-----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, Prf48mrPD4Bc7LmronUxWxJvkZvir+OIpJgyIyLQlI1RZJddUIkbOSyFnGDcc/Bf lO6Q7PAmMhcQelD89ZIHcQ== /in/edgar/work/0001009675-00-000006/0001009675-00-000006.txt : 20000718 0001009675-00-000006.hdr.sgml : 20000718 ACCESSION NUMBER: 0001009675-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000717 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAWTEK INC \FL\ CENTRAL INDEX KEY: 0001009675 STANDARD INDUSTRIAL CLASSIFICATION: [3663 ] IRS NUMBER: 591864440 STATE OF INCORPORATION: FL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28276 FILM NUMBER: 673995 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 10-Q 1 0001.txt FORM 10-Q FOR SAWTEK INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q ------------------- (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 For the quarterly period ended June 30, 2000 OR - ----- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 000-28276 SAWTEK INC. (Exact name of registrant as specified in its charter) Florida 59-1864440 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1818 South Highway 441 Apopka, Florida 32703 (Address of principal executive offices) Telephone Number (407) 886-8860 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ------ ------ As of July 17, 2000, there were 42,619,678 shares of the Registrant's Common stock outstanding, par value $.0005. Sawtek Inc. TABLE OF CONTENTS Part I. Financial Information Page Number --------------------- ----------- Item 1. Financial Statements (unaudited) Consolidated Balance Sheets as of June 30, 2000 and September 30, 1999...................................... 3 Consolidated Statements of Income for the three months and nine months ended June 30, 2000 and 1999............ 4 Consolidated Statements of Cash Flows for the nine months ended June 30, 2000 and 1999............................ 5 Notes to Consolidated Financial Statements............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 9 Item 3. Quantitative and Qualitative Disclosure of Market Risk .. 24 Part II. Other Information ----------------- Item 1. Legal Proceedings ....................................... 25 Item 2. Changes in Securities ................................... 25 Item 3. Defaults Upon Senior Securities ......................... 25 Item 4. Submission of Matters to a Vote of Security Holders ..... 25 Item 5. Other Information ....................................... 25 Item 6. Exhibits and Reports on Form 8-K ........................ 25 Signatures.............................................................. 26 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SAWTEK INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
June 30, September 30, 2000 1999 -------- ------------- (unaudited) Assets Current assets: Cash, cash equivalents and short-term investments $ 135,856 $ 115,274 Accounts receivable, net 26,869 18,641 Inventories, net 16,470 8,052 Deferred income taxes 1,082 1,063 Other current assets 2,298 2,107 --------- --------- Total current assets 182,575 145,137 Property, plant and equipment, net 60,984 46,442 --------- --------- Total assets $ 243,559 $ 191,579 ========= ========= Liabilities and shareholders' equity Current liabilities: Accounts payable $ 4,239 $ 4,055 Accrued liabilities 6,088 5,312 Current maturities of long-term debt 289 379 Income taxes payable 2,852 191 --------- --------- Total current liabilities 13,468 9,937 Long-term debt, less current maturities 1,574 1,790 Deferred income taxes 27,784 21,453 Shareholders' equity: Common stock; $.0005 par value; 120,000,000 authorized shares; 42,668,194 issued shares; 42,599,541 and 42,230,489 outstanding shares at June 30, 2000 and September 30, 1999, respectively 21 21 Capital surplus 76,926 74,755 Unearned ESOP compensation (781) (781) Retained earnings 125,025 87,330 Less common stock held in treasury at cost; 68,653 shares at June 30, 2000 and 437,705 shares at September 30, 1999 (458) (2,926) --------- --------- Total shareholders' equity 200,733 158,399 --------- --------- Total liabilities and shareholders' equity $ 243,559 $ 191,579 ========= ========= See accompanying notes to consolidated financial statements.
3 SAWTEK INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands, except per share data) Net sales $ 44,105 $ 26,045 $ 113,515 $ 71,761 Cost of sales 17,546 10,737 45,970 30,523 -------- -------- --------- -------- Gross profit 26,559 15,308 67,545 41,238 Operating expenses: Selling expenses 1,631 1,517 4,367 4,242 General & administrative expenses 1,629 1,114 4,095 3,230 Research & development expenses 2,306 1,334 6,179 4,147 -------- -------- --------- -------- Total operating expenses 5,566 3,965 14,641 11,619 -------- -------- --------- -------- Operating income 20,993 11,343 52,904 29,619 Other income, net 1,831 1,174 4,867 3,409 -------- -------- --------- -------- Income before taxes 22,824 12,517 57,771 33,028 Income taxes 7,932 4,380 20,076 11,559 -------- -------- --------- -------- Net income $ 14,892 $ 8,137 $ 37,695 $ 21,469 ======== ======== ========= ======== Net income per share: Basic $ 0.35 $ 0.19 $ 0.89 $ 0.51 Diluted $ 0.34 $ 0.19 $ 0.86 $ 0.50 Shares used in per share calculation: Basic 42,566 42,004 42,452 41,864 Diluted 43,808 43,066 43,661 42,674 See accompanying notes to consolidated financial statements.
