-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B82e/+cM6/IY3R8h3wutQwwUssbDww8b4N9KdhvopKDVh7eSKw/hToLjDzCoQrJs Fiz4CLxKMj9GLMewzfk7mg== 0000950109-00-000189.txt : 20000203 0000950109-00-000189.hdr.sgml : 20000203 ACCESSION NUMBER: 0000950109-00-000189 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAWTEK INC \FL\ CENTRAL INDEX KEY: 0001009675 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 591864440 STATE OF INCORPORATION: FL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-92527 FILM NUMBER: 511893 BUSINESS ADDRESS: STREET 1: 1818 SOUTH HIGHWAY 441 STREET 2: P O BOX 609501 CITY: APOPKA STATE: FL ZIP: 32703 BUSINESS PHONE: 4078868860 MAIL ADDRESS: STREET 1: 1818 SOUTH HIGHWAY 441 CITY: APOPKA STATE: FL ZIP: 32703 S-3/A 1 SAWTEK. INC. FORM S-3 AMENDMENT NO. 2 Registration No. 333-92527 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Amendment No. 2 to Form S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- SAWTEK INC. (Exact name of registrant as specified in its charter) Florida 59-1864440 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1818 South Highway 441, Apopka, Florida 32703 (407) 886-8860 (Address including zip code, and telephone number, including area code, of registrant's principal executive offices) Gary A. Monetti, 1818 South Highway 441, Apopka, Florida 32703 (407) 886-8860 (Name, address including zip code, and telephone number, including area code, of agent for service) Copies to: WILLIAM A. GRIMM, ESQ. MARK L. HANSON, ESQ. Gray, Harris & Robinson, P.A. Jones, Day, Reavis & Pogue 201 East Pine Street 3500 SunTrust Plaza Suite 1200 303 Peachtree Street, N.E. Orlando, Florida 32802 Atlanta, Georgia 30308 (407) 843-8880 (404) 521-3939 ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JANUARY 24, 2000 PROSPECTUS 4,000,000 Shares [LOGO OF SAWTEK] Common Stock This is an offering of 4,000,000 shares of common stock of Sawtek Inc. All of the 4,000,000 shares offered by this prospectus will be sold by the selling shareholders named in this prospectus. Sawtek Inc. will not receive any proceeds from the sale of shares by the selling shareholders. Our common stock is traded on the Nasdaq National Market under the symbol SAWS. The last reported sale price of our common stock on the Nasdaq National Market on January 21, 2000 was $81.88 per share. -------
Per Share Total Public offering price.............................................. $ $ Underwriting discounts and commissions ............................ $ $ Proceeds to the selling shareholders, before expenses ............. $ $
The underwriters may also purchase up to an additional 600,000 shares of common stock from some of the selling shareholders at the public offering price, less the underwriting discounts and commissions, to cover over- allotments. ------- Investing in our common stock involves a high degree of risk. These risks are described under the caption "Risk Factors" beginning on page 7. ------- The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Chase H&Q CIBC WORLD MARKETS BANC OF AMERICA SECURITIES LLC , 2000 Inside cover of prospectus - -------------------------- Text: "Sawtek's products are used in a variety of applications in the wireless neighborhood, including: Base stations; Handsets; Digital microwave radios; Wireless local area networks; Wireless local loop; Defense and satellite systems; Cable television equipment; and Equipment for cable modems for the Internet. We even have products that have gone to Mars on the successful Pathfinder mission." Sawtek logo Inside prospectus gatefold: - -------------------------- Panoramic picture of a busy downtown area, including buildings, people, automobiles, trucks, airplanes, a satellite, a wireless phone and other common items. Text includes: "Welcome to the wireless neighborhood!", "SAW products for the wireless neighborhood" and each of the following, with arrows pointing to where each product would be used: Base station (micro and pico cell), CDMA and GSM digital wireless communications; Commercial avionics - collision avoidance, GPS; Inventory control - shipping and receiving, wireless data terminal, remote process monitoring; Mobile chemical analysis - VaporLab (handheld vapor identification); Navigation - GPS; Satellite communication - voice, data, Internet access, broadband access, military, weather; Medical - ethylene oxide monitor, wireless data transmission; Cable - cable TV head-end, cable modem head-end; Wireless handsets - cellular and PCS digital wireless communications; Space exploration - Mars Pathfinder, communications; Wireless data - wireless local area networks; Military - electronic warfare, radar, navigation, missile guidance, targeting, communication; Base station (macro cell), CDMA and GSM digital wireless communications; Home office - wireless data transfer, high speed Internet access; and Home environment - WLL, wireless Internet, wireless computing, HDTV, digital TV, security systems, cordless telephone. TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 4 Risk Factors............................................................. 7 Forward-Looking Statements............................................... 13 Use of Proceeds.......................................................... 14 Dividend Policy.......................................................... 14 Price Range of Common Stock.............................................. 14 Capitalization........................................................... 15 Selected Consolidated Financial Data..................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 17 Business................................................................. 23 Management............................................................... 34 Principal and Selling Shareholders....................................... 37 Underwriting............................................................. 39 Transfer Agent........................................................... 40 Legal Matters............................................................ 40 Experts.................................................................. 41 Information Incorporated by Reference.................................... 41 Where You Can Find More Information...................................... 41 Index to Consolidated Financial Statements............................... F-1
Information contained on our Web site does not constitute part of this prospectus. References in this prospectus to "Sawtek," "we," "our" and "us" refer to Sawtek Inc., a Florida corporation. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. 3 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the Consolidated Financial Statements, before making an investment decision. We maintain our records on a fiscal year ending on September 30 of each year and all references to a year refer to the respective fiscal year ending on that date. Sawtek We are a leading supplier of electronic signal processing components based on surface acoustic wave, or SAW, technology, primarily for use in the wireless communications industry. Our main products are custom-designed, high performance bandpass filters, resonators, delay lines, oscillators and SAW- based subsystems. These products are used in the following applications: . base stations for digital wireless communications for both Code Division Multiple Access, or CDMA, and Global System for Mobile communications, or GSM, applications; . handsets for both CDMA and GSM applications; . digital microwave radios; . wireless local area networks, or WLAN; . wireless local loop, or WLL, systems; . defense and satellite systems; . chemical sensors; . cable television equipment; and . equipment for cable modems for the Internet. We believe our products offer key advantages such as lower distortion, reduced size and weight, greater reliability and more precise frequency control compared to products based on alternative technologies and address rapidly growing needs in telecommunications, data communications, video transmission, military and space systems and other markets. Our proprietary computer aided design and analysis software tools support rapid and precise SAW device design and simulation, enabling us to achieve timely new product development. Our customers include major telecommunications equipment producers such as Ericsson, Hyundai, LGIC, Lucent Technologies, Motorola, Nokia, Qualcomm and Samsung. The increase in demand for wireless communications, including the growth in both CDMA and GSM wireless handsets and multi-mode, dual-band handsets, has accelerated the demand for SAW bandpass filters for both the intermediate frequency, or IF, and radio frequency, or RF, sections of wireless handsets. According to Dataquest, an independent research firm that tracks the telecommunications industry, worldwide shipments of digital wireless handsets are projected to increase from approximately 210 million units in 1999 to 364 million in 2002. Our strategy is focused on becoming the leading supplier of SAW devices used in wireless communications and other applications. The key elements of our strategy are: . expand our product offerings for wireless handsets to include SAW RF filters for CDMA and GSM, SAW IF filters for GSM and SAW duplexer filters. This will augment our core business consisting of CDMA IF filters for handsets and IF filters for both CDMA and GSM base stations; 4 . expand our manufacturing capacity and capability through a capital investment plan estimated at $32 million for 2000. This plan should increase our wafer fabrication capacity and capability in Orlando, add new automated production lines in Orlando and Costa Rica and increase the size of our Costa Rican facility by approximately 30,000 square feet; . enhance our relationships with major telecommunications equipment manufacturers by developing a product-based sales force, working closely with these customers in the design phase and expanding our production capacity in advance of their requirements; and . continue to target new or emerging markets for SAW applications, including filters for head-end equipment for cable modems for the Internet, WLAN, wireless data, chemical sensors and other applications for bringing voice, data and video into the home. This prospectus relates to the offer and sale of 4,000,000 shares of our common stock by the selling shareholders. We will not receive any proceeds from the sale of these shares. ---------------- Our corporate headquarters is located at 1818 South Highway 441, Apopka, Florida 32703 and our telephone number is (407) 886-8860. Apopka is located near Orlando, Florida. The Offering Common stock Sawtek is offering......... None Common stock the selling shareholders 4,000,000 shares are offering........................... Common stock to be outstanding after 42,384,723 shares this offering.......................... Use of proceeds......................... All proceeds will go to the selling shareholders. We will not receive any proceeds from this offering. Nasdaq National Market symbol........... SAWS
- -------- Common stock to be outstanding after this offering is based on shares outstanding as of December 31, 1999 and excludes shares exercisable under employee stock options as follows: . 2,137,781 shares of common stock issuable upon exercise of options outstanding under our stock option plans at December 31, 1999 at a weighted-average exercise price of $13.75 per share; and . 3,999,046 shares of common stock reserved for future grants or issuance under our stock option and employee stock purchase plans. Unless otherwise specified, all information in this prospectus assumes that the underwriters' over-allotment option is not exercised. 5 Summary Consolidated Financial Data (in thousands, except per share data) Consolidated Statement of Income Data:
Three Months Ended Year Ended September 30, September 30, -------------------------------------------- ---------------- 1999 1998 1997 1996 1995 1999 1998 -------- ------- ------- ------- ------- ------- ------- Net sales............... $100,276 $97,700 $85,041 $59,173 $32,473 $28,515 $21,522 Gross profit............ 58,052 52,889 46,472 30,835 18,325 16,814 11,857 Gross profit margin %... 57.9% 54.1% 54.6% 52.1% 56.4% 59.0% 55.1% Operating income........ 42,469 37,903 31,490 6,005 9,273 12,850 8,491 Net income (loss)....... 30,684 26,205 20,719 (220) 5,724 9,215 6,080 Net income (loss) per share: Basic.................. $ 0.73 $ 0.62 $ 0.50 $ (0.01) $ 0.21 $ 0.22 $ 0.14 ======== ======= ======= ======= ======= ======= ======= Diluted................ $ 0.72 $ 0.60 $ 0.49 $ (0.01) $ 0.16 $ 0.21 $ 0.14 ======== ======= ======= ======= ======= ======= =======
In 1996, we incurred $12.9 million of ESOP compensation expense. Consolidated Balance Sheet Data:
September 30, 1999 ------------- Cash, cash equivalents and short-term investments................. $115,274 Total assets...................................................... 191,579 Total shareholders' equity ....................................... $158,399
Recent Developments For the three months ended December 31, 1999, we expect that our net sales will be approximately $31.8 million. In addition, we expect our diluted earnings per share will be approximately $0.23. Net sales increased approximately 43% compared to the quarter ended December 31, 1998 and increased approximately 12% compared to the quarter ended September 30, 1999. The increase in net sales was a result of increased shipments of bandpass filters for CDMA digital wireless phones, including approximately $2.4 million of shipments of SAW RF filters. Sawtek began shipments of SAW RF filters in the quarter ended December 31, 1999. Diluted earnings per share increased from $0.15 per share for the quarter ended December 31, 1998 due to higher net sales and a higher gross profit margin. 6 RISK FACTORS You should carefully consider the risks described below before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that event, the trading price of our shares could decline, and you may lose part or all of your investment. A decline in either the growth of wireless communications or in the continued acceptance of CDMA technology would have an adverse impact on us. Approximately 74% of our net sales for 1999 and 1998 were derived from sales of SAW devices for applications in wireless communications systems. Any economic, technological or other developments resulting in a reduction in demand for wireless services would have a material adverse effect on our business, financial condition and results of operations. Sales of our products for CDMA-based systems, including base stations and subscriber handsets, accounted for approximately 56% of our net sales in 1999 and 1998. CDMA technology is relatively new to the marketplace and there can be no assurance that emerging markets will adopt this technology. Our business and financial results would be adversely impacted if CDMA technology does not continue to gain acceptance. If we are unable to successfully develop and bring new products to market, our operating results will be adversely affected. Recently, we announced our intent to offer an expanded line of SAW filters for the wireless handset market, including SAW RF and GSM IF filters. To date, we have completed some designs for these filters, and we have begun to receive orders from customers for these products. We have also begun to order and receive the materials and equipment necessary to enter this market. However, to date we have produced these new filters only in limited volumes and have just begun to ship SAW RF filters to customers. Expanding our product line and sales of these filters is an important part of our growth strategy. There is no assurance that we will be successful in our efforts to introduce these and other new types of filters for the wireless telecommunications market. Sustained growth of our business is dependent on our ability to continue 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 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 may also depend on timely completion of new product designs, quality of new products and market acceptance of these products. If we are unable to successfully increase our production capacity, we will not be able to grow our revenue as planned. We have initiated a capital expenditure program, estimated at $32 million for 2000, to increase our manufacturing output to enable us to grow our revenue. This plan includes new wafer fabrication capacity and capability in Orlando, new assembly capacity in Orlando and Costa Rica and expanding our building in Costa Rica. Any delay in increasing our capacity will have a material adverse impact on our ability to meet the anticipated demand for our new products and on our ability to grow revenue. Because we rely on a limited number of suppliers, our operating results would be adversely affected if a few suppliers were unable to meet our needs. We have a limited number of suppliers for certain critical raw materials, components, services and equipment. There are only a few ceramic package manufacturers and wafer producers worldwide who have the 7 expertise and capacity necessary to satisfy our requirements. Most of these suppliers are based in Japan. Recently, we have experienced difficulty in obtaining ceramic surface mount packages used in the production of bandpass filters. A failure by us to anticipate demand for materials, or of our suppliers to provide sufficient amounts of material, could result in raw material shortages. There can be no assurance that we will be able to secure adequate supplies of materials, components, services or equipment. If we are unable to satisfy our requirements for raw materials or to obtain and maintain appropriate equipment, our business, financial condition and results of operations would be materially adversely affected. Risks associated with international sales could adversely affect our operating results. Overall, our net sales from international sales accounted for approximately 41%, 37% and 43% of net sales for 1999, 1998 and 1997, respectively. 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: . currency exchange rate fluctuations and restrictions; . import-export regulations; . customs requirements; . ability to secure credit and funding; . longer payment cycles; . foreign collection problems; . political and transportation risks; and . economic turmoil. Some of our major customers are relying on growth in international markets, including Asia and Latin America, for sales of their products. The demand for our products will be reduced if the economies in these regions decline. We have grown our net sales over the past several years partly from shipments to South Korean customers. In 1999, our net sales from South Korean customers was approximately $16.8 million, equal to 17% of total net sales, and in 1998 it was approximately $14 million, or 14% of net sales. However, net sales from South Korean customers fluctuates greatly as experienced in the last quarter of 1998 when those net sales declined to $1.1 million, or approximately 5% of total net sales, compared to $4.8 million, or approximately 18% of total net sales, in the immediately preceding quarter. The South Korean economy and the economies of many other countries in Asia and around the world have experienced economic turmoil and recession during the past 18 months and may continue to face economic problems which would adversely impact our sales in these regions. Because we depend on a few large customers, our operating results would be adversely affected by the loss of one or two customers. A few large customers have accounted for a significant portion of our net sales. Sales to our top 10 customers accounted for approximately 70% of net sales in 1999 and 76% in 1998. Motorola, our largest customer, accounted for 23% of net sales in 1999 and 17% of net sales in 1998 and may account for a higher percentage of net sales in 2000. 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. 