting
for approximately 55% of net sales in both 2000 and 1999. During 2000, our top
five customers were, in alphabetical order, Avnet, LGIC, Lucent Technologies,
Motorola and Samsung. Our top 10 customers accounted for approximately 72% and
70% of net sales in 2000 and 1999, respectively. The loss of any of these
customers could have a material adverse effect on our business, operating
results and financial condition. There is no assurance that we will obtain
future business from these customers.
The following is an alphabetical list of some of the customers that
contributed $1.0 million or more to our revenues in 2000:
<TABLE>
<S> <C>
------------------------------------- -------------------------------------
Alcatel Motorola
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
AVNET Nokia
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Celestica Nortel
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Ericsson Northrop Grumman
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Hyundai Qualcomm
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Kyocera Rockwell
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
LGIC Samsung
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Lucent Technologies Symbol
------------------------------------- -------------------------------------
</TABLE>
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Competition
The markets for our products are characterized by price competition, rapid
technological change, short product life cycles and heightened global
competition. We compete against large international firms that have
substantially greater financial, technical, sales, marketing, distribution and
other resources than us in each of our product markets. In addition, we face
competition from companies that currently produce SAW devices for their internal
requirements, as well as from a number of our customers who have the potential
to develop an internal capability to produce SAW devices. The following North
American companies compete with us to a greater or lesser degree: CTS Wireless
Components, Micro Networks, Phonon, RF Monolithics and Vectron. Competition from
European companies principally includes EPCOS AG, formerly Siemens Matsushita
Components, and Thomson Microsonics. We are experiencing increasing competition
from Pacific Rim companies as we further expand into wireless phones and other
high volume subscriber applications. Major Asian suppliers of SAW-based products
include Fujitsu, Murata, Toyocom and several other Japanese and Korean
manufacturers. We expect competition to increase from both established and
emerging competitors as well as from internal capabilities developed by certain
customers. Competition could also come from alternative technologies including
digital filtering, direct conversion or other approaches that could potentially
reduce or eliminate the need for certain SAW filters in wireless phones.
Research and Development
Our research and development efforts are directed towards developing new
and innovative SAW device structures and SAW-based technologies to address
demand in selected markets. The goal of our research and development group is to
develop the technological tools and techniques necessary to meet emerging market
requirements.
At September 30, 2000, we engaged 24 scientists, technicians and
consultants in our research and development efforts. In addition to our staff
and consultants, we are involved in cooperative research programs with outside
organizations, including individuals, research groups, universities, institutes
and national laboratories. This approach allows our research and development
group to benefit from the ideas and talents of a group of scientists larger than
our internal staff, and helps to maintain a highly creative, stimulating and
intellectual environment for our scientists.
Research and development expenses were $8.6 million in 2000, $5.6 million
in 1999 and $4.3 million in 1998. We anticipate that research and development
expenses will continue to increase as personnel and programs are added. A
portion of our development activities is conducted in connection with the design
and development of custom devices, which is paid for by customers.
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Intellectual Property Matters
We rely on a combination of patents, copyrights and trade secrets to
establish and protect our intellectual property rights. We hold 23 patents
(which expire between 2005 and 2019), relating to SAW devices, oscillators,
packaging technologies and chemical sensors, and we have 12 patents pending. We
also own a substantial body of proprietary techniques and trade secrets. We
recognize the benefits associated with developing a portfolio of corporate
intellectual property, particularly during the new product development process,
and we are aggressively pursuing patents on several technologies. There can be
no assurance that patents will issue from any of the pending applications, that
any claims allowed from existing or pending patents will be sufficiently broad
to protect our technology or that the patents will withstand challenges to their
validity.
We also seek to protect our 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 we will have adequate remedies for any breach or that our 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 our
proprietary rights to the same extent as the laws of the United States.
Backlog
Our backlog as of September 30, 2000 was approximately $47.4 million
compared to the backlog at September 30, 1999 of approximately $29.0 million. We
include in backlog only customer orders and certain purchase agreements with
firmly scheduled deliveries within the subsequent 12 months. We expect to ship
substantially our entire backlog by September 30, 2001. The backlog is not
necessarily indicative of future product sales, and a delay or cancellation of a
small number of purchase orders may materially adversely affect us. Backlog
cancellations are negotiated with each customer in writing and generally form a
part of the contract with the customer.
Most of the orders from our largest customers allow the customer to cancel
the order with a certain amount of required notice; and, from time to time, we
have 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 that 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
renegotiations as a result of the lower quantity of units taken.
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Employees
At September 30, 2000, we had 770 employees (compared to 603 at September
30, 1999), including 503 in manufacturing and operations; 172 in research,
development and engineering; 24 in quality assurance; 26 in sales and marketing
and 45 in administration. There were 311 employees located in San Jose, Costa
Rica, 8 in Bowling Green, Kentucky, 4 in Seoul, South Korea and 447 employees in
Orlando, Florida. None of our employees are represented by a labor union, and we
have not experienced any work stoppages. We consider employee relations to be
excellent.
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RISK FACTORS AND UNCERTAINTIES
An investment in our Common Stock is extremely risky. You should carefully
consider the following risk factors and other information in this Form 10-K
before investing in our Common Stock. Our business and the results of operations
could be seriously harmed by any of the following risks. The trading price of
our Common Stock could decline due to any of these risks, and you may lose part
or all of your investment.
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. We 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. We do not assume the
obligation to update any forward-looking statement. The following "Risk Factors"
are intended to be cautionary statements identifying important factors that
could cause actual results to differ materially from those in the
forward-looking statements.
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 72%, 74% and 74% of our net sales for 2000, 1999 and 1998,
respectively, were derived from sales of SAW devices for applications in
wireless communications systems, specifically wireless phones and base stations.
Any economic, technological or other development resulting in a reduction in
demand for wireless services and products would have a material adverse effect
on our business, financial condition and results of operations.
Sales of our products for CDMA-based systems, including filters for base
stations and wireless phones, accounted for approximately 45% of our net sales
in 2000. During fiscal 1999 and 1998, approximately 56% 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.
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If we are unable to successfully develop and bring new products to market, our
operating results will be adversely affected.
During fiscal 2000, we announced our intent to offer an expanded line of
SAW filters for the wireless phone market, including RF and GSM IF filters. To
date, we have completed some designs for these filters, purchased the necessary
materials and equipment to enter this market and we have shipped approximately
$19 million of these new products in fiscal year 2000. 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.
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 properly 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.
During fiscal 2000, we incurred approximately $27 million in capital
expenditures to increase our manufacturing output to enable us to grow our
revenue. We have not completed our capacity expansion plans and intend to spend
approximately $15 million in fiscal year 2001 on new equipment. Expansion plans
for fiscal year 2001 include new wafer fabrication capacity and capability in
Orlando and new assembly capacity in Orlando and 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. At times in the past, 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
quantities 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.
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Risks associated with international sales could adversely affect our operating
results.
Our net sales to international customers accounted for approximately 61%,
41% and 37% of total net sales for 2000, 1999 and 1998, respectively. 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 or do not
meet anticipated growth expectations.
We have grown our net sales over the past several years partly from
shipments to South Korean customers. For fiscal 2000, our net sales to South
Korean customers was approximately $32.9 million or 20.6% of total net sales,
and in 1999 it was approximately $16.8 million, or 16.8% of net sales. However,
net sales to 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. 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 24 months and
may continue to face economic problems which would adversely impact our sales in
these regions. In addition, the South Korean government recently reduced
subsidies for the purchase of wireless phones in the South Korean market, which
could adversely impact future sales of our products into this market.
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Because we depend on a few large customers, our operating results would be
adversely affected by the loss of any of these customers.
A few large customers have accounted for a significant portion of our net
sales. Sales to our top 10 customers accounted for approximately 72%, 70% and
76% of net sales in 2000, 1999 and 1998, respectively. Motorola, our largest
customer, accounted for 25%, 23% and 17% of net sales in 2000, 1999 and 1998,
respectively, and we believe it will continue to account for a high percentage
of net sales in 2001. 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.
Our manufacturing facilities are located in areas prone to natural disasters.
We have manufacturing and production facilities located in Orlando, Florida
and 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 Central America. Additionally, our Costa Rican facility
could also be affected by 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.