4 SAWTEK INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended June 30, 2000 1999 ---- ---- (in thousands) Operating activities: Net income $ 37,695 $ 21,469 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,965 5,489 Deferred income taxes 6,312 4,003 Loss on disposal of equipment 365 Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable (8,228) (3,270) Inventories (8,418) 1,154 Other current assets (191) (457) Increase (decrease) in liabilities: Accounts payable 184 805 Accrued liabilities 776 (462) Income taxes payable 5,464 26 --------- --------- Net cash provided by operating activities 40,924 28,757 Investing activities: Purchase of property, plant and equipment, net (21,872) (3,438) Short-term investments (3,242) 10,985 --------- --------- Net cash provided by (used in) investing activities (25,114) 7,547 Financing activities: Principal payments on long-term debt (306) (351) Net proceeds from exercise of stock options 1,836 4,399 Purchase of Common stock for treasury (2,932) --------- --------- Net cash provided by financing activities 1,530 1,116 --------- --------- Increase in cash and cash equivalents 17,340 37,420 Cash and cash equivalents at beginning of period 50,640 42,132 Short-term investments 67,876 31,014 --------- --------- Cash, cash equivalents and short-term investments $ 135,856 $ 110,566 ========= ========= Supplemental disclosures: Interest paid $ 103 $ 116 Income taxes paid $ 7,860 $ 5,190 See accompanying notes to consolidated financial statements.
5 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended June 30, 2000 and 1999 NOTE 1 BASIS OF PRESENTATION - ------------------------------ The accompanying unaudited, consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in response to the requirements of Article 10 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited, consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position as of June 30, 2000, and the results of its operations and its cash flows for the three and nine months ended June 30, 2000 and 1999. These financial statements should be read in conjunction with our audited financial statements as of September 30, 1999, including the notes thereto, and the other information included in our most recent annual report on Form 10-K for the year ended September 30, 1999 (File No. 000-28276), which was filed with the Securities and Exchange Commission, or SEC, on November 5, 1999, and our registration statement filed on Form S-3A (File No. 333-92527) on January 24, 2000. The following discussion may contain forward looking statements which are subject to the risk factors set forth in "Risks and Uncertainties" as stated in Item 2 of this Form 10-Q. We maintain our records on a fiscal year ending on September 30 of each year and all references to a year refer to the year ending on that date. Our first, second and third quarters normally end on the Sunday closest to the last day of the last month of such quarter, which was July 2, 2000, for the third quarter of fiscal 2000. However, for convenience, the financial statements are dated as of June 30, 2000. There were no material transactions from June 30, 2000 through July 2, 2000. Operating results for the three and nine months ended June 30, 2000 are not necessarily indicative of the operating results that may be expected for the year ending September 30, 2000. Certain historical accounts have been restated to conform to the current year presentation. Certain references made in this Form 10-Q to "Sawtek", "we", "our", and "us" refer to Sawtek Inc., a Florida corporation. 6 NOTE 2 EARNINGS PER SHARE - --------------------------- The following table sets forth the computation of basic and diluted earnings per share in accordance with the Statement of Financial Accounting Standard Number 128:
Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands, except per share data) Numerator: Net income available to common stockholders $14,892 $ 8,137 $37,695 $21,469 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share: Weighted average shares 42,566 42,004 42,452 41,864 Effect of dilutive securities: Employee stock options 1,242 1,062 1,209 810 ------- ------- ------- ------- Denominator for diluted earnings per share: Adjusted weighted average shares and assumed conversions 43,808 43,066 43,661 42,674 ======= ======= ======= ======= Earnings per share: Basic $ 0.35 $ 0.19 $ 0.89 $ 0.51 ======= ======= ======= ======= Diluted $ 0.34 $ 0.19 $ 0.86 $ 0.50 ======= ======= ======= =======
NOTE 3 INVENTORIES - -------------------- Net inventories consist of the following:
June 30, 2000 September 30, 1999 ------------- ------------------ (in thousands) Raw material $10,500 $ 2,984 Work in process 3,248 1,993 Finished goods 2,722 3,075 ------- ------- Total $16,470 $ 8,052 ======= =======
7 NOTE 4 PROPERTY, PLANT AND EQUIPMENT - -------------------------------------- Property, plant and equipment consist of the following:
June 30, 2000 September 30, 1999 ------------- ------------------ (in thousands) Land and Improvements $ 841 $ 830 Buildings 16,500 16,500 Production and Test Equipment 63,230 39,797 Computer Equipment 3,943 3,455 Furniture and Fixtures 2,954 2,865 Construction in Progress 6,688 9,589 ------- ------- 94,156 73,036 Less accumulated depreciation 33,172 26,594 ------- ------- Total $60,984 $46,442 ======= =======
NOTE 5 SHAREHOLDERS' EQUITY - ----------------------------- The consolidated changes in shareholders' equity for the nine months ended June 30, 2000 are as follows:
Unearned Common Stock Treasury Stock Capital ESOP Retained Shares Amount Shares Amount Surplus Compensation Earnings Total ------ ------ ------ ------ ------- ------------ -------- ----- (in thousands) Balance at September 30, 1999 42,668 $21 438 $(2,926) $74,755 $(781) $ 87,330 $158,399 Net proceeds from exercise of stock options (369) 2,468 (632) 1,836 Compensatory stock option tax benefit 2,803 2,803 Net income for the nine months ended June 30, 2000 37,695 37,695 ------ --- --- ------- ------- ----- -------- -------- Balance at June 30, 2000 42,668 $21 69 $ (458) $76,926 $(781) $125,025 $200,733 ====== === === ======= ======= ===== ======== ========
