-----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, PR4Rvq8loI9u7ILJmop7Q2aJDHaxpxtAM4d4c5CaCKCtVJ4H6+LRNuKuEztFmmwA fIibdiOR2Lxnz9Rm+H5Zgw== 0001009675-01-500005.txt : 20010430 0001009675-01-500005.hdr.sgml : 20010430 ACCESSION NUMBER: 0001009675-01-500005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010427 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-28276 FILM NUMBER: 1612494 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 q22001.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 March 31, 2001 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 April 26, 2001, there were 42,287,586 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 March 31, 2001 and September 30, 2000................................ 3 Consolidated Statements of Income for the three months and six months ended March 31, 2001 and 2000... 4 Consolidated Statements of Cash Flows for the six months ended March 31, 2001 and 2000.................. 5 Notes to Consolidated Financial Statements............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................10 Item 3. Quantitative and Qualitative Disclosure of Market Risk..................................................30 Part II. Other Information Item 1. Legal Proceedings.....................................31 Item 2. Changes in Securities.................................31 Item 3. Defaults Upon Senior Securities.......................31 Item 4. Submission of Matters to a Vote of Security Holders...31 Item 5. Other Information.....................................32 Item 6. Exhibits and Reports on Form 8-K .....................32 Signatures...............................................................33 Exhibit Index ...........................................................34 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SAWTEK INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
March 31, September 30, 2001 2000 --------- ------------- (unaudited) Assets Current assets: Cash, cash equivalents and short-term investments $ 166,210 $ 144,343 Accounts receivable, net 20,648 30,661 Inventories, net 19,385 18,588 Deferred income taxes 1,320 1,320 Other current assets 3,268 2,157 --------- --------- Total current assets 210,831 197,069 Property, plant and equipment, net 63,326 62,368 Other assets 1,051 51 --------- --------- Total assets $ 275,208 $ 259,488 ========= ========= Liabilities and shareholders' equity Current liabilities: Accounts payable $ 2,604 $ 3,656 Accrued liabilities 3,111 6,003 --------- --------- Total current liabilities 5,715 9,659 Deferred income taxes 7,002 6,393 Shareholders' equity: Common stock; $.0005 par value; 120,000,000 authorized shares; 42,668,194 issued shares; 42,264,236 and 42,632,776 outstanding shares at March 31, 2001 and September 30, 2000, respectively 21 21 Capital surplus 76,417 78,531 Unearned ESOP compensation (586) (586) Retained earnings 195,962 166,612 Less common stock held in treasury at cost; 403,958 shares at March 31, 2001 and 35,418 at September 30, 2000 (9,323) (1,142) --------- --------- Total shareholders' equity 262,491 243,436 --------- --------- Total liabilities and shareholders' equity $ 275,208 $ 259,488 ========= ========= See accompanying notes to consolidated financial statements.
3 SAWTEK INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended Six Months Ended March 31, March 31, -------------------- --------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (dollars in thousands, except per share data) Net sales $ 28,370 $ 37,612 $ 76,120 $ 69,410 Cost of sales 13,379 14,930 32,827 28,424 -------- -------- -------- -------- Gross profit 14,991 22,682 43,293 40,986 Operating expenses: Selling expenses 1,367 1,497 3,423 2,736 General & administrative expenses 1,550 1,229 3,186 2,466 Research & development expenses 2,654 2,195 4,829 3,873 -------- -------- -------- -------- Total operating expenses 5,571 4,921 11,438 9,075 -------- -------- -------- -------- Operating income 9,420 17,761 31,855 31,911 Other income, net 2,210 1,580 4,613 3,036 -------- -------- -------- -------- Income before taxes 11,630 19,341 36,468 34,947 Income taxes 2,361 6,721 7,118 12,144 -------- -------- -------- -------- Net income $ 9,269 $ 12,620 $ 29,350 $ 22,803 ======== ======== ======== ======== Net income per share: Basic $ 0.22 $ 0.30 $ 0.69 $ 0.54 Diluted $ 0.22 $ 0.29 $ 0.68 $ 0.52 Shares used in per share calculation: Basic 42,414 42,470 42,509 42,396 Diluted 42,969 43,724 43,032 43,668 See accompanying notes to consolidated financial statements.
4 SAWTEK INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended March 31, --------------------- 2001 2000 ---- ---- (in thousands) Operating activities: Net income $ 29,350 $ 22,803 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,112 4,143 Deferred income taxes 609 3,890 Loss on disposal of equipment - 365 Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable 10,013 (4,975) Inventories (797) (5,882) Other assets (1,111) (193) Increase (decrease) in liabilities: Accounts payable (1,052) 1,968 Accrued liabilities (2,892) (1,230) Income taxes payable - 3,374 --------- --------- Net cash provided by operating activities 40,232 24,263 Investing activities: Purchase of property, plant and equipment, net (7,070) (18,414) Purchase of long-term investments (1,000) - Short-term investments 41,783 11,230 --------- --------- Net cash provided by (used in) investing activities 33,713 (7,184) Financing activities: Principal payments on long-term debt - (234) Issuance of common stock 1,197 872 Stock option income tax benefits 933 2,076 Purchase of common stock for treasury (12,425) - --------- --------- Net cash provided by (used in) financing activities (10,295) 2,714 --------- --------- Increase in cash and cash equivalents 63,650 19,793 Cash and cash equivalents at beginning of period 69,536 50,640 Short-term investments 33,024 53,404 --------- --------- Cash, cash equivalents and short-term investments $ 166,210 $ 123,837 ========= ========= Supplemental disclosures: Interest paid $ - $ 69 Income taxes paid $ 7,980 $ 2,450 See accompanying notes to consolidated financial statements.
5 SAWTEK INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended March 31, 2001 and 2000 NOTE 1 BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 March 31, 2001, and the results of its operations and its cash flows for the three and six months ended March 31, 2001 and 2000. These financial statements should be read in conjunction with our audited financial statements as of September 30, 2000, including the notes thereto, and the other information set forth therein included in our most recent annual report on Form 10-K for the year ended September 30, 2000 (File No. 000-28276), which was filed with the Securities and Exchange Commission, or SEC, on November 13, 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 April 1, 2001, for the second quarter of fiscal 2001. However, for convenience, the financial statements are dated as of March 31, 2001. There were no material transactions from March 31, 2001 through April 1, 2001. Operating results for the three and six months ended March 31, 2001 are not necessarily indicative of the operating results that may be expected for the year ending September 30, 2001. 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 Six Months Ended March 31, March 31, ------------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- (in thousands, except per share data) Numerator: Net income available to common stockholders $ 9,269 $12,620 $29,350 $22,803 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share: Weighted average shares 42,414 42,470 42,509 42,396 Effect of dilutive securities: Employee stock options 555 1,254 523 1,272 ------- ------- ------- ------- Denominator for diluted earnings per share: Adjusted weighted average shares and Assumed conversions 42,969 43,724 43,032 43,668 ======= ======= ======= ======= Earnings per share: Basic $ 0.22 $ 0.30 $ 0.69 $ 0.54 ======= ======= ======= ======= Diluted $ 0.22 $ 0.29 $ 0.68 $ 0.52 ======= ======= ======= =======
NOTE 3 INVENTORIES Net inventories consist of the following:
March 31, 2001 September 30, 2000 -------------- ------------------ (in thousands) Raw material $10,442 $11,750 Work in process 3,394 3,662 Finished goods 5,549 3,176 ------- ------- Total $19,385 $18,588 ======= =======
7 NOTE 4 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
March 31, 2001 September 30, 2000 -------------- ------------------ (in thousands) Land and Improvements $ 830 $ 830 Buildings 22,295 16,541 Production and Test Equipment 69,562 62,680 Computer Equipment 4,336 4,036 Furniture and Fixtures 3,070 2,943 Construction in Progress 3,936 9,929 --------- --------- 104,029 96,959 Less accumulated depreciation 40,703 34,591 --------- --------- Total $ 63,326 $ 62,368 ========= =========
NOTE 5 SHAREHOLDERS' EQUITY The consolidated changes in shareholders' equity for the six months ended March 31, 2001 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, 2000 42,668 $21 35 $(1,142) $78,531 $(586) $166,612 $243,436 Net proceeds from exercise of stock options (129) 4,244 (3,047) 1,197 Compensatory stock option tax benefit 933 933 Purchase of treasury stock 498 (12,425) (12,425) Net income for the six months ended March 31, 2000 29,350 29,350 ------ --- ---- ------- ------- ----- -------- -------- Balance at March 31, 2001 42,668 $21 404 $(9,323) $76,417 $(586) $195,962 $262,491 ====== === ==== ======= ======= ===== ======== ========
8 NOTE 6 RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and its amendments Statements 137 and 138, in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company's principal hedging activities relate to hedges of firm commitments. This type of hedging generally relates to purchases of equipment or materials, denominated in foreign currencies. The Company evaluates whether to hedge or not based on the currency, time, amount and other factors. In this type of hedging, both the hedging instrument and the change in the fair value of the firm commitment to the extent of the hedge instrument are recognized on the balance sheet as part of the fair value hedge relationship. The Company adopted FAS No. 133 on October 1, 2000. At March 31, 2001, the Company had no hedges on firm commitments outstanding. NOTE 7 RELATED PARTY TRANSACTIONS In March 2001, the Company completed a $1,000,000 investment in Xytrans, Inc. In return, Sawtek received an approximately eight percent equity ownership and one seat on the Board of Directors of Xytrans. The Company's former Chief Executive Officer and current Chairman of its Board of Directors, Steven P. Miller, will serve as the Chairman of Xytrans. In addition, Mr. Miller and Dr. Neal Tolar, a former senior vice-president of Sawtek and current member of Sawtek's board, also have an equity interest in Xytrans. Xytrans is a spin-off company from Lockheed Martin and is a developer of millimeter wave, wireless data communication products. NOTE 8 RECLASSIFICATIONS Certain amounts in prior years have been reclassified to conform to current year presentation. 9 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, projections 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, 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 six months ended March 31, 2001 and 2000, accounted for approximately 41% and 43%, 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 67% and 62% of net sales during the first six months of fiscal years 2001 and 2000, respectively. 10 Results of Operations The following tables set 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 Six Months Three Months Six Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 2001 vs. 2000 2001 vs. 2000 ---- ---- ---- ---- ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% (24.6%) 9.7% Cost of sales 47.2 39.7 43.1 41.0 (10.4%) 15.5% ----- ----- ----- ----- Gross profit 52.8 60.3 56.9 59.0 Operating expenses: Selling expenses 4.8 4.0 4.5 3.9 (8.7%) 25.1% General & administrative expenses 5.5 3.3 4.2 3.6 26.1% 29.2% Research & development expenses 9.3 5.8 6.3 5.6 20.9% 24.7% ----- ----- ----- ----- Total operating expenses 19.6 13.1 15.0 13.1 13.2% 26.0% ----- ----- ----- ----- Operating income 33.2 47.2 41.9 45.9 (47.0%) (0.2%) Other income - net 7.8 4.2 6.0 4.4 39.7% 51.9% ----- ----- ----- ----- Income before taxes 41.0 51.4 47.9 50.3 (39.7%) 4.4% Income taxes 8.3 17.8 9.3 17.4 (64.9%) (41.4%) ----- ----- ----- ----- Net income 32.7% 33.6% 38.6% 32.9% (26.6%) 28.7% ===== ===== ===== =====