8 A disruption in our Costa Rican operations could have an adverse impact on our operating results. During 1999, net sales from our Costa Rican operation accounted for approximately 47% of our total net sales and 40% of our operating income. We expect our Costa Rican operations to account for an increasing proportion of our overall operations in the future. Operating a production facility in Costa Rica presents potential risks of disruption, including: . government intervention; . wars; . currency fluctuations; . limited supplies of labor; . labor disputes; . earthquakes; . volcanic eruptions; . hurricanes; . floods; and . mud slides. Any such disruptions could have a material adverse effect on our business, results of operations and financial condition. A continued decline in selling prices for some of our key products could have an adverse impact on our operating results. Selling prices for our products have declined due to competitive pricing pressures and to the use of newer surface mount package devices that are smaller and less expensive than previous generation filters. We have experienced declines in prices for filters for GSM base stations due to the use of surface mount packages, and we expect this will occur in filters for CDMA base stations. In addition, we expect prices for handset filters to continue to decline as they become smaller and as competitive pricing pressure increases. A continued decline in prices could have a material adverse impact on both our revenues and margins. If we experience a decline in our manufacturing yields, our operating results will be adversely affected. The manufacture of SAW devices involves complex processes that may result in reduced yields from time to time, the causes of which are often difficult to determine. A reduction in yields at any stage of the manufacturing process would have a material adverse effect on our ability to meet our quoted delivery times and cost of production, which would have an adverse impact on our operations and profitability. If one or more customers cancel or terminate purchase orders or delay deliveries with short notice, our operating results would be adversely affected. Our customers' orders are typically subject to cancellation or modification with very short notice. In addition, purchase orders for our products may be large and intended to satisfy customers' long-term needs. Accordingly, our backlog is not necessarily indicative of future product sales, and a delay or cancellation of a small number of purchase orders may adversely impact our operations. In addition, our expense levels are based, in part, on our expectations of future product sales and therefore are relatively fixed in the short term. If we were unable to reduce our expense levels correspondingly with a reduction in sales levels, our results of operations would be further harmed. 9 New competitive products or technologies may be developed which could reduce demand for our products. Our business is dependent upon the application of SAW-based technology. Competing technologies, including digital filtering technology, direct conversion or any other technology that could be developed, could replace or reduce the use of SAW filters for certain applications. Direct conversion is a process that converts an RF signal to baseband without the need for a SAW IF filter. Any development of a cost-effective technology that replaces SAW filtering technology or reduces the need for SAW filtering technology could have a material adverse effect on our business, financial condition and results of operations. We expect competition to increase which could result in lower selling prices and have an adverse effect on our operating results. Competition in the markets for our products is intense. We compete against large international companies that have substantially greater financial, technical, sales, marketing, distribution and other resources than us. In addition, we may face competition from companies that currently manufacture SAW devices for their own internal requirements, as well as from a number of our customers that have the potential to develop an internal supply capability for SAW devices. We expect competition to increase from both established and emerging competitors, as well as from internal capabilities developed by certain customers. Our ability to compete effectively in our target markets depends on a variety of factors both within and outside of our control, including timing and success of new product introductions, availability of manufacturing capacity, the rate at which customers incorporate our components into their products, our ability to respond to competitive pricing pressures, availability of technical personnel, sufficient supplies of raw materials, the quality, reliability and price of products and general economic conditions. There can be no assurance that we will be able to compete successfully in the future. If we are not able to protect our intellectual property or if we infringe on the intellectual property of others, our business and operating results could be adversely affected. We rely on a combination of patents, copyrights and trade secrets to establish and protect our intellectual property rights. There can be no assurance that patents will issue from any of our pending applications or that any claims allowed from existing or pending patents will be sufficiently broad to protect our technology. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted will provide proprietary protection. Litigation may be necessary to enforce our patents, trade secrets and other intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, results of operations and financial condition regardless of the final outcome of the litigation. We are not currently engaged in any patent infringement suits nor have we been threatened with any such suits in recent years. We recently received a letter from a large Canadian telephone equipment manufacturer claiming that it believes we are infringing on a patent it owns that issued in 1987 and offering a license on preferred terms, without stating the proposed terms of the license. It is our position that this patent is unenforceable because we sold devices commercially utilizing the invention claimed in the patent at least two years before the application for this patent was filed and the patent owner did not attempt to exercise its rights to enforce this patent for over 12 years. If we are incorrect in our position in this matter and this patent is found to be enforceable, we could be required to pay a license fee or pay damages related to sales of devices utilizing this invention sold for the past six years and an injunction against further alleged infringement could issue, either of which could have a material adverse effect on our operating results. Despite our efforts to maintain and safeguard our proprietary rights, there can be no assurances that we will be successful in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technologies. If any of the holders of these patents assert claims that we are infringing such patents, we could be forced to incur substantial litigation expenses. In addition, if we were found to infringe, we would be required to pay substantial damages, pay royalties in the future or be enjoined from infringing on such patents in the future. 10 A failure to attract and retain qualified individuals for critical positions could have an adverse impact on our business, financial condition and results of operations. Our success depends, in part, on the performance of a number of key management and technical personnel, the loss of one or more of whom could have a material adverse effect on our business. Our success will also depend, in part, on our ability to attract and retain qualified professional, technical, production, managerial and marketing personnel, both domestically and internationally. Competition for such personnel in our industry is very intense. While we have not yet experienced significant problems in recruiting or retaining qualified personnel, we cannot be certain that such problems will not arise in the future. Our operating results could be adversely affected by fluctuations in the value of foreign currencies. Our international sales are generally denominated in U.S. dollars. However, we may be required in the future to denominate sales in the foreign currencies of certain countries or in the new euro for some of our European customers. As a result, fluctuations in currency exchange rates may have a significant effect on our sales, even in the absence of an increase or decrease of unit sales to foreign customers. A strong U.S. dollar could make our products more expensive for foreign customers, which could have a material adverse effect on our ability to compete internationally. We also purchase a great deal of our key raw materials and equipment from foreign countries, primarily Japan. A weak U.S. dollar could make our purchases more expensive. Over the past two years, the valuations of many foreign currencies have fluctuated significantly relative to the U.S. dollar. The Korean won and Japanese yen, in particular, have fluctuated in value due in part to the economic problems experienced by these countries. We have not, to date, engaged in substantial hedging transactions for our foreign exchange risks. If any of our future international sales are denominated in foreign currencies, we may find it necessary to engage in rate hedging activities with respect to certain exchange rate risks. There can be no assurance that we will engage in such exchange rate hedging or that any such activities will successfully protect against such risks. 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. The failure to comply with present or future regulations could result in the imposition of fines, suspension of production or a cessation of operations. Such regulations could require us to acquire significant equipment or to incur substantial expense in order to comply with such regulations. Any past or future failure to control the use of or the discharge of toxic or hazardous substances or to comply with export regulations could subject us to future liabilities and could have a material adverse effect on our business, results of operations and financial condition. A number of factors affecting our customers may result in the cancellation of orders or delays in deliveries of our products to these customers. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for wireless communications products and services. The delays inherent in this governmental approval process have in the past, and may in the future, cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers. Any such delays may have a material adverse effect on the sale of our products to these customers. In addition, our customers may have difficulty in obtaining parts from other suppliers, such as flash memory for wireless handsets, causing these customers to cancel or delay orders for our products. 11 Our manufacturing facilities are located in areas prone to natural disasters. Our main facility is located in Orlando, Florida and we also have a production facility in Costa Rica. Hurricanes, tropical storms, flooding, tornadoes, and other natural disasters are common events for the southeastern part of the United States and in Costa Rica. We could suffer disruptions due to natural disasters that could have an adverse effect on our operations. Our Costa Rican facility is also prone to these disasters as well as mud slides, earthquakes and volcanic eruptions. Any disruptions from these or other events would have a material adverse impact on our operations and financial results. Year 2000 problems could have an adverse effect on our operations. We are subject to potential Year 2000 problems affecting our internal systems, the systems of our suppliers and our customers. If any of these were not corrected for Year 2000 problems, our operations could be materially impacted. We have completed an examination of these systems and a summary of our results is included elsewhere in this prospectus. 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: . variations in our operating results or the operating results of our customers or competitors; . announcements of new products by us or by our competitors; . gain or loss of significant contracts; . announcements of technological innovations; . acquisitions by us or our competitors; . changes in analysts' estimates of our financial performance; . government regulatory action; . developments or disputes regarding proprietary rights; . general trends in the industry; and . general economic or stock market conditions. Additionally, in the past, securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management's attention and resources. Certain considerations could make it more difficult for others to acquire us. Certain anti-takeover provisions of the Florida Business Corporation Act could have the effect of making it more difficult for a third party to acquire us or of discouraging a third party from attempting to acquire us. These anti- takeover measures could result in a lower value to be received by our shareholders if an acquisition was not approved by our Board of Directors. Such provisions could limit or depress the price that certain investors might be willing to pay in the future for shares of our stock. We are also authorized to issue preferred stock, with rights senior to our common stock, without the necessity of shareholder approval. We have no present plans to issue shares of preferred stock. However, issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. 12 In addition, the Sawtek Employee Stock Ownership and 401(k) Plan, or the ESOP, owns approximately 28% of our outstanding common stock and will own approximately 23% of our outstanding common stock after this offering. The ESOP trustee has the right to vote all of these shares. The ESOP trustee votes the shares allocated to participants' accounts in accordance with their voting direction and votes in its sole discretion with respect to the unallocated shares. If the ESOP trustee votes against or opposes a proposed acquisition of us, a potential acquirer may be discouraged from acquiring us even though the holders of a majority of the shares of our common stock are in favor of the acquisition. FORWARD-LOOKING STATEMENTS Certain statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and elsewhere in this prospectus are "forward- looking statements." These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in the prospectus that are not historical facts. When used in this prospectus, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under "Risk Factors." 13 USE OF PROCEEDS All of the shares will be sold by the selling shareholders. We will not receive any proceeds from the sale of these shares. The selling shareholders will pay for all direct out-of-pocket expenses associated with this offering. DIVIDEND POLICY We have never declared or paid dividends on our common stock. We intend to retain our earnings to finance expansion of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. PRICE RANGE OF COMMON STOCK Our common stock is traded 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):
High Low ---- --- FY 1998 First Quarter................................................. $23.38 $10.50 Second Quarter................................................ 15.63 10.47 Third Quarter ................................................ 16.25 6.19 Fourth Quarter ............................................... 9.63 5.13 FY 1999 First Quarter................................................. $11.94 $ 5.91 Second Quarter................................................ 17.59 8.75 Third Quarter ................................................ 23.63 15.25 Fourth Quarter ............................................... 40.75 22.31 FY 2000 First Quarter................................................. $67.25 $32.50 Second Quarter (through January 21, 2000)..................... $93.50 $57.81
The last reported sale price of our common stock on the Nasdaq National Market on January 21, 2000 was $81.88 per share. As of December 31, 1999, there were 42,384,723 shares of common stock outstanding (net of 283,471 shares held as treasury stock) held by approximately 120 shareholders of record. Many shareholders hold their shares in "street name." We believe we have more than 4,000 beneficial owners of our common stock. 14 CAPITALIZATION The following table sets forth our audited capitalization as of September 30, 1999. Because we are not selling any shares in this offering, there will not be a change in capitalization from September 30, 1999 as a result of the selling shareholders' sale of shares.
Balance at September 30, 1999 --------------------------------- (in thousands, except share data) Current maturities of long-term debt......... $ 379 Long-term debt, less current maturities...... 1,790 -------- Total debt ................................. $ 2,169 Shareholders' Equity: Common stock; $.0005 par value; 120,000,000 authorized shares; 42,668,194 issued and outstanding shares . . . .................. 11 Capital surplus.............................. 74,765 Unearned ESOP compensation .................. (781) Retained earnings............................ 87,330 Less common stock held in treasury; 437,705 shares, at cost ............................ (2,926) -------- Total shareholders' equity.................. 158,399 -------- Total capitalization ....................... $160,568 ========
The above table excludes: . 2,293,741 shares of common stock issuable upon exercise of options outstanding under our option plans at September 30, 1999 at a weighted average exercise price of $12.98 per share; and . 3,999,046 shares of common stock reserved for future grants or issuance under our stock option plans and employee stock purchase plan. All shares held by our ESOP, whether allocated to participants' accounts or not, are included in the common stock outstanding. 15 SELECTED CONSOLIDATED FINANCIAL DATA In the table below, we provide you with summary historical financial data of Sawtek Inc. We have prepared this information using the consolidated financial statements of Sawtek Inc. for the five years ended September 30, 1999, which have been audited by Ernst & Young LLP, independent auditors. When you read this summary historical financial data, it is important that you read it along with the historical financial statements and related notes appearing in this prospectus, as well as the section of this prospectus titled, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended September 30, ----------------------------------------- 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------- (in thousands, except per share data) Consolidated Statement of Income Data: Net sales.......................... $100,276 $97,700 $85,041 $59,173 $32,473 Cost of sales...................... 42,224 44,811 38,569 28,338 14,148 -------- ------- ------- ------- ------- Gross profit....................... 58,052 52,889 46,472 30,835 18,325 Operating expenses: Selling expenses.................. 5,637 6,008 5,384 4,024 3,139 General and administrative expenses......................... 4,319 4,693 5,842 18,852 4,244 Research and development expenses......................... 5,627 4,285 3,756 1,954 1,669 -------- ------- ------- ------- ------- Total operating expenses........ 15,583 14,986 14,982 24,830 9,052 -------- ------- ------- ------- ------- Operating income................... 42,469 37,903 31,490 6,005 9,273 Other income (expense), net ....... 4,737 3,542 1,785 343 (144) -------- ------- ------- ------- ------- Income before income taxes......... 47,206 41,445 33,275 6,348 9,129 Income taxes....................... 16,522 15,240 12,556 6,568 3,405 -------- ------- ------- ------- ------- Net income (loss).................. $ 30,684 $26,205 $20,719 $ (220) $ 5,724 ======== ======= ======= ======= ======= Net income (loss) per share: Basic............................. $ 0.73 $ 0.62 $ 0.50 $ (0.01) $ 0.21 ======== ======= ======= ======= ======= Diluted........................... $ 0.72 $ 0.60 $ 0.49 $ (0.01) $ 0.16 ======== ======= ======= ======= ======= Shares used in per share calculations: Basic............................. 41,946 42,360 41,092 34,734 27,816 ======== ======= ======= ======= ======= Diluted........................... 42,815 43,356 42,668 40,486 36,542 ======== ======= ======= ======= =======
General and administrative expenses for 1996 include $12.9 million of ESOP compensation expense.