NOTE 6 RECLASSIFICATIONS - -------------------------- Certain amounts in prior years have been reclassified to conform to current year presentation. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements such as statements of our plans, objectives, expectations and intentions that involve risks and uncertainties. The cautionary statements made herein should be read as being applicable to all related forward looking statements wherever they appear. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risks and Uncertainties," as well as those discussed elsewhere. Overview - -------- Sawtek designs, develops, manufactures and markets a broad range of electronic signal processing components based on surface acoustic wave, or SAW, technology primarily for use in the wireless communications industry. Our primary products are custom-designed, high performance bandpass filters, resonators, delay lines, oscillators and SAW-based subsystems. These products are used in a variety of microwave and RF systems, such as CDMA and GSM digital wireless communications systems, digital microwave radios, wireless local area networks, cable television equipment, Internet infrastructure, various defense and satellite systems, and sensors. We have a wide range of customers, but a significant percentage of our revenue is derived from a limited number of customers. Our top three customers during the nine months ended June 30, 2000 and 1999, accounted for approximately 44% and 45%, respectively, of total net sales. It is not uncommon for our top three customers to change from quarter to quarter. In addition, we have experienced significant growth in international markets over the last five years, with international sales accounting for approximately 62% of net sales during the first nine months of fiscal 2000. 9 Results of Operations - --------------------- The following table sets forth, for the periods indicated, information derived from our statements of operations for those periods expressed as a percentage of net sales, and the percentage change in such items from the comparable prior year period. Any trends illustrated in the following table are not necessarily indicative of future results.
Percent Increase Over the Prior Period Three Months Ended Nine Months Three Months Nine Months Ended Ended Ended June 30, June 30, June 30, June 30, 2000 1999 2000 1999 2000 vs. 1999 2000 vs. 1999 ---- ---- ---- ---- ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% 69.3% 58.2% Cost of sales 39.8 41.2 40.5 42.5 63.4% 50.6% ----- ----- ----- ----- Gross profit 60.2 58.8 59.5 57.5 73.5% 63.8% Operating expenses: Selling expenses 3.7 5.8 3.9 5.9 7.5% 2.9% General & administrative expenses 3.7 4.3 3.6 4.5 46.2% 26.7% Research & development expenses 5.2 5.1 5.4 5.8 72.9% 49.0% ----- ----- ----- ----- Total operating expenses 12.6 15.2 12.9 16.2 40.4% 26.0% ----- ----- ----- ----- Operating income 47.6 43.6 46.6 41.3 85.1% 78.6% Other income - net 4.2 4.5 4.3 4.7 56.0% 42.8% ----- ----- ----- ----- Income before taxes 51.8 48.1 50.9 46.0 82.3% 74.9% Income taxes 18.0 16.8 17.7 16.1 81.1% 73.7% ----- ----- ----- ----- Net income 33.8% 31.3% 33.2% 29.9% 83.0% 75.6% ===== ===== ===== =====
Net Sales. Net sales increased 69.3% from $26.0 million in the quarter ended June 30, 1999, to $44.1 million in the quarter ended June 30, 2000. Net sales for the nine months ended June 30, 2000, increased by $41.8 million or 58.2% to $113.5 million from the comparable period in 1999. These increases were primarily the result of increased revenues from the sale of bandpass filters for code division multiple access, or CDMA, base stations and handsets, increased shipments of bandpass filters for both global system for mobile communication, or GSM, and CDMA base stations and handsets, and shipments of SAW radio frequency, or RF, filters for handsets. We first began shipments of GSM IF and RF filters during the quarter ended December 31, 1999. Additional improvements in net sales during the quarter and nine months ended June 30, 2000 are attributable to an increased level of sales for filters for wireless local area networks, Internet infrastructure, video transmission and other standard products. 10 A significant percentage of our revenues continue to be generated from international markets. Sales to international customers accounted for approximately 62.2% and 38.3% of total revenues during the nine months ended June 30, 2000 and 1999, respectively. However, we believe that financial turmoil or instability in international markets, specifically, the Asian market, could reoccur and impact us in the future. Revenues generated from Asian customers continue to vary significantly from quarter to quarter and could decline substantially with little or no advance notice. Revenues generated from Asian customers accounted for approximately 27.7% and 19.2% of total revenues during the quarters ended June 30, 2000 and 1999, respectively, and accounted for approximately 32.5% and 15.7% of total revenues during the nine months ended June 30, 2000 and 1999, respectively. During the quarter ended June 30, 2000, approximately 70% of our Asian revenue was generated from South Korea. The South Korean government recently reduced subsidies for the purchase of cellular phones in the South Korean market. We have recently seen delays in orders and some push out of orders to South Korean customers as a result of this governmental action. At present, we are uncertain what the near or mid-term impact of this action will be on our revenues from these customers. Our growth in revenue is highly dependent on the overall growth of the wireless telecommunications market and on our ability to offer new and improved products for this market. Recently, we expanded our product line of SAW filters for this market to include SAW RF filters for handsets and intermediate frequency, or IF, filters for GSM handsets. There is no assurance, however, that we will continue to be successful in introducing new products for the wireless telecommunications market. We are experiencing increased unit orders from a number of our customers, primarily for CDMA and GSM handset filters, which may, in the short