Percent Increase Over the Prior Period ---------------------------- Three Months Six Months Three Months Six Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 2001 vs. 2000 2001 vs. 2000 ---- ---- ---- ---- ------------- ------------- Revenue by markets: Communication: Base stations 32.8% 34.6% 32.7% 34.0% (28.5%) 5.3% Handsets 35.3 36.8 35.5 38.6 (27.7%) 0.8% Broadband access 6.1 2.2 6.9 2.7 106.9% 186.9% Data communications 6.4 9.7 7.1 8.0 (50.5%) (2.6%) All other communications 0.4 1.7 1.1 1.7 (82.4%) (27.7%) ----- ----- ----- ----- Sub-total communication 81.0 85.0 83.3 85.0 Military and space 6.8 3.8 5.6 4.1 36.4% 50.2% All other 12.2 11.2 11.1 10.9 (17.5%) 11.8% ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% (24.6%) 9.7% ===== ===== ===== =====
11
Percent Increase Over the Prior Period ---------------------------- Three Months Six Months Three Months Six Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 2001 vs. 2000 2001 vs. 2000 ---- ---- ---- ---- ------------- ------------- Revenue by architecture: GSM 15.0% 24.2% 22.5% 19.2% (53.4%) 28.7% CDMA 46.1 41.4 41.5 46.9 (16.1%) (3.0%) All other 38.9 34.4 36.0 33.9 (14.5%) 16.4% ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== Revenue by product line: Handset CDMA IF filters 29.0% 18.2% 22.9% 24.7% 20.1% 1.4% RF and GSM IF filters 6.3 18.6 12.6 13.9 (74.6%) (0.4%) ----- ----- ----- ----- Sub-total Handset 35.3 36.8 35.5 38.6 (27.7%) 0.8% Base Station CDMA 17.8 23.9 19.2 22.6 (43.8%) (6.7%) GSM 15.0 10.7 13.4 11.5 5.6% 28.8% ----- ----- ----- ----- Sub-total Base Station 32.8 34.6 32.6 34.1 (28.5%) 5.3% All other 31.9 28.6 31.9 27.3 (15.8%) 27.7% ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== Revenue by geographic region: North America 44.6% 39.2% 42.6% 42.3% (14.6%) 10.3% Europe 16.5 21.7 19.1 18.2 (42.5%) 15.1% Pacific Rim (excluding 9.4 10.6 15.2 7.1 (32.8%) 135.5% S. Korea) South Korea 27.2 25.5 19.3 28.6 (19.8%) (25.9%) Other 2.3 3.0 3.8 3.8 (42.1%) 11.1% ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
Net Sales. Net sales decreased 24.6% from $37.6 million in the quarter ended March 31, 2000, to $28.4 million in the quarter ended March 31, 2001. Net sales for the six months ended March 31, 2001, increased by $6.7 million or 9.7% to $76.1 million from the comparable period in 2000. The decrease in revenues during the second quarter of 2001, were primarily the result of decreased shipments of bandpass filters for code division multiple access, or CDMA, base stations, decreased shipments of bandpass filters for global system for mobile communication, or GSM, mobile phones and a lower level of sales from our data communication related products. 12 We believe that the current slowdown in the wireless and communications markets will continue into the third and fourth quarter of fiscal 2001 and we will be significantly affected by this slowdown. We are projecting our revenue will be down by approximately 15% to 20% for fiscal 2001, compared to fiscal 2000, and net income, exclusive of one-time tax gains recorded in fiscal 2000, to be down slightly more than the decline in revenue. The decline in revenue is projected to be across most of our major product lines. Reasons for the continued reduced revenue outlook include a slowing economy resulting in a reduced demand for cellular phones, excess inventory at one of our major customers relating to one of our products, a slower adoption rate of 2.5G and 3G platforms and a more competitive marketplace resulting in slightly lower average selling prices than originally anticipated. A significant percentage of our revenues continue to be generated from international markets. Sales to international customers accounted for approximately 67% and 62% of total revenues during the six months ended March 31, 2001 and 2000, respectively. During the three-month period ended March 31, 2001, sales to our international customers declined approximately 27% as compared to the quarter ended March 31, 2000. Additionally, sales to our international customers declined approximately 45% from the first quarter of 2001 to the second quarter of 2001. Revenues generated from Asian customers accounted for approximately 37% and 36% of total revenues during the quarters ended March 31, 2001 and 2000, respectively, and accounted for approximately 34% and 36% of total revenues during the six months ended March 31, 2001 and 2000, respectively. 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. During the quarters ended March 31, 2001 and 2000, the percentage of our Asian revenue generated from South Korea was approximately 74% and 71%, respectively. The percentage of our Asian revenue generated from South Korean customers during the first six months of fiscal 2001 and for the fiscal year 2000 was 56% and 80%, respectively. During our fiscal year 2000, the South Korean government reduced subsidies for the purchase of cellular phones in the South Korean market. As a result of this governmental action, we experienced delays in orders and some push out of orders to South Korean customers. 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, intermediate frequency, or IF, filters for GSM handsets and SAW duplexers for cellular CDMA handsets. There is no assurance, however, that we will continue to be successful in introducing new products for the wireless telecommunications market. 13 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 17.8% and 23.9% of total revenues during the quarters ended March 31, 2001 and 2000, respectively. CDMA base station filter sales accounted for approximately 19.2% and 22.6% of total revenues during the six-month periods ended March 31, 2001 and 2000, respectively. Gross Margin. Gross profit margins decreased from 60.3% in the quarter ended March 31, 2000, to 52.8% in the quarter ended March 31, 2001. Gross margins for the six-months ended March 31, 2001 was 56.9% compared to 59.0% for the comparable period in 2000. The gross margin decrease primarily resulted from a continuing competitive marketplace, resulting in lower average selling prices, coupled with a lower revenue base to absorb our fixed manufacturing overhead. During fiscal 2001, we plan to produce a significantly higher volume of RF and GSM IF filters for wireless phones, both of which have lower average selling prices, lower gross profit margins compared to our other products and are subject to more competitive pricing pressure than our other products. As a result, we believe that our gross profit margin percentage will decrease in 2001 compared to 2000. We are projecting our gross margins will be between 50% and 54% for the remainder of fiscal 2001. However, due to certain risks and uncertainties detailed in the risk factor section of this Form 10-Q, no assurances can be provided that our gross profit margins will not fall below this range. Selling Expenses. Selling expenses decreased 8.7% from $1.5 million in the quarter ended March 31, 2000 to $1.4 million in the quarter ended March 31, 2001. Selling expenses for the six months ended March 31, 2001, increased 25.1% to $3.4 million from the comparable period in 2000. As a percentage of net sales, selling expenses increased from 4.0% during the quarter ended March 31, 2000, to 4.8% in the quarter ended March 31, 2001, and increased from 3.9% during the six months ended March 31, 2000, to 4.5% during the six months ended March 31, 2001. This increase in selling expenses as a percentage of net sales is attributable to a lower level of sales to customers where historically, no sales commission has been paid, resulting in a higher percentage of sales where sales commissions are paid. General and Administrative Expenses. General and administrative expenses increased 26.1% from $1.2 million in the quarter ended March 31, 2000 to $1.5 million in the quarter ended March 31, 2001. General and administrative expenses for the six months ended March 31, 2001, increased 29.2% to $3.2 million from the comparable period in 2000. 14 As a percentage of net sales, general and administrative expenses increased from 3.3% during the quarter ended March 31, 2000, to 5.5% in the quarter ended March 31, 2001, and increased from 3.6% during the six months ended March 31, 2000, to 4.2% during the six months ended March 31, 2001. The increase in general and administrative expenses as a percentage of net sales is attributable to the lower level of sales made during the second quarter 2001 as compared to the second quarter 2000, while general and administrative expenses increased. In response to our continued reduced revenue outlook, we have adjusted our spending plans, reduced headcount at our plant in Costa Rica, reduced working hours and have encouraged employees to take early retirement in the event this slowdown continues for a longer period of time. Research and Development Expenses. Research and development expenses increased 20.9% from $2.2 million in the quarter ended March 31, 2000 to $2.7 million in the quarter ended March 31, 2001. Research and development expenses for the six months ended March 31, 2001, increased 24.7% to $4.8 million from the comparable period in 2000. As a percentage of net sales, research and development expenses increased from 5.8% during the quarter ended March 31, 2000, to 9.3% in the quarter ended March 31, 2001, and increased from 5.6% during the six months ended March 31, 2000, to 6.3% during the six months ended March 31, 2001. The increase in research and development expenses as a percentage of net sales is the result of a higher level of new product development combined with declining sales. Despite the current industry slowdown, we are aggressively recruiting engineers and continue to invest in new products and technologies. Other Income. Other income increased 39.7% and 51.9% from $1.6 million and $3.0 million during the three and six months ended March 31, 2000, respectively, to $2.2 million and $4.6 million during the three and six months ended March 31, 2001, respectively. These increases are the result of higher interest income being earned on increased levels of cash, cash equivalents and short-term investments. Other income decreased 8.2% from $2.4 million during the first quarter 2001 to $2.2 million during the second quarter 2001. This decrease is the result of lower interest rates and a shift in our investment portfolio to tax advantaged securities. Income Tax Expense. The provision for income taxes as a percentage of income before income taxes was 20% and 35% for the three and six months ended March 31, 2001 and 2000, respectively. This decrease was primarily due to adjusting our income taxes for our Costa Rican subsidiary. In the fourth quarter of 2000, we completed a significant expansion to our Costa Rican operation and adjusted the income taxes for this subsidiary. The Costa Rican subsidiary operates in a free trade zone and is currently exempt from taxes in Costa Rica. As a result, effective in the fourth quarter of 2000, we no longer record income taxes for this subsidiary as it is now considered to be a permanent investment. We believe that our effective tax rate for 2001 will range from 19% to 24%. However, due to certain risks and uncertainties detailed in the risk factor section of this Form 10-Q, no assurances can be provided that our effective tax rate will not exceed this range. 