Though we have manufacturing and assembly capabilities in both Orlando and
San Jose, we are only capable of fabricating wafers in our Orlando facility. As
a result, any disruption to our Orlando facility would have a material adverse
impact on our operations and financial results.
A disruption in our Costa Rican operations would have an adverse impact on our
operating results.
As discussed in a previous risk factor, we have a production facility
located in Costa Rica, which is prone to natural disasters. In addition to the
potential risk of a natural disaster occurring, operating a facility in Costa
Rica presents additional risks of disruption such as government intervention,
currency fluctuations, labor disputes, limited supplies of labor, power
interruption and war. Any such disruptions could have a material adverse effect
on our business, results of operations and financial condition.
During fiscal year 2000, net sales from our Costa Rican operation accounted
for approximately 51% of our total net sales and 37% of our operating income.
During 1999, net sales from our Costa Rican operation generated approximately
47% of our total net sales and 40% of our operating income. We expect our Costa
Rican operations to account for an increasing proportion of our overall
operations in the future.
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A change in our favorable tax status in Costa Rica would have an adverse impact
on our operating results.
Our subsidiary in Costa Rica operates in a free trade zone and will receive
a 100% exemption from Costa Rican income taxes through 2003 and a 50% exemption
through 2007. During fiscal 2000, this tax exemption provided tax savings of
approximately $10.0 million, excluding the one-time gain of $16.7 million
related to prior year's deferred income taxes, and increased our diluted
earnings per share by approximately $0.23.
The Costa Rican government is reviewing its policy on granting tax
exemptions to certain companies. To date, no changes have been made and it is
uncertain if any changes will be made to the current tax structure. Any adverse
change in the tax structure for our Costa Rican subsidiary made by the local
government would have a negative impact on our net income.
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 this has also begun to occur in filters for CDMA base
stations. In addition, we expect prices for wireless phone 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 on our cost of production, which would have an adverse impact on our
operations and profitability.
21
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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. Qualcomm Inc. of San Diego, California, Analog Devices, Inc. of Norwood,
Massachusetts, and Agilient Technologies, Inc. of Palo Alto, California, each
produce integrated circuits for use in wireless phones and have announced
products or plans to produce products that utilize direct conversion or other
technologies that could reduce or eliminate SAW filters in certain applications.
Other companies, as well, may from time to time, announce products, patents or
other claims relating to direct conversion or such other technologies that may
reduce or eliminate certain SAW filters. The product introduced by Analog
Devices, Inc. may have some application in certain GSM phones, which, if proven
successful, could impact sales of our GSM IF filters for wireless phones. We
believe that revenues generated from GSM IF filter sales could account for up to
10% of our total net revenues in fiscal 2001. Qualcomm Inc. indicated that they
are working on a direct conversion concept for CDMA phones for potential
production in the future, but acknowledged the extreme difficulty of such a
solution and could offer no time frame for its introduction. Additionally,
Agilent Technologies, Inc. recently announced an alternative solution to
SAW-based technology for potential use as a duplexer in certain PCS wireless
phone applications. To date, we have not sold any SAW-based duplexers, but we
have targeted this application for future revenue growth.
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.
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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
January 2000, we 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. 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 because 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 to pay damages related
to sales of devices utilizing this invention sold over the past seven years and
we could be enjoined from further infringement, either of which could have a
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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 doing so or that our competitors will not independently
develop or patent technologies that are substantially equivalent to 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 a key employee 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 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 most 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.
To date, we have engaged in limited 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
substantial rate hedging activities with respect to exchange rate risks. There
can be no assurance that such exchange rate hedging will successfully protect us
against such exchange rate risk.
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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 phones, causing
these customers to cancel or delay orders for our products.
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, or other technology companies;
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;
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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 be the target of similar litigation in the
future. Securities litigation could result in substantial costs and damages and
divert management's attention and resources.
The increased use of consignment inventories makes it more difficult for us to
accurately forecast our quarterly revenues.
We have experienced an increase in the dollar value of our products sold
through consignment inventory or hub agreements. Under these agreements, we ship
finished goods to warehouse sites located near our customers' facilities and the
customer then withdraws this inventory at their discretion. We do not recognize
revenue until our customers withdraw the inventory for their use. As a result of
not knowing the exact usage of inventory at these sites until late each quarter,
our estimates of quarterly revenues may fluctuate from our projections. At
September 30, 2000, we had approximately $350,000 in consignment inventory at
offsite locations and approximately 10% of our total revenue came from these
agreements in fiscal 2000. We expect these amounts to increase in fiscal year
2001.
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 our Board of Directors did not approve an acquisition. 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
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outstanding voting stock. In addition, the Sawtek Employee Stock Ownership and
401(k) Plan, or the ESOP, owns approximately 21% 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.
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ITEM 2. PROPERTIES
Our principal administrative, engineering and manufacturing facilities are
located in one owned building of approximately 93,000 square feet and one leased
building of approximately 1,400 square feet, both located near Orlando, Florida.
We also own a production facility located in San Jose, Costa Rica of
approximately 62,000 square feet. We also lease a 7,600 square foot facility in
Bowling Green, Kentucky for our sensor development operation, and a small sales
office in Seoul, South Korea. We believe that our facilities, along with our
current expansion plans, are adequate to meet our current needs and that
suitable additional or alternative space will be available, as needed, on
commercially reasonable terms.
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 our competitive position.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings either by or against us during
fiscal 2000 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 2000.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our shares 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
our common stock as reported by the Nasdaq National Market for the periods
indicated (all prices are adjusted for the two-for-one stock split in August
1999):
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended September 30, 1999:
1st Quarter $11.94 $ 5.91
2nd Quarter 17.59 8.75
3rd Quarter 23.63 15.25
4th Quarter 40.75 22.31
Fiscal Year Ended September 30, 2000:
1st Quarter $67.25 $32.50
2nd Quarter 93.50 43.75
3rd Quarter 77.25 35.25
4th Quarter 73.75 34.88
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on September 30, 2000 was $38.52 per share.
As of October 27, 2000, there were 42,567,358 shares of common stock
outstanding (net of 100,836 shares held in treasury stock) held by approximately
130 shareholders of record. Many shareholders hold their shares in "street
name." We believe we have more than 20,000 beneficial owners of our common
stock.
Historically, we have not paid dividends on our common stock. Because we
believe we may require additional capital in the future, we intend to retain our
earnings and do not anticipate paying cash dividends on our common stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data as of and for each of
the five years ended September 30, 2000. The historical consolidated financial
data has been derived from the historical financial statements, which financial
statements have been audited by Ernst & Young LLP, independent auditors, as
indicated in their report. These data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements appearing elsewhere in
this document.
29
<PAGE>
Consolidated Statements of Income Data:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $159,841 $100,276 $97,700 $85,041 $59,173
Cost of sales 64,283 42,224 44,811 38,569 28,338
-------- -------- ------- ------- -------
Gross profit 95,558 58,052 52,889 46,472 30,835
Operating expenses:
Selling expenses 6,561 5,637 6,008 5,384 4,024
Gen. and admin. expenses(1) 5,548 4,319 4,693 5,842 18,852
R&D expenses 8,552 5,627 4,285 3,756 1,954
-------- -------- ------- ------- -------
Total operating expenses 20,661 15,583 14,986 14,982 24,830
-------- -------- ------- ------- -------
Operating income 74,897 42,469 37,903 31,490 6,005
Other income, net 7,323 4,737 3,542 1,785 343
-------- -------- ------- ------- -------
Income before income taxes 82,220 47,206 41,445 33,275 6,348
Income taxes(2) 2,938 16,522 15,240 12,556 6,568
-------- -------- ------- ------- -------
Net income (loss) $ 79,282 $ 30,684 $26,205 $20,719 $ (220)
======== ======== ======= ======= =======
Net income (loss) per share: (3)
Basic $ 1.87 $ 0.73 $ 0.62 $ 0.50 $ (0.01)
======== ======== ======= ======= =======
Diluted $ 1.82 $ 0.72 $ 0.60 $ 0.49 $ (0.01)
======== ======== ======= ======= =======
Shares used in per share calculations:
Basic 42,498 41,946 42,360 41,092 34,734
======== ======== ======= ======= =======
Diluted 43,667 42,815 43,356 42,668 40,486
======== ======== ======= ======= =======
<FN>
(1) General and administrative expenses for 1996 includes $12.9 million of ESOP
compensation expense.