term, create a capacity problem. As a result, we may not be able to fill all of our orders in a timely manner, which could impact our ability to grow revenue. We have initiated an aggressive capital expenditure program to deal with this issue; however, it will take several quarters before all of the new equipment and facilities are operational. In addition, in the past, we experienced a shortage of ceramic surface mount packages, which are used in the assembly of products and account for approximately 50% of our revenue. We have taken an aggressive position by increasing our raw material inventory to provide a higher level of safety stock to mitigate the impact of potential shortages. However, there is no assurance that shortages could not reoccur in the future. If this were to happen, it could impact our ability to respond to customer requirements, which could impact our ability to grow revenue. Finally, we believe that prices for filters for CDMA base stations will decline in the future due to the transition to smaller surface mount packages which would reduce revenues and gross margins on these products. Sales of CDMA base station filters accounted for approximately 21.8% and 22.0% of total revenues during the three and nine months ended June 30, 2000, respectively. 11 Gross Margin. The gross profit margin percentage increased from 58.8% in the quarter ended June 30, 1999, to 60.2% in the quarter ended June 30, 2000. Gross margins for the nine-months ended June 30, 2000 was 59.5% compared to 57.5% for the comparable period in 1999. The gross margin increase was primarily due to higher than expected sales of filters for base stations and yields on new products, improved productivity, and lower costs, resulting from more product being produced in our facility in Costa Rica. Our Costa Rican plant accounted for 53.1% and 52.7% of consolidated sales during the three and nine months ended June 30, 2000, respectively. Our Costa Rican plant accounted for 46.5% and 47.8% of consolidated sales during the three and nine months ended June 30, 1999, respectively. We continue to believe that gross margins will decline in the future as we shift more of our product mix to handset filters, which are lower priced, have lower profit margins, and are subject to more competitive pricing pressure than our other products. In addition, the prices of ceramic surface mount packages, which have been in short supply, could increase in price, resulting in lower gross margins. Selling Expenses. Selling expenses increased 7.5% from $1.5 million in the quarter ended June 30, 1999 to $1.6 million in the quarter ended June 30, 2000. Selling expenses for the nine months ended June 30, 2000, increased 2.9% to $4.4 million from the comparable period in 1999. As a percentage of net sales, selling expenses decreased from 5.8% during the quarter ended June 30, 1999, to 3.7% in the quarter ended June 30, 2000, and decreased from 5.9% during the nine months ended June 30, 1999, to 3.9% during the nine months ended June 30, 2000. This decrease in selling expenses as a percentage of net sales is attributable to a reduction in commissions paid to independent sales representatives, primarily in South Korea. We opened a Korean sales office during the second quarter of 1999, which reduced the cost of selling into the Korean market. General and Administrative Expenses. General and administrative expenses increased 46.2% from $1.1 million in the quarter ended June 30, 1999 to $1.6 million in the quarter ended June 30, 2000. General and administrative expenses for the nine months ended June 30, 2000, increased 26.7% to $4.1 million from the comparable period in 1999. As a percentage of net sales, general and administrative expenses decreased from 4.3% during the quarter ended June 30, 1999, to 3.7% in the quarter ended June 30, 2000, and decreased from 4.5% during the nine months ended June 30, 1999, to 3.6% during the nine months ended June 30, 2000. The absolute dollar increase in general and administrative expenses can be attributed to increased staffing and other items related to the capacity expansion currently under way, increased salaries and bonuses and to increased legal and accounting services as we expand our business and evaluate various tax and business strategies. 12 Research and Development Expenses. Research and development expenses increased 72.9% from $1.3 million in the quarter ended June 30, 1999 to $2.3 million in the quarter ended June 30, 2000. Research and development expenses for the nine months ended June 30, 2000, increased 49.0% to $6.2 million from the comparable period in 1999. As a percentage of net sales, research and development expenses increased from 5.1% during the quarter ended June 30, 1999, to 5.2% in the quarter ended June 30, 2000, and decreased from 5.8% during the nine months ended June 30, 1999, to 5.4% during the nine months ended June 30, 2000. The increase in research and development expenses is the result of a higher level of new product development. Other Income. Other income increased 56.0% and 42.8% from $1.2 million and $3.4 million during the three and nine months ended June 30, 1999, respectively, to $1.8 million and $4.9 million during the three and nine months ended June 30, 2000, respectively. These increases are the result of higher interest income being earned on increased levels of cash, cash equivalents and short-term investments. Income Tax Expense. The provision for income taxes as a percentage of income before income taxes was 34.8% and 35.0% for the three and nine months ended June 30, 2000 and 1999, respectively. 