15 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 six months ended March 31, 2001, we generated net cash from operating activities of approximately $40.2 million. Cash generated from operations consisted primarily of net income of $29.4 million, $6.1 million of depreciation and amortization and a decrease in accounts receivable of $10.0 million. These increases were partially offset by an increase in other assets of approximately $1.1 million, an increase in inventory of approximately $0.8 million and a decrease in accounts payable and accrued liabilities of approximately $3.9 million. We have a revolving credit agreement totaling $30.0 million from SunTrust Bank, Central Florida, N.A. available through January 31, 2002. There were no borrowings against the line of credit as of March 31, 2001. During the three and six months ended March 31, 2001, we spent approximately $3.6 million and $7.1 million, respectively, on new equipment and facilities. We intend to spend an additional $8 million to $12 million during the remainder of fiscal year 2001 on capital equipment and facilities to increase capacity. It is also our intention to order additional equipment during the remainder of 2001, which will utilize next generation manufacturing techniques. In the fourth quarter of 1998, the Board of Directors authorized us to repurchase up to 2,000,000 shares of common stock. As of March 31, 2001, 1,655,952 shares have been repurchased under this program. During the first six months of fiscal 2001, we repurchased 497,500 shares for approximately $12.4 million. 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. 16 Foreign Operations, Export Sales and Foreign Currency We established a subsidiary in Costa Rica in 1996. As of March 31, 2001, we had a net investment in fixed assets of approximately $30.6 million in this operation. During the three and six months ended March 31, 2001, we recorded net sales of approximately $16.5 million and $45.3 million, respectively, with operating profits of approximately $4.1 million and $15.3 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 six months ended March 31, 2001 and 2000, international sales accounted for approximately 67% and 62% of net sales, respectively. Sales to the European market accounted for approximately 19% and 18% of net sales for these same periods, respectively, and sales to the Asian and Pacific Rim markets, principally to South Korea, were approximately 34% and 36% 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. The new common European currency, the euro, made its debut in January 1999. During the three and six months ended March 31, 2001, approximately 17% and 19%, 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 6 to the Consolidated Financial Statements included in this report and Note 1 to the Consolidated Financial Statements included in our report on Form 10-K for the year ended September 30, 2000, for a discussion of new pronouncements. 17 Impact of Inflation We believe that inflation has not had a material impact on operating costs and earnings. Impact of the Year 2000 We completed our plan to address Year 2000 (Y2K) computer issues in calendar year 1999 and we did not experience any significant problems related to computer hardware, software or other applications, nor do we expect to experience any Y2K issues in the future. 18 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. During the three and six months ended March 31, 2001, the percentage of total revenues generated from the sale of SAW devices was 68% and 69%, respectively, for applications in wireless communications systems, specifically wireless phones and base stations. Approximately 72%, 74% and 74% of our net sales for 2000, 1999 and 1998, respectively, were derived from sales of SAW devices for applications in wireless communications systems, specifically wireless phones and base stations. The growth rate for the unit sales of wireless phones has been over 40% for the past several years, but has slowed recently. At the beginning of calendar year 2001, forecasts by Ericsson, Motorola and Nokia, three leading manufacturers of wireless phones, placed the projected unit sales of wireless phones to be between 525 million and 575 million, compared to approximately 408 million phones for calendar year 2000. These projections have recently been revised with Ericsson, Motorola and Nokia all cutting their forecasts for global handset sales for calendar year 2001. Consensus estimates now range between 425 million and 500 million global handset sales for calendar year 2001, representing a growth rate of approximately 15%. Any economic, technological or other development resulting in a reduction in demand for wireless services and products would have a material adverse effect on our business, financial condition and results of operations. Sales of our products for CDMA-based systems, including filters for base stations and wireless phones, accounted for approximately 46% and 41% of our net sales during the three and six months ended March 31, 2001. During fiscal 2000 and 1999, approximately 45% and 56%, respectively, 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. 19 Because we depend on a few large customers, our operating results would be adversely affected by the loss of any of these customers. A few large customers have accounted for a significant portion of our net sales. During the first six months of fiscal 2001, sales to our top 5 and 10 customers accounted for approximately 54% and 75% or our total net sales, respectively. Sales to our top 10 customers accounted for approximately 72%, 70% and 76% of net sales in 2000, 1999 and 1998, respectively. Motorola, our largest customer, accounted for approximately 19% and 26% of our total net sales during the three and six months ended March 31, 2001, and we believe it will continue to account for a high percentage of net sales during the remainder of fiscal 2001. Motorola accounted for 25% and 23% of net sales in 2000 and 1999, respectively. In a conference call with the investment community on April 11, 2001, senior management from Motorola stated that they expect revenue and operating income from their sales of wireless phones to decline in the quarter ending June 30, 2001. Additionally, during the same conference call, Motorola cut its forecast for global handset sales to approximately 425 million to 475 million units from its previous guidance of 525 million units. Motorola's recent forecast is at the low end of most analysts' current projections. A decline in Motorola's handset revenues combined with a reduction in the global forecast for handset sales in calendar year 2001 could adversely affect our sales and revenue growth in the future. 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. New competitive products and technologies have been announced which could reduce demand for our products. Our business is dependent upon the application of SAW-based technology. Competing technologies, including digital filtering technology, direct conversion or any other technology that could be developed, could replace or reduce the use of SAW filters for certain applications. Direct conversion is a process that converts an RF signal to baseband without the need for a SAW IF filter. Qualcomm Inc. of San Diego, California, Analog Devices, Inc. of Norwood, Massachusetts, Agilient Technologies, Inc. of Palo Alto, California and RF Micro Devices of Greensboro, North Carolina, each produce integrated circuits for use in wireless phones and have announced products or plans to produce products that utilize direct conversion or other technologies that could reduce or eliminate SAW filters in certain applications. Other companies, as well, may from time to time, announce products, patents or other claims relating to direct conversion or such other technologies that may reduce or eliminate certain SAW filters. 20 The product introduced by Analog Devices, Inc. may have some application in certain GSM phones, which, if proven successful, could impact sales of our GSM IF filters for wireless phones. Our sales of SAW filters for GSM wireless phones accounted for approximately 9% of revenues for the six months ended March 31, 2001, and approximately 8% of revenues for the year ended September 30, 2000. We believe that revenues generated from handset filters for GSM phones could account for up to 10% of our total revenues for all of fiscal 2001. Qualcomm Inc., on December 18, 2000, announced a new product based on a direct conversion concept that could eliminate a SAW IF filter in certain CDMA phones. Qualcomm expects to sample this product in late calendar year 2001. Our sales of IF filters for CDMA phones accounted for approximately 23% of revenues for the six months ended March 31, 2001 and approximately 22% of revenues for the year ended September 30, 2000. We believe that revenues generated from IF filters for CDMA phones could account for up to 25% of our total revenues for all of fiscal 2001. If Qualcomm's product is successful in the market, it could reduce or eliminate our revenues from IF filters for CDMA phones. Agilent Technologies, Inc. recently announced an alternative solution to SAW-based technology for potential use as a duplexer in certain PCS wireless phone applications. To date, we have not sold any SAW-based duplexers, but we have targeted this application for future revenue growth. Lastly, RF Micro Devices, on January 22, 2001, announced a direct conversion modulator for multi-mode wireless phones that could reduce the need for certain transmit filters for GSM and potentially other architectures. Production for this product is scheduled for the second half of calendar year 2001. Currently, most phone OEM's do not use SAW filters in the transmit path for GSM phones and we do not derive any revenue from this application. At this time we are unable to assess the impact, if any, of this announcement on our future revenue and growth. Any development of a cost-effective technology that replaces SAW filtering technology or reduces the need for SAW filtering technology could have a material adverse effect on our business, financial condition and results of operations. If we are unable to successfully develop and bring new products to market, our operating results will be adversely affected. During fiscal 2000, we announced our intent to offer an expanded line of SAW filters for the wireless phone market, including RF and GSM IF filters. 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. 