(2) Includes approximately $16.7 million of deferred income taxes reversed in
2000, due to an adjustment for income taxes for our Costa Rican facility.
(3) Computed on the basis described in Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
September 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments $144,343 $115,274 $ 84,131 $ 58,073 $27,743
Working capital 187,461 135,200 99,038 68,658 36,307
Total assets 259,488 191,579 148,710 120,506 75,524
Long-term debt, less current maturities 1,790 2,169 2,868 3,907
Total shareholders' equity $243,436 $158,399 $123,877 $98,218 $62,086
</TABLE>
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
We maintain our 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
We were incorporated in January 1979 to design, develop, manufacture and
market a broad range of electronic components based on SAW technology for use in
telecommunications, data communications, broadband access, military and space
systems and other applications. Our focus is on the high-end performance
spectrum of the market, and our primary products are SAW bandpass filters,
resonators, oscillators, SAW-based subsystems and sensors. Our products were
initially concentrated in the military and space systems market. In the past
five years, however, we made a strategic decision to target commercial markets,
which accounted for approximately 96% and 94% of net sales in 2000 and 1999,
respectively. We have also witnessed significant growth in our international
markets over the last five years. International sales accounted for
approximately 61% and 41% of net sales in 2000 and 1999, respectively.
We reported record net sales and net income for fiscal year 2000. Our net
income increased 158.4% from 1999 to 2000 due to our higher sales, a higher
gross profit margin, lower operating expenses as a percentage of net sales and
lower income taxes. Included in net income for 2000 is a one-time tax benefit of
$16.7 million that relates to an adjustment for income taxes for our Costa Rican
subsidiary. Please see a further discussion of income taxes under the captions
"Income Tax Expense" and "Pro-Forma Net Income" which follow.
Net sales increased 59.4% from 1999 to 2000, and 2.6% from 1998 to 1999.
The growth in net sales is attributable to growth in the wireless communications
market to which we supply SAW bandpass filters for cellular and PCS base
stations and wireless phones and our introduction of new SAW based products,
including RF and GSM IF filters for wireless phones and SAW filters for data
communication and broadband access applications.
For 2000, net sales to our top 10 customers accounted for approximately 72%
of net sales, compared to 70% in 1999, with the top five customers accounting
for approximately 55% of net sales in both of these years. We expect that sales
of products to a limited number of customers will continue to account for a high
percentage of our net sales in the foreseeable future.
31
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statements of income to net sales:
<TABLE>
<CAPTION>
Percent Increase (Decrease)
Percentage of Net Sales Over the Prior Year
Year Ended Year Ended
September 30, September 30,
2000 1999 1998 2000 vs. 1999 1999 vs. 1998
---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 59.4% 2.6%
Cost of sales 40.2 42.1 45.9 52.2% (5.8%)
----- ----- -----
Gross profit 59.8 57.9 54.1 64.6% 9.8%
Operating expenses:
Selling expenses 4.1 5.6 6.1 16.4% (6.2%)
General & admin. expenses 3.5 4.3 4.8 28.5% (8.0%)
R&D expenses 5.3 5.6 4.4 52.0% 31.3%
----- ----- ----- ----- ----
Total operating expenses 12.9 15.5 15.3 32.6% 4.0%
----- ----- -----
Operating income 46.9 42.4 38.8 76.4% 12.0%
Other income, net 4.5 4.7 3.6 54.6% 33.7%
----- ----- -----
Income before taxes 51.4 47.1 42.4 74.2% 13.9%
Income taxes 1.8 16.5 15.6 (82.2%) 8.4%
------ ----- -----
Net income 49.6% 30.6% 26.8% 158.4% 17.1%
===== ===== =====
</TABLE>
Comparison of Years Ended September 30, 1999 and 2000
Net Sales. Net sales increased 59.4% from $100.3 million in 1999 to $159.8
million in 2000. The increase was due to the continued growth of the wireless
communications market, our introduction of new products, strong demand for our
filters for base stations, increased international sales and favorable pricing
due to the strong demand for SAW filters. Our new products, specifically RF and
GSM IF filters for wireless phones accounted for approximately 12.0% of net
sales in 2000 compared to none in 1999. Demand for our other new products was
also strong, with data communications and broadband access products accounting
for 13.1% of net sales in 2000 compared to 7.3% in 1999. Net sales from filters
for base stations increased from $41.1 million in 1999 to $58.2 million in 2000.
Lastly, international sales increased from 41% of net sales in 1999 to 61% in
2000.
32
<PAGE>
Gross Profit Margin. The gross profit margin increased from 57.9% of net
sales in 1999 to 59.8% of net sales in 2000. This increase was primarily due to
higher yields, a shift of more production to our low cost, highly automated
Costa Rican facility and an increase in net sales of our filters for base
stations. Our Costa Rican plant accounted for approximately 51% and 47% of net
sales in 2000 and 1999, respectively. As we move into fiscal 2001, we plan to
produce a significantly higher volume of RF and GSM IF filters for wireless
phones, both of which have lower average selling prices and lower gross profit
margins compared to our other products. As a result, we believe that our gross
profit margin percentage will decrease in 2001 compared to 2000.
Selling Expenses. Selling expenses increased 16.4% from $5.6 million in
1999 to $6.6 million in 2000. As a percentage of net sales, selling expenses
decreased from 5.6% in 1999 to 4.1% in 2000. The absolute dollar increase was a
result of the 59.4% increase in net sales from 1999 to 2000, with increased
commissions being paid to independent sales representatives, and additional
costs being incurred to service the higher level of net sales. The decrease in
selling expenses as a percentage of net sales is attributable to a reduction in
commissions paid to our South Korean sales representatives. We opened a Korean
sales office in the second quarter of 1999, which reduced the cost of selling
into the Korean market. We plan to increase our sales and marketing staff and to
open additional outside sales offices in 2001, which will increase our selling
expenses from fiscal 2000 levels.
General and Administrative Expenses. General and administrative expenses
increased 28.5% from $4.3 million in 1999 to $5.5 million in 2000. As a
percentage of net sales, general and administrative expenses decreased from 4.3%
in 1999 to 3.5% in 2000. The absolute dollar increase in general and
administrative expenses is attributed to increased staffing and other items
related to our capacity expansion, increased salaries and bonuses and to
increased legal and accounting services as we expand our business and evaluate
various tax and business strategies.
Research and Development Expenses. Research and development expenses
increased 52.0% from $5.6 million in 1999 to $8.6 million in 2000. As a
percentage of net sales, research and development expenses decreased from 5.6%
in 1999 to 5.3% in 2000. The absolute dollar increase is due to more research
and development programs for new products and manufacturing processes.
Other Income. Other income increased 54.6% from $4.7 million in 1999 to
$7.3 million in 2000, due to increased interest and dividend income on our cash
and investment portfolio, which increased from $115 million in 1999 to $144
million in 2000.
33
<PAGE>
Income Tax Expense. The provision for income tax as a percentage of income
before income tax declined from 35.0% in 1999 to 3.6% in 2000. This decrease was
primarily due to adjusting our accounting treatment for income taxes for our
Costa Rican subsidiary. In the fourth quarter of 2000, we completed a
significant expansion to our Costa Rican operation and adjusted the accounting
for income taxes for this subsidiary. The Costa Rican subsidiary operates in a
free trade zone and is currently exempt from taxes in Costa Rica. As a result,
effective in the fourth quarter of 2000, we no longer recorded income taxes for
this subsidiary as it is now considered to be a permanent investment and
recorded a one time tax benefit of $23.1 million (equal to $0.53 per diluted
share). This one time tax benefit resulted from the reversal of $16.7 million in
deferred income taxes recorded for our Costa Rican subsidiary prior to 2000
(equal to $0.38 per diluted share), plus an additional $6.4 million of deferred
income taxes recorded during the first nine months of 2000. We believe that our
effective tax rate for 2001 will range from 20% to 25%. However, due to certain
risks and uncertainties detailed in the risk factor section of this Form 10-K,
no assurances can be provided that our effective tax rate will not exceed this
range.
Pro-Forma Net Income. Pro-forma results are not based on generally accepted
accounting principles, but are provided to explain the impact of significant
one-time transactions.