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 nine months ended June 30, 2000, we generated net cash from operating activities of approximately $40.9 million. Cash generated from operations consisted primarily of net income of $37.7 million, $7.0 million of depreciation and amortization, an increase of $11.8 million in deferred taxes and income taxes payable and an increase of approximately $1.0 million in accounts payable and accrued liabilites. These increases were partially offset by an increase in accounts receivable of approximately $8.2 million and an increase in inventory of approximately $8.4 million. We have a revolving credit agreement totaling $30.0 million from SunTrust Bank, Central Florida, N.A. available through March 31, 2001. There were no borrowings against the line of credit as of June 30, 2000. During the three and nine months ended June 30, 2000, we spent approximately $3.4 million and $21.9 million, respectively, on new equipment and facilities. We intend to spend an additional $5 million to $10 million during the remainder of fiscal year 2000 on capital equipment and facilities to increase capacity. It is also our intention to order additional equipment in late 2000, which will utilize next generation manufacturing techniques. 13 In the fourth quarter of 1998, the Board of Directors authorized us to repurchase up to 2,000,000 shares of common stock. To date, 1,129,810 shares have been repurchased under this program. We expect to continue to repurchase shares of common stock from time to time in the future. The repurchased shares will be used to satisfy stock option exercises and issuance of shares under other stock related benefit programs. We believe that our present cash position and funds expected to be generated from operations will be sufficient to meet our projected working capital and other cash requirements through the next twelve months. Thereafter, we may require additional equity or debt financing to address our working capital needs or to provide funding for capital expenditures. There can be no assurance that events in the future will not require us to seek additional capital sooner or, if so required, that it will be available on acceptable terms, if at all. Foreign Operations, Export Sales and Foreign Currency - ----------------------------------------------------- We established a subsidiary in Costa Rica in 1996. As of June 30, 2000, we had a net investment in fixed assets of approximately $26.0 million in this operation. During the three and nine months ended June 30, 2000, we recorded net sales of approximately $23.4 million and $59.8 million, respectively, with operating profits of approximately $6.9 million and $17.9 million, respectively. The functional currency for the Costa Rican subsidiary is the U.S. dollar since sales and most material cost and equipment are U.S. dollar denominated. The effects of currency fluctuations of the local Costa Rican currency are not considered significant and are not hedged. In 1996, we established a "foreign sales corporation" pursuant to the applicable provisions of the Internal Revenue Code to take advantage of income tax reductions on export sales. The cost to operate this subsidiary is nominal. In 1999, we opened a sales and service office in Seoul, South Korea to assist in our Asian sales efforts. The cost to operate this subsidiary is nominal. International sales are denominated in U.S. dollars. During the nine months ended June 30, 2000 and 1999, international sales accounted for approximately 62.2% and 38.3% of net sales, respectively. Sales to the European market accounted for approximately 20.5% and 18.2% of net sales for these same periods, respectively, and sales to the Asian and Pacific Rim markets, principally to South Korea, were approximately 32.5% and 15.7% of net sales, respectively, for these same periods. Over the past several years, the value of many foreign currencies have fluctuated relative to the U.S. dollar. The Korean won and Japanese yen, in particular, have fluctuated in value due in part to the economic events experienced by these countries over the past year. A stronger U.S. dollar makes it more difficult for us to sell our products to customers in these countries and makes it more difficult for us to compete against SAW producers based in these countries. A weaker U.S. dollar may make it more expensive for us to buy certain raw materials and equipment from Japanese suppliers. 14 The new common European currency, the euro, made its debut in January 1999. During the three and nine months ended June 30, 2000, approximately 24.1% and 20.5%, respectively, of our sales were to European customers. To date, no customers or suppliers have requested us to transact business in the euro. At this time, the impact of this new currency is not determinable. Recently Issued Accounting Standards - ------------------------------------ Please see Note 1 to the Consolidated Financial Statements included in our report on Form 10-K for the year ended September 30, 1999, for a discussion of new pronouncements. Impact of Inflation - ------------------- We believe that inflation has not had a material impact on operating costs and earnings. Impact of the Year 2000 - ----------------------- The Year 2000 issue is the result of computer programs and other business systems being written using two digits rather than four to represent the year. Many of the time sensitive applications and business systems of ours and our business partners could recognize a date using "00" as the year 1900 rather than the year 2000, which potentially could result in system failure or disruption of operations. We diligently addressed the potential Year 2000 issue through remediation projects relating to our information technology systems, non-information technology systems and material third party relationships. We completed these initiatives at an estimated cost of approximately $250,000. As previously disclosed, most of our information technology systems were updated or replaced with Year 2000 compliant applications in the normal course of business. As of this date, we have not experienced any significant business disruptions or system failures as a result of the Year 2000 issue. Additionally, there has been no substantial Year 2000 related issues reported from our major business partners. Although the Year 2000 event has occurred, and while there can be no assurances that there will be no problems related to the Year 2000 for a period of time after January 1, 2000, we believe that the Company will not be adversely impacted by the Year 2000 issue. 