21 Sustained growth of our business is dependent on our ability to develop new or improved SAW devices in a timely fashion. Our product development resources are limited, requiring us to allocate resources among a limited number of product development projects. Failure by us to properly allocate our product development resources to products that meet market needs could have a material adverse effect on our future growth. The success of new products also depends on timely completion of new product designs, quality of new products and market acceptance of these products. If we are unable to successfully increase our production capacity, we will not be able to grow our revenue as planned. During the first six months of fiscal 2001, we spent approximately $7.1 million on capital expenditures to increase our manufacturing capacity. We have not completed our capacity expansion plans and intend to spend an additional $8 million to $12 million during the remainder of fiscal year 2001 on new equipment. During fiscal 2000 we incurred approximately $27 million in capital expenditures to increase our manufacturing output to enable us to grow our revenue. Expansion plans for fiscal year 2001 include new wafer fabrication capacity and capability in Orlando and new assembly capacity in Orlando and Costa Rica. Any delay in increasing our capacity will have a material adverse impact on our ability to meet the anticipated demand for our new products and on our ability to grow revenue. Because we rely on a limited number of suppliers, our operating results would be adversely affected if a few suppliers were unable to meet our needs. We have a limited number of suppliers for certain critical raw materials, components, services and equipment. There are only a few ceramic package manufacturers and wafer producers worldwide who have the expertise and capacity necessary to satisfy our requirements. Most of these suppliers are based in Japan. At times in the past, we have experienced difficulty in obtaining ceramic surface mount packages used in the production of bandpass filters. A failure by us to anticipate demand for materials, or of our suppliers to provide sufficient quantities of material, could result in raw material shortages. There can be no assurance that we will be able to secure adequate supplies of materials, components, services or equipment. If we were 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. 22 Risks associated with international sales could adversely affect our operating results. During the three and six months ended March 31, 2001, net sales to our international customers accounted for approximately 64% and 67% of total net sales, respectively. Our net sales to international customers accounted for approximately 61%, 41% and 37% of total net sales for 2000, 1999 and 1998, respectively. The sale of products in foreign countries involves a number of risks that can arise from international trade transactions, local business practices and cultural considerations, including: o currency exchange rate fluctuations and restrictions; o import-export regulations; o customs requirements; o ability to secure credit and funding; o longer payment cycles; o foreign collection problems; o political and transportation risks; and o economic turmoil. Some of our major customers are relying on growth in international markets, including Asia and Latin America, for sales of their products. The demand for our products will be reduced if the economies in these regions decline or do not meet anticipated growth expectations. We have grown our net sales over the past several years partly from shipments to South Korean customers. During the three and six months ended March 31, 2001, net sales to our South Korean customers accounted for approximately 27% and 19% of total net sales, respectively. For fiscal 2000, our net sales to South Korean customers was approximately $32.9 million or 20.6% of total net sales, and in 1999 it was approximately $16.8 million, or 16.8% of net sales. However, net sales to South Korean customers fluctuates greatly as experienced in the last quarter of 1998 when those net sales declined to $1.1 million, or approximately 5% of total net sales, compared to $4.8 million, or approximately 18% of total net sales, in the immediately preceding quarter. The South Korean economy and the economies of many other countries in Asia and around the world have experienced economic turmoil and recession during the past 24 months and may continue to face economic problems which would adversely impact our sales in these regions. In addition, the South Korean government recently reduced subsidies for the purchase of wireless phones in the South Korean market, which could adversely impact future sales of our products into this market. 23 Our manufacturing facilities are located in areas prone to natural disasters. We have manufacturing and production facilities located in Orlando, Florida and in San Jose, Costa Rica. Hurricanes, tropical storms, flooding, tornadoes, and other natural disasters are common events for the southeastern part of the United States and in Central America. Additionally, our Costa Rican facility could also be affected by mud slides, earthquakes and volcanic eruptions. Any disruptions from these or other events would have a material adverse impact on our operations and financial results. Though we have manufacturing and assembly capabilities in both Orlando and San Jose, we are only capable of fabricating wafers in our Orlando facility. As a result, any disruption to our Orlando facility would have a material adverse impact on our operations and financial results. A disruption in our Costa Rican operations would have an adverse impact on our operating results. As discussed in a previous risk factor, we have a production facility located in Costa Rica, which is prone to natural disasters. In addition to the potential risk of a natural disaster occurring, operating a facility in Costa Rica presents additional risks of disruption such as government intervention, currency fluctuations, labor disputes, limited supplies of labor, power interruption and war. Any such disruptions could have a material adverse effect on our business, results of operations and financial condition. During the three and six months ended March 31, 2001, net sales from our Costa Rican operation accounted for approximately 58% and 60% of total net sales, respectively, and 27% and 48% of our operating income, respectively. During fiscal years 2000 and 1999, net sales from our Costa Rican operation accounted for approximately 51% and 47% of our total net sales, respectively, and approximately 37% and 40% of our operating income, respectively. We expect our Costa Rican operations to continue to account for a significant proportion of our overall operations in the future. A change in our favorable tax status in Costa Rica would have an adverse impact on our operating results. Our subsidiary in Costa Rica operates in a free trade zone and will receive a 100% exemption from Costa Rican income taxes through 2003 and a 50% exemption through 2007. During the three and six months ended March 31, 2001, this tax exemption provided tax saving of approximately $1.6 million and $5.7 million. During fiscal 2000, this tax exemption provided tax savings of approximately $10.0 million, excluding the one-time gain of $16.7 million related to adjusting the prior year's deferred income taxes, and increased our diluted earnings per share by approximately $0.23. The Costa Rican government is reviewing its policy on granting tax exemptions to companies located in free trade zones. To date, no changes have been made and it is uncertain if any changes will be made to the current tax structure. Any adverse change in the tax structure for our Costa Rican subsidiary made by the local government would have a negative impact on our net income. 24 A continued decline in selling prices for some of our key products could have an adverse impact on our operating results. Selling prices for our products have declined due to competitive pricing pressures and to the use of newer surface mount package devices that are smaller and less expensive than previous generation filters. We have experienced declines in prices for filters for GSM base stations due to the use of surface mount packages, and this has also begun to occur in filters for CDMA base stations. In addition, we expect prices for wireless phone filters to continue to decline as they become smaller and as competitive pricing pressure increases. A continued decline in prices could have a material adverse impact on both our revenues and our net income. If we experience a decline in our manufacturing yields, our operating results will be adversely affected. The manufacture of SAW devices involves complex processes that may result in reduced yields from time to time, the causes of which are often difficult to determine. A reduction in yields at any stage of the manufacturing process would have a material adverse effect on our ability to meet our quoted delivery times and on our cost of production, which would have an adverse impact on our operations and profitability. 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. 25 We expect competition to increase, which could result in lower selling prices and have an adverse effect on our operating results. Competition in the markets for our products is intense. We compete against large international companies that have substantially greater financial, technical, sales, marketing, distribution and other resources than us. In addition, we may face competition from companies that currently manufacture SAW devices for their own internal requirements, as well as from a number of our customers that have the potential to develop an internal supply capability for SAW devices. We expect competition to increase from both established and emerging competitors, as well as from internal capabilities developed by certain customers. Our ability to compete effectively in our target markets depends on a variety of factors both within and outside of our control, including timing and success of new product introductions, availability of manufacturing capacity, the rate at which customers incorporate our components into their products, our ability to respond to competitive pricing pressures, availability of technical personnel, sufficient supplies of raw materials, the quality, reliability and price of products and general economic conditions. There can be no assurance that we will be able to compete successfully in the future. If we are not able to protect our intellectual property or if we infringe on the intellectual property of others, our business and operating results could be adversely affected. We rely on a combination of patents, copyrights and trade secrets to establish and protect our intellectual property rights. There can be no assurance that patents will issue from any of our pending applications or that any claims allowed from existing or pending patents will be sufficiently broad to protect our technology. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted will provide proprietary protection. Litigation may be necessary to enforce our patents, trade secrets and other intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, results of operations and financial condition regardless of the final outcome of the litigation. We are not currently engaged in any patent infringement suits, nor have we been threatened with any such suits. In January 2000, we received a letter from a large Canadian telephone equipment manufacturer claiming that it believes we are infringing on a patent it owns that issued in 1987 and offering a license on preferred terms. It is our position that this patent is unenforceable because we sold devices commercially utilizing the invention claimed in the patent at least two years before the application for this patent was filed and because the patent owner did not attempt to exercise its rights to enforce this patent for over 12 years. If we are incorrect in our position in this matter and this patent is found to be enforceable, we could be required to pay a license fee or to pay damages related to sales of devices utilizing this invention sold over the past seven years and we could be enjoined from further infringement, either of which could have a material adverse effect on our operating results. Despite our efforts to maintain and safeguard our proprietary rights, there can be no assurances that we will be successful in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent to or superior to our technologies. If any of the holders of these patents assert claims that we are infringing such patents, we could be forced to incur substantial litigation expenses. In addition, if we were found to infringe, we would be required to pay substantial damages, pay royalties in the future or be enjoined from infringing on such patents in the future. 