September 30, ------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- ------- -------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short- term investments................ $115,274 $ 84,131 $ 58,073 $27,743 $ 2,821 Working capital.................. 135,200 99,038 68,658 36,307 7,490 Total assets..................... 191,579 148,710 120,506 75,524 23,802 Long-term debt, less current maturities...................... 1,790 2,169 2,868 3,907 6,916 Total shareholders' equity...... $158,399 $123,877 $ 98,218 $62,094 $(20,256)
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our consolidated financial statements and the notes thereto included in this prospectus and the "Selected Consolidated Financial Data" above. 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, video transmission, military and space systems and other applications. Our focus has been on the high-end performance spectrum of the market, and our primary products are SAW bandpass filters, resonators, delay lines, oscillators, SAW-based subsystems and chemical sensors. Our products were initially concentrated in the military and space systems market, with over half of net sales in 1992 attributable to this market segment. Since then, we made a strategic decision to target commercial markets, which accounted for approximately 94% of net sales in 1999 and 92% of net sales in 1998. We have witnessed significant growth in our international markets over the last five years. International sales accounted for 41% of net sales in 1999. We derive revenue from high-volume commercial production components, military/industrial production components and engineering services and products. Non-recurring engineering revenue is included in net sales and relates to the design and development of custom devices and delivery of one or more prototype units. In all cases, revenue is recognized when the parts or services have been completed and units, including prototypes, have been shipped. Net sales increased 14.9% from 1997 to 1998, and 2.6% from 1998 to 1999. The growth in net sales was attributable to growth in the wireless communications market to which we supply SAW bandpass filters for cellular and PCS base stations and handsets. We have a broad product line of SAW filters, components and subsystems with average selling prices ranging from under $1 for RF filters to over $10,000 for complex sub-systems. For 1999, net sales to our top 10 customers accounted for approximately 70% of net sales, compared to 76% in 1998, with the top five customers accounting for approximately 55% of net sales in 1999, compared to 61% in 1998. 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. 17 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:
Year Ended September 30, ---------------------------- 1999 1998 1997 -------- -------- -------- Net sales...................................... 100.0% 100.0% 100.0% Cost of sales.................................. 42.1 45.9 45.4 -------- -------- -------- Gross margin .................................. 57.9 54.1 54.6 Operating expenses: Selling expenses.............................. 5.6 6.1 6.3 General and administrative expenses........... 4.3 4.8 6.8 Research and development expenses............. 5.6 4.4 4.4 -------- -------- -------- Total operating expenses .................... 15.5 15.3 17.5 -------- -------- -------- Operating income............................... 42.4 38.8 37.1 Other income-net............................... 4.7 3.6 2.1 -------- -------- -------- Income before income taxes..................... 47.1 42.4 39.2 Income taxes................................... 16.5 15.6 14.8 -------- -------- -------- Net income..................................... 30.6% 26.8% 24.4% ======== ======== ========
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 handsets, 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 Margin. Gross margin increased from 54.1% of net sales in 1998 to 57.9% of net sales in 1999. The increase was attributable 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. We believe that we will produce a significantly higher volume of products in 2000 compared to 1999; however, these newer products will likely have substantially lower average selling prices compared to products sold in 1999. As a result, we believe that while sales may increase in 2000, our gross margin will decline as a percent of net sales because the newer products will be subject to more competitive pricing and the cost to manufacture them will be higher compared to products sold in 1999. Selling Expenses. Selling expenses decreased in absolute dollars and as a percentage of net sales from 1998 to 1999. The decrease was due to reduced corporate sales expense and reduced commissions paid to independent sales representatives due in part to our opening of a Korean sales office which reduced the cost of selling into the Korean market. 18 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 was due to reduced corporate administrative staff in 1999 compared to 1998. In addition, the general and administrative costs 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 was due to more R&D programs undertaken, including costs associated with developing VaporLab, which is a handheld SAW-based chemical detector, costs associated with developing SAW-based RF filters and other 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 $84 million in 1998 to $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 slightly lower effective rate for 1999 compared to 1998 relates to increased tax exempt interest earned, the benefit from our foreign sales corporation, increased R&D tax credits due to increased R&D expenditures and a lower effective rate for state income taxes. We believe that our effective tax rate will be between 34% and 35% for 2000. Comparison of Years Ended September 30, 1997 and 1998 Net Sales. Net sales increased 14.9% from $85.0 million in 1997 to $97.7 million in 1998. The increase was due to an increase in shipments of CDMA subscriber handset filters, which grew from 16% of net sales in 1997 to 28% of net sales in 1998. Sales of GSM base station filters declined from $16.1 million in 1997 to $14.8 million in 1998 due to the conversion to smaller, lower cost, surface mount package filters in 1998 compared to larger, higher average price, dual-in-line package filters sold in 1997. Sales of CDMA base station filters were essentially unchanged from the previous year. International sales decreased from 43% of total net sales in 1997 to 37% of total net sales in 1998 due to the economic recession in Asia and reduced revenue from GSM base station filter sales to European customers. Sales to South Korean customers decreased from 16% of total net sales in 1997 to 14% of total net sales in 1998. Sales to South Korean customers dropped in the fourth quarter of 1998 to approximately 5% of total net sales due to the economic turmoil experienced in that country and the decline in consumer and industrial spending. Sales for military and space systems decreased from $9.8 million in 1997 to $8.8 million in 1998. Gross Margin. Gross margin decreased slightly from 54.6% in 1997 to 54.1% in 1998 due to lower gross profit margin on filters for subscriber handsets, which increased as a percentage of overall net sales, lower gross profit margin on surface mount GSM base station filters and competitive pricing pressure. Offsetting these factors were improvements in manufacturing automation, improved yields and higher productivity per worker in 1998 compared to 1997. Selling Expenses. Selling expenses increased 11.6% from $5.4 million in 1997 to $6.0 million in 1998 due to commissions paid to independent sales representatives and increased costs for internal sales personnel and related expenses. Selling expenses decreased as a percentage of overall net sales from 6.3% in 1997 to 6.1% in 1998. General and Administrative Expenses. General and administrative expenses decreased 19.7% from $5.8 million in 1997 to $4.7 million in 1998 due to reduced corporate administrative staff in 1998 compared to 1997, lower bonus payments and no grants of compensatory stock options in 1998 compared to 1997. Research and Development Expenses. Research and development expenses increased 14.1% from $3.8 million in 1997 to $4.3 million in 1998 due to additional personnel and expanded research and development efforts, particularly for the development of SAW-based chemical sensors. A significant portion of our development activities are conducted in connection with the design and development of devices for specific customer applications, which are paid for by customers. The revenue generated from these items is included in net sales and the cost is reflected in cost of sales rather than in research and development expenses. 19 Other Income. Other income increased in 1998 due to interest earned on the higher cash and investment balances in 1998 compared to 1997 and lower interest expense. Income Tax Expense. The provision for income taxes as a percentage of income before tax was 36.8% in 1998 compared to 37.7% in 1997. The slightly lower effective tax rate for 1998 related to increased interest earned on tax-exempt securities, the benefit from our foreign sales corporation and a lower effective rate for state income taxes. Liquidity and Capital Resources To date, we have financed our business through cash generated from operations, bank borrowings, lease financing, the private sale of securities, our May 1, 1996 initial public offering and the July 1, 1997 follow-on public offering. We require capital principally for equipment, financing of accounts receivable and inventory, investment in product development activities and new technologies, expansion of our operations in Orlando and Costa Rica and potential acquisitions of new technologies or compatible companies. For the year ended September 30, 1999, we generated net cash from operating activities of $42.4 million, consisting primarily of net income of $30.7 million, $7.2 million of depreciation and amortization and an increase of $6.4 million in deferred taxes, offset by a $7.1 million increase in accounts receivable. We have a revolving credit agreement totaling $30.0 million from SunTrust Bank, Central Florida, N.A. available through March 31, 2000. There were no balances outstanding on this credit line at September 30, 1999. We made capital expenditures of approximately $11.4 million during the year ended September 30, 1999. We intend to spend approximately $32 million in 2000 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. To date, 1,129,810 shares have been repurchased under this program, of which 358,810 shares costing approximately $2.9 million were purchased in the year ended September 30, 1999. We expect to continue to repurchase shares of common stock from time to time in the future. The repurchased shares will be used to satisfy stock option exercises and issuance of shares under other stock-related benefit programs. We believe that our present cash position and funds expected to be generated from operations will be sufficient to meet our projected working capital and other cash requirements for 2000. Thereafter, we may require additional equity or debt financing to address our working capital needs or to provide funding for capital expenditures. There can be no assurance that events in the future will not require us to seek additional capital sooner or, if so required, that it will be available on acceptable terms, if at all. Foreign Operations, Export Sales and Foreign Currency We established a subsidiary in Costa Rica in 1996, began operations in the second quarter and commenced shipments in the third quarter of 1996. As of September 30, 1999, we had a net investment in fixed assets of approximately $16.7 million in this operation and recorded net sales of approximately $47.1 million with an operating profit of approximately $16.8 million for 1999. The functional currency for the Costa Rican subsidiary is the U.S. dollar since sales, and most material costs 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. For 1999, the cost to operate this subsidiary was less than $10,000, and it had less than $10,000 in identifiable assets. 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 in 1999 was less than $200,000. 20 International sales are denominated in U.S. dollars and represented 41%, 37% and 43% of net sales for the years ended September 30, 1999, 1998 and 1997, respectively. Sales to the European market accounted for 18%, 18% and 22% for these same periods, respectively, and sales to the Asian and Pacific Rim markets, principally to South Korea were 18%, 16% and 17%, respectively for these same periods. See Notes 11 and 12 to the Consolidated Financial Statements. Over the past year, the value of many foreign currencies have fluctuated relative to the U.S. dollar. The Korean won and Japanese yen, in particular, have fluctuated in value due in part to the economic events experienced by these countries over the past year. A stronger U.S. dollar makes it more difficult for us to sell our products to customers in these countries and makes it more difficult for us to compete against SAW producers based in these countries. A weaker U.S. dollar may make it more expensive for us to buy certain raw materials and equipment from Japanese suppliers. The new common European currency, the euro, made its debut in January 1999. Approximately 20% of our sales are to European customers. To date, none of our customers or suppliers has requested us to transact business in the euro. At this time, the impact of this new currency is not determinable. Recently Issued Accounting Standards Please see Note 1 to the Consolidated Financial Statements for a discussion of new pronouncements. Impact of Inflation We believe that inflation has not had a material impact on operating costs and earnings. Year 2000 Readiness The Year 2000 issue relates to the method used by computer hardware and software for recognizing a year represented by "00" as 1900, instead of 2000. Computer hardware and software describes traditional information technology systems such as enterprise resource planning systems, accounting systems, fax servers, print servers, desktop computers and applications, telephone/PBX systems, as well as other systems such as manufacturing equipment, facilities equipment and security systems and imbedded hardware. Some computer hardware and software may recognize a year represented by "00" as 1900, instead of 2000. This could result in unexpected behavior in the affected hardware or software. These systems need to be able to accept four-digit entries to distinguish years beginning with 2000 from prior years. As a result, systems that do not accept four-digit year entries need to be upgraded or replaced to comply with Year 2000 requirements. Our State of Readiness--Year 2000 Our Year 2000 inventory, assessment, remediation and testing began in January 1998. We believe that we have completed the tasks necessary for a successful Year 2000 transition. To certify Year 2000 compliance, we employed two methods. Vendor certification was the primary method utilized. In order for a system from a vendor to be considered compliant, we required a written statement from that vendor, as well as a description of the testing methods used. If this information was not available or was not otherwise considered adequate, we performed internal tests. These tests included the use of a certified hardware test program, the examination of the software source code by our Software Engineering Department or Information Systems Department and advancing the date past January 1, 2000. We also surveyed key suppliers. As of November 30, 1999, 100% of those surveyed had responded. Of those surveyed, all stated that they are compliant. No suppliers responded that they would fail to be Year 2000 compliant. We believe, based on surveys of our key customers, that all of them have achieved full Year 2000 compliance. 21 Costs to Address the Year 2000 Issues The bulk of our costs to address Year 2000 issues were internal staff time estimated at less than $200,000 and the cost to upgrade our main MRP software, which is certified as Year 2000 compliant. The cost of this upgrade, which was purchased in 1998, was $48,000. The cost to complete the Year 2000 compliance was funded out of 1998 and 1999 operating cash flow. The Risks of the Year 2000 Issues Our products generally are not date sensitive and, therefore, are not subject to Year 2000 defects or problems. We believe that our primary manufacturing, engineering, financial and administrative systems are Year 2000 compliant. We believe that the greatest potential risk from Year 2000 issues relates to the possibility that a major supplier or customer whose systems are not Year 2000 compliant may be unable to meet delivery requirements for important raw materials or equipment or may not be able to accept shipment of our products until they correct their Year 2000 problem. We believe that the Year 2000 issue will not pose significant operational problems. However, if all Year 2000 issues are not properly identified, or assessment, remediation and testing are not effected in a timely fashion, there can be no assurance that the Year 2000 issue will not materially adversely impact our results of operations or adversely affect relationships with customers, vendors or other relevant parties. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on our systems or results of operations. Our Contingency Plans--Year 2000 In anticipation of the Year 2000 issue, we completed a comprehensive analysis of the operational problems and costs (including loss of revenues) that could reasonably occur from any failure by us or third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. A contingency plan has been developed for dealing with the most likely, worst- case scenario. This worst-case scenario includes difficulties in customer billing, order processing, disruptions in our receipt of raw material, loss of power and equipment malfunction. If this worst-case scenario occurred it would harm our business. Depending on the systems affected, these plans include increased work hours for our personnel or the use of contract personnel to correct (on an accelerated schedule) any Year 2000 problems that may arise and use of manual workarounds for information systems. However, because of our large power requirements, it is not practical to establish emergency power systems should our electrical suppliers encounter disruptions in service. Quantitative and Qualitative Disclosures about Market Risk We are exposed to minimal market and interest rate risk. We manage the sensitivity of our results of operations to these risks by maintaining a conservative investment portfolio, which is comprised solely of highly rated, short-term investments. We do not hold or issue derivative securities, derivative commodity instruments or other financial instruments for trading purposes. We are exposed to currency exchange fluctuations since we sell our products internationally and we purchase raw materials and equipment from foreign suppliers. We are also exposed to currency fluctuations associated with our Costa Rican operation. We manage the sensitivity of our international sales, purchases of raw materials and equipment and our Costa Rican operation by denominating most transactions in U.S. dollars. We do engage in limited foreign currency hedging transactions, principally to lock in the cost of purchase commitments that are not denominated in U.S. dollars. We are exposed to minimal interest rate risk on debt instruments as our outstanding debt is less than $3 million, and we do not plan to use additional debt-based financing to fund capital expenditures in 2000. 22 BUSINESS Overview 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, delay lines, oscillators and SAW-based subsystems. These products are used in a variety of microwave and RF systems, such as CDMA and GSM digital wireless communications systems, digital microwave radios, wireless local area networks, cable television equipment, Internet infrastructure, various defense and satellite systems and chemical sensors. We believe our products offer key advantages such as lower distortion, reduced size and weight, higher reliability and more precise frequency control compared to products based on alternative technologies and address rapidly growing needs in telecommunications, data communications, video transmission, military and space systems and other markets. Our proprietary computer aided design and analysis software tools support rapid and precise SAW device design and simulation, enabling us to achieve timely new product development. Our customer base includes major telecommunications equipment producers such as Ericsson, Hyundai, LGIC, Lucent Technologies, Motorola, Nokia, Qualcomm and Samsung. 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 RF or microwave frequency range. However, before the information can be used, the signal must generally be converted to a lower IF, or intermediate frequency, and finally to the lowest system frequency, commonly referred to as baseband. While the RF and microwave frequencies at which voice, data and video systems operate are generally dictated by regulatory bodies such as the FCC, system designers have considerable flexibility in selecting one or more IF frequencies which suit the requirements of 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 such wireless communications products as cellular, personal communications services, or PCS, WLL, global satellite telephones and wireless data systems are contributing to this growth. Wireless communications systems can offer the functional advantages of wired systems without the costly and time consuming development of an extensive wired infrastructure, which is of particular importance in developing parts of the world. Rapidly emerging digital telecommunications standards and technology are providing the performance improvements necessary to address overcrowding of existing cellular systems as well as increased functionality. Unless wireless carriers adopt the emerging digital standards, they will suffer from dropped calls due to the overcrowding problem. These standards include CDMA, which is predominately utilized in the United States and South Korea as well as in 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 and PCS mobile services as well as fixed WLL networks. As demands for wireless communications subscriber services grow, service providers are offering digital handset 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 23 frequency bands, regulatory agencies have allocated new blocks of spectrum at higher frequencies and more stringently regulated allowable signal bandwidths. Systems operating at these higher microwave and RF frequencies require higher frequency IF components to simplify the overall system architecture, thereby reducing cost, complexity and power consumption. To make more efficient use of the crowded frequency bands, the spacing between adjacent signal channels must be reduced, placing the desired signal very close to unwanted interfering signals. Highly selective 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, are rapidly evolving 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, 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 RF and IF signal processing components, particularly for use in handset applications such as cellular telephones. Traditional signal processing technologies include lumped element known as LC filters, ceramic 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. 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 without significant distortion. Perhaps the most significant benefit inherent in SAW technology is the relative ease in producing large quantities of high precision components that are comparatively small in size and are passive (no current required). SAW devices are generally manufactured at the higher RF and IF frequency ranges and broader bandwidths required for emerging systems. The range of signal bandwidths that can be accommodated with SAW technology ranges from 10 MHz to 3 GHz, permitting SAW components to address almost all viable applications. As the use of wireless communications systems increases and new applications develop, there is a need for large quantities of 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. 