15 Risk Factors and Uncertainties - ------------------------------ This Form 10-Q contains certain forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that forward-looking statements such as statements of the Company's plans, objectives, expectations and intentions involve risks and uncertainties. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they appear. Statements containing terms such as "believes," "does not believe," "no reason to believe," "expects," "plans," "intends," "estimates" or "anticipates" are considered to contain uncertainty and are forward-looking statements. The Company's actual results could differ materially from those discussed. Factors that could cause or contribute to such differences include the following: A decline either in the growth of wireless communications or in the continued acceptance of CDMA technology would have an adverse impact on us. Approximately 74% of our net sales for 1999 and 1998 were derived from sales of SAW devices for applications in wireless communications systems. This trend continued during the first three fiscal quarters of 2000, with approximately 73.6% of our total net sales being derived from sales of SAW devices for applications in wireless communications systems. Any economic, technological or other development resulting in a reduction in demand for wireless services and products would have a material adverse effect on our business, financial condition and results of operations. Sales of our products for CDMA-based systems, including base stations and subscriber handsets, accounted for approximately 56% of our net sales in 1999. During the nine months ended June 30, 2000, approximately 45% of our net sales were generated from sales for CDMA-based systems. CDMA technology is relatively new to the marketplace and there can be no assurance that emerging markets will adopt this technology. Our business and financial results would be adversely impacted if CDMA technology does not continue to gain acceptance. If we are unable to successfully develop and bring new products to market, our operating results will be adversely affected. Recently, we announced our intent to offer an expanded line of SAW filters for the wireless handset market, including SAW RF and GSM IF filters. To date, we have completed some designs for these filters, and we have received orders for these products and began shipments in fiscal 2000. We have also ordered and begun to receive the materials and equipment necessary to enter this market. Expanding our product line and sales of these filters is an important part of our growth strategy. There is no assurance that we will be successful in our efforts to introduce these and other new filters for the wireless telecommunications market. Sustained growth of our business is dependent on our ability to develop new or improved SAW devices in a timely fashion. Our product development resources are limited, requiring us to allocate resources among a limited number of product development projects. Failure by us to efficiently allocate our product development resources to products that meet market needs could have a material adverse effect on our future growth. The success of new products also depends on timely completion of new product designs, quality of new products and market acceptance of these products. 16 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 $25 million to $32 million for fiscal year 2000, to increase our manufacturing output to enable us to grow our revenue. This plan includes new wafer fabrication capacity and capability in Orlando, new assembly capacity in Orlando and Costa Rica and expanding our building in Costa Rica. Any delay in increasing our capacity will have a material adverse impact on our ability to meet the anticipated demand for our new products and on our ability to grow revenue. During the nine months ended June 30, 2000, we spent approximately $21.9 million under this plan. Because we rely on a limited number of suppliers, our operating results would be adversely affected if a few suppliers were unable to meet our needs. We have a limited number of suppliers for certain critical raw materials, components, services and equipment. There are only a few ceramic package manufacturers and wafer producers worldwide who have the expertise and capacity necessary to satisfy our requirements. Most of these suppliers are based in Japan. Recently, we have experienced difficulty in obtaining ceramic surface mount packages used in the production of bandpass filters. A failure by us to anticipate demand for materials, or of our suppliers to provide sufficient amounts of material, could result in raw material shortages. There can be no assurance that we will be able to secure adequate supplies of materials, components, services or equipment. If we are unable to satisfy our requirements for raw materials or to obtain and maintain appropriate equipment, our business, financial condition and results of operations would be materially adversely affected. Risks associated with international sales could adversely affect our operating results. Overall, our net sales from international sales accounted for approximately 41%, 37% and 43% of net sales for 1999, 1998 and 1997, respectively. During the nine months ended June 30, 2000, international sales accounted for approximately 62.2% of net sales. The sale of products in foreign countries involves a number of risks that can arise from international trade transactions, local business practices and cultural considerations, including: o currency exchange rate fluctuations and restrictions; o import-export regulations; o customs requirements; o ability to secure credit and funding; o longer payment cycles; o foreign collection problems; o political and transportation risks; and o economic turmoil. 17 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. For the nine months ended June 30, 2000, our net sales from South Korean customers was approximately $28.2 million or 25% of total net sales, and in 1999 it was approximately $16.8 million, or 17% 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 24 months and may continue to face economic problems which would adversely impact our sales in these regions. In addition, the South Korean government recently reduced subsidies for the purchase of cellular phones in the South Korean market, which could adversely impact future sales of our product into this market. 