26 A failure to attract and retain qualified individuals for critical positions could have an adverse impact on our business, financial condition and results of operations. Our success depends, in part, on the performance of a number of key management and technical personnel. The loss of a key employee could have a material adverse effect on our business. Our success also depends, in part, on our ability to attract and retain qualified professional, technical, production, managerial and marketing personnel, both domestically and internationally. Competition for such personnel in our industry is very intense. While we have not yet experienced significant problems in recruiting or retaining qualified personnel, we cannot be certain that such problems will not arise in the future. Our operating results could be adversely affected by fluctuations in the value of foreign currencies. Our international sales are generally denominated in U.S. dollars. However, we may be required in the future to denominate sales in the foreign currencies of certain countries or in the euro for some of our European customers. As a result, fluctuations in currency exchange rates may have a significant effect on our sales, even in the absence of an increase or decrease in unit sales to foreign customers. A strong U.S. dollar could make our products more expensive for foreign customers, which could have a material adverse effect on our ability to compete internationally. We also purchase most of our key raw materials and equipment from foreign countries, primarily Japan. A weak U.S. dollar could make our purchases more expensive. Over the past two years, the valuations of many foreign currencies have fluctuated significantly relative to the U.S. dollar. The Korean won and Japanese yen, in particular, have fluctuated in value due in part to the economic problems experienced by these countries. To date, we have engaged in limited hedging transactions for our foreign exchange risks. If any of our future international sales or purchases are denominated in foreign currencies, we may find it necessary to engage in substantial rate hedging activities with respect to exchange rate risks. There can be no assurance that such exchange rate hedging will successfully protect us against such exchange rate risk. 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. 27 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, causing these customers to cancel or delay orders for our products. Our stock price has been volatile. There has been significant volatility in the market price of our common stock, as well as in the market price of securities of technology-based companies and the U.S. stock markets overall. Some of the factors that could affect our stock price include: o variations in our operating results or the operating results of our customers or competitors, or other technology companies; o announcements of new products by us or by our competitors; o gain or loss of significant contracts; o announcements of technological innovations; o acquisitions by us or our competitors; o changes in analysts' estimates of our financial performance; o government regulatory action; o developments or disputes regarding proprietary rights; o general trends in the industry; and o general economic or stock market conditions. Additionally, in the past, securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and damages and divert management's attention and resources. 28 The increased use of consignment inventories makes it more difficult for us to accurately forecast our quarterly revenues. We have experienced an increase in the dollar value of our products sold through consignment inventory or hub agreements. Under these agreements, we ship finished goods to warehouse sites located near our customers' facilities and the customer then withdraws this inventory at their discretion. We do not recognize revenue until our customers withdraw the inventory for their use. As a result of not knowing the exact usage of inventory at these sites until late each quarter, our estimates of quarterly revenues may fluctuate from our projections. At March 31, 2001, we had approximately $95,000 in consignment inventory at offsite locations and approximately 1.2% and 5.0% of our total revenue during the three and six months ended March 31, 2001, respectively, was generated through these types of agreements. Approximately 10% of our total revenue came from these agreements in fiscal 2000. We expect these amounts to increase during the remainder of fiscal 2001. Certain considerations could make it more difficult for others to acquire us. Certain anti-takeover provisions of the Florida Business Corporation Act could have the effect of making it more difficult for a third party to acquire us or of discouraging a third party from attempting to acquire us. These anti-takeover measures could result in a lower value to be received by our shareholders if our Board of Directors did not approve an acquisition. Such provisions could limit or depress the price that certain investors might be willing to pay in the future for shares of our stock. We are also authorized to issue preferred stock, with rights senior to our common stock, without the necessity of shareholder approval. We have no present plans to issue shares of preferred stock. However, issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our 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. 29 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 do not have any outstanding debt, therefore, we are not exposed to interest rate risk on debt and we do not plan to use debt-based financing to fund capital expenditures over the next 12 months 30 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not subject to any legal proceedings that, if adversely determined, would cause a material adverse effect on the Company's financial condition, business or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS IN SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 30, 2001 at the Company's annual meeting of shareholders, the following members were elected to the Board of Directors:
Nominee to Board Votes For Votes Withheld Abstain ---------------- --------- -------------- ------- Steven P. Miller 34,735,948 420 533,888 Neal J. Tolar 34,735,948 420 533,888 Robert C. Strandberg 34,735,948 420 533,888 Bruce S. White 34,735,948 1,650 533,888 Willis C. Young 34,735,948 1,450 533,888
Approval of amendments to the Sawtek Inc. Second Stock Option Plan: Votes For 28,044,651 Votes Withheld 2,059,255 Abstain 204,538
Approval of amendments to the Sawtek Inc. Second Stock Option Plan for Acquired Companies: Votes For 29,403,059 Votes Withheld 671,887 Abstain 233,498
31 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Index to Exhibits
Exhibit Number - ------- 10.20 2000 Modified ESOP Loan Agreement for the Sawtek Inc. Employee Stock Ownership and 401(K) Plan and Trust as of December 14, 2000. 10.22 2000 Renewal ESOP Note dated as of December 14, 2000. 10.23 2000 Implementation Agreement as of December 14, 2000 by and between Sawtek Inc., HSBC Bank and the Sawtek Inc. Employee Stock Ownership and 401(K) Plan and Trust. 10.39 Renewal of unsecured $30,000,000 credit line agreement with SunTrust Bank, extending agreement maturity date to January 31, 2002. b) Reports on Form 8-K On February 26, 2001, we filed with the Commission a Current Report on Form 8-K regarding the press release issued by us dated February 26, 2001, announcing a mid-quarter update for the quarter ending March 31, 2001.
32 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: April 26, 2001 SAWTEK INC. (Registrant) /S/ Raymond A. Link Raymond A. Link Senior Vice President Finance, Chief Financial Officer (Principal Financial and Accounting Officer) 33 EXHIBIT INDEX
Exhibit Number Description of Exhibits - -------------- ----------------------- 10.20 2000 Modified ESOP Loan Agreement for the Sawtek Inc. Employee Stock Ownership and 401(K) Plan and Trust as of December 14, 2000. 10.22 2000 Renewal ESOP Note dated as of December 14, 2000. 10.23 2000 Implementation Agreement as of December 14, 2000 by and between Sawtek Inc., HSBC Bank and the Sawtek Inc. Employee Stock Ownership and 401(K) Plan and Trust. 10.39 Renewal of unsecured $30,000,000 credit line agreement with SunTrust Bank, extending agreement maturity date to January 31, 2002.
34 Exhibit 10.20 2000 MODIFIED ESOP LOAN AGREEMENT This 2000 MODIFIED ESOP LOAN AGREEMENT (the "Agreement") is made and entered into on December 14, 2000 in Apopka, Orange County, Florida between SAWTEK INC., a Florida corporation (the "Company") and HSBC BANK, as successor trustee (the "Trustee") of the SAWTEK INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN AND TRUST (the "KSOP" and the "Trust") (formerly known as the Employee Stock Ownership Plan and Trust for Employees of Sawtek Inc. (the "ESOP")). BACKGROUND INFORMATION A. Effective October 1, 1990, the Company established the ESOP for the benefit of its participants and beneficiaries. The ESOP was amended and restated, and combined with the Company's 401(k) profit sharing plan, on July 16, 1997, to become the KSOP. B. On January 11, 1991, the Company and certain shareholders thereof sold Shares of common stock of the Company to the Trust. C. In order to finance the acquisition of the Shares, the Trust entered into the 1991 ESOP Loan with the Company in the principal amount of $4,000,000, as evidenced by the 1991 ESOP Loan Agreement. D. The Trust acquired 17,777,760 Shares (as adjusted to reflect a 1996, 20 for 1 stock split and the year 2000, 2 for 1 stock split) in conjunction with the 1991 ESOP Loan Agreement and placed such Shares in a suspense account within the ESOP for release in accordance with the 1991 ESOP Pledge Agreement and applicable ERISA regulations. E. As of the date of this Agreement, the Trust remains indebted to the Company from the 1991 ESOP Loan in the principal amount of $585,597, and there remains 2,312,932 Shares in the suspense account of the KSOP for allocation to the participants and beneficiaries of the KSOP. F. As stated and memorialized in the 2000 Implementation Agreement, the Company and the Trustee have agreed to extend the amortization of the 1991 ESOP Loan (as previously extended and modified on September 26, 1997) in exchange for the additional consideration to be provided by the Company to the Trust in accordance with the 2000 Implementation Agreement. The Company and the Trustee have agreed that the 1991 ESOP Loan, as modified herein, continues to be primarily for the benefit of the participants and beneficiaries of the KSOP. ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "Agreement" means this modification of the 1991 ESOP Loan Agreement, as modified on September 26, 1997, between the Company and the Trustee. "Business Day" means any day except a Saturday, Sunday or other day on which banks in Orlando, Florida are authorized or required by law to close. "Company" means Sawtek Inc., a Florida corporation that sponsors the KSOP, and its successor. "Code" means the Internal Revenue Code of 1986, as amended or replaced from time to time. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended or replaced from time to time. "ESOP" means the Employee Stock Ownership Plan and Trust for Employees of Sawtek, Inc. prior to its amendment and restatement as of July 16, 1997. "Event of Default" means the events of default provided in Article VI of this Agreement. "KSOP" means the Sawtek Inc. Employee Stock Ownership and 401(k) Plan and Trust dated as of July 16, 1997. "1991 ESOP Loan" means the $4,000,000 loan by the Company to the Trust on January 11, 1991, as evidenced by the 1991 ESOP Note. "1991 ESOP Loan Agreement" means the ESOP Loan Agreement between the Trustee and the Company dated as of January 11, 1991. "1991 ESOP Note" means the Trust's ESOP Note in the principal amount of $4,000,000 dated as of January 11, 1991. "1991 ESOP Pledge Agreement" means the ESOP Pledge Agreement between the Trustee and the Company dated as of January 11, 1991. "1997 Modified ESOP Pledge Agreement" means the 1991 ESOP Pledge Agreement, as modified by the Modified ESOP Pledge Agreement dated as of September 26, 1997." "Shares" means the shares of common stock of the Company acquired by the Trust pursuant the 1991 ESOP Loan. "Trust" means the Sawtek Inc. Employee Stock Ownership and 401(k) Trust dated as of July 16, 1997. "Trustee" means HSBC Bank, as successor trustee of the Trust, and any successor thereto. "2000 Implementation Agreement" means the agreement between the Company and the Trustee of even date herewith that provides the overall agreement between the Company and the Trustee with respect to the modification of the 1991 ESOP Loan Agreement and 1991 ESOP Pledge Agreement, as modified September 26, 1997. "2000 Modified ESOP Loan Documents" means collectively this Agreement, and the 2000 Renewal ESOP Note. "2000 Renewal ESOP Note" means the renewal of the 1991 ESOP Note, as modified September 26, 1997, and now in the principal amount of $585,597.00, dated as of December 14, 2000. "Unallocated Shares" means Shares being held in suspense in the Trust, pending allocation to participants pursuant to the terms of the KSOP. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principals. In the event of ambiguities or changes in GAAP, the more conservative principal or interpretation shall be used. ARTICLE II THE LOAN SECTION 2.01. Commitment to Extend Loan. On the terms and subject to the conditions of this Agreement, the Company and the Trustee hereby agree that the amortization of the repayment of the 1991 ESOP Loan shall be extended to September 30, 2007. Furthermore, the Company and the Trustee acknowledge and agree that as of the date of this Agreement, the unpaid principal balance of the 1991 ESOP Loan, as modified, from the Company to the Trust is $585,597.00, and 2,312,932 Shares remain in the suspense account of the Trust pending allocation to the participants and beneficiaries of the KSOP. SECTION 2.02. Effect on Agreements. Except with respect to the termination of the 1997 Modified ESOP Pledge Agreement as provided in Section 3 of the 2000 Implementation Agreement, nothing in this Agreement shall be interpreted or construed to affect the rights and obligations of the Company and the Trust under the 1991 ESOP Loan Agreement and the 1991 ESOP Note, as such agreements and documents were modified on September 26, 1997 and as existed prior to the date of this Agreement. As of the date of the Agreement, the rights and obligations of the Company and the Trust under the 1991 ESOP Note, 1991 ESOP Loan Agreement and 1991 ESOP Pledge Agreement, all as previously modified on September 26, 1997, shall be as provided in this Agreement and the 2000 Renewal ESOP Note. SECTION 2.03. ESOP Note: Payment of Principal and Interest. The continuing obligation of the Trust to repay the 1991 ESOP Loan, as previously modified, shall be evidenced by the 2000 Renewal ESOP Note. The 2000 Renewal ESOP Note shall be payable in seven (7) annual installments of principal plus accrued interest, payable each year on September 30, with the first installment due on September 30, 2001, and the final installment due on September 30, 2007. The 2000 Renewal ESOP Note shall be without recourse to the Trust. SECTION 2.04. Interest Rate. Interest shall accrue from the date hereof on the outstanding principal amount of the 2000 Renewal ESOP Note at the fixed, annual rate of 7.5016%. SECTION 2.05. Prepayments. The Trust may, without premium or penalty, prepay the 2000 Renewal ESOP Note in whole or in part, at any time, upon payment of the principal amount being prepaid together with accrued interest thereon to the date of prepayment. Any prepayment of the 2000 Modified ESOP Note shall be applied to the principal installments thereof in the inverse order of their maturities. SECTION 2.06. General Provisions as to Payments. (a) The Trust shall make each payment of principal and interest hereunder under the 2000 Renewal ESOP Note not later than 11:00 a.m. (Orlando, Florida time) on the date when due in lawful money of the United States of America to the Company at its address referred to in the signature section of this Agreement in immediately available funds. Whenever any payment of principal of, or interest on, the 2000 Renewal ESOP Note is due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. (b) Interest shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). If the due date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. SECTION 2.07. Special Limitations. Notwithstanding any other provision in the 2000 Modified ESOP Loan Documents, the obligations of the Trust and the rights of the Company under the 2000 Modified ESOP Loan Documents are subject to and limited by any specific limitations that may now or in the future be explicitly required by law to qualify the 1991 ESOP Loan (as modified herein) for an exemption from any prohibition relating to transactions with an employee stock ownership plan by a "disqualified person" or "party in interest" under Code Section 4975 or ERISA Sections 406 and 408, respectively, or any similar or successor provision of applicable law, but only to the extent, and for so long as, such prohibitions specifically would be applicable to the 1991 ESOP Loan (as modified herein), and no exemption is available for such limitations. The Trustee shall comply with any reasonable request from the Company for assistance in establishing the inapplicability of such a prohibition or the qualification for such an exemption. SECTION 2.08. Maximum Interest Rate. (a) Nothing contained in this Agreement or the 2000 Renewal ESOP Note shall require the Trust to pay interest at a rate exceeding the maximum rate permitted by applicable law. (b) If the amount of interest payable to the Company on any interest payment date in respect of the immediately preceding interest computation period, computed pursuant to Section 2.06, would exceed the maximum amount permitted by such applicable law to be charged by the Company, the amount of interest payable on such interest payment date automatically shall be reduced to such maximum permissible amount. ARTICLE III CONDITIONS TO MODIFICATION SECTION 3.01. Conditions. The modification of the 1991 ESOP Loan, as previously modified on September 26, 1997, shall be subject to the satisfaction of the following conditions: (a) execution by the Company and the Trustee of this Agreement; (b) execution by the Trustee of the 2000 Renewal ESOP Note; (c) agreement by the Company to the termination of the 1997 Modified ESOP Pledge Agreement; (d) execution by the Company and the Trustee of the 2000 Implementation Agreement; (e) cancellation of the 1997 ESOP Note, as modified by the 1997 Renewal ESOP Note; and (f) the fact that all of the representations and warranties of the Trust contained in any of the 2000 Modified ESOP Loan Documents shall be true and correct on and as of the date of such modification in all material respects. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Trustee represents and warrants, on behalf of the Trust, to and with the Company the following: SECTION 4.01. Authorization: Assuming that the Company (i) submits the KSOP and Trust to the Internal Revenue Service with an application for a favorable determination letter that the KSOP meets the requirements of Code Sections 401(a) and 4975(e)(7), (ii) obtains a favorable determination letter from the Internal Revenue Service on such application, and (iii) promptly adopts any amendments to the KSOP and Trust that are required by the Internal Revenue Service as a condition to the issuance of its favorable determination letter, then, to the best knowledge of the Trustee, the transactions contemplated hereby do not constitute prohibited transactions under the Code or ERISA. The Trust forming a part of the KSOP has been duly constituted in accordance with valid and binding trust instruments, is validly existing and is qualified under Code Sections 401(a) and 501(a). SECTION 4.02. Binding Effect. Each of the 2000 Modified ESOP Loan Documents constitutes a valid and binding agreement of the Trust, and the 2000 Renewal ESOP Note, when executed and delivered in accordance with this Agreement, will continue to be a valid and binding obligation of the Trust. SECTION 4.03. Debt. The Trust has no debt other than debt incurred pursuant to this Agreement and the 1991 ESOP Loan Agreement, as previously modified on September 26, 1997. SECTION 4.04. Litigation. To the best knowledge of the Trustee, there is no action, suit or proceeding pending against, threatened against or affecting the KSOP or Trust before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which would adversely affect the KSOP and Trust, taken as a whole, or the ability of the Trust to perform its obligations under this Agreement, or which in any manner questions the validity of any of the 2000 Modified ESOP Loan Documents. ARTICLE V COVENANTS The Trustee agrees that, so long as any amount payable under the 2000 Renewal ESOP Note remains unpaid or any obligation of the Trust to the Company remains unperformed or unfulfilled: SECTION 5.01. Plan Documents and Information. The Trustee will deliver to the Company: (a) any consent, acknowledgment or other document that reasonably may be requested by the Company in order to establish the qualified and exempt status of the KSOP and Trust and the 2000 Renewal ESOP Loan; and (b) from time to time such additional information in the Trustee's possession regarding the status or financial position of the KSOP and Trust, including copies of all documents and correspondence relating to the KSOP and Trust or the transactions contemplated hereby, to or from the Internal Revenue Service, the U.S. Department of Labor or any other competent authority, as the Company may reasonably request. SECTION 5.02. Benefit to Participants. The Trustee has engaged, consulted with and has relied and will rely upon the advice of such advisers as it deems appropriate, and based upon said investigations and advice, the Trustee has determined and will determine that this modification of the 1991 ESOP Loan, together with the 2000 Implementation Agreement, is primarily for the benefit of the KSOP's participants and beneficiaries as contemplated by United States Department of Labor Regulations Section 2550.408b-3 and Treasury Regulation Section 54.4975-7. SECTION 5.03. Relating to Company. The Company shall make contributions to the KSOP and Trust at such times, in such amounts, and within the limits specified in the applicable provisions of the Code, as may be necessary to enable the KSOP and Trust to meet all of its debt and other obligations as provided in the 2000 Modified ESOP Loan Documents. The Company shall take any and all actions necessary or appropriate to maintain the tax qualified status of the KSOP and Trust under the Internal Revenue Code. ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events shall have occurred and be continuing: (a) the failure or omission of the Trust to pay when due any installment of principal or interest on the 2000 Renewal ESOP Note (but only to the extent the Company is in compliance with its covenants contained in Section 5.03); (b) the Trust shall fail to observe or perform any covenant contained in Section 5.02 of this Agreement; (c) the Trust shall fail to observe or perform any covenant contained in any of the 2000 Modified ESOP Loan Documents; (d) any representation, warranty, certification or statement made by the Trust in any of the 2000 Modified ESOP Loan Documents is false in a material way; or, (e) an event of default shall occur under any of the 2000 Modified ESOP Loan Documents; then, and in every such event, the Company may take any action permitted to be taken upon the occurrence of an Event of Default under this Agreement and the other 2000 Modified ESOP Loan Documents. Notwithstanding anything contained herein to the contrary, if an Event of Default shall occur and be continuing, the Company shall have no rights to assets of the KSOP and Trust other than contributions (other than contributions of employer securities) that are made by the Company to enable the KSOP and Trust to meet its obligations hereunder and earnings attributable to the investment of such contributions. ARTICLE VII MISCELLANEOUS SECTION 7.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, fax, or similar writing) and shall be given to such party at its address or fax number set forth on the signature pages hereof or such other address or fax number as such party may hereafter specify for the purpose by notice to the Trustee and the Company. Each such notice, request or other communication shall be effective (i) if given by fax, when such fax is transmitted to the fax number specified in this Section and the appropriate answer back is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section. SECTION 7.02. Survival. All representations and warranties made by the Trust in any of the 2000 Modified ESOP Loan Documents, or in any document delivered in connection herewith or therewith shall survive the execution of this Agreement and the 2000 Modified ESOP Loan Documents. SECTION 7.03. Amendments and Waivers. Any provision of any of the 2000 Modified ESOP Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and the Trustee. SECTION 7.04. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns (including any successor trustees of the KSOP), except that the KSOP and Trust may not assign or otherwise transfer any of its rights under this Agreement. The Company may at any time sell, assign, transfer, pledge, grant security interests or participations in, or otherwise dispose of, its rights under any of the 2000 Modified ESOP Loan Documents, in whole or in part. SECTION 7.05. Florida Law. To the extent not superceded by federal law, each of the 2000 Modified ESOP Loan Documents shall be construed in accordance with and governed by the law of the State of Florida. SECTION 7.06. Counterparts: Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 7.07. No Waivers. The obligations of the KSOP and Trust hereunder shall not in any way be modified or limited by reference to any other ESOP or KSOP loan document, instrument or agreement. All of the rights of the Company hereunder are separate from and in addition to any rights that it may have under the terms of the 2000 Renewal ESOP Note, the 2000 Implementation Agreement or otherwise. No failure or delay by the Company in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law or otherwise. No failure or delay by the Company in exercising any right, power or privilege under or in respect of any of the 2000 Modified ESOP Loan Documents shall affect the rights, powers or privileges hereunder or shall operate as a limitation or waiver thereof. SECTION 7.08. Term of the Agreement. The term of this Agreement shall be until the payment in full of all principal and interest on the 2000 Renewal ESOP Note and all sums payable to the Company pursuant to this Agreement, whichever is earlier. SECTION 7.09. Severability. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable under any applicable law, the validity, legality and enforceability of the remaining provisions hereof shall not be affected or impaired thereby. SECTION 7.10. Titles and Contents. The Section headings and table of contents are inserted for convenience of reference only and are not a part of this Agreement and shall not be used to limit, expand or otherwise interpret or construe the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this 2000 Modified ESOP Loan Agreement to be duly executed by their respective authorized officers as of the day and year first above written. COMPANY: SAWTEK INC. By: /S/ Raymond A. Link Raymond A. Link Senior Vice President Finance Chief Financial Officer 1818 South Highway 441 Apopka, Florida 32703 (407) 886-7061 (Fax) TRUSTEE: HSBC BANK USA, NOT IN ITS INDIVIDUAL CAPACITY BUT SOLELY AS TRUSTEE OF THE SAWTEK INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN AND TRUST By: /S/ Stephen J. Hartman, Jr. Stephen J. Hartman, Jr. Senior Vice President HSBC Bank USA 452 Fifth Avenue, 17th Floor New York, N.Y. 10018-2706 (212) 525-2396 (Fax) Exhibit 10.22 2000 RENEWAL ESOP NOTE $ 585,597.00 Apopka, Florida December 14, 2000 This is the 2000 Renewal ESOP Note modifying the terms of the Renewal ESOP Note dated September 26, 1997, in the principal amount of $1,366,392.35 (the "1997 Note"). All required documentary stamp taxes, if any, on the 1997 Note have been fully paid. This 2000 Renewal ESOP Note is intended to comply with the provisions of Florida Statutes ss.201.09 (dealing with documentary stamp taxes on renewal notes). This 2000 Renewal ESOP Note modifies the term and interest rate of the 1997 Note. For value received, HSBC Bank USA, as successor trustee of the Sawtek Inc. Employee Stock Ownership and 401(k) Plan and Trust (the "Borrower") (formerly known as the Employee Stock Ownership Plan and Trust for Employees of Sawtek Inc.), promises to pay to the order of Sawtek Inc. (the "Company") at 1818 South Highway 441, Apopka, Florida 32703, or at such other location as may hereafter be designated by the Company, the principal sum of Five Hundred Eighty-Five Thousand, Five Hundred Ninety-Seven Dollars, ($585,597) plus interest at 7.5016% per annum, in seven annual installments of principal and interest as follows:
Due Date Principal Interest Total -------- --------- -------- ----- September 30, 2001 $106,071 $43,929 $150,000 September 20, 2002 91,528 35,972 127,500 September 20, 2003 83,394 29,106 112,500 September 20, 2004 82,150 22,850 105,000 September 20, 2005 80,812 16,688 97,500 September 20, 2006 71,875 10,625 82,500 September 20, 2007 69,766 5,234 75,000
All such payments of principal and interest shall be made in lawful money of the United States in immediately available funds in the manner specified in the 2000 Modified ESOP Loan Agreement. The Borrower also shall pay all costs of collection, including court costs and attorneys' fees, if collection proceedings are brought with respect to this 2000 Renewal ESOP Note. The Borrower may prepay all or any portion of this 2000 Renewal ESOP Note without penalty or premium. This is the 2000 Renewal ESOP Note referred to in the 2000 Modified ESOP Loan Agreement dated as of December 14, 2000, between the Borrower and the Company (as the same may be amended from time to time, the "2000 Modified ESOP Loan Agreement"). The provisions of the 2000 Modified ESOP Loan Agreement are incorporated herein by reference. This Note shall be without recourse to the Borrower. Notwithstanding anything contained herein to the contrary, the Company shall not take any action or fail to act in any manner that would cause the loan represented by this 2000 Renewal ESOP Note to fail to qualify as an exempt loan as defined in Section 54.4975-7 of the Treasury Regulations. This 2000 Renewal ESOP Note shall be interpreted so as to qualify as an exempt loan. Time is of the essence hereunder. The failure or forbearance of the Company to exercise any right hereunder, or otherwise granted by law or another agreement, shall not affect or release the liability of the Borrower, and shall not constitute a waiver of such right unless so stated by the Company in writing. The Borrower agrees that the Company shall have no responsibility for the collection or protection of any property securing this 2000 Renewal ESOP Note, and expressly consents that the Company may from time to time, without notice, extend the time for payment of this 2000 Renewal ESOP Note, or any part thereof, and waive its rights with respect to any property or indebtedness. The Borrower hereby expressly waives presentment and notice of dishonor of this 2000 Renewal ESOP Note. SAWTEK INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN AND TRUST ATTEST: By: HSBC Bank USA, Trustee, Not in its Individual Capacity, but solely as Trustee _________________________ By: /S/ Stephen J. Hartman, Jr. Stephen J. Hartman, Jr. Senior Vice President Exhibit 10.23 2000 IMPLEMENTATION AGREEMENT This 2000 IMPLEMENTATION AGREEMENT is entered into effective December 14, 2000, by and between SAWTEK INC., a Florida corporation (the "Company") and HSBC BANK, as successor trustee (the "Trustee") of the trust (the "Trust") that forms a part of the SAWTEK INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN AND TRUST (the "Plan"). BACKGROUND INFORMATION A. Effective October 1, 1990, the Company established the Employee Stock Ownership Plan and Trust (the "Prior Plan") for the benefit of its eligible employees. B. The Prior Plan was amended and restated and combined with the Company's 401 (k) profit sharing plan in the form of the Plan effective July 16, 1997. C. On January 11, 1991, the Company and certain shareholders thereof sold 17,777,760 shares (adjusted to reflect a 1996 20 for 1 stock split, and a year 2000 2 for 1 stock split) of common stock of the Company (the "Shares") to the Trust. D. In order to finance the acquisition of the Shares, the Trust entered into an exempt loan (the "1991 Exempt Loan") with the Company in the principal amount of $4,000,000, as evidenced by the ESOP Loan Agreement dated as of January 11, 1991 (the "1991 Loan Agreement"). E. The Shares were placed in a suspense account within the Prior Plan for release in accordance with the ESOP Pledge Agreement dated as of January 11, 1991 (the "1991 Pledge Agreement") and applicable regulations under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). F. As of September 26, 1997, the Company and the Trustee entered into an Implementation Agreement (the "1997 Implementation Agreement") for the purpose of modifying the 1991 Loan Agreement, 1991 Pledge Agreement, and the January 11, 1991 ESOP Note. Such documents were modified in consideration of an incremental contribution set forth in the 1997 Implementation Agreement. G. As of the date of this agreement, the Trust remains indebted to the Company from the 1991 Exempt Loan (as modified) in the principal amount of $585,597 and there remains 2,312,932 of the Shares (after all stock split adjustments) in the suspense account of the Plan for allocation to the participants and beneficiaries of the Plan. H. The Trustee