<TABLE>
<CAPTION>
Year Ended Quarter Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income as reported $ 79,282 $ 30,684 $ 41,587 $9,215
Adjustment in accounting for income taxes (16,689) (23,075)
for our Costa Rican subsidiary -------- -------- -------- ------
Pro-forma net income $ 62,593 $ 30,684 $ 18,512 $9,215
======== ======== ======== ======
Pro-forma net income per share:
Basic $ 1.47 $ 0.73 $ 0.43 $ 0.22
Diluted $ 1.43 $ 0.72 $ 0.42 $ 0.21
Pro-forma effective tax rate as a 23.9% 35.0% 24.3% 35.0%
percentage of pretax net income
</TABLE>
These pro-forma results exclude the one-time adjustment to reverse the
deferred income taxes recorded for our Costa Rican subsidiary prior to 2000. If
we did not adjust the accounting for income taxes for this subsidiary and
continued to record income tax expense for this subsidiary at the statutory
Federal tax rates, our diluted earnings per share for the quarter and year ended
September 30, 2000, would have been approximately $0.37 and $1.23, respectively.
34
<PAGE>
Comparison of Years Ended September 30, 1998 and 1999
Net Sales. Net sales increased 2.6% from $97.7 million in 1998 to $100.3
million in 1999. The increase was due to an increase in shipments of bandpass
filters for CDMA wireless phones, which increased from 28% of net sales in 1998
to 31% of net sales in 1999. Sales of filters for base station applications
decreased 3% from 1998 due to lower average selling prices. Sales for military
and space applications also declined from 9% of sales in 1998 to 6% of sales in
1999. International sales increased from 37% of net sales in 1998 to 41% of net
sales in 1999 due to the recovery of the South Korean market, which accounted
for 17% of net sales in 1999 compared to 14% of net sales in 1998. Sales to all
other international markets also increased slightly in 1999 compared to 1998.
Gross Profit Margin. The gross profit margin increased from 54.1% of net
sales in 1998 to 57.9% of net sales in 1999. The increase is attributed to
higher yields, reduced prices for certain raw materials, a lower labor base for
much of 1999 compared to 1998 and a shift of more production to our low-cost,
high-volume Costa Rican operation. Our Costa Rican operation accounted for 37.5%
of net sales in 1998 compared to 46.9% of net sales in 1999.
Selling Expenses. Selling expenses decreased in absolute dollars and as a
percentage of net sales from 1998 to 1999. The decrease is due to reduced
corporate sales expense and reduced commissions paid to independent sales
representatives due in part to our opening of a South Korean sales office which
reduced the cost of selling into the Korean market.
General and Administrative Expenses. General and administrative expenses
decreased in absolute dollars and as a percentage of net sales from 1998 to
1999. The decrease is due to reduced corporate administrative staff in 1999
compared to 1998. In addition, general and administrative expenses for 1998
included various costs associated with the acquisition of Microsensor Systems,
Inc. and costs to transfer certain of its operations to Orlando.
Research and Development Expenses. Research and development expenses
increased 31.3% from $4.3 million in 1998 to $5.6 million in 1999. The increase
is due to more R&D programs being undertaken, including costs associated with
developing VaporLab, a handheld SAW-based chemical detector, costs associated
with developing RF filters and other R&D programs.
Other Income. Other income increased $1.2 million from 1998 to 1999 due to
increased interest income on our cash and investment portfolio, which increased
from approximately $84 million in 1998 to approximately $115 million in 1999.
Income Tax Expense. The provision for income tax as a percentage of income
before tax was 36.8% in 1998 compared to 35% in 1999. The lower effective rate
for 1999 relates to increased tax exempt interest, increased benefits from our
foreign sales corporation, increased R&D tax credits and a lower effective rate
for state income taxes.
35
<PAGE>
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 operation in Costa Rica and Orlando and potential
acquisitions of new technologies or compatible companies. For the year ended
September 30, 2000, we generated net cash from operating activities of $56.9
million, consisting primarily of net income of $79.3 million, $11.1 million of
depreciation and amortization and an increase of $3.9 million in income taxes
payable, partially offset by a $15.3 million decrease in deferred income taxes
and increases in accounts receivable and inventory of $12.0 million and $10.5
million, respectively.
We have a revolving credit agreement totaling $30 million from SunTrust
Bank, Central Florida, N.A. available through March 31, 2001. There were no
borrowings against the line of credit as of September 30, 2000.
We made capital expenditures of approximately $27 million during the year
ended September 30, 2000. We intend to spend approximately $15 million over the
next 12 months on capital equipment and facilities to increase capacity.
In the fourth quarter of 1998, the Board of Directors authorized us to
repurchase up to 2,000,000 shares of common stock. As of October 27, 2000,
1,263,452 shares have been repurchased under this program, of which 28,642
shares costing approximately $1.1 million were purchased in the year ended
September 30, 2000. 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 throughout the next 12 months. 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.
36
<PAGE>
Foreign Operations, Export Sales and Foreign Currency
We established a subsidiary in Costa Rica in 1996. As of September 30,
2000, we had a net investment in fixed assets of approximately $31.3 million in
this operation compared to $16.7 million at September 30, 1999. In 2000 and
1999, we recorded net sales of approximately $80.9 million and $47.1 million,
respectively, in Costa Rica while generating operating profits of approximately
$28.1 million and $16.8 million, respectively. The functional currency for our
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
nominal.
International sales are denominated in U.S. dollars and represented 61%,
41% and 37% of net sales for 2000, 1999 and 1998, respectively. Sales to the
European market accounted for 19%, 18% and 18% for these same periods,
respectively, and sales to the Asian and Pacific Rim markets, principally to
South Korea were 29%, 18% and 16%, respectively for these same periods. See
Notes 11 and 12 to the Consolidated Financial Statements for additional
information on international sales.
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. 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.
The new common European currency, the euro, made its debut in January 1999.
For 2000, approximately 19% of our sales were made to European customers. To
date, no customers or suppliers have requested us to transact business in the
euro. At this time, the impact of this new currency is not determinable.
37
<PAGE>
Recently Issued Accounting Standards
Please see Note 1 to the Consolidated Financial Statements for a discussion
of new pronouncements.
Impact of Inflation
We believe that inflation has not had a material impact on operating costs
and earnings.
Impact of the Year 2000
The Year 2000 issue is the potential problem related to computer programs
and other business systems using two digits rather than four digits to represent
the year. Because of this many sensitive applications and business systems of
both our business partners and ourselves could recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in system failure or
disruption of operations.
As of this date, we have not experienced any significant business
disruptions or system failures as a result of the Year 2000 issue. Additionally,
there have been no substantial Year 2000 related issues reported from our major
business partners. Although January 1, 2000 has passed, and while there can be
no assurances that problems related to the Year 2000 issue will not occur in the
future, we believe that the Company will not be adversely impacted by the Year
2000 issue. We spent approximately $200,000 for year 2000 compliance, the
majority of which was incurred in 1999 and 1998.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market and interest rate risks. 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 operations. We manage exchange rate sensitivity of our
international sales, purchases of raw materials and equipment and our Costa
Rican operations 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. At
September 30, 2000, we had no open commitments to purchase foreign currency.