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% and 76% of net sales in 1999 and 1998, respectively. Motorola, our largest customer, accounted for 23% of net sales in 1999 and 17% of net sales in 1998 and we believe it will continue to account for a high percentage of net sales in 2000. During the nine months ended June 30, 2000, sales to our top 10 customers accounted for approximately 72% of our total net sales. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our net sales in the foreseeable future. Our future success depends largely upon the decisions of our current customers to continue to purchase our products, as well as the decisions of prospective customers to develop and market systems that incorporate our products. A disruption in our Costa Rican operations could have an adverse impact on our operating results. During 1999, net sales from our Costa Rican operation accounted for approximately 47% of our total net sales and 40% of our operating income. During the nine months ended June 30, 2000, net sales from our Costa Rican operation generated approximately 53% of our total net sales and 38% 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: o government intervention; o wars; o currency fluctuations; 18 o limited supplies of labor; o labor disputes; o earthquakes; o volcanic eruptions; o hurricanes; o floods; and o mud slides. Any such disruptions could have a material adverse effect on our business, results of operations and financial condition. 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. 19 New competitive products or technologies may be developed which could reduce demand for our products. Our business is dependent upon the application of SAW-based technology. Competing technologies, including digital filtering technology, direct conversion or any other technology that could be developed, could replace or reduce the use of SAW filters for certain applications. Direct conversion is a process that converts an RF signal to baseband without the need for a SAW IF filter. Qualcomm Inc. of San Diego, California, and Analog Devices, Inc. of Norwood, Massachusetts, both produce integrated circuits for use in wireless phones and have announced products or plans to produce products that utilize direct conversion technology that could reduce or eliminate SAW filters in certain applications. Other companies, as well, may from time to time, announce products, patents or other claims relating to direct conversion or such other technologies that may reduce or eliminate certain SAW filters. The product produced by Analog Devices, Inc. may have some application in certain GSM phones, which, if proven to be successful, could impact our GSM IF filters for handsets. We believe that revenues generated from GSM IF filter sales could account for up to 10% of total net revenues in the fiscal year 2001. Qualcomm Inc. indicated that they were working on a direct conversion concept for CDMA phones for potential production in the future, but acknowledged the extreme difficulty of such a solution and could offer no time frame for its introduction. 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. 20 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. A failure to attract and retain qualified individuals for critical positions could have an adverse impact on our business, financial condition and results of operations. Our success depends, in part, on the performance of a number of key management and technical personnel, the loss of one or more of whom could have a material adverse effect on our business. Our success also depends, in part, on our ability to attract and retain qualified professional, technical, production, managerial and marketing personnel, both domestically and internationally. Competition for such personnel in our industry is very intense. While we have not yet experienced significant problems in recruiting or retaining qualified personnel, we cannot be certain that such problems will not arise in the future. 21 Our operating results could be adversely affected by fluctuations in the value of foreign currencies. Our international sales are generally denominated in U.S. dollars. However, we may be required in the future to denominate sales in the foreign currencies of certain countries or in the new euro for some of our European customers. As a result, fluctuations in currency exchange rates may have a significant effect on our sales, even in the absence of an increase or decrease in unit sales to foreign customers. A strong U.S. dollar could make our products more expensive for foreign customers, which could have a material adverse effect on our ability to compete internationally. We also purchase a great deal of our key raw materials and equipment from foreign countries, primarily Japan. A weak U.S. dollar could make our purchases more expensive. Over the past two years, the valuations of many foreign currencies have fluctuated significantly relative to the U.S. dollar. The Korean won and Japanese yen, in particular, have fluctuated in value due in part to the economic problems experienced by these countries. We have not, to date, engaged in substantial hedging transactions for our foreign exchange risks. If any of our future international sales or purchases are denominated in foreign currencies, we may find it necessary to engage in rate hedging activities with respect to certain exchange rate risks. There can be no assurance that we will engage in such exchange rate hedging or that any such activities will successfully protect against such risks. We could be subject to fines, suspension of production or cessation of operations if we fail to comply with the many laws and government regulations applicable to our business. We are subject to a variety of federal, state and local laws, rules and regulations relating to the discharge and disposal of toxic, volatile and other hazardous chemicals used in our manufacturing processes and to export controls. A failure by us to comply with present or future regulations could result in the imposition of fines, suspension of production or a cessation of operations. Such regulations could require us to acquire significant equipment or to incur substantial expense in order to comply with such regulations. Any past or future failure to control the use of or the discharge of toxic or hazardous substances or to comply with export regulations could subject us to future liabilities and could have a material adverse effect on our business, results of operations and financial condition. A number of factors affecting our customers may result in the cancellation of orders or delays in deliveries of our products to these customers. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for wireless communications products and services. The delays inherent in this governmental approval process have in the past, and may in the future, cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers. Any such delays may have a material adverse effect on the sale of our products to these customers. In addition, our customers may have difficulty in obtaining parts from other suppliers, such as flash memory for wireless handsets, causing these customers to cancel or delay orders for our products. 22 Our manufacturing facilities are located in areas prone to natural disasters. Our main facility is located in Orlando, Florida and we also have a production facility in San Jose, Costa Rica. Hurricanes, tropical storms, flooding, tornadoes, and other natural disasters are common events for the southeastern part of the United States and in Costa Rica. We could suffer disruptions due to natural disasters that could have an adverse effect on our operations. Our Costa Rican facility is also prone to these disasters as well as mud slides, earthquakes and volcanic eruptions. Any disruptions from these or other events would have a material adverse impact on our operations and financial results. Year 2000 problems could have an adverse effect on our operations. We are subject to potential Year 2000 problems affecting our internal systems, the systems of our suppliers and our customers. If any of these were not corrected for Year 2000 problems, our operations could be materially impacted. We have completed an examination of these systems and a summary of our results is included elsewhere in this Form 10-Q. Our stock price has been volatile. There has been significant volatility in the market price of our common stock, as well as in the market price of securities of technology-based companies and the U.S. stock markets overall. Some of the factors that could affect our stock price include: o variations in our operating results or the operating results of our customers or competitors; o announcements of new products by us or by our competitors; o gain or loss of significant contracts; o announcements of technological innovations; o acquisitions by us or our competitors; o changes in analysts' estimates of our financial performance; o government regulatory action; o developments or disputes regarding proprietary rights; o general trends in the industry; and o general economic or stock market conditions. Additionally, in the past, securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management's attention and resources. 23 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. In addition, the Sawtek Employee Stock Ownership and 401(k) Plan, or the ESOP, owns approximately 21% of our outstanding common stock. The ESOP trustee has the right to vote all of these shares. The ESOP trustee generally votes the shares allocated to participants' accounts in accordance with their voting directions and votes in its sole discretion with respect to the unallocated shares. If the ESOP trustee were to vote against or oppose a proposed acquisition of us, a potential acquirer might be discouraged from acquiring us even though the holders of a majority of the shares of our common stock were in favor of the acquisition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to minimal market and interest rate risk. We manage the sensitivity of our results of operations to these risks by maintaining a conservative investment portfolio, which is comprised solely of highly rated, short-term investments. We do not hold or issue derivative securities, derivative commodity instruments or other financial instruments for trading purposes. We are exposed to currency exchange fluctuations since we sell our products internationally and we purchase raw materials and equipment from foreign suppliers. We are also exposed to currency fluctuations associated with our Costa Rican operation. We manage the sensitivity of our international sales, purchases of raw materials and equipment and our Costa Rican operation by denominating most transactions in U.S. dollars. We do engage in limited foreign currency hedging transactions, principally to lock in the cost of purchase commitments that are not denominated in U.S. dollars. We are exposed to minimal interest rate risk on debt instruments as our outstanding debt is less than $2 million, and we do not plan to use additional debt-based financing to fund capital expenditures in 2000. 24 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not subject to any legal proceedings that, if adversely determined, would cause a material adverse effect on the Company's financial condition, business or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS IN SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Index to Exhibits Exhibit Number ------- 27 Financial Data Schedule (filed electronically only with the SEC) b) Reports on Form 8-K None 25 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: July 17, 2000 SAWTEK INC. (Registrant) /S/ Raymond A. Link Raymond A. Link Senior Vice President Finance, Chief Financial Officer (Principal Financial and Accounting Officer) 26 EX-27 2 0002.txt FDS FOR 3RD QUARTER 10-Q
5 (Replace this text with the legend) 0001009675 Sawtek Inc. 1,000 9-MOS SEP-30-2000 OCT-01-1999 JUN-30-2000 135,856 0 27,631 762 16,470 182,575 94,156 33,172 243,559 13,468 1,574 0 0 21 200,712 243,559 113,515 113,515 45,970 45,970 14,641 0 104 57,771 20,076 37,695 0 0 0 37,695 .89 .86
-----END PRIVACY-ENHANCED MESSAGE-----