has made the determination to enter into this Agreement and other documents related to the modification of the 1991 ESOP Loan including the 2000 Modification of ESOP Loan Agreement between the Company and the Trust dated as of the date hereof, attached as Exhibit A (the "2000 Modified ESOP Loan Agreement"), and the 2000 Renewal ESOP Note dated as of the date hereof, attached as Exhibit B. I. It is intended that the loan made under the 2000 Modified ESOP Loan Agreement and evidenced by the 2000 Renewal ESOP Note (the "2000 Modified ESOP Loan") will be primarily for the benefit of the Plan participants and beneficiaries and will constitute an "exempt loan" within the meaning of section 4975(d)(3) of the Internal Revenue Code 1986, as amended (the "Code"), Treasury Regulation ss.54.4975-7(b), Section 408(b)(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), Department of Labor Regulation ss.2550.408b-3, and Section 5.5 of the Plan. J. The Company has agreed to enter into this Agreement in consideration for the Trustee entering into the 2000 Modified ESOP Loan Agreement and the 2000 Renewal ESOP Note. AGREEMENT In consideration of the premises and the mutual covenants and agreements herein contained, and other good and valuable consideration (the receipt, adequacy and sufficiency of which each party hereto respectively acknowledges by its execution hereof), the parties hereto intending legally to be bound do hereby agree to the implementation of their understanding as follows: 1. Representation. The Company represents that (i) the execution, delivery and performance of this Agreement are within the Company's powers, and have been duly authorized by all necessary action by the Board of Directors of the Company, and (ii) this Agreement constitutes the Company's valid and legally binding obligation, enforceable against the Company in accordance with its terms. 2.Incremental Contribution. For the fiscal years ended September 30, 2001 through and including September 30, 2007, the Company shall contribute to the Trust an amount equal to the lesser of (i) one hundred percent (100%) of each Plan participant's salary deferral contributions not to exceed three percent (3%) of such participant's compensation (as defined in the Plan), and (ii) five percent (5%) of the Company's accumulated net, after-tax profits, calculated in accordance with generally accepted accounting principals, minus any accrual for the Company's contribution for that plan year. The Company's contribution under the foregoing paragraph is referred to as the "Incremental Contribution." The Company, in its sole discretion, may make the Incremental Contribution in the form of cash, shares of common stock of the Company ("Common Stock"), or a combination thereof. The value of a contribution in the form of shares of Common Stock shall be determined by multiplying the number of shares contributed to the Plan by the average (as defined herein) of the last sale prices of a share of Common Stock, as reported on NASDAQ at the close of trading on the ten (10) consecutive trading days ending on its third business day prior to the date of the contribution to the Plan (the "Value Calculation"). "Average" shall mean the sum of the ten (10) last sale prices determined as specified above divided by ten (10), with the result rounded to the nearest ten-thousandth. The Company and the Trustee agree that the Value Calculation will be adjusted, as mutually agreeable, in the even that such calculation is deemed at some future date to constitute a prohibited transaction under section 4975 of the Code or Section 406 of ERISA. 3. Termination of 1997 ESOP Pledge Agreement. The Company hereby agrees to release from the 1997 ESOP Pledge Agreement all Shares that were pledged pursuant to the 1991 Pledge Agreement, as modified by the 1997 ESOP Pledge Agreement. As a result of the release of the pledge, no portion of the proceeds from the sale of any Shares held in the Suspense Account (as defined in Section 1.7 of the Plan) may be applied to the repayment of the 1991 Exempt Loan, as modified by the 2000 Renewal ESOP Note. 4. Acceleration of Repayment. The Company and Trustee hereby agree that in the event a "Change of Control" of the Company occurs at any time in which Shares remain unallocated pursuant to the "Revised Allocation Schedule" set forth below in Section 5, then such remaining Shares shall be allocated pursuant to the "Current Allocation Schedule" set forth in Section 5 below, and as of the date of the Change of Control, all Shares that would have been allocated if the "Current Allocation Schedule" had remained in effect shall be allocated as of that date to the individuals who are then active participants in the Plan as of the date immediately prior to the Change of Control. In the event there is a Change of Control of the Company and the Plan is terminated, all remaining Shares immediately shall be released from suspense and allocated to the individuals who are then active participants in the Plan as of the date of the termination of the Plan. In the event of a Change of Control, the repayment schedule for the 2000 Renewal ESOP Note may not be extended in any event, and neither the "Current Allocation Schedule" nor the "Revised Allocation Schedule" may be extended (but may be accelerated) for any reason, even if both the Company and the Trustee agree to such extension. For purposes of this Agreement, a "Change of Control" means any of the following events: (a) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, (the "Exchange Act")) or group (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act), other than a subsidiary of the Company or any employee benefit plan (or any related trust) of the Company or a subsidiary, becomes the beneficial owner of fifty percent (50%) or more of the Company's outstanding voting shares and other outstanding voting securities of the Company that are entitled to vote generally in the election of directors of the Company ("Voting Securities"); (b) individuals who, as of the effective date of this Agreement constitute the Board ("Incumbent Board"), cease for any reason to constitute a majority of the members of the Board; provided that any individual who becomes a director after the effective date whose election or nomination for election by the Company's shareholders was approved by a majority of the members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened "election contest" relating to the election of the directors of the Company (as such terms are used in Rule 14a-11 under the Exchange Act), "tender offer" (as such term is used in Section 14(d) of the Exchange Act) or a proposed Merger (as defined below)) shall be deemed to be members of the Incumbent Board; or (c) approval by the stockholders of the Company of either of the following: (i) merger, reorganization, consolidation or similar transaction (any of the foregoing, a "Merger") as a result of which the persons who were the respective beneficial owners of the outstanding Common Stock and/or the Voting Securities immediately before such Merger are not expected to beneficially own, immediately after such Merger, directly or indirectly, more than 50% of, respectively, the outstanding voting shares and the combined voting power of the voting securities resulting from such merger in substantially the same proportions as immediately before such Merger; or (ii) a plan of liquidation of the Company or a plan or agreement for the sale or other disposition of all or substantially all of the assets of the Company. 5. Allocation Schedule. Effective immediately, the Share allocation schedule shall be modified to the "Revised Allocation Schedule" set forth below:
Plan Year End Current Revised September 30 Allocation Schedule Allocation Schedule ------------- ------------------- ------------------- 2001 819,264 462,586 2002 770,978 393,198 2003 722,690 346,940 2004 -0- 323,810 2005 -0- 300,681 2006 -0- 254,423 2007 -0- 231,293 2,312,932 2,312,932
In the event the foregoing "Revised Allocation Schedule" shall violate either ERISA, the Code or any regulation thereunder, such schedule shall be revised to be in compliance with provisions. 6. Dividends. In the event the Company shall pay a dividend prior to the repayment in full of the 2000 Modified ESOP Note, such dividends paid on the Shares shall not be applied to the repayment of the 2000 Modified ESOP Note, but instead shall be allocated to the "Participant's ESOP Investment Accounts" of all KSOP participants, retired participants and terminated participants who then had "Participant's Company Stock Accounts" in the KSOP on the relative basis of the "Participant's Company Stock Accounts" of all such KSOP participants, retired participants and terminated participants in the KSOP on the record date of the dividend. 7. Repayment of ESOP Loan. The Company agrees that under the terms of the 2000 Modified ESOP Loan Agreement it is obligated to contribute sufficient monies to the Trust to repay the 2000 Modified ESOP Loan and the Trustee agrees that it is obligated to use these monies to repay its loan from the Company. The Company agrees that no Shares held in the Trust will be used to repay the 2000 Modified ESOP Loan. 8. Amendment. This Agreement may not be amended, waived or modified in any manner without the advance written consent of both the parties. See also Section 3 in the event of a Change of Control. 9. Notices. All notices or other communications given or made hereunder shall be duly given when received if delivered in person or by telex, facsimile, registered or certified mail, return receipt requested, postage prepaid to any party at the address and to the addresses for such party set forth on the signature page of this Agreement or such other address or addressees as the party to whom notice is to be given furnishes in writing to the other party in the manner set forth above. 10. Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the State of Florida applicable to contracts made and performed in the State of Florida. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their respective representatives thereunto duly authorized as of the date first hereinbefore appearing. SAWTEK INC. EMPLOYEE STOCK OWNERSHIP AND 401(k) TRUST HSBC BANK USA, solely in its capacity as Trustee and not in its individual or corporate capacity By:/S/ Stephen J. Hartman, Jr. Stephen J. Hartman, Jr. Senior Vice President Address: 452 Fifth Avenue, 17th Floor New York, New York 10018-2706 SAWTEK, INC. By:/S/ Raymond A. Link Raymond A. Link Senior Vice President and Finance Chief Financial Officer Address: P.O. Box 609501 Orlando, Florida 32860-9501 Exhibit 10.39 February 22, 2001 Mr. Raymond A. Link Senior Vice President/Chief Financial Officer Sawtek, Inc. P.O. Box 609501 Orlando, Florida 32860-9501 Dear Ray: I am pleased to inform you that your $30,000,000 unsecured line of credit has been renewed for an additional year with an expiry date of January 31, 2002. An unused fee of 10 basis points shall only apply to the $11.5 million currently evidenced by the note dated December 9, 1996. All other terms and conditions shall remain in effect. As a reminder, we only have documentation in place to fund up to $11.5 million. Should you ever anticipate a need that would exceed $11.5 million, please call me in advance so that I can get the necessary documents in place. Please sign below evidencing your acceptance and agreement with this renewal. Best regards, /S/ William C. Barr, III William C. Barr, III Director Agreed to: /S/ Raymond A. Link Raymond A. Link Senior Vice President/Chief Financial Officer Sawtek, Inc. -----END PRIVACY-ENHANCED MESSAGE-----