24 Sawtek Strategy Our goal is to be the 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 handsets. We have completed several key designs and have introduced SAW RF filters for CDMA handsets and SAW IF filters for GSM handsets. In the future we plan to offer SAW RF filters for GSM and other applications as well as SAW duplexer filters. We believe this broad product offering will augment our core business consisting of CDMA IF filters for handsets and IF base station filters for GSM and CDMA. This broad-based product offering will enable us to offer our customers a total SAW solution for wireless communications. . expand our manufacturing capacity. We have started an aggressive capital expenditure plan for 2000, estimated at $32 million. This plan includes increasing the manufacturing capacity and capability at our Orlando wafer fabrication facility, adding 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. We anticipate completing the bulk of this program in 2000. Upon completion, our production capacity will be more than four times greater in units compared to 1999. . 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. . 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, wireless LAN, wireless data, SAW-based chemical sensors and other applications for bringing voice, data and video into the home. 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 82% of our net sales in 1999, compared to 81% in the previous year. Our communications product offerings consist primarily of IF bandpass filters for CDMA and GSM base station equipment and CDMA subscriber handsets. Additional applications include base station repeaters, global satellite systems, digital radios and data and video applications. We offer many custom SAW components to serve these market applications. As systems evolve from analog to digital, it is important to understand what role the SAW filter serves. 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 the FCC allocated frequency band), is performed digitally. The actual transmission from a phone to a base station through the air, however, must still be done through analog RF waves. A SAW filter is a passive analog component that rejects the unwanted RF signals and passes the desired signals for later digital signal processing. Cellular. In cellular applications, calls are placed through subscriber handsets 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 handset applications. We have also recently introduced SAW RF filters for cellular CDMA handsets and SAW IF filters for GSM handsets. 25 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, and bandpass filters for CDMA subscriber handsets. WLL. WLL systems eliminate the need for a wire (loop) connecting users to the public switched telephone network by transmitting voice messages over radio waves for the "last mile" connection between the location of the customers' telephone and a base station connected to the network equipment. We supply bandpass filters to both base station and subscriber applications for WLL. Data Communications. The data communications market encompasses a number of applications involving the transmission and reception of data through wired, wireless or satellite networks. As the usage of these networks increases, 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, handset data terminals, global positioning systems and filters for head-end equipment to clean up signals, which speed up Internet access for cable modems. Video Transmission. OEM products utilizing relatively low frequency SAW filter designs for cable television head-end equipment are purchased worldwide by cable operating companies. We manufacture a variety of SAW filters to serve the various standards required by the worldwide video transmission market. Emerging technologies within the video transmission market include digital high definition television and interactive television. We have designed custom products for both of these applications. 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. We perform classified work for the United States government and certain of its contractors. In early October 1999, we were informally advised by Defense Security Services, or DSS, that our facility security clearance had been invalidated based on foreign ownership, control or influence. The reason given by DSS for this action was that Dr. Anemogiannis, our President and Chief Operating Officer, is a Greek citizen, not a United States citizen. Dr. Anemogiannis has permanent residence status in the United States. Based on meetings with a representative of DSS, we amended our bylaws and adopted certain resolutions on November 2, 1999, to exclude Dr. Anemogiannis and all other officers or directors not having the necessary security clearance from having any influence or control over classified work performed by us. On December 8, 1999, at the suggestion of the DSS representative, our Board of Directors adopted another resolution to create a committee consisting of persons who have security clearances and gave this committee full executive authority to exercise management control and supervision over all matters involving the security of classified information in our possession. DSS is currently reviewing these actions to determine whether or not to validate our facility security clearance. We will be prohibited from accepting new classified work until we have a facility security clearance. In 1999, we had net sales of approximately $2,300,000 from classified work. 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 three families of standard SAW filters and offer these products for sale through distribution networks in North America and Europe. 26 We have been developing SAW-based chemical sensors for several years, and we are a leading supplier of SAW resonators and delay lines used in sensor development programs. In February 1998, we acquired Microsensor Systems, Inc. of Bowling Green, Kentucky, a supplier in the developing SAW-based chemical sensor instrument market. Products We produce unique SAW products at frequencies ranging from 10 MHz to nearly 3 GHz. Products are organized into six product categories: bandpass filters, resonators, delay lines, oscillators, SAW-based subsystems and SAW-based chemical 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 handset 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 define not only the specifications needed, but also the importance of each specification. We then select a general 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, surface mount devices include CDMA handsets, digital radios, WLL, 3G base stations, WLAN and GPS. Reflective Low-loss Filters. To suit the narrower fractional bandwidth of GSM-based systems, Sawtek utilizes a reflective low loss design approach. Sawtek has utilized this design approach to drive GSM base station filters 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 handset 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. Resonator Filters. As we enter the handset 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 mobile handset 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 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. 27 Delay Lines We currently offer SAW delay line products, consisting of non-dispersive, dispersive and multi-tap delay line configurations. All SAW delay lines make use of the fact that a surface acoustic wave travels 100,000 times more slowly than an electromagnetic wave. This permits SAW delay lines to be much smaller for a given signal delay than those of most competing technologies. Our delay line products are primarily used in military communications and electronic warfare applications, such as pulse expansion and compression radar. However, they also find uses in commercial applications, such as commercial avionics collision avoidance transponders, RF identification tag systems and wireless handset data terminal 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. 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 largely used in military and space applications and include channelized filter banks, switched filter and delay line modules and pulse expansion and compression subsystems. SAW-based Chemical Sensor Products We offer a line of SAW-based chemical sensor instruments for the chemical agent detection market 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 municipalities. 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 1999, we introduced a new product, VaporLab, which is a handheld, battery operated device that can be programmed to detect a variety of chemical compounds for use in commercial applications. In addition, we continue to be a leading supplier of SAW resonators and delay lines 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 involved in reducing the size and increasing the performance of our devices. Examples of recent development efforts that are generating new revenue include filters for WLAN and WLL applications, significantly smaller surface mount IF filters for GSM and CDMA applications and the introduction of SAW RF filters. We have identified SAW-based chemical 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 chemical sensors is in the early stages of development. For 1999, sales of chemical sensor products accounted for less than 3% of our consolidated revenue. 28 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. 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 could 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 aluminum onto piezoelectric wafers. These metallized wafers are coated with a light sensitive material known as photoresist. The wafer is then exposed to light through a master glass plate, or photomask, which contains multiple images of the SAW devices to be produced. 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 between several and 3,000 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. 29 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. In 1996, we established a subsidiary in Costa Rica for the production of SAW components. In 1999, our Costa Rican subsidiary accounted for approximately 47% of net sales, compared to 38% of net sales in 1998, and 36% of consolidated net fixed assets at September 30, 1999, compared to 30% at September 30, 1998. We have recently initiated a significant capital expansion program for both the Orlando and Costa Rican operations, estimated at $32 million for 2000. The expansion program will increase the capacity and capability of the Orlando wafer fabrication facility and will add new automated production lines in Orlando and Costa Rica. 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 against annual supply agreements, and we do not normally carry significant inventories of raw material. 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. Recently, 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 alternate sources of supply, negotiated long-term agreements, and have planned to increase our raw material inventories. 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 11 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, 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 five customers that each accounted for over 5% of net sales in 1999. They are, in alphabetical order, Lucent Technologies, Motorola, Nokia, Qualcomm and Samsung. Our top 10 customers accounted for approximately 70% of net sales in 1999 and 76% of net sales in 1998. 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. 30 The following is an alphabetical list of some of the customers that contributed $1.0 million or more to our revenues in 1999: .Alcatel .Motorola .AVNET .Nokia .Ericsson .Northrop Grumman .Hanwha .Qualcomm .Hyundai .Rockwell .LGIC .Samsung .Lucent Technologies .United States Government
Competition The markets for our products are characterized by price competition, rapid technological change, product obsolescence 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: Andersen Laboratories, CTS Wireless Components, 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 handsets and other high volume subscriber applications. Major Asian suppliers of SAW-based products include Fujitsu, Murada, NDK 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 handsets. 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. We engage 28 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 $5.6 million in 1999, $4.3 million in 1998 and $3.8 million in 1997. We anticipate that research and development expenses will continue to increase in total dollars 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. Intellectual Property Matters We rely on a combination of patents, copyrights and trade secrets to establish and protect our intellectual property rights. We hold 22 patents (which expire between 2005 and 2018), relating to SAW devices, 31 oscillators, packaging technologies and chemical sensors, and we have 18 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. Over the past two years, 19 patent applications were filed and 12 patents have been issued. 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. We recently received a letter from a large, Canadian telephone equipment manufacturer claiming that it believes we are infringing on a patent which is owned by that company that issued in 1987 and offering a license on preferred terms, without stating the proposed terms of a license. We have obtained a legal opinion from our intellectual property counsel to the effect that this patent is unenforceable because: (a) we sold devices commercially which utilized the invention claimed in the patent at least two years before the patent application was filed and (b) the patent owner failed to bring an action against us within six years after it had knowledge that we utilized the invention in our devices. The patent owner has been a customer of ours since 1986 and should have known that devices we sold to it utilized this invention. We have advised the patent owner about our position on this patent and have not received a response. The patent owner has not filed suit against us. We estimate that 10% to 20% of our revenues are derived from the sale of devices that the patent owner could claim infringe on this patent. If we are incorrect in our position and the 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 for the last six years and an injunction against further alleged infringements could issue, either of which could have a material adverse effect on our operating results. Backlog Our backlog as of September 30, 1999 was approximately $29 million compared to the backlog at September 30, 1998 of $16 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, 2000. 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. Employees At September 30, 1999, we had 603 employees (compared to 549 at September 30, 1998), including 423 in manufacturing and operations; 107 in research, development and engineering; 22 in quality assurance; 23 in sales and marketing and 28 in administration. There were 212 employees located in San Jose, Costa Rica, 8 in Bowling Green, Kentucky, 3 in Seoul, South Korea and 380 employees in Orlando, Florida. None of our employees is represented by a labor union, and we have not experienced any work stoppages. We consider employee relations to be excellent. 32 Facilities 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 32,000 square feet. We are in the process of adding approximately 30,000 square feet to this facility over the next year. We also lease a 7,600 square foot facility in Bowling Green, Kentucky for our chemical sensor development operation, and a small sales office in Seoul, South Korea. We believe our facilities, along with the planned expansion, are adequate to meet our current needs and that suitable additional or alternative space will be available, as needed, on commercially reasonable terms. Our Orlando facility is encumbered by an Industrial Development Revenue Bond maturing in 2010. Federal, state and local laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had and are not expected to have a material effect on capital expenditures, earnings or our competitive position. Legal Proceedings There are no material legal proceedings pending either by us or against us as of the date of this prospectus. 33 MANAGEMENT Executive Officers and Directors The executive officers and directors of the Company and their ages as of October 1, 1999 are as follows:
Name Age Position - ---- --- -------- Steven P. Miller........ 51 Chairman of the Board of Directors Gary A. Monetti......... 40 Chief Executive Officer and Director Kimon Anemogiannis ..... 37 President and Chief Operating Officer Raymond A. Link ........ 45 Senior Vice President-Finance, Treasurer And Chief Financial Officer Brian P. Balut ......... 34 Vice President-Sales and Marketing John K. Bitzer ......... 49 Vice President-Operations Support Azhar Waseem............ 46 Vice President-Operations Robert C. Strandberg(1) (2).................... 42 Director Neal J. Tolar(1)........ 58 Director Bruce S. White(2)....... 66 Director Willis C. Young(1) (2).. 58 Director
- -------- (1)Member of the Audit Committee. (2)Member of the Compensation Committee. 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. 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 electronic 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. From 34 1987 to 1994, Mr Balut was in various sales, marketing and engineering positions with REMEC, a manufacturer of electronic components. Mr. Balut has a B.S. degree in Electrical Engineering from the Massachusetts Institute of Technology and 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 operation and engineering positions of Siliconix, Inc., a microelectronics manufacturer, based in Santa Clara, California and from 1986- 1989 he was in various engineering positions with 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. Robert C. Strandberg has been a Director of the Company since October 1995. Mr. Strandberg has been President and CEO of PSC Inc., a manufacturer of bar code readers, since June 1997 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. 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 has been a Senior Partner of the Atlanta office of BDO Seidman, LLP, an international accounting and consulting firm, since January 1996. From April 1995 to December 1995, Mr. Young was the Chief Financial Officer for Hayes Microcomputer Products, Inc., a manufacturer of modems and communication equipment, where he was engaged to assist in the implementation of Hayes' restructuring in bankruptcy. From 1965 to March 1995, Mr. Young held various positions with BDO Seidman, LLP, and from 1988 to March 1995 he was a Vice Chairman and a member of the Executive Committee. Mr. Young has a B.S. degree in Accounting from Ferris State University. He is a Certified Public Accountant. 35 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. 36 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information known to us with respect to the beneficial ownership of our common stock by the following persons as of December 31, 1999, and as adjusted to reflect the sale of common stock offered by the selling shareholders: . each shareholder known by us to own beneficially more than five percent of our common stock; . each of the executive officers named in the Summary Compensation Table set forth in our proxy materials on Schedule 14A incorporated by reference in this prospectus; . each of our directors; and . all directors and executive officers as a group. Except as otherwise noted below, the address of each person listed on the table is 1818 South Highway 441, Apopka, Florida 32703. The table below assumes the underwriters do not exercise their over- allotment option. If the over-allotment option is exercised in full, the selling shareholders will sell a total of 4,600,000 shares of common stock. We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we include shares of common stock subject to options held by that person that are currently exercisable or will become exercisable within 60 days after December 31, 1999, while those shares are not included for purposes of computing percentage ownership of any other person. Unless otherwise indicated, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
Shares Beneficially Shares Beneficially Owned Owned After Offering -----------------------Number of Shares ---------------------------- Name Number Percent Being Offered Number Percent - ---- ------------ -------------------------- -------------- ------------- Sawtek Inc. Employee Stock Ownership and 401(k) Plan(1) (the "ESOP")............... 11,893,959 28.06% 2,000,000 9,893,959 23.34% Care of: HSBC USA 140 Broadway, 11th Floor New York, NY 10005 Executive Officers and Directors: Steven P. Miller(2).... 1,994,692 4.71% 1,000,000 994,692 2.35% Neal J. Tolar(3)....... 1,979,637 4.67% 1,000,000 979,637 2.31% Gary A. Monetti(4)..... 328,564 * -- 328,569 * Raymond A. Link(5)..... 171,356 * -- 171,356 * Kimon Anemogiannis(6).. 87,162 * -- 87,162 * Robert C. Strandberg(7)......... 23,600 * -- 23,600 * Bruce S. White(8)...... 40,000 * -- 40,000 * Willis C. Young(9)..... 14,000 * -- 14,000 * All Directors and Exec- utive Officers as a Group (11 per- sons)(10)............. 4,721,675 11.14% 2,000,000 2,721,615 6.42%
- -------- * Less than 1% of the outstanding common stock. (1) HSBC Bank USA (formerly known as Marine Midland Bank) is the Trustee of the ESOP. The ESOP, through the Trustee, exercises sole dispositive and voting control over these shares, all of which are held by the ESOP as record owner. Includes 9,029,485 shares allocated to participants' accounts and 3,180,484 shares not yet allocated to participants' accounts. Each ESOP participant, with respect to certain 37 matters, controls the voting of shares allocated to his or her account by instructing the Trustee how such shares shall be voted. The Trustee controls the voting of all unallocated shares. (2) Includes 659,022 shares held by Sawmill Investment Limited Partnership, of which Mr. Miller is the general partner, 795,670 shares held by Via Capri Investment Limited Partnership, over which Mr. Miller has indirect voting control and 540,000 shares held by Via Tuscany Investment Limited Partnership, of which Mr. Miller's wife is the beneficial owner. Excludes 237,892 shares owned by the ESOP but allocated to his account. Mr. Miller has directed the ESOP Trustee to sell approximately 59,500 shares from his allocated ESOP account. (3) Excludes 23,166 shares owned by his majority age children for which he disclaims any beneficial interest. Includes 472,028 shares held by MOP Investment Limited Partnership and 1,507,609 held by MOPNJ Investment Limited Partnership, over which Dr. Tolar has indirect voting control. Dr. Tolar does not have any shares in the ESOP. (4) Includes options to purchase 159,460 shares of common stock exercisable within 60 days of December 31, 1999. Excludes 200,583 shares owned by the ESOP but allocated to his account. Mr. Monetti has directed the ESOP Trustee to sell approximately 50,200 shares from his allocated ESOP account. (5) Includes options to purchase 107,500 shares of common stock exercisable within 60 days of December 31, 1999. Excludes 59,098 shares owned by the ESOP but allocated to his account. Mr. Link has directed the ESOP Trustee to sell approximately 14,800 shares from his allocated ESOP account. (6) Includes options to purchase 78,334 shares of common stock exercisable within 60 days of December 31, 1999. Excludes 48,207 shares owned by the ESOP but allocated to his account. Dr. Anemogiannis has directed the ESOP Trustee to sell approximately 12,100 shares from his allocated ESOP account. (7) Includes options to purchase 13,332 shares of common stock exercisable within 60 days of December 31, 1999. (8) Includes options to purchase 40,000 shares of common stock exercisable within 60 days of December 31, 1999. (9) Includes options to purchase 14,000 shares of common stock exercisable within 60 days of December 31, 1999. (10) Includes options to purchase 449,026 shares of common stock exercisable within 60 days of December 31, 1999. 38 UNDERWRITING Hambrecht & Quist LLC, CIBC World Markets Corp. and Banc of America Securities LLC are the representatives of the underwriters. Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below, through their representatives, have severally agreed to purchase from the selling shareholders the following number of shares of common stock:
Number of Name Shares ---- --------- Hambrecht & Quist LLC.............................................. CIBC World Markets Corp. .......................................... Banc of America Securities LLC..................................... --------- Total ............................................................ 4,000,000 =========
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and the independent auditors. The underwriters are committed to purchase all of the shares of common stock offered by the selling shareholders if they purchase any shares. The following table shows the per share and total underwriting discounts and commissions the selling shareholders will pay to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares.