We do not have any outstanding debt, therefore, we are not exposed to
interest rate risk on debt and we do not plan to use debt-based financing to
fund capital expenditures over the next 12 months.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements, which appears on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE>
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Income ......................................... 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, 2000 and 1999, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Orlando, Florida
October 24, 2000
F-2
<PAGE>
Sawtek Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
<S> <C> <C>
Current Assets:
Cash, cash equivalents and short-term investments $144,343 $115,274
Accounts receivable, net 30,661 18,641
Inventories 18,588 8,052
Deferred income taxes 1,320 1,063
Other current assets 2,208 2,107
-------- --------
Total current assets 197,120 145,137
Property, plant and equipment, net 62,368 46,442
-------- --------
Total assets $259,488 $191,579
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,656 $ 4,055
Accrued wages and benefits 4,173 3,638
Accrued sales commissions 855 543
Other accrued liabilities 975 1,131
Current maturities of long-term debt - 379
Income taxes payable - 191
-------- --------
Total current liabilities 9,659 9,937
Long-term debt, less current maturities - 1,790
Deferred income taxes 6,393 21,453
Shareholders' Equity:
Common stock; $.0005 par value; 120,000,000 authorized shares;
42,668,194 issued shares; 42,632,776 and 42,230,489 outstanding
shares at September 30, 2000 and 1999, respectively 21 21
Capital surplus 78,531 74,755
Unearned ESOP compensation (586) (781)
Retained earnings 166,612 87,330
Less common stock held in treasury, at cost; 35,418 and 437,705
shares at September 30, 2000 and 1999, respectively (1,142) (2,926)
-------- --------
Total shareholders' equity 243,436 158,399
-------- --------
Total liabilities and shareholders' equity $259,488 $191,579
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $159,841 $100,276 $97,700
Cost of sales 64,283 42,224 44,811
-------- -------- -------
Gross Profit 95,558 58,052 52,889
Operating expenses:
Selling expenses 6,561 5,637 6,008
General and administrative expenses 5,548 4,319 4,693
Research and development expenses 8,552 5,627 4,285
-------- -------- -------
Total operating expenses 20,661 15,583 14,986
-------- -------- -------
Operating income 74,897 42,469 37,903
Other income, net 7,323 4,737 3,542
-------- -------- -------
Income before income taxes 82,220 47,206 41,445
Income taxes 2,938 16,522 15,240
-------- -------- -------
Net income $ 79,282 $ 30,684 $26,205
======== ======== =======
Net income per share:
Basic $ 1.87 $ 0.73 $ 0.62
======== ======== =======
Diluted $ 1.82 $ 0.72 $ 0.60
======== ======== =======
Shares used in per share calculation:
Basic 42,498 41,946 42,360
======== ======== =======
Diluted 43,667 42,815 43,356
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Unearned
Common Stock Treasury Stock Capital ESOP Retained
Shares Amount Shares Amount Surplus Compensation Earnings Total
------ ------ ------ ------ ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 41,864 $21 $68,927 $(1,171) $ 30,441 $ 98,218
Net proceeds from exercise of stock 804 1,171 1,171
options
Compensatory stock option tax 2,708 2,708
benefit
Purchase of treasury stock 771 $(4,621) (4,621)
ESOP allocation 196 196
Net income 26,205 26,205
------ --- ---- -------- ------- ------- -------- --------
Balance at September 30, 1998 42,668 21 771 (4,621) 72,806 (975) 56,646 123,877
Net proceeds from exercise of stock (692) 4,627 (1,054) 3,573
options
Compensatory stock option tax 3,003 3,003
benefit
Purchase of treasury stock 359 (2,932) (2,932)
ESOP allocation 194 194
Net income 30,684 30,684
------ --- ---- ------- ------- ------- -------- --------
Balance at September 30, 1999 42,668 21 438 (2,926) 74,755 (781) 87,330 158,399
Net proceeds from exercise of stock (431) 2,882 (288) 2,594
options
Compensatory stock option tax 4,064 4,064
benefit
Purchase of treasury stock 28 (1,098) (1,098)
ESOP allocation 195 195
Net income 79,282 79,282
------ --- ---- ------- ------- ------- -------- --------
Balance at September 30, 2000 42,668 $21 35 $(1,142) $78,531 $ (586) $166,612 $243,436
====== === ==== ======= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
Sawtek Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 79,282 $ 30,684 $ 26,205
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 11,125 7,244 6,036
Deferred income taxes (15,317) 6,383 6,670
ESOP allocation 195 194 196
Loss on disposal of fixed assets 68 616
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (12,020) (7,072) 758
Inventories (10,536) 401 (1,333)
Other current assets (101) (649) (404)
Increase (decrease) in liabilities:
Accounts payable (399) 2,225 (1,057)
Accrued liabilities 691 202 (953)
Income taxes payable 3,873 2,787 2,709
-------- -------- --------
Net cash provided by operating activities 56,861 42,399 39,443
Investing activities:
Purchase of property, plant and equipment (27,119) (11,428) (7,915)
Short-term investments (10,173) (22,635) (26,235)
-------- -------- --------
Net cash used in investing activities (37,292) (34,063) (34,150)
Financing activities:
Proceeds from long-term debt 146
Principal payments on long-term debt (2,169) (469) (2,166)
Issuance of common stock 2,594 3,573 1,171
Purchase of common stock for treasury (1,098) (2,932) (4,621)
-------- -------- --------
Net cash provided by (used in) financing activities (673) 172 (5,470)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 18,896 8,508 (177)
Cash and cash equivalents at beginning of period 50,640 42,132 42,309
-------- -------- --------
Cash and cash equivalents at end of period 69,536 50,640 42,132
Short-term investments 74,807 64,634 41,999
-------- -------- --------
Cash, cash equivalents and short-term investments $144,343 $115,274 $ 84,131
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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, oscillators, SAW-based subsystems and 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 sensors,
in a transaction accounted for as a pooling-of-interests.
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
calendar 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 selling expenses. See Note 11 for
a discussion of concentration of risk.
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.
F-7
<PAGE>
The estimated useful lives used in computing depreciation expense are as
follows:
<TABLE>
<S> <C>
Building and Improvements 10 - 40 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.
Earnings Per Share. The Company follows Statement of Financial Accounting
Standard (SFAS) No. 128, Earnings per Share to calculate basic and diluted
earnings per share. All earnings per share amounts have been adjusted for the
two-for-one stock split in August 1999.
Revenue Recognition. Revenues from production contracts are recorded when
the product is completed and shipped. Revenues from non-recurring engineering
contracts ("NRE") are recognized when the parts or services have been completed
and units, including prototypes, have been shipped. Revenues from NRE are less
than 10% of total net sales for the periods reported.
Income Taxes. The provision for income taxes includes Federal and State
taxes currently payable and deferred taxes arising from temporary differences
between income for financial and tax reporting purposes. These temporary
differences result principally from the use of accelerated methods of
depreciation for tax purposes, the provisions for losses on inventories and
accounts receivable and the accounting for stock compensation. Research and
development tax credits are applied as a reduction to the provision for income
taxes in the year in which they are utilized.
ESOP Compensation Expense. 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.
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."
F-8
<PAGE>
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 were 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.
Impact of Recently Issued Accounting Pronouncements. In June 2000, the FASB
issued Statement No. 138, Accounting for Certain Hedging Activities, which
amended Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. Statement 138 must be adopted concurrently with the adoption of
Statement 133. The Company expects to adopt these new Statements effective
October 1, 2000. These Statements will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company does not anticipate
that the adoption of these Statements will have a significant effect on its
results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 summarizing its views of applying generally
accepting accounting principles to revenue recognition in financial statements.
The Company's policy of revenue recognition is consistent with this bulletin.
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 SAW-based sensors, in exchange for 339,622 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 year ended June 30,
1997 were combined with Sawtek's for the year ended September 30, 1997. MSI's
unaudited net sales and net loss for the three-month 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 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 consist of the following:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and overnight investments $ 11,940 $ 9,943
Commercial paper, corporate notes, banker's acceptances and money market 57,596 40,697
preferreds with maturities less than or equal to 90 days from date of
purchase -------- --------
Cash and cash equivalents 69,536 50,640
Short-term investments:
Commercial paper, corporate notes, banker's acceptances and money market 36,323 18,618
preferreds with maturities greater than 90 days from date of purchase
Municipal securities -- 3,011
Certificates of deposit 4,039 12,005
Government agency securities 34,445 31,000
-------- --------
Short-term investments 74,807 64,634
-------- --------
Cash, cash equivalents and short-term investments $144,343 $115,274
======== ========
</TABLE>
Note 4 - Allowance for Doubtful Accounts and Sales Returns
The allowance for doubtful accounts and sales returns is as follows:
<TABLE>
<CAPTION>
Year Ended
September 30,
2000 1999 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period $1,135 $1,399 $ 684
Provision for doubtful accounts and sales returns 325 174 1,396
Sales returns and uncollectible accounts written off (460) (438) (681)
------ ------ ------
Balance, end of period $1,000 $1,135 $1,399
====== ====== ======
</TABLE>
F-10
<PAGE>
Note 5 - Inventories
Net inventories consist of the following:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Raw material $11,750 $2,984
Work in process 3,662 1,993
Finished goods 3,176 3,075
------- ------
Total $18,588 $8,052
======= ======
</TABLE>
The allowance for obsolete and slow moving inventory is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period $2,109 $2,118 $1,935
Charged to cost of sales 1,508 130 345
Disposal of inventory (191) (139) (162)
------ ------ ------
Balance, end of period $3,426 $2,109 $2,118
====== ====== ======
</TABLE>
Note 6 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Land and improvements $ 830 $ 830
Buildings 16,541 16,500
Production and test equipment 62,680 39,797
Computer equipment 4,036 3,455
Furniture and fixtures 2,943 2,865
Construction in progress 9,929 9,589
------- -------
96,959 73,036
Less accumulated depreciation 34,591 26,594
------- -------
Total $62,368 $46,442
======= =======
</TABLE>
No interest costs were capitalized as part of property, plant and equipment
during 2000. Approximately $36,000 and $98,000 of interest costs were
capitalized as part of property, plant and equipment in 1999 and 1998,
respectively.
F-11
<PAGE>
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 $30 million
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 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, 2000 and 1999. There
were no borrowings against the line of credit at September 30, 2000 and 1999.
Note 8 - Long-Term Debt and Lease Obligations
In August 2000, the Company paid its outstanding debt obligations. The debt
obligations were obtained through the Orange County Industrial Development
Authority for the acquisition of land and the expansion of facilities. The bonds
were paid in full with a final payment of approximately $1,894,000, including
accrued interest. The Company made interest payments of approximately $134,000,
$152,000 and $228,000 on its debt obligations during the years ended September
30, 2000, 1999 and 1998, respectively.
The Company has several non-cancelable lease agreements for facilities and,
in the past, has leased certain equipment. Rental expense was approximately
$69,000, $394,000 and $843,000 in 2000, 1999 and 1998, respectively. The leases
run through 2002, with obligations of approximately $52,000 and $17,000, in 2001
and 2002, respectively.
Note 9 - Income Taxes
The income tax provision consists of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal $16,892 $ 9,414 $ 7,908
State 1,363 725 662
------- ------- --------
18,255 10,139 8,570
Deferred:
Federal (benefit) (15,385) 6,068 6,024
State 68 315 646
------- ------- -------
(15,317) 6,383 6,670
------- ------- -------
Total Income Tax Provision $ 2,938 $16,522 $15,240
======= ======= =======
</TABLE>
F-12
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant temporary differences giving rise to year-end deferred tax balances
were as follows:
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Current:
Accruals not currently deductible $ 372 $ 389
Inventory costs capitalized for tax purposes 57 71
Inventory loss provision 891 603
------ -------
Deferred Tax Asset $1,320 $ 1,063
====== =======
Non-Current:
Stock option compensation not currently deductible $ (71) $ (159)
Earnings of Costa Rican subsidiary not currently 16,689
taxed
Excess tax over book depreciation 2,828 2,906
Other 3,636 2,017
------ -------
Deferred Tax Liability $6,393 $21,453
====== =======
</TABLE>
A reconciliation of statutory Federal income taxes to reported income taxes
is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income taxes computed at the Federal $28,777 $16,522 $14,506
Statutory rate of 35%
Reversal of deferred taxes previously provided on (16,689)
earnings of Costa Rican subsidiary
Current benefit of tax exemption of Costa Rican (10,041)
subsidiary
State income taxes, net of Federal benefit 1,431 676 850
Other, primarily tax credits, tax-exempt interest (540) (676) (116)
income and dividend income
------- ------- -------
Total Income Tax Provision $ 2,938 $16,522 $15,240
======= ======= =======
</TABLE>
In 2000 and 1999, the Company's tax liability was reduced and its capital
surplus was increased by approximately $4,064,000 and $3,003,000, respectively,
as a result of transactions involving stock options.
F-13
<PAGE>
The Company made income tax payments of approximately $14,165,000,
$7,765,000 and $6,276,000 in 2000, 1999 and 1998, respectively.
The Company provided for deferred taxes on the non-repatriated earnings of
its subsidiary in Costa Rica prior to fiscal 2000. This subsidiary benefits from
a complete exemption from Costa Rican income taxes through 2003 and a 50%
exemption thereafter through 2007. In the fourth quarter of 2000, the Company
determined that its investment in Costa Rica is permanent and that its earnings
are considered indefinitely reinvested; and, accordingly, no provision for
United States federal and state income taxes has been provided for 2000. In
addition, the Company reversed the previous accrual for deferred income taxes
resulting in a one-time tax benefit for the fourth quarter of 2000 of
approximately $23.1 million and a $16.7 million benefit for the fiscal year. In
the event the Costa Rican subsidiary ever remits these earnings to the U.S.
parent, the Company would be subject to U.S. federal and state income taxes. The
estimated unrecognized deferred income tax liability on these unremitted
earnings at September 30, 2000, is approximately $26.7 million.
Note 10 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net income $79,282 $30,684 $26,205
======= ======= =======
Weighted-average common stock outstanding for basic earnings per share 42,498 41,946 42,360
Dilutive effect of employee stock options 1,169 869 996
------- ------- -------
Weighted-average common stock outstanding for diluted earnings per share 43,667 42,815 43,356
======= ======= =======
Earnings per share:
Basic $ 1.87 $ 0.73 $ 0.62
Diluted $ 1.82 $ 0.72 $ 0.60
</TABLE>
The weighted-average common stock outstanding includes all ESOP shares
outstanding.
F-14
<PAGE>
Note 11 - Concentration of Risk
(a) Significant customers and sales to foreign markets. Sales 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,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Foreign Markets (Including Significant Customers 61% 41% 37%
and European Market)
European Market (Including Significant Customers) 19% 18% 18%
Asian and Pacific Rim Market (Principally to S. Korea) 29% 18 16%
Significant Customer A 25% 23% 17%
Significant Customer B 11% * *
Significant Customer C * 13% 15%
Significant Customer D * * 15%
<FN>
*Less than 10%
</FN>
</TABLE>
(b) Concentrations of risk
(1) Suppliers
The Company currently procures certain key raw materials for its
products from a limited number of vendors, most of whom are based in
Japan. The Company acquires this material on a purchase order basis.
The Company's reliance on a limited number of vendors involves several
risks, including reduced control over the price, foreign currency
exposure, timely delivery, reliability and quality of the components.
Any inability of the Company to obtain timely deliveries of material of
acceptable quality in required quantities or any increases in the
prices of components for which the Company does not have alternative
sources could materially adversely affect the Company's business,
financial condition and results of operations.
(2) Credit Risk
The Company generally sells its products to customers engaged in the
development and/or manufacture of high technology products either
recently introduced or soon to be introduced to the marketplace. The
Company's customers are concentrated into a small group of which
several account for more than 10% of sales as noted above and a
significant percentage are foreign customers. Substantially all of the
Company's trade accounts receivable are due from such sources.
F-15
<PAGE>
The Company continually performs credit evaluations of its customers
and generally does not require collateral; however, in certain
circumstances, the Company may require letters of credit from its
customers or the Company may secure credit insurance.
(3) Foreign Currency Exchange Risk
At times the Company engages in foreign exchange forward contracts to
lock in the cost of foreign currency exposures for the purchase of
equipment or raw materials denominated in foreign currencies. While
these forward contracts are subject to fluctuations in value from
movement in the foreign currency exchange rates, such fluctuations are
offset by the change in value of the underlying exposures being hedged.
At September 30, 2000, the Company did not have any open foreign
currency exchange contracts.
The Company is not a party to leveraged derivatives and does not hold
or issue financial instruments for trading purposes. Foreign currency
contracts are entered into with major financial institutions with
investment grade credit ratings, thereby decreasing the risk of credit
loss. Gains and losses on instruments that hedge firm commitments are
deferred and are included in the basis of the underlying hedged item.
Note 12 - Segment Information
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
reporting by public business enterprises of information about operating
segments, products and services, geographic areas and major customers. The
method for determining what information to report is based on the way that
management organizes the segments within the Company for making operating
decisions and assessing financial performance.
The Company's chief operating decision-maker is the Chief Executive Officer
(CEO). The Company's CEO evaluates both consolidated and disaggregated financial
information in deciding how to allocate resources and assess performance. The
CEO uses certain disaggregated financial information for the Company's primary
markets: communications, military and space, and other markets. The
communications market includes the sale of bandpass filters for wireless phones,
base stations, data communications and broadband access and other applications.
F-16
<PAGE>
The Company has aggregated its three markets into a single reportable
segment as allowed under SFAS No. 131 because these product lines have similar
long-term economic characteristics, such as average gross margin, and the
product lines are similar in regards to (a) nature of products and production
processes, (b) type of customers, and (c) method used to distribute products.