Without With Over- Over- Allotment Allotment Exercise Exercise --------- --------- Per Share................................................ $ $ Total.................................................... $ $
We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ . The underwriters propose to offer the shares directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After this offering of the shares, the offering price and other selling terms may be changed by the underwriters. Certain of the selling shareholders have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to an aggregate of 600,000 additional shares of common stock at the public offering price, less the underwriting discount set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered hereby. These selling shareholders will be obligated, pursuant to the option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of shares of common stock in this offering. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. 39 We and certain selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of these liabilities. Certain beneficial owners of shares, including the executive officers, directors and the selling shareholders, who will own in the aggregate 12,635,574 shares after the offering, have executed lock-up agreements under which these shareholders, except for the ESOP, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, sell or otherwise dispose of any shares of common stock or options to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock owned by them during the 90-day period following the date of this prospectus. The ESOP, which will hold 9,893,959 shares after this offering (assuming no exercise of the over-allotment option) is subject to a lock-up agreement except that the ESOP may distribute shares without the lock-up restriction upon the death, retirement or disability of a participant. The lock-up agreements provide that Hambrecht & Quist LLC may, in its sole discretion and at any time without notice to our shareholders or the public market, release all or a portion of the shares subject to the lock-up agreements. We have agreed that we will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell, grant any option to purchase or otherwise dispose of any shares or any securities exchangeable for or convertible into shares during the 90-day period following the date of this prospectus, except that we may issue, and grant options to purchase, shares under our stock option and employee stock purchase plans and under currently outstanding options. Sales of such shares in the future could adversely affect the market price of the common stock. Certain persons participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of common stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the- counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. In connection with this offering, certain underwriters and selling group members (if any) who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in our common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. TRANSFER AGENT Our transfer agent is SunTrust Bank-Atlanta. LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby and certain other legal matters will be passed upon for the Company by Gray, Harris & Robinson, P.A., Orlando, Florida. William A. Grimm, a shareholder in Gray, Harris & Robinson, P.A. is the secretary of Sawtek Inc. Certain legal matters will be passed upon for the underwriters by Jones, Day, Reavis & Pogue, Atlanta, Georgia. Jones, Day, Reavis & Pogue may rely upon Gray, Harris & Robinson, P.A. with respect to the laws of Florida. 40 EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at September 30, 1999 and 1998, and for each of the three years in the period ended September 30, 1999, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. INFORMATION INCORPORATED BY REFERENCE The Securities and Exchange Commission allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents that we have previously filed with the Commission or documents that we will file with the Commission in the future. The information incorporated by reference is considered to be part of this prospectus, except as modified or superseded by this prospectus, and later information documents that we file with the Securities and Exchange Commission will automatically update and supersede this information. We incorporate by reference the documents listed below, and any future filings made with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, until we close this offering, and the over-allotment option expires or is exercised. The documents we incorporate by reference are: . Our annual report on Form 10-K for the year ended September 30, 1999. . Our proxy materials on Schedule 14A, as filed with the Securities and Exchange Commission on December 6, 1999. . Our current report on Form 8-K, as filed with the Securities and Exchange Commission on January 4, 2000. . The description of our common stock contained in our registration statement on Form 8-A, as filed with the Securities and Exchange Commission on April 29, 1996. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address and number: Raymond A. Link, Senior Vice President and Chief Financial Officer, Sawtek Inc., 1818 South Highway 441, Apopka, Florida 32703; telephone number (407) 886-8860. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any materials we file with the Securities and Exchange Commission at the Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for more information on its public reference rooms. The Securities and Exchange Commission also maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission. We have filed with the Securities and Exchange Commission a registration statement (which contains this prospectus) on Form S-3 under the Securities Act of 1933. The registration statement relates to the common stock offered by the selling shareholders. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Please refer to the registration statement and its exhibits and schedules for further information with respect to us and our common stock. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, we refer you to the copy of that contract or document filed as an exhibit to the registration statement. You may read and obtain a copy of the registration statement and its exhibits and schedules from the Securities and Exchange Commission, as described in the preceding paragraph. 41 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- 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 REPORT OF 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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sawtek Inc. and subsidiaries at September 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Orlando, Florida October 22, 1999 F-2 Sawtek Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share data) ASSETS
September 30, ------------------ 1999 1998 -------- -------- Current Assets: Cash, cash equivalents and short-term investments......... $115,274 $ 84,131 Accounts receivable, net.................................. 18,641 11,569 Inventories............................................... 8,052 8,453 Deferred income taxes..................................... 1,063 1,179 Other current assets...................................... 2,107 1,184 -------- -------- Total current assets................................... 145,137 106,516 Property, plant and equipment, net......................... 46,442 42,194 -------- -------- Total assets........................................... $191,579 $148,710 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 4,055 $ 1,830 Accrued wages and benefits................................ 3,638 3,198 Other accrued liabilities................................. 1,674 1,912 Current maturities of long-term debt...................... 379 469 Income taxes payable...................................... 191 69 -------- -------- Total current liabilities.............................. 9,937 7,478 Long-term debt, less current maturities.................... 1,790 2,169 Deferred income taxes...................................... 21,453 15,186 Shareholders' Equity: Common stock; $.0005 par value; 120,000,000 authorized shares; 42,668,194 issued and outstanding shares......... 11 11 Capital surplus........................................... 74,765 72,816 Unearned ESOP compensation................................ (781) (975) Retained earnings......................................... 87,330 56,646 Less common stock held in treasury, at cost; 437,705 shares in 1999 and 771,000 shares in 1998................ (2,926) (4,621) -------- -------- Total shareholders' equity............................. 158,399 123,877 -------- -------- Total liabilities and shareholders' equity............. $191,579 $148,710 ======== ========
See notes to consolidated financial statements. F-3 Sawtek Inc. and Subsidiaries Consolidated Statements of Income (Dollars in thousands, except per share data)
Year Ended September 30, ------------------------ 1999 1998 1997 -------- ------- ------- Net sales............................................. $100,276 $97,700 $85,041 Cost of sales......................................... 42,224 44,811 38,569 -------- ------- ------- Gross profit.......................................... 58,052 52,889 46,472 Operating expenses: Selling expenses..................................... 5,637 6,008 5,384 General and administrative expenses.................. 4,319 4,693 5,842 Research and development expenses.................... 5,627 4,285 3,756 -------- ------- ------- Total operating expenses.......................... 15,583 14,986 14,982 -------- ------- ------- Operating income...................................... 42,469 37,903 31,490 Other income, net..................................... 4,737 3,542 1,785 -------- ------- ------- Income before income taxes............................ 47,206 41,445 33,275 Income taxes.......................................... 16,522 15,240 12,556 -------- ------- ------- Net income........................................ $ 30,684 $26,205 $20,719 ======== ======= ======= Net income per share: Basic................................................ $ 0.73 $ 0.62 $ 0.50 ======== ======= ======= Diluted.............................................. $ 0.72 $ 0.60 $ 0.49 ======== ======= ======= Shares used in per share calculation: Basic................................................ 41,946 42,360 41,092 ======== ======= ======= Diluted.............................................. 42,815 43,356 42,668 ======== ======= =======
See notes to consolidated financial statements. F-4 Sawtek Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (Dollars in thousands)
Common Stock Unearned ------------- Capital ESOP Retained Treasury Shares Amount Surplus Compensation Earnings Stock Total ------ ------ ------- ------------ -------- -------- -------- Balance at Oct. 1, 1996................... 40,048 $11 $53,057 $(1,367) $10,393 $ 62,094 Net income.............. 20,719 20,719 Sale and issuance of common stock........... 1,816 10,627 10,627 Compensatory stock option tax benefit..... 4,700 4,700 Stock option compensation........... 553 553 ESOP allocation......... 196 196 Net loss of MSI for the three months ended Sept. 30, 1997......... (671) (671) ------ --- ------- ------- ------- -------- Balance at Sept. 30, 1997................... 41,864 11 68,937 (1,171) 30,441 98,218 Net income.............. 26,205 26,205 Issuance of common stock.................. 804 1,171 1,171 Compensatory stock option tax benefit..... 2,708 2,708 Purchase of treasury stock $(4,621) (4,621) ESOP allocation......... 196 196 ------ --- ------- ------- ------- ------- -------- Balance at Sept. 30, 1998................... 42,668 11 72,816 (975) 56,646 (4,621) 123,877 Net income.............. 30,684 30,684 Issuance of common stock.................. (1,054) 4,627 3,573 Compensatory stock option tax benefit..... 3,003 3,003 Purchase of treasury stock.................. (2,932) (2,932) ESOP allocation......... 194 194 ------ --- ------- ------- ------- ------- -------- Balance at Sept. 30, 1999................... 42,668 $11 $74,765 $ (781) $87,330 $(2,926) $158,399 ====== === ======= ======= ======= ======= ========
See notes to consolidated financial statements. F-5 Sawtek Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands)
Year Ended September 30, ---------------------------- 1999 1998 1997 -------- -------- -------- Operating activities: Net income..................................... $ 30,684 $ 26,205 $ 20,719 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 7,244 6,036 3,995 Deferred income taxes.......................... 6,383 6,670 7,646 ESOP allocation................................ 194 196 196 Stock option compensation...................... 553 Loss on disposal of fixed assets............... 616 87 Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable.......................... (7,072) 758 (3,656) Inventories.................................. 401 (1,333) (464) Other current assets......................... (649) (404) (155) Increase (decrease) in liabilities: Accounts payable............................... 2,225 (1,057) 764 Accrued liabilities............................ 202 (953) 1,701 Income taxes payable........................... 2,787 2,709 3,923 -------- -------- -------- Net cash provided by operating activities... 42,399 39,443 35,309 Investing activities: Purchase of property, plant and equipment...... (11,428) (7,915) (14,624) Short-term investments......................... (22,635) (26,235) (15,764) -------- -------- -------- Net cash used in investing activities....... (34,063) (34,150) (30,388) Financing activities: Proceeds from long-term debt................... 146 309 Principal payments on long-term debt........... (469) (2,166) (1,279) Issuance of common stock....................... 3,573 1,171 10,627 Purchase of common stock for treasury.......... (2,932) (4,621) -------- -------- -------- Net cash provided by (used in) financing activities................................. 172 (5,470) 9,657 -------- -------- -------- Increase (decrease) in cash and cash equivalents.................................... 8,508 (177) 14,578 Cash and cash equivalents at beginning of period......................................... 42,132 42,309 27,731 -------- -------- -------- Cash and cash equivalents at end of period...... 50,640 42,132 42,309 Short-term investments.......................... 64,634 41,999 15,764 -------- -------- -------- Cash, cash equivalents and short-term investments................................ $115,274 $ 84,131 $ 58,073 ======== ======== ========
See notes to consolidated financial statements. F-6 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Description of Business. Sawtek Inc. and subsidiaries (the "Company") design, develop, manufacture and market a broad range of electronic signal processing components based on surface acoustic wave ("SAW") technology. The Company's primary products are custom-designed, high performance bandpass filters, resonators, delay lines, oscillators, SAW-based subsystems and chemical sensors. These products are used in a variety of microwave and RF systems, such as Code Division Multiple Access and Global System for Mobile communications- based digital wireless systems, digital microwave radios, WLAN, cable television equipment and various defense and satellite systems. In fiscal 1998, the Company acquired Microsensor Systems, Inc. ("MSI"), a manufacturer of SAW- based chemical sensors, in a transaction accounted for as a pooling-of- interests. The Company's consolidated financial statements for all periods prior to this acquisition have been restated to include MSI's financial position, results of operations and cash flows. 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. The estimated useful lives used in computing depreciation expense are as follows: Building and Improvements 10-30 years Production and Test Equipment 4-8 years Computer Equipment 4-8 years Furniture and Fixtures 5-10 years
Expenditures for maintenance, repairs and renewals of minor items are expensed as incurred. Major renewals and improvements are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations for the period. 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. F-7 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition. Revenues from production contracts are recognized when the product is completed and shipped. Revenues from non-recurring engineering ("NRE") are recognized when the parts or services have been completed and units, including prototypes, have been shipped. Revenues from NRE are less than 10% of total net sales for the periods reported. Income Taxes. The provision for income taxes includes Federal and State taxes currently payable and deferred taxes arising from temporary differences between income for financial and tax reporting purposes. These temporary differences result principally from the use of accelerated methods of depreciation for tax purposes, earnings of the Costa Rican subsidiary not currently subject to tax, the provisions for losses on inventories and accounts receivable, and the accounting for stock compensation. Research and development tax credits are applied as a reduction to the provision for income taxes in the year in which they are utilized. ESOP Compensation Expense. 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." 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. Comprehensive Income. Effective October 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. The objective of SFAS No. 130 is to report all changes in equity that result from transactions and economic events other than transactions with owners. There is no difference between net income and comprehensive income for any of the periods presented. Impact of Recently Issued Accounting Standard. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company expects to adopt the new Statement effective October 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. Reclassifications. Certain amounts in prior years have been reclassified to conform to current year presentation. 2. Acquisition of MSI On February 25, 1998, the Company acquired all of the outstanding shares of MSI, a manufacturer of chemical sensors, in exchange for 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, F-8 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 3. Cash, Cash Equivalents and Short-Term Investments Cash, cash equivalents and short-term investments consist of the following:
September 30, ---------------- 1999 1998 -------- ------- (Dollars in thousands) Cash and equivalents: Cash and overnight investments................................ $ 9,943 $ 2,390 Commercial paper, banker's acceptances and money market preferreds under 90 days........................ 40,697 39,742 -------- ------- Cash and equivalents.......................................... 50,640 42,132 Short-term investments: Banker's acceptances and money market preferreds over 90 days......................................................... 18,618 8,761 Municipal securities.......................................... 3,011 7,775 Certificates of deposit....................................... 12,005 11,401 Government agency securities.................................. 31,000 14,062 -------- ------- Short-term investments........................................ 64,634 41,999 -------- ------- Cash, cash equivalents and short-term investments............ $115,274 $84,131 ======== =======
4. Allowance for Doubtful Accounts and Sales Returns The allowance for doubtful accounts and sales returns is as follows:
September 30, --------------------- 1999 1998 1997 ------ ------ ----- (Dollars in thousands) Balance, beginning of period............................. $1,399 $ 684 $ 654 Provision for doubtful accounts and sales returns....... 174 1,396 821 Sales returns and uncollectible accounts written off.... (438) (681) (791) ------ ------ ----- Balance, end of period................................. $1,135 $1,399 $ 684 ====== ====== =====
5. Inventories Net inventories consist of the following:
September 30, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Raw material......................................... $ 2,984 $ 3,809 Work in process...................................... 1,993 1,969 Finished goods....................................... 3,075 2,675 ----------- ----------- Total.............................................. $ 8,052 $ 8,453 =========== ===========
F-9 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The allowance for obsolete and slow moving inventory is as follows:
September 30, ---------------------- 1999 1998 1997 ------ ------ ------ (Dollars in thousands) Balance, beginning of period........................ $2,118 $1,935 $1,705 Charged to cost of sales............................ 130 345 270 Disposal of inventory............................... (139) (162) (40) ------ ------ ------ Balance, end of period.............................. $2,109 $2,118 $1,935 ====== ====== ======
6. Property, Plant and Equipment Property, plant and equipment consist of the following:
September 30, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Land and improvements.............................. $ 830 $ 830 Buildings.......................................... 16,500 16,500 Production and test equipment...................... 39,797 37,235 Computer equipment................................. 3,455 3,239 Furniture and fixtures............................. 2,865 2,666 Construction in progress........................... 9,589 1,138 ----------- ----------- 73,036 61,608 Less accumulated depreciation...................... 26,594 19,414 ----------- ----------- Total............................................ $ 46,442 $ 42,194 =========== ===========
Approximately $36,000, $98,000 and $159,000 of interest costs were capitalized as part of property, plant and equipment in 1999, 1998 and 1997, respectively. 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 $30,000,000 with interest at LIBOR plus 125 basis points. The line of credit is unsecured and renewable annually. Covenants in connection with the line of credit and with long-term debt agreements impose restrictions with respect to, among other things, the maintenance of certain financial ratios, additional indebtedness and disposition of assets. The Company was in compliance with the covenants as of September 30, 1999 and 1998. There were no borrowings against the line of credit at September 30, 1999 and 1998. F-10 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Long-Term Debt and Lease Obligations Long-term debt consists of the following:
September 30, ----------------------- 1999 1998 ----------- ----------- (Dollars in thousands) Industrial Revenue Bond (a)..................... $ 259 $ 375 Industrial Revenue Bond (b)..................... 1,910 2,263 ----------- ----------- 2,169 2,638 Less Current Maturities......................... 379 469 ----------- ----------- $1,790 $ 2,169 =========== ===========
(a) In 1982, the Company obtained $1,800,000 in financing through the Orange County Industrial Development Authority. The obligation is secured by land and land improvements, the building and related equipment with a carrying value of approximately $696,000 at September 30, 1999. The obligation is payable in varying quarterly installments through 2001 plus interest at 68% of the prime rate. (b) In 1995, the Company obtained $3,500,000 in financing through the Orange County Industrial Development Authority. The obligation is secured by a building expansion and related equipment with a carrying value of approximately $6,637,000 at September 30, 1999. The obligation is payable in quarterly installments of $88,334 through March 2000, thereafter in quarterly installments of $43,334 through March 2010, both plus interest at LIBOR plus 150 basis points. The Company has two non-cancelable lease agreements for facilities and, in the past, leased certain equipment. Rental expense was approximately $394,000, $843,000 and $461,000 in 1999, 1998 and 1997, respectively. Required future payments for long-term debt and operating leases are as follows:
Debt Leases ------------ ------------ (Dollars in thousands) 2000............................................. $ 379 $ 52 2001............................................. 288 52 2002............................................. 202 17 2003............................................. 173 2004............................................. 173 Thereafter....................................... 954 ------------ ---------- $2,169 $ 121 ============ ==========
The Company made interest payments of approximately $152,000, $228,000 and $313,000 on long-term debt in 1999, 1998 and 1997, respectively. The fair value of the Company's long-term debt approximates the carrying amount. F-11 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Income Taxes The income tax provision consists of the following:
Year Ended September 30, ----------------------- 1999 1998 1997 ------- ------- ------- (Dollars in thousands) Current: Federal........................................... $ 9,414 $ 7,908 $ 4,537 State............................................. 725 662 373 ------- ------- ------- 10,139 8,570 4,910 Deferred: Federal........................................... 6,068 6,024 6,554 State............................................. 315 646 1,092 ------- ------- ------- 6,383 6,670 7,646 ------- ------- ------- Total Income Tax Provision....................... $16,522 $15,240 $12,556 ======= ======= =======
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:
September 30, ------------------ 1999 1998 -------- -------- (Dollars in thousands) Current: Accruals not currently deductible..................... $ 389 $ 481 Inventory costs capitalized for tax purposes.......... 71 120 Inventory loss provision............................. 603 578 -------- -------- Deferred Tax Asset................................... $ 1,063 $ 1,179 ======== ======== Noncurrent: Stock option compensation not currently deductible.... $ 159 $ 245 Earnings of subsidiary not currently taxed............ (18,706) (12,630) Excess tax over book depreciation..................... (2,906) (2,801) -------- -------- Deferred Tax Liability............................... $(21,453) $(15,186) ======== ========
A reconciliation of statutory Federal income taxes to reported income taxes is as follows:
Year Ended September 30, ------------------------- 1999 1998 1997 ------- ------- ------- (Dollars in thousands) Income taxes computed at the Federal Statutory rate of 35%...................................... $16,522 $14,506 $11,652 State income taxes, net of Federal benefit....... 676 850 952 Other-tax credits, tax-exempt interest............ (676) (116) (48) ------- ------- ------- Total Income Tax Provision...................... $16,522 $15,240 $12,556 ======= ======= =======
F-12 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1999 and 1998, the Company's tax liability was reduced and its capital surplus was increased by approximately $3,003,000 and $2,708,000, respectively, as a result of transactions involving stock options. The Company made income tax payments of approximately $7,765,000, $6,276,000 and $1,007,000 in 1999, 1998 and 1997, respectively. The Company provides for deferred taxes on the non-repatriated earnings of its subsidiary in Costa Rica. The subsidiary benefits from a complete exemption from Costa Rican income taxes through 2003 and a 50% exemption thereafter through 2007. 10. Earnings Per Share (in thousands, except per share data) The following table sets forth the computation of basic and diluted earnings per share:
Year Ended September 30, ------------------------ 1999 1998 1997 -------- ------- ------- Net income......................................... $30,684 $26,205 $20,719 ======== ======= ======= Weighted-average common stock outstanding for basic earnings per share................................ 41,946 42,360 41,092 Dilutive effect of employee stock options.......... 869 996 1,576 -------- ------- ------- Weighted-average common stock outstanding for diluted earnings per share........................ 42,815 43,356 42,668 ======== ======= ======= Basic earnings per share........................... $ 0.73 $ 0.62 $ 0.50 Diluted earnings per share......................... $ 0.72 $ 0.60 $ 0.49
The weighted-average common stock outstanding includes all ESOP shares outstanding. 11. Concentration of Risk (a) Significant customers and sales to foreign markets. Sales to the United States government (both as a prime contractor and on a subcontract basis) to foreign markets and to significant customers as a percent of the Company's net sales were as follows:
Year Ended September 30, ---------------- 1999 1998 1997 ---- ---- ---- U.S. Government (Inclusive of Significant Customers)...... * * 11% Foreign Markets (Inclusive of Significant Customers and European Market)......................................... 41% 37% 43% European Market (Inclusive of Significant Customers)...... 18% 18% 22% Asian and Pacific Rim Market (principally to S. Korea).... 18% 16% 17% Significant Customer A.................................... 23% 17% 14% Significant Customer B.................................... * * 12% Significant Customer C.................................... * * 11% Significant Customer D.................................... 13% 15% 11% Significant Customer E.................................... * 15% *
-------- * Less than 10% F-13 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (b) Concentrations or 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 purchases this material on a purchase order basis and does not carry significant inventories of these components. 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 design and/or manufacture of high technology products either recently introduced or not yet introduced to the marketplace. The Company's customers are concentrated into a small group, of which several account for more than 10% of net sales as noted above, and a significant percentage of which are foreign. Substantially all of the Company's trade accounts receivable are due from such sources. The Company performs continuing 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 certain foreign currency exposures for the purchase of equipment or raw materials denominated in foreign currencies. At September 30, 1999, the Company is committed to purchase 4,835,200 Dutch guilders (approximately $2.4 million) under forward foreign currency contracts that mature in October 1999 for the purchase of equipment. 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. 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. At September 30, 1999, any deferred hedging gains or losses are immaterial. 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. F-14 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's chief operating decision-maker is considered to be 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, video and data communication applications. 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. Net sales by markets (as defined by the Company), as a percentage of total revenues for years ended September 30, 1999, 1998 and 1997, were as follows: Communications, 82%, 81%, and 78%, respectively; military and space, 6%, 9%, and 12%, respectively; and other markets, 12%, 10%, and 10%, respectively. Sales are reported in the geographic area where they originate. Transfers from the U.S. to Costa Rica are made on a basis intended to reflect the market price of the products.