Accordingly, the Company describes its reportable segment as the
manufacture and sale of SAW-based products as described in Note 1. All of the
Company's revenue results from sales in these markets. The Company does not
allocate operating expense or assets by market.
Revenues by markets (as defined by the Company), as a percentage of total
revenues for the years ended September 30, 2000, 1999 and 1998, were as follows:
Communications, 85%, 82%, and 81%, respectively; military and space, 4%, 6%, and
9%, respectively; and other markets, 11%, 12%, and 10%, respectively.
Sales are reported in the geographic areas 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.
<TABLE>
<CAPTION>
Net Sales Operating Income Assets
-------------------------------- -------------------------------- -----------------------
2000 1999 1998 2000 1999 1998 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 97,076 $ 66,373 $70,960 $46,824 $25,416 $23,181 $188,934 $146,939
Costa Rica 80,918 47,053 36,612 28,073 16,783 14,722 77,751 53,532
Transfers/ (18,153) (13,150) (9,872) - 270 - (7,197) (8,892)
Eliminations -------- -------- ------- ------- ------- ------- -------- --------
Consolidated $159,841 $100,276 $97,700 $74,897 $42,469 $37,903 $259,488 $191,579
Results ======== ======== ======= ======= ======= ======= ======== ========
</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.
To date, substantially all sales have been 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
fluctuations of the local Costa Rican currency is not considered significant and
is not hedged.
F-17
<PAGE>
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 was approximately $324,000, $299,000 and $368,000 in the
years ended September 30, 2000, 1999 and 1998, respectively.
Employee Stock Ownership Element. In 1991, the Company established an
Employee Stock Ownership Plan covering substantially all U.S. employees. The
ESOP purchased 6,753,280 shares of common stock from substantially all of the
common shareholders and 11,024,480 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, 2000, 2,312,932 of these shares
remain unallocated. These shares will be allocated through fiscal year 2003.
The Company made contributions of approximately $251,000, $265,000 and
$279,000 to the ESOP during the years ended September 30, 2000, 1999 and 1998,
respectively. Allocations to participants' accounts were 867,552 shares, 915,838
shares and 964,126 shares during the years ended September 30, 2000, 1999 and
1998, respectively.
Employee Stock Purchase Plan. In February 1996, the Board of Directors
approved an Employee Stock Purchase Plan and allotted 1,000,000 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.
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 $147,000, $101,000 and $70,000 to this plan during the years ended
September 30, 2000, 1999 and 1998, respectively.
F-18
<PAGE>
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 4,000,000 shares of Common Stock
available for options and the Stock Option Plan for Acquired Companies was
approved by shareholders in 1998 with up to 2,000,000 shares of Common Stock
available for options. Incentive options generally become exercisable in four
equal annual installments commencing one year after the date of grant and expire
within ten years. 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>
Shares Under Weighted-Average
Option Price Range of Options Exercise Price
------------ ---------------------- ----------------
<S> <C> <C> <C>
Balance at September 30, 1997 2,430,260 $ 0.06-$16.63 $ 3.69
Granted 516,000 $ 6.64-$17.50 $10.97
Terminated (143,500) $ 0.06-$14.38 $ 5.67
Exercised (747,468) $ 0.06-$13.44 $ 0.95
---------
Balance at September 30, 1998 2,055,292 $ 0.06-$17.50 $ 6.37
Granted 937,000 $10.94-$35.13 $22.00
Terminated (76,400) $ 6.64-$17.50 $11.01
Exercised (622,151) $ 0.06-$17.50 $ 4.98
---------
Balance at September 30, 1999 2,293,741 $ 0.06-$35.13 $12.98
Granted 303,250 $45.03-$70.19 $48.58
Terminated (22,526) $ 6.64-$47.73 $14.46
Exercised (417,715) $ 0.06-$17.50 $ 5.11
---------
Balance at September 30, 2000 2,156,750 $ 0.06-$70.19 $19.49
=========
Exercisable at September 30, 2000 863,975
=========
</TABLE>
The weighted-average contractual life of stock options outstanding as of
September 30, 2000 was 7.43 years.
F-19
<PAGE>
The following table summarizes information about fixed stock options
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Weighted-Avg.
Range of Exercise Number Remaining Weighted-Avg. Number Exercisable Weighted-Avg.
Prices Outstanding Contractual Life Exercise Price at Sept. 30, 2000 Exercise Price
----------------- ----------- ---------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
$ 0.06 - $ 5.53 394,026 3.90 $ 1.43 394,026 $ 1.43
$ 5.54 - $10.94 448,957 8.13 $ 10.29 113,782 $ 9.05
$10.95 - $17.50 527,467 7.03 $ 12.39 234,917 $12.86
$17.51 - $35.13 485,000 8.83 $ 32.31 121,250 $32.31
$35.14 - $70.19 301,300 9.46 $ 48.59 -- $48.59
---------- -------
2,156,750 863,975
========= =======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost was recognized to the extent that 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 and income per share would
be the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net income as reported $ 79,282 $ 30,684 $ 26,205
Pro forma net income $ 73,101 $ 27,615 $ 24,376
Pro forma earnings per share:
Basic $ 1.72 $ 0.66 $ 0.58
Diluted $ 1.69 $ 0.66 $ 0.57
</TABLE>
The weighted-average fair value of options granted during the years ended
September 30, 2000, 1999 and 1998 was $48.58, $18.79 and $6.96, respectively,
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were utilized:
<TABLE>
<CAPTION>
Black-Scholes Pricing Assumptions
Year Ended
September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Expected volatility 85.00% 77.00% 78.00%
Risk-free interest rate 6.54% 5.75% 5.71%
Expected dividends None None None
Expected life (in years) 4.76 4.94 4.79
</TABLE>
F-20
<PAGE>
The pro forma net income reflects only options granted since 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income 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.
Note 15 - Capital Structure
Common Stock. 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.
Share Repurchase. On August 31, 1998, the Board of Directors approved a
Common Stock repurchase program for up to 2,000,000 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. As of September 30, 2000, 1,158,452 shares have been repurchased under
this program.
Stock Split Effected in the Form of a Stock Dividend. On July 27, 1999, the
Board of Directors approved a two-for-one stock split of the outstanding common
shares to be effected in the form of a stock dividend on August 24, 1999 to
stockholders of record as of August 9, 1999. Common share and per share data for
all periods presented in the accompanying financial statements have been
adjusted to give effect to the stock split.
Preferred Stock. 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-21
<PAGE>
Note 16 - Quarterly Financial Information (unaudited)
Selected quarterly financial data is summarized below:
<TABLE>
<CAPTION>
Quarter Ended
(in thousands, except per share data)
Fiscal 2000 Fiscal 1999
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
2000 2000 2000 1999 1999 1999 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $46,326 $44,105 $37,612 $31,798 $28,515 $26,045 $23,497 $22,219
Cost of sales 18,313 17,546 14,930 13,494 11,701 10,737 9,828 9,958
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 28,013 26,559 22,682 18,304 16,814 15,308 13,669 12,261
Operating expenses:
Selling expenses 2,194 1,631 1,497 1,239 1,395 1,517 1,340 1,385
Gen. & Adm. Expenses 1,453 1,629 1,229 1,237 1,089 1,114 1,037 1,079
R&D expenses 2,373 2,306 2,195 1,678 1,480 1,334 1,616 1,197
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 6,020 5,566 4,921 4,154 3,964 3,965 3,993 3,661
------- ------- ------- ------- ------- ------- ------- -------
Operating income 21,993 20,993 17,761 14,150 12,850 11,343 9,676 8,600
Other income, net 2,456 1,831 1,580 1,456 1,328 1,174 1,116 1,119
------- ------- ------- ------- --- --- ------- ------- -------
Income before income taxes 24,449 22,824 19,341 15,606 14,178 12,517 10,792 9,719
Income taxes (benefit)(2) (17,138) 7,932 6,721 5,423 4,963 4,380 3,777 3,402
------- ------- ------- ------- ------- ------- ------- -------
Net income $41,587 $14,892 $12,620 $10,183 $ 9,215 $ 8,137 $ 7,015 $ 6,317
======= ======= ======= ======= ======= ======= ======= =======
Net income per share(1):
Basic $ 0.98 $ 0.35 $ 0.30 $ 0.24 $ 0.22 $ 0.19 $ 0.17 $ 0.15
======= ======= ======= ======= ======= ======= ======= =======
Diluted $ 0.95 $ 0.34 $ 0.29 $ 0.23 $ 0.21 $ 0.19 $ 0.17 $ 0.15
======= ======= ======= ======= ======= ======= ======= =======
Shares used in per share
calculations:
Basic 42,646 42,566 42,470 42,325 42,193 42,004 41,824 41,764
Diluted 43,724 43,808 43,724 43,657 43,236 43,066 42,494 42,462
<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. All earnings per share data are restated to reflect the
two-for-one stock split in August 1999.
(2) Includes approximately $23.1 million of deferred income taxes reversed in
the fourth quarter ending September 30, 2000, due to an adjustment for
income taxes for our Costa Rican facility.
</FN>
</TABLE>
F-22
<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
October 1, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven P. Miller 52 Chairman of the Board of Directors
Gary A. Monetti 41 Chief Executive Officer and Director
Kimon Anemogiannis 38 President and Chief Operating Officer
Raymond A. Link 46 Senior Vice President-Finance, Treasurer
and Chief Financial Officer
Brian P. Balut 35 Vice President-Sales and Marketing
John K. Bitzer 50 Vice President-Operations Support
Azhar Waseem 47 Vice President-Operations
Robert C. Strandberg(1) 43 Director
Neal J. Tolar 59 Director
Bruce S. White (1) 67 Director
Willis C. Young (1) 59 Director
<FN>
(1) Member of the Audit Committee and the Compensation Committee.
</FN>
</TABLE>
Steven P. Miller co-founded the Company, has served as a Director since
1979, Chief Executive Officer from 1986 to September 30, 1999, Chairman since
February 1996 and President from 1979 to April 1997. He stepped down from day-
to-day operations on September 30, 1999. 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 and was appointed Chief
Executive Officer effective October 1, 1999. He served as President from April
1997 to September 30, 1999, Chief Operating Officer from July 1995 to September
30, 1999 and Vice President-Operations from July 1995 to April 1997. He has
served in various positions since 1982 with the Company, including Filter Design
Engineer, Manager of Filter Technology, Vice President-Sales and Marketing and
Vice President-Engineering. Mr. Monetti has a B.S. degree in Electrical
Engineering from the University of Illinois and an M.B.A. degree from Rollins
College. Mr. Monetti was appointed to the Board of Directors in April 1998.
40
<PAGE>
Kimon Anemogiannis joined Sawtek in July 1995 as Director of Engineering
and was promoted to Vice President-Engineering in April 1998, Vice President-
Operations in 1999 and President and Chief Operating Officer, effective October
1, 1999. Prior to joining Sawtek, Dr. Anemogiannis was in various engineering
positions for the surface acoustic wave (SAW) group at Siemens Matsushita, a SAW
component manufacturer, based in Munich, Germany from August 1986 to July 1995.
Dr. Anemogiannis has an M.S. degree and a Ph.D. degree in Electrical Engineering
from the Technical University of Munich.
Raymond A. Link joined the Company in September 1995 as Vice President-
Finance and Chief Financial Officer and was promoted to Senior Vice President-
Finance and Chief Financial Officer, effective October 1, 1999. 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, a manufacturer of communication
equipment, in various financial capacities. Mr. Link has a B.S. degree from the
State University of New York at Buffalo and an M.B.A. degree from the Wharton
School at the University of Pennsylvania. He is a Certified Public Accountant.
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. From1987 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 an 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, a diversified electronics manufacturer. From
1974 to December 1988, Mr. Bitzer was in various operations and management
positions with the General Electric Company, a diversified electronics
manufacturer. Mr. Bitzer has a B.S. degree in Mechanical Engineering from West
Virginia University.
Azhar Waseem joined Sawtek in March 1995 as Director of Wafer Fabrication
and was promoted to Vice President-Manufacturing in April 1998 and to Vice
President-Operations, effective October 1, 1999. From 1989-1994, Mr. Waseem was
in various operations 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 General Electric. Mr.
Waseem has a B.S. and M.S. degree in Electrical Engineering and an M.B.A., all
from the University of Minnesota.
41
<PAGE>
Robert C. Strandberg has been a Director of the Company since October 1995.
Mr. Strandberg was the President and CEO of PSC Inc., a manufacturer of bar code
readers, from June 1997 to August 2000, and served as its 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 B.S. degree in Operations Research and
Industrial Engineering from Cornell University and an M.B.A. degree from Harvard
Graduate School of Business Administration.
Neal J. Tolar co-founded the Company and served as Senior Vice President
and Chief Technical Officer from June 1995 to September 30, 1999 and a Director
since 1979. He stepped down from the day-to-day operations on September 30,
1999. 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 B.S. degree in Ceramic Engineering from Mississippi
State University and a Ph.D. in Ceramic Engineering from the University of Utah.
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. He is now retired. 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 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
was a Senior Partner of the Atlanta office of BDO Seidman, LLP, an international
accounting and consulting firm, from January 1996 until June 2000. He is now
retired. 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.
42
<PAGE>
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.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
This 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 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.
43
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
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
None
(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* 1999 Bylaws of Sawtek Inc.
4.1 Specimen stock certificate (incorporated by reference to Registration
Statement on Form S-1, File No. 333-1860).
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).
44
<PAGE>
10.3 Sawtek Inc. Employee Stock Purchase Plan (incorporated by reference
to Registration Statement on Form S-8, File No. 333-11701 and
amendment incorporated by reference to Form 10-Q for the period ended
June 30, 1999, filed on July 19, 1999).
10.17 Letter from SunTrust Bank, Central Florida, N.A. for renewal and
increase in credit to $30,000,000 of unsecured line of credit for
Sawtek Inc. dated September 22, 1999 (incorporated by reference to
Form 10-K for 1999 filed on November 5, 1999).
10.20 Modification of ESOP Loan Agreement dated as of September 26, 1997
between the Company and Marine Midland Bank (incorporated by
reference to Form 10-K for 1997 filed on November 12, 1997).
10.21 Modification of ESOP Pledge Agreement dated as of September 26, 1997
between the Company and Marine Midland Bank (incorporated by
reference to Form 10-K for 1997 filed on November 12, 1997).
10.22 Renewal ESOP Note dated as of September 26, 1997 (incorporated by
reference to Form 10-K for 1997 filed on November 12, 1997).
10.23 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 (incorporated by reference
to Form 10-K for 1997 filed on November 12, 1997).
10.24 Sawtek Inc. Employee Stock Ownership and 401(k) Trust Agreement dated
July 16, 1997 between the Company and HSBC (formerly Marine Midland
Bank) updated for all amendments through May 1, 1999 (incorporated by
reference to Form 10-Q for the period ended June 30, 1999, filed on
July 19, 1999).
10.25 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).
45
<PAGE>
21.1 List of subsidiaries of the registrant (incorporated by reference to
Form 10-K for 1999 filed on November 5, 1999).
23.1 Consent of Ernst & Young LLP.
24.1 Power of attorney. Reference is made to page 47.
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.
(2) Incorporated by reference to Form 10-K for 1998 filed on November 10, 1998.
46
<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 10th day of
November 2000.
SAWTEK INC.
By:/s/Gary A. Monetti
Gary A. Monetti
Chief Executive Officer
By:/s/Raymond A. Link
Raymond A. Link
Senior 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 Gary A. Monetti 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 3rd day of November, 2000.
/s/Neal J. Tolar /s/Steven P. Miller
Neal J. Tolar Steven P. Miller
Director Chairman of the Board of Directors
/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 Chief Executive Officer and Director
47
<PAGE>
Exhibit 21.1
List of Subsidiaries
<TABLE>
<CAPTION>
Name State or other Jurisdiction of Incorporation
---- --------------------------------------------
<S> <C>
Sawtek, S.A. Costa Rica
Sawtek International, Inc. Barbados
Microsensor Systems, Inc. Kentucky
Sawtek Far East, Inc. Florida
Sawtek Korean Sales Office South Korea
</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 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following
Registration Statements of our report dated October 24, 2000, with respect to
the consolidated financial statements of Sawtek Inc. included in its Annual
Report (Form 10-K) for the year ended September 30, 2000.
<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 13, 2000