Net Sales Operating Income Assets -------------------------- ----------------------- ----------------- 1999 1998 1997 1999 1998 1997 1999 1998 -------- ------- ------- ------- ------- ------- -------- -------- (Dollars in thousands) United States........... $ 66,373 $70,960 $63,795 $25,416 $23,181 $18,096 $142,114 $117,973 Costa Rica.............. 47,053 36,612 28,438 16,783 14,722 13,424 49,137 30,737 Transfers/Eliminations.. (13,150) (9,872) (7,192) 270 (30) 328 -------- ------- ------- ------- ------- ------- -------- -------- Consolidated Results.... $100,276 $97,700 $85,041 $42,469 $37,903 $31,490 $191,579 $148,710 ======== ======= ======= ======= ======= ======= ======== ========
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. 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. F-15 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 $299,000 and $368,000 in 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, 1999, 3,180,484 of these shares remain unallocated. These shares will be allocated through fiscal year 2003. The Company made contributions of approximately $265,000, $279,000 and $293,000 to the ESOP in 1999, 1998 and 1997, respectively. Allocations to participants' accounts were 915,838 shares, 964,126 shares and 1,012,414 shares in 1999, 1998 and 1997, 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 $101,000 and $70,000 to this plan in 1999 and 1998, respectively. 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. F-16 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information concerning options under these plans is as follows:
Shares Under Price Range Weighted-Average Option of Options Exercise Price ------------ ------------- ---------------- Balance at October 1, 1996................... 3,090,920 $ 0.06-$12.38 $ 1.07 Granted................. 499,000 $ 5.53-$16.63 $12.74 Terminated.............. (23,160) $ 0.37-$12.38 $ 5.63 Exercised............... (1,136,500) $ 0.06-$ 5.53 $ 0.49 ---------- 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 ========== Exercisable at September 30, 1999............... 788,791 ==========
The weighted-average contractual life of stock options outstanding as of September 30, 1999 was 5.25 years. The following table summarizes information about fixed stock options outstanding at September 30, 1999:
Weighted-Avg. Weighted- Number Weighted- Range of Number Remaining Avg. Exercise Exercisable Avg. Exercise Exercise Prices Outstanding Contractual Life Price at Sept. 30, 1999 Price --------------- ----------- ---------------- ------------- ----------------- ------------- $0.06-$ 1.00 539,128 5.43 $ 0.33 539,128 $ 0.33 $1.01-$12.50 1,014,388 4.58 $ 5.57 160,844 $ 7.27 $12.51-$35.13 740,225 6.03 $26.07 88,819 $14.24 --------- ------- 2,293,741 788,791 ========= =======
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:
Year Ended September 30, ----------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- (Dollars in thousands, except per share data) Net income as reported..... $ 30,684 $ 26,205 $ 20,719 Pro forma net income....... $ 27,615 $ 24,376 $ 19,657 Pro forma basic earnings per share................. $ 0.66 $ 0.58 $ 0.48 Pro forma diluted earnings per share................. $ 0.66 $ 0.57 $ 0.46
The weighted-average fair value of options granted during the year ended September 30, 1999, 1998 and 1997 was $18.79, $6.96 and $9.81, respectively, using the Black-Scholes option-pricing model with the following weighted- average assumptions: 1999--expected volatility of 77%, risk-free interest rate of 5.75%, no expected dividends and an expected life of 4.94 years; 1998-- expected volatility of 78%, risk-free interest rate of 5.71%, no expected dividends and an expected life of 4.79 years; 1997--expected volatility of 74%, risk-free interest rate of 6.45%, no expected dividends and an expected life of 4.5 years. F-17 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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 issuances of shares under other stock related benefit programs. To date, 1,129,810 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-18 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. Quarterly Financial Information (unaudited) Selected quarterly financial data is summarized below:
Quarter Ended --------------------------------------------------------------- (Dollars in thousands, except per share data) Fiscal 1999 Fiscal 1998 ------------------------------- ------------------------------- Sept. June Mar. Dec. Sept. June Mar. Dec. 30, 30, 31, 31, 30, 30, 31, 31, 1999 1999 1999 1998 1998 1998 1998 1997 ------- ------- ------- ------- ------- ------- ------- ------- Net sales.............. $28,515 $26,045 $23,497 $22,219 $21,522 $26,301 $25,183 $24,694 Cost of sales.......... 11,701 10,737 9,828 9,958 9,665 12,585 11,190 11,371 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit........... 16,814 15,308 13,669 12,261 11,857 13,716 13,993 13,323 Operating expenses: Selling expenses...... 1,395 1,517 1,340 1,385 1,295 1,436 1,508 1,769 General and administrative expenses............. 1,089 1,114 1,037 1,079 527 1,226 1,509 1,431 Research and development expenses............. 1,480 1,334 1,616 1,197 1,544 923 950 868 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses 3,964 3,965 3,993 3,661 3,366 3,585 3,967 4,068 ------- ------- ------- ------- ------- ------- ------- ------- Operating income....... 12,850 11,343 9,676 8,600 8,491 10,131 10,026 9,255 Other income, net...... 1,328 1,174 1,116 1,119 1,009 921 794 818 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes................. 14,178 12,517 10,792 9,719 9,500 11,052 10,820 10,073 Income taxes........... 4,963 4,380 3,777 3,402 3,420 4,089 4,004 3,727 ------- ------- ------- ------- ------- ------- ------- ------- Net income............. $ 9,215 $ 8,137 $ 7,015 $ 6,317 $ 6,080 $ 6,963 $ 6,816 $ 6,346 ======= ======= ======= ======= ======= ======= ======= ======= Net income per share: Basic(1).............. $ 0.22 $ 0.19 $ 0.17 $ 0.15 $ 0.14 $ 0.16 $ 0.16 $ 0.15 ======= ======= ======= ======= ======= ======= ======= ======= Diluted(1)............ $ 0.21 $ 0.19 $ 0.17 $ 0.15 $ 0.14 $ 0.16 $ 0.16 $ 0.15 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in per share calculations: Basic................. 42,193 42,004 41,824 41,764 42,502 42,542 42,354 42,046 Diluted............... 43,236 43,066 42,494 42,462 43,132 43,524 43,302 43,466
- -------- (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. F-19 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4,000,000 Shares [LOGO OF SAWTEK] Common Stock ------------ PROSPECTUS ------------ Chase H&Q CIBC World Markets Banc of America Securities LLC ------------ , 2000 ------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The following is a statement of estimated expenses of the distribution of the securities being registered other than underwriting compensation, all of which will be paid by the selling shareholders.
Estimated --------- Securities and Exchange Commission registration.................. $ 59,000 NASD filing fee.................................................. 21,660 Blue Sky fee and expenses (including attorney's fees and expenses)....................................................... 5,000 Printing and engraving expenses.................................. 75,000 Transfer agent fees and expenses................................. 5,000 Accounting fees and expenses..................................... 35,000 Legal fees and expenses.......................................... 330,000 Advisory fees for ESOP Trustee................................... 50,000 Miscellaneous expense............................................ 53,500 --------- Total.......................................................... $ 634,160 =========
Item 15. Indemnification of Directors and Officers The registrant, a Florida corporation, is empowered by Section 607.0850 of the Florida Business Corporation Act, ("Section 607.0850"), subject to the procedures and limitations stated therein, to indemnify any person who was or is a party to any proceeding (other than an action by, or in the right of, the corporation), by reason of the fact that he is or was a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise against liability incurred in connection with such proceeding, including any appeal thereof, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 607.0850 also empowers a Florida corporation to indemnify any person who was or is a party to any proceeding by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses and amounts paid in settlement not exceeding, in the judgment of the board of directors, the estimated expense of litigating the proceeding to conclusion, actually and reasonably incurred in connection with the defense or settlement of such proceeding, including any appeal thereof, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudicated to be liable unless, and only to the extent that, the court in which such proceeding was brought, or any other court of competent jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any proceeding referred to above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses actually and reasonably incurred by him in connection therewith. The indemnification and advancement of expenses provided pursuant to Section 607.0850 are not exclusive, and a corporation may make any other or further indemnification or advancement of expenses of any of its directors, officers, employees or agents, under any bylaw, agreement, vote of shareholders or disinterested II-1 directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. However, a director, officer, employee or agent is not entitled to indemnification or advancement of expenses if a judgment or other final adjudication establishes that his action or omissions to act were material to the cause of action so adjudicated and constitute (a) a violation of the criminal law, unless the director, officer, employee or agent had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; (b) a transaction from which the director, officer, employee or agent derived an improper personal benefit; (c) in the case of a director, a circumstance under which the liability provisions of Section 607.0834 of the Florida Business Corporation Act, relating to a director's liability for voting in favor of or asserting to an unlawful distribution, are applicable; or (d) willful misconduct or a conscious disregard for the best interests of the corporation in a proceeding by or in the right of the corporation to procure a judgment in its favor or in a proceeding by or in the right of a shareholder. The registrant's Articles of Incorporation provides that the company shall indemnify its officers and directors to the extent permitted by Section 607.0850. Pursuant to the underwriting agreement filed as Exhibit 1.1 to this registration statement, the underwriters have agreed to indemnify the directors, officers and controlling persons of the registrant against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act of 1933, as amended. The registrant maintains an insurance policy covering directors and officers of the registrant for the wrongful act for which they become legally obligated to pay or for which the registrant is required to indemnify its directors or officers. Item 16. Exhibits The following exhibits are filed as part of this registration statement: 1.1 Form of Underwriting Agreement. 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). 5.1 Legal opinion of Gray, Harris & Robinson, P.A. 10.1 Sawtek Inc. 1983 Incentive Stock Option Plan (incorporated by reference to Registration Statement on Form S-8, File No. 333-10579). 10.2 Sawtek Inc. Second Stock Option Plan (incorporated by reference to Registration Statement on Form S-8, File No. 333-11523). 10.3 Sawtek Inc. Employee Stock Purchase Plan (incorporated by reference to Registration Statement on Form S-8, File No. 333-11701 and amendment incorporated by reference to Form 10-Q for the period ended June 30, 1999, filed on July 19, 1999). 10.4 Mortgage and Security Agreement, dated January 9, 1991, by and between the Company, the Orange County Industrial Development Authority ("OCIDA"), and Sun Bank (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.5 Fourth Amendment to Installment Sales and Security Agreement, dated January 8, 1991, by and between the Company, OCIDA, and Sun Bank (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860).
II-2 10.6 Amended and Restated Loan and Security Agreement, dated November 15, 1995, between the Company and SunTrust Bank, Central Florida, National Association ("SunTrust") (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.7 Increase Promissory Note dated November 10, 1995 (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.8 Renewal, Increase and Consolidation Promissory Note, dated November 10, 1995 (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.9 Promissory Demand Note, dated November 10, 1995 (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.10 Fifth Amendment to Installment Sale and Security Agreement, dated as of March 1, 1995, between the Company, Sun Bank and OCIDA (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.11 Fourth Supplemental Trust Indenture, dated as of March 1, 1995, between the Company, Sun Bank and OCIDA (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.12 Eighth Amendment to Loan and Security Agreement, Fourth Amendment to Company Loan Agreement and First Amendment to Second Company Loan Agreement, dated as of March 11, 1995, between the Company and Sun Bank (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.13 Bond Purchase Agreement dated as of December 1, 1981, between OCIDA and the Company (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.14 Installment Sale and Security Agreement, dated as of December 1, 1981, between OCIDA and the Company and accepted by the Guarantors (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.15 Guaranty Agreement dated as of December 1, 1981, among the Guarantors and OCIDA (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 10.16 Trust Indenture dated as of December 1, 1981, between OCIDA and the Trustee and accepted by the Company and the Guarantors (incorporated by reference to Registration Statement on Form S-1, File No. 333-1860). 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). 10.18 First Amendment to Amended and Restated Loan and Security Agreement dated December 9, 1996 between the Company and SunTrust Bank, Central Florida, N.A. (incorporated by reference to Form 10-Q filed January 21, 1997). 10.19 First Amendment to Fourth Supplemental Trust Indenture dated November 19, 1996 by and among the Company, SunTrust Bank, Central Florida, N.A., and the Orange County Industrial Development Authority (incorporated by reference to Form 10-Q filed April 21, 1997). 10.20 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).
II-3 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). 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. 23.2 Consent of Gray, Harris & Robinson (included in Exhibit 5.1). 24.1* Power of attorney.
- -------- * Previously filed Item 17. Undertakings The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this amendment to its registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Apopka, State of Florida, on the 24th day of January, 2000. SAWTEK INC. /s/ GARY A. MONETTI By: _________________________________ Gary A. Monetti Chief Executive Officer II-5 Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons on behalf of the registration in the capacities indicated on the 24th day of January, 2000.
Signature Title --------- ----- * Director ______________________________________ Neal J. Tolar * Director ______________________________________ Robert C. Strandberg * Director ______________________________________ Bruce S. White * Chairman of the Board of ______________________________________ Directors Steven P. Miller * Director ______________________________________ Willis C. Young /s/ Gary A. Monetti Chief Executive Officer ______________________________________ and Director (Principal Gary A. Monetti Executive Officer) * Senior Vice President- ______________________________________ Finance, Chief Financial Raymond A. Link Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ Gary A. Monetti *By: ________________________________ Gary A. Monetti As Attorney-in-Fact *By: ________________________________ Raymond A. Link As Attorney-in-Fact II-6 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 SAWTEK INC. 4,000,000 Shares/1/ Common Stock FORM OF UNDERWRITING AGREEMENT ------------------------------ January __, 2000 HAMBRECHT & QUIST LLC CIBC World Markets Corp. Banc of America Securities LLC c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Certain shareholders of Sawtek Inc., a Florida corporation (herein called the Company), named in Schedule II hereto (herein collectively called the Selling Securityholders) propose to sell an aggregate of 4,000,000 shares of Common Stock, par value $0.0005 per share (herein called the Common Stock), of the Company (said shares of Common Stock being herein called the Underwritten Stock). Certain Selling Securityholders, also as set forth on Schedule II, propose to grant to the Underwriters (as hereinafter defined) an option to purchase up to 600,000 additional shares of Common Stock (herein called the Option Stock and with the Underwritten Stock herein collectively called the Stock). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company and the Selling Securityholders severally hereby confirm the agreements made with respect to the purchase of the Stock by the several underwriters, for whom you are acting, named in Schedule I hereto (herein collectively called the Underwriters, which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. Registration Statement. The Company has filed with the Securities and Exchange Commission (herein called the Commission) a registration statement on Form S-3 (No. 333-92527), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the Securities Act) of the Stock. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term Registration Statement as used in this agreement shall mean such registration statement, including all documents incorporated by reference therein, all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Stock (herein called a Rule 462(b) registration statement), and, in the event of any - ---------- /1/ Plus an option to purchase from certain Selling Securityholders up to 600,000 additional shares to cover over-allotments. amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the prospectus, including the documents incorporated by reference therein, relating to the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus, including the documents incorporated by reference therein, included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. Representations and Warranties of the Company and the Selling Securityholders. (a) The Company hereby represents and warrants as follows: (i) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole). (ii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any materially adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. (iii) The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the Securities Exchange Act of 1934, as amended (herein called the Exchange Act), and the rules and regulations of the Commission thereunder; on the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this subparagraph (iii) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. (iv) The Company has filed all required tax returns and has paid all taxes shown thereon as due, and there is no tax deficiency that has been asserted against the Company that will have a material adverse effect on the Company and its subsidiaries taken as a whole, and all tax liabilities are adequately provided for on the books of the Company. 2 (v) The Company's authorized, issued and outstanding capitalization as of September 30, 1999 is as set forth under the caption "Capitalization" in the Prospectus, and all of the outstanding shares of such capital stock have been duly authorized and validly issued and are fully paid and nonassessable. The Stock is duly and validly authorized, is duly and validly issued, fully paid and nonassessable and conforms to the description thereof in the Prospectus. No further approval or authority of the shareholders or the Board of Directors of the Company will be required for the transfer and sale of the Stock to be sold by the Selling Securityholders as contemplated herein. The holders of outstanding shares of capital stock of the Company are not entitled to preemptive or other similar rights in connection with the purchase and sale of Stock contemplated by this Agreement, and there are no restrictions upon the voting or transfer of any of the capital stock of the Company pursuant to the Company's Articles of Incorporation or Bylaws or any agreement or other outstanding instrument to which the Company is a party or by which it is bound. All of the issued and outstanding capital stock of each of the subsidiaries of the Company has been duly authorized and validly issued and is fully paid and nonassessable and is owned by the Company free and clear of all liens, encumbrances and security interests. (vi) The Stock to be sold by the Selling Securityholders is listed and duly admitted to trading on the Nasdaq National Market. (vii) Except as set forth in the Prospectus, there are no outstanding securities convertible into or exchangeable for, or warrants, rights or options to purchase from the Company, or obligations of the Company or any of its subsidiaries to issue, shares of capital stock of the Company or any of its subsidiaries. (viii) The Company is not, nor with the giving of notice or lapse of time or both will be, in violation of or in default (A) under its Articles of Incorporation or Bylaws, or (B) under any indenture or other agreement or instrument to which the Company or any of its subsidiaries is a party, or by which they, or any of their properties, are bound, and which would have a material adverse effect on the condition, results of operations or business of the Company and its subsidiaries, taken as a whole. Neither (A) the sale of the Stock or (B) the consummation by the Company of any other of the transactions contemplated herein, will conflict with or result in a breach or violation of or constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any of its subsidiaries pursuant to the organization documents of the Company or its subsidiaries, the terms of any indenture or other agreement or instrument to which the Company or any of its subsidiaries is a party, or any order or regulation applicable to the Company or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body or arbitration body having jurisdiction over the Company or any of its subsidiaries, except where such conflicts, breaches, violations, defaults, liens, charges or encumbrances would not have a material adverse effect on the business, properties or consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole. (ix) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding obligation of the Company enforceable in accordance with its terms. (x) The Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all governmental authorities, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file such would not have a material adverse effect on the Company. (xi) No consent, approval, authorization or order of any court or governmental agency, person or body, the Company's shareholders, or pursuant to applicable law is required for the consummation of the transactions contemplated herein, except such as have been obtained or may be required under the blue sky laws of any jurisdiction or by the National Association of Securities Dealers, Inc. (herein called NASD) in 3 connection with the purchase of Stock and distribution of the Stock by the Underwriters and such other approvals as have been obtained and which are in full force and effect. (xii) Ernst & Young LLP, which has audited the consolidated financial statements of the Company included in the Registration Statement, are independent public accountants within the meaning of the Securities Act and the applicable rules and regulations thereunder; the historical financial statements, together with the related financial notes and schedules, included in the Registration Statement and the Prospectus (herein called the Financial Information) comply in all material respects with the requirements of the Securities Act and fairly present in all material respects the financial position, results of operations and cash flows of the Company and its subsidiaries at the respective dates and for the respective periods indicated. The Financial Information has been prepared in accordance with generally accepted accounting principles (herein called GAAP), applied on a consistent basis throughout all periods specified and as presented in the Prospectus and as required by the Securities Act or the rules and regulations thereunder to be included in the Registration Statement and the Prospectus. No other financial statements or schedules are required to be included in the Registration Statement. The financial information and financial data set forth in the Prospectus under the captions "Summary Consolidated Financial Data," "Capitalization" and "Selected Consolidated Financial Data" are derived from the accounting records of the Company and its subsidiaries, and are a fair representation in all material respects of the data purported to be shown in accordance with GAAP. Since the respective dates as of which the information is given in the Registration Statement and the Prospectus, there has not been a material adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole. (xiii) There are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. (xiv) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar businesses in similar industries. (xv) The Company and its subsidiaries own or possess adequate rights to use all material patents (or foreign equivalents), patent applications, trademarks, trademark registrations, service marks, service mark registrations, trade names, licenses, copyrights and proprietary or other confidential information necessary for the conduct of their respective businesses except such as the failure to so own or possess would not have a material adverse effect on the Company and its subsidiaries taken as a whole. To the Company's knowledge, the conduct of business of the Company and its subsidiaries will not conflict with, and neither the Company nor any of its subsidiaries has received any notice of any claim of infringement or conflict with, the rights of others in respect thereof. (xvi) The Company has good and marketable title to all of the properties and assets as described in the Prospectus or as reflected in the financial statements filed with the Commission as part of the Registration Statement, free and clear of any lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements or as described in the Prospectus. All leases to which the Company is a party are valid and binding obligations of the Company and no default by the Company has occurred or is continuing thereunder, and the Company enjoys peaceful and undisturbed possession under all such leases to which it is a party as lessee. (xvii) There is no legal or governmental proceeding pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that is required to be described in the Registration Statement or the Prospectus and is not so described or that could reasonably be expected to prevent the consummation of the transactions contemplated hereby; or any statute, regulation, contract or other document that is required to be described 4 in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described or filed. (xviii) No labor disturbance by the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent which might be expected to have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole. (xix) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each pension plan for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xx) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or any of its subsidiaries (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the Property now or previously owned or leased by the Company or any of its subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or with respect to which the Company has knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole; and the terms "hazardous wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (xxi) Neither the Company nor any of its subsidiaries has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof, or (iii) violated the Foreign Corrupt Practices Act of 1977, as amended. (xxii) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Stock, nor, to the best knowledge of the Company, instituted proceedings for that purpose. (xxiii) The Company has not taken, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Stock. 5 (xxiv) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxv) There are no issues related to the Company's preparedness for the Year 2000 that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act or the rules and regulations of the Commission thereunder which have not been accurately described in the Registration Statement or Prospectus or (ii) might reasonably be expected to result in any material adverse effect on the condition, results of operations or business of the Company and its subsidiaries, taken as a whole. Except as set forth in the Registration Statement, all internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products, and each Constituent Component of those products of the Company, fully comply with the Year 2000 Qualification Requirements. "Year 2000 Qualification Requirements" means that the internal computer systems and each Constituent Component of those systems and all computer-related products and each Constituent Component of those products of the Company (i) have been reviewed to confirm that they store, process (including sorting and performing mathematical operations, calculations and computations), input and output data containing date and information correctly regardless of whether the date contains dates and times before, on or after January 1, 2000, (ii) have been designated to ensure date and time entry recognition, calculations that accommodate same century and multi-century formulas and date values, leap year recognition and calculations, and date data interface values that reflect the century, (iii) accurately manage and manipulate data involving dates and times, including single century formulas and multi-century formulas, and will not cause an abnormal ending scenario within the application or generate incorrect values or invalid results involving such dates, (iv) accurately process any date rollover and (v) accept and respond to two-digit year date input in a manner that resolves any ambiguities as to the century. "Constituent Component" means all software (including operating systems, programs, packages and utilities), firmware, hardware, networking components, and peripherals provided as part of the configuration. (xxvi) The Company has not distributed and will not distribute, prior to the later of (A) the Closing Date, or any later date on which Option Stock is to be purchased, as the case may be, and (B) completion of the distribution of the Stock, any offering material in connection with the offering and sale of the Stock other than any Preliminary Prospectus, the Prospectus, the Registration Statement and such other materials, if any, permitted by the Securities Act. (xxvii) The Company has not taken and will not take any actions in connection with the sale of Stock to be sold hereunder that violate any provision of the Securities Act or the Exchange Act, the rules and regulations of the Commission thereunder, or any applicable state securities laws. (b) Each of the Selling Securityholders hereby represents and warrants as follows: (i) Such Selling Securityholder has good and marketable title to all the shares of Stock to be sold by such Selling Securityholder hereunder, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever, with full right and authority to deliver the same hereunder, subject, in the case of each Selling Securityholder, to the rights of SunTrust Bank, Central Florida, N.A., as Custodian (herein called the Custodian), and that upon the delivery of and payment for such shares of the Stock hereunder, the several Underwriters will receive good and marketable title thereto, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever. (ii) Certificates in negotiable form for the shares of the Stock to be sold by such Selling Securityholder have been placed in custody under a Custody Agreement for delivery under this Agreement with the Custodian; such Selling Securityholder specifically agrees that the shares of the Stock represented by the certificates so held in custody for such Selling Securityholder are subject to the interests of the 6 several Underwriters and the Company, that the arrangements made by such Selling Securityholder for such custody, including (except with respect to the Sawtek Inc. Employee Stock Ownership Plan and 401(k) Plan) (herein called the ESOP) the Power of Attorney provided for in such Custody Agreement, are to that extent irrevocable, and that the obligations of such Selling Securityholder shall not be terminated by any act of such Selling Securityholder or by operation of law, whether by the death or incapacity of such Selling Securityholder (or, in the case of a Selling Securityholder that is not an individual, the dissolution or liquidation of such Selling Securityholder) or the occurrence of any other event; if any such death, incapacity, dissolution, liquidation or other such event should occur before the delivery of such shares of the Stock hereunder, certificates for such shares of the Stock shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity, dissolution, liquidation or other event had not occurred, regardless of whether the Custodian shall have received notice of such death, incapacity, dissolution, liquidation or other event. (iii) Each Selling Securityholder identified on Schedule II as a Major Selling Securityholder represents and warrants that the Registration Statement and the Prospectus comply, and on the Closing Date and any later date on which Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the Exchange Act, and the rules and regulations of the Commission thereunder; on the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this subparagraph (iii) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. (iv) All information furnished in writing by or on behalf of such Selling Securityholder for use in the Registration Statement and Prospectus is, and on the Closing Date and any later date on which Option Stock is to be purchased will be, true, correct and complete, and does not, and on the Closing Date and any later date on which Option Stock is to be purchased will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. (v) Neither the sale of the Stock to be sold by such Selling Securityholder to the Underwriters nor the consummation of any other of the transactions herein contemplated by such Selling Securityholder will conflict with or result in a breach or violation of or constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of such Selling Securityholder pursuant to the organization documents of such Selling Securityholder (if applicable), the terms of any indenture or other agreement or instrument to which such Selling Securityholder is a party, or any order or regulation applicable to such Selling Securityholder of any court, regulatory body, administrative agency, governmental body or arbitration body having jurisdiction over such Selling Securityholder, except where such conflicts, breaches, violations, defaults, liens, charges or encumbrances would not have a material adverse effect on such Selling Securityholder. (vi) With respect to the ESOP, the sale of the Stock to be sold by such Selling Securityholder to the Underwriters will not, in whole or in part, constitute a prohibited transaction pursuant to Section 4975(c) of the Code or a party-in-interest transaction pursuant to Section 406 of ERISA, and none of the Underwriters or any person or entity affiliated with them is a "fiduciary" (as such term is defined in Section 3(21) of ERISA) of such Selling Securityholder or a "named fiduciary" (as such term is defined in Section 402(a)(2) of ERISA) of such Selling Securityholder. (vii) Such Selling Securityholder has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, 7 executed and delivered by or on behalf of such Selling Securityholder and is a legal, valid and binding obligation of such Selling Securityholder enforceable in accordance with its terms. (viii) Such Selling Securityholder has not distributed and will not distribute, prior to the later of (A) the Closing Date, or any later date on which Option Stock is to be purchased, as the case may be, and (B) completion of the distribution of the Stock, any offering material in connection with the offering and sale of the Stock other than any Preliminary Prospectus, the Prospectus, the Registration Statement and such other materials, if any, permitted by the Securities Act . (ix) Such Selling Securityholder has not taken and will not take any actions in connection with the sale of Stock to be sold by such Selling Securityholder that violate any provision of the Securities Act or the Exchange Act, the rules and regulations of the Commission thereunder, or any applicable state securities laws. 3. Purchase of the Stock by the Underwriters. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, each Selling Securityholder agrees to sell to the several Underwriters the number of shares of the Underwritten Stock set forth in Schedule II opposite the name of such Selling Securityholder, and each of the Underwriters agrees to purchase from the Company and the Selling Securityholders the respective aggregate number of shares of Underwritten Stock set forth opposite its name in Schedule I. The price at which such shares of Underwritten Stock shall be sold by the Company and the Selling Securityholders and purchased by the several Underwriters shall be $___ per share. The obligation of each Underwriter to each of the Selling Securityholders shall be to purchase from the Selling Securityholders that number of shares of the Underwritten Stock which represents the same proportion of the total number of shares of the Underwritten Stock to be sold by each of the Company and the Selling Securityholders pursuant to this Agreement as the number of shares of the Underwritten Stock set forth opposite the name of such Underwriter in Schedule I hereto represents of the total number of shares of the Underwritten Stock to be purchased by all Underwriters pursuant to this Agreement, as adjusted by you in such manner as you deem advisable to avoid fractional shares. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Stock specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of shares of the Stock agreed to be purchased by such Underwriter or Underwriters, the Selling Securityholders shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the shares of the Stock which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of shares of the Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of the Stock exceeds 10% of the total number of shares of the Stock which all Underwriters agreed to purchase hereunder. If the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Selling Securityholders shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company and the Selling Securityholders shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Selling Securityholders shall make arrangements within the 24-hour 8 periods stated above for the purchase of all the shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company or the Selling Securityholders to any non- defaulting Underwriter and without any liability on the part of any non- defaulting Underwriter to the Company or the Selling Securityholders. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Selling Securityholders indicated on Schedule II as those selling Option Stock grant an option to the several Underwriters to purchase, severally and not jointly, up to 600,000 shares in the aggregate of the Option Stock from those Selling Securityholders at the same price per share as the Underwriters shall pay for the Underwritten Stock. Said option may be exercised only to cover over- allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of the Option Stock as to which the several Underwriters are exercising the option. Delivery of certificates for the shares of Option Stock, and payment therefor, shall be made as provided in Section 5 hereof. The number of shares of the Option Stock to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. Offering by Underwriters. (a) The terms of the initial public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the fourth paragraph on the front cover page and under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Stock filed by the Company (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 5. Delivery of and Payment for the Stock. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later than 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the offices of Jones, Day, Reavis & Pogue, 3500 SunTrust Plaza, 303 Peachtree Street, N.E., Atlanta, Georgia 30308-3242, at 7:00 a.m., San Francisco time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company, the Selling Securityholders and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the offices of Jones, Day, Reavis & Pogue, 3500 SunTrust Plaza, 303 Peachtree Street, N.E., Atlanta, Georgia 30308-3242, at 7:00 a.m., San Francisco time, on the third business day after the exercise of such option. (c) Payment for the Stock purchased from the Selling Securityholders shall be made to the Custodian, for the account of the Selling Securityholders, in each case by one or more certified or official bank check or checks in next day funds (and the Selling Securityholders agree not to deposit any such check in the bank on which drawn until the day following the date of its delivery to the Custodian). Such payment shall be made upon delivery of 9 certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Selling Securityholders for shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. Further Agreements of the Company and the Selling Securityholders. The ESOP covenants and agrees as set forth in Section 6(i), (j), (k) and (l), and each of the Company and the Major Selling Securityholders covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company and the Major Selling Securityholders will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Stock, the Company will forthwith prepare and file with the Commission a supplement to 10 the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Stock by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Stock in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Stock. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to shareholders of the Company and of all information, documents and reports filed with the Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (i) The Company and the Major Selling Securityholders jointly and severally, and the ESOP, only as to its pro rata share, agree to pay all costs and expenses incident to the performance of their obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. ("NASD") of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. Each of the Selling Securityholders will pay any transfer taxes incident to the transfer to the Underwriters of the shares of Stock being sold by such Selling Securityholder. (j) The Company and the Selling Securityholders jointly and severally agree to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Stock under state securities or blue sky laws and in the review of the offering by the NASD. 11 (k) The provisions of paragraphs (i) and (j) of this Section are intended to relieve the Underwriters from the payment of the expenses and costs which the Company and the Selling Securityholders hereby agree to pay and shall not affect any agreement which the Company and the Selling Securityholders may make, or may have made, for the sharing of any such expenses and costs. (l) The Company and each of the Selling Securityholders, except for the ESOP, hereby agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company or such Selling Securityholder, as the case may be, will not, for a period of 90 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The ESOP hereby agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the ESOP will not, for a period of 90 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise; provided, however, that this agreement shall not apply to distributions from the ESOP to employees, their heirs or beneficiaries on account of death, disability or retirement from the Company. The foregoing sentence shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by the Company upon the exercise of options granted under the stock option plans of the Company (the "Option Plans"), all as described in the paragraph containing bullet points immediately following the table under the caption "Capitalization" in the Preliminary Prospectus, and (C) options to purchase Common Stock granted under the Option Plans. 7. Indemnification and Contribution. (a) Subject to the provisions of paragraph (f) of this Section 7, the Company and the Selling Securityholders jointly and severally agree to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or the common law or otherwise, and the Company and the Selling Securityholders jointly and severally agree to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company and the Selling Securityholders contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for 12 use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto, (2) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person (excluding the documents incorporated therein by reference) and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (c) of Section 6 hereof, and (3) each Selling Securityholder (other than the Major Selling Securityholders) shall only be liable under this paragraph with respect to (A) information pertaining to such Selling Securityholder furnished by or on behalf of such Selling Securityholder expressly for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto or (B) facts that would constitute a breach of any representation or warranty of such Selling Securityholder set forth in Section 2(b) hereof. The indemnity agreements of the Company and the Selling Securityholders contained in this paragraph (a) and the representations and warranties of the Company and the Selling Securityholders contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, and the Selling Securityholders from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding 13 against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Securityholders on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the Selling Securityholders and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. 14 Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) Neither the Company nor the Selling Securityholders will, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (f) The liability of each Selling Securityholder under the indemnity and reimbursement agreements contained in the provisions of this Section 7 and Section 11 hereof shall be limited to an amount equal to the initial public offering price of the stock sold by such Selling Securityholder to the Underwriters. The Company and the Selling Securityholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. 8. Termination. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company and the Selling Securityholders if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company or the Selling Securityholders to the Underwriters and no liability of the Underwriters to the Company or the Selling Securityholders; provided, however, that in the event of any such termination the Company and the Selling Securityholders agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 9. Conditions of Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the performance by the Company and by the Selling Securityholders of all their respective obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Stock hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the 15 foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Jones, Day, Reavis & Pogue, counsel for the Underwriters. (c) You shall have received from Gray, Harris & Robinson, P.A., counsel for the Company and the Selling Securityholders, and from Allen, Dyer, Doppelt, Franjola & Milbrath, patent counsel for the Company, opinions, addressed to the Underwriters and dated the Closing Date, covering the matters set forth in Annex A and Annex B hereto, respectively, and if Option Stock is purchased at any date after the Closing Date, additional opinions from each such counsel, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) neither the Company nor any of its subsidiaries has any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company or any of its subsidiaries is a party or of which property of the Company or any of its subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vii) of paragraph (d) of this Section 9 are true and correct. (f) You shall have received from Ernst & Young, LLP, a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described 16 in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company or any of its subsidiaries which, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. (g) You shall have received from Ernst & Young, LLP a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at September 30, 1999, did not disclose any weakness in internal controls that they considered to be material weaknesses. (h) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) On or prior to the Closing Date, you shall have received from all directors and officers of the Company agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating that without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will not, for a period of 90 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Jones, Day, Reavis & Pogue, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company and to the Selling Securityholders. Any such termination shall be without liability of the Company or the Selling Securityholders to the Underwriters and without liability of the Underwriters to the Company or the Selling Securityholders; provided, however, that (i) in the event of such termination, the Company and the Selling Securityholders agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company or the Selling Securityholders to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 10. Conditions of the Obligation of the Company and the Selling Securityholders. The obligation of the Company and the Selling Securityholders to deliver the Stock shall be subject to the conditions that (a) the Registration Statement shall have become effective and (b) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company and the Selling Securityholders by giving notice to you. Any such termination shall be without liability of the Company and the Selling Securityholders to the Underwriters and without liability of the Underwriters to the Company or the Selling Securityholders; provided, however, that in the event of any such termination the Company and the Selling Securityholders jointly and severally agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the 17 Selling Securityholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 11. Reimbursement of Certain Expenses. In addition to their other obligations under Section 7 of this Agreement (and subject, in the case of a Selling Securityholder, to the provisions of paragraph (f) of Section 7), the Company and the Selling Securityholders hereby jointly and severally agree to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 12. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of the Company, the Selling Securityholders and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company, the Selling Securityholders and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 13. Notices. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104; and if to the Company, shall be mailed, telegraphed or delivered to it at its office, Sawtek Inc., 1818 South Highway 441, Apopka, Florida 32703, Attention: Chief Executive Officer, and if to the Selling Securityholders, shall be mailed, telegraphed or delivered to the Selling Securityholders in care of William A. Grimm, Esq., at Gray, Harris & Robinson, P.A., 201 East Pine Street, Suite 1200, Orlando, Florida 32801. All notices given by telegraph shall be promptly confirmed by letter. 14. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or the Selling Securityholders or their respective directors or officers, and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraphs (l) and (m) of Section 6 hereof shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 18 Please sign and return to the Company and to the Selling Securityholders in care of the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement among the Company, the Selling Securityholders and the several Underwriters in accordance with its terms. Very truly yours, SAWTEK INC. By: ------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- SELLING SECURITYHOLDERS: SAWTEK INC. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN By: HSBC Bank USA, not in its individual or corporate capacity, but solely as Trustee By: ---------------------------------------- Name: ----------------------------------- Title: ---------------------------------- VIA TUSCANY INVESTMENT LIMITED PARTNERSHIP By: ---------------------------------------- Todd C. Miller General Partner SAWMILL INVESTMENT LIMITED PARTNERSHIP By: Sawmill (1996) Inc., its General Partner By: ---------------------------------------- Steven P. Miller President VIA CAPRI INVESTMENT LIMITED PARTNERSHIP By: Via Capri Inc., its General Partner By: ---------------------------------------- Steven P. Miller President [Signatures continued on following page] 19 MOPNJ INVESTMENT LIMITED PARTNERSHIP By: MOPNJT Inc., its General Partner By: ---------------------------------------- Neal Jay Tolar President MOP INVESTMENT LIMITED PARTNERSHIP By: MOP Inc., its General Partner By: ---------------------------------------- Neal Jay Tolar President The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC CIBC WORLD MARKETS CORP. BANC OF AMERICA SECURITIES LLC By: Hambrecht & Quist LLC By: -------------------------------------------- Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 20 SCHEDULE I UNDERWRITERS
Number of Shares to be Underwriters Purchased ------------ --------- Hambrecht & Quist LLC ............................... CIBC World Markets Corp. ............................ Banc of America Securities LLC ...................... --------- Total........................................... 4,000,000
21 SCHEDULE II SELLING SECURITYHOLDERS
Number of Shares to be Sold --------- Name of Selling Securityholders - ------------------------------- Major Selling Securityholders ----------------------------- Via Capri Investment Limited Partnership 130,459 Via Tuscany Investment Limited Partnership 539,541 Sawmill Investment Limited Partnership 330,000 MOPNJ Investment Limited Partnership 700,000 MOP Investment Limited Partnership 300,000 Other Selling Securityholders ----------------------------- Sawtek Inc. Employee Stock Ownership and 401(k) Plan..... 2,000,000 --------- Total.................................................... 4,000,000 Name of Shareholders Selling Option Stock - ----------------------------------------- [------------------]..................................... [--------] [------------------]..................................... [--------] Total.................................................... 600,000
22 ANNEX A Matters to be Covered in the Opinion of Gray, Harris & Robinson, P.A. Counsel for the Company and the Selling Securityholders (i) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, is duly qualified as a foreign corporation and in good standing in each state of the United States of America in which its ownership or leasing of property requires such qualification, and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; all the issued and outstanding capital stock of each of the subsidiaries of the Company has been duly authorized and validly issued and is fully paid and nonassessable, and is owned by the Company free and clear of all liens, encumbrances and security interests, and to the best of our knowledge, no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in such subsidiaries are outstanding; (ii) the authorized capital stock of the Company consists of 120,000,000 shares of Common Stock, $0.0005 par value, of which there are outstanding [----------] shares (including the Underwritten Stock plus the number of shares of Option Stock issued on the date hereof); all of the outstanding shares of such capital stock (including the Underwritten Stock and the shares of Option Stock issued, if any) have been duly and validly issued and are fully paid and nonassessable; any Option Stock purchased after the Closing Date, when issued and delivered to and paid for by the Underwriters as provided in the Underwriting Agreement, will have been duly and validly issued and be fully paid and nonassessable; and no preemptive rights of, or rights of refusal in favor of, shareholders exist with respect to the Stock, or the issue and sale thereof, pursuant to the Articles of Incorporation or Bylaws of the Company and, to the knowledge of such counsel, there are no contractual preemptive rights that have not been waived, rights of first refusal or rights of co-sale which exist with respect to the Stock being sold by the Selling Securityholders or the issue and sale of the Stock; (iii) the Registration Statement has become effective under the Securities Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; (iv) the Registration Statement and the Prospectus (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act, the Exchange Act and with the rules and regulations of the Commission thereunder; (v) such counsel have no reason to believe that the Registration Statement (except as to the financial statements and schedules and other financial and statistical data derived therefrom, contained or incorporated by reference therein, as to which such counsel need express no opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (except as to the financial statements and schedules and other financial and statistical data derived therefrom, contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (vi) the information required to be set forth in the Registration Statement in answer to Items 9 and 10 (insofar as it relates to such counsel) of Form S-3 is to the best of such counsel's knowledge, accurately and adequately set forth therein in all material respects or no response is required with respect to 23 such Items, and the description of the Company's 1983 Incentive Stock Option Plan, the Sawtek Inc. Second Stock Option Plan, the Sawtek Inc. Employee Stock Purchase Plan, the Sawtek Inc. Stock Option Plan for Acquired Companies, the Sawtek Inc. Employee Stock Ownership and 401(k) Trust Agreement and the options and stock awards granted and which may be granted thereunder and the options granted otherwise than under such plans set forth or incorporated by reference in the Prospectus accurately and fairly presents the information required to be shown with respect to said plans, grants and options to the extent required by the Securities Act and the rules and regulations of the Commission thereunder; (vii) such counsel do not know of any franchises, contracts, leases, documents or legal proceedings, pending or threatened, which, in their opinion, are of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not described and filed as required; (viii) the Underwriting Agreement has been duly authorized, executed and delivered by the Company; (ix) the Underwriting Agreement has been duly executed and delivered by or on behalf of each of the Selling Securityholders; (B) the Custody Agreement between the Selling Securityholders and SunTrust Bank Central Florida, N.A., as Custodian, and the Power of Attorney referred to in such Custody Agreement have been duly executed and delivered by such Selling Securityholder; (C) the Custody Agreement entered into by, and the Power of Attorney given by, (except for the Custody Agreement executed by the ESOP) such Selling Securityholder is valid and binding on such Selling Securityholder; and (D) each Selling Securityholder has full legal right and authority to enter into the Underwriting Agreement and to sell, transfer and deliver in the manner provided in the Underwriting Agreement the shares of Stock sold by such Selling Securityholder thereunder; (x) Such counsel do not know of any consents, authorizations, approvals, orders, certificates and permits of and from, or declarations and filings to be made with governmental authorities necessary to own, lease, license and use the Company's properties and assets and to conduct its business in the manner described in the Prospectus, which have not been obtained or filed or where the failure to obtain or file such would not have a material adverse effect on the Company. (xi) to the best of such counsel's knowledge, all holders of securities of the Company having rights to the registration of shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company have waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement; (xii) good and marketable title to the shares of Stock sold by the Selling Securityholders under the Underwriting Agreement, free and clear of all liens, encumbrances, equities, security interests and claims, has been transferred to the Underwriters who have severally purchased such shares of Stock under the Underwriting Agreement, assuming for the purpose of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims; (xiii) no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters; and (xiv) the Stock sold by the Selling Securityholders is listed and duly admitted to trading on the Nasdaq National Market. 24 ANNEX B Matters to be Covered in the Opinion of Allen, Dyer, Doppelt, Milbrath, & Gilchrist, P.A., Patent Counsel for the Company We are familiar with the Surface Acoustic Wave ("SAW") technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, trademarks, service marks or other proprietary information or materials and: (i) We have no reason to believe that the Registration Statement or the Prospectus contain any untrue statement of a material fact with respect to, as applicable, patent rights, copyrights, trade secrets, trademarks, service marks or other proprietary information or materials owned or used by the Company or any allegation on the part of any person that the Company is infringing any patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of any such person or omits to state any material fact relating to patent rights, copyrights, trade secrets, trademarks, service marks or other proprietary information or materials of any such person; (ii) We have no reason to believe that the Registration Statement or the Prospectus omit any material fact relating to, as applicable, patent rights, copyrights, trade secrets, trademarks, service marks or other proprietary information or materials owned by or used by the Company, or the manner of the Company's use thereof, necessary to make the statements therein not misleading; and (iii) We are not aware that there is any allegation by another person of which we have knowledge that is required to be stated in the Registration Statement or the Prospectus or is necessary to make the statements therein not misleading. 25 EX-5.1 3 OPINION OF GRAY, HARRIS & ROBINSON EXHIBIT 5.1 [LETTERHEAD OF GRAY, HARRIS & ROBINSON, P.A.] January 24, 2000 Sawtek, Inc. 1818 South Highway 441 Apopka, Florida 32703 Re: Registration Statement on Form S-3, as amended Dear Ladies and Gentlemen: We have examined the Registration Statement on Form S-3, as amended, filed by you with the Securities and Exchange Commission on January 24, 2000, File No. 333-92527 (the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of 4,600,000 shares of Common Stock of Sawtek Inc. (the "Shares"), assuming the underwriters' overallotment option is exercised, by certain selling shareholders. As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken in connection with the sale of the Shares. It is our opinion that the Shares will, when sold, be legally issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting part thereof, and any amendment thereto and any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and all post-effective amendments thereto. Very truly yours, Gray, Harris & Robinson, P.A. By: /s/ William A. Grimm -------------------- William A. Grimm EX-23.1 4 CONSENT OF INDEPENDENT AUDITOR Exhibit 23.1 Consent of Independent Auditors We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated October 22, 1999, in Amendment No. 2 to the Registration Statement (Form S-3 No. 333-92527) and related Prospectus of Sawtek Inc. for the registration of 4,600,000 shares of its common stock. /s/ Ernst & Young LLP Orlando, Florida January 24, 2000 -----END PRIVACY-ENHANCED MESSAGE-----