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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[ X ] Annual report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 [No fee required]
For the fiscal year ended DECEMBER 28, 1996, or
[ ] Transition report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 [No fee required]
For the transition period from _________ to __________
Commission file number 0-11880
HYTEK MICROSYSTEMS, INC.
(Name of small business issuer in its charter)
California 94-2234140
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Hot Springs Road, Carson City, Nevada 89706
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (702) 883-0820
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ______
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Revenues of the Issuer for the most recent fiscal year ended December 28,
1996 were: $8,641,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the average of the bid and asked prices reported on the
Over the Counter bulletin board of the National Association of Securities
Dealers, Inc.) on March 17, 1997 was approximately $2,866,023. For purposes
of such calculation, shares of Common Stock held by each executive officer
and director and by each person who owns more than 5% of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 17, 1997, the issuer had outstanding 2,941,424 shares of Common
Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 16, 1997 (the "Proxy Statement") are
incorporated by reference into Part III of this Annual Report on Form 10-KSB.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS.
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Hytek Microsystems, Inc. ("Hytek" or the "Company") designs,
manufactures, markets and sells custom and standard hybrid microcircuits.
These microcircuits utilize thick film technology and consist of conductive
and non-conductive inks that are bonded onto a substrate and interconnected
with various subminiature electronic components to form a hybrid
microcircuit. In addition to custom thick film hybrid microcircuits, the
Company also manufactures delay lines, thermo-electric cooler controllers and
laser diode driver standard products.
Net revenues in 1996 increased 60% from 1995 levels. The Company had a net
income of $1,927,000 in 1996 as compared to a net income of $521,000 during
1995. During 1996, the Company had strong positive cash flow and
experienced an overall increase in total assets and working capital position
from the 1995 year-end. See "Management's Discussion and Analysis or Plan of
Operation" in Part II, Item 6 hereof.
Hytek was incorporated as a California corporation on January 4, 1974.
Unless the context otherwise requires, the terms "Hytek" and the "Company"
refer to Hytek Microsystems, Inc. See Note 1 of Notes to Financial
Statements.
This Annual Report on Form 10-KSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of the
risk factors set forth below and elsewhere in this Report. See "Management's
Discussion and Analysis or Plan of Operation--Factors Affecting Future
Results." The Company has attempted to identify forward-looking statements by
placing an asterisk immediately following the sentence or phrase containing
the forward-looking statement(s). Statements made herein are as of the date
of the filing of this Form 10-KSB with the Securities and Exchange
Commission, and should not be relied upon as of any subsequent date. The
Company expressly disclaims any obligation to update information presented
herein.
PRODUCTS AND MARKETS
Products manufactured by the Company are sold primarily to original
equipment manufacturers (OEMs) serving the oil exploration, military,
computing, telecommunications, and industrial markets. Approximately 94% of
the Company's net revenues in 1996 were derived from products designed and
manufactured to meet a particular customer's specifications. The remaining
6% of net revenues in 1996 were derived from standard products designed by
the Company's engineering staff.
During 1996, approximately 76% of the Company's revenues were derived
from commercial and industrial private sector programs as compared to
approximately 70% in 1995. Sales to the military and government sector
increased in total dollar volume during 1996. However, this volume was
reduced as a percentage of total revenues in 1996 due to the large overall
increase in total revenues.
From 1987, when the Company was certified under MIL-Standard-1772,
through 1994, sales of military and government products increased. 1995 was
the first year that the Company experienced a decline in the sale of
military and government products. Although sales to the military and
government sector increased in 1996, these sales did not keep pace with the
Company's overall growth for the year. The Company continues to pursue
business in the military market and in 1996 received a significant military
order, which will be reflected in future revenues when shipped. Offshore
producers with significantly lower costs have in the
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past been precluded from participating in many U.S. military applications;
however, it is not certain that this preclusion will remain in effect in the
future. Military products are subject to much more stringent manufacturing
criteria than the commercial products and have in the past commanded
significantly higher prices. The Company intends to continue its efforts to
remain competitive in the military market. *
The apparent end of the "Cold War" and the reduction in overall global
tension, together with an apparent congressional goal of a balanced federal
budget has put considerable uncertainty into the future of defense and
government related spending programs. In the past two years, the Company has
experienced a decrease in business for weapon systems related products, while
simultaneously experiencing an increase in business for satellite
communications and satellite systems related products. While the management
of the Company believes that the outlook for increased military business is
uncertain, we currently intend to continue active participation in the
military and government marketplace.*
The commercial custom hybrid market has historically been an extremely
competitive, low margin arena. In many commercial applications, U.S.
manufacturers are competing against offshore producers that have
significantly lower costs. However, there are certain segments of this
market that require high reliability custom hybrid products. Such high
reliability products command higher prices and margins. It is in this
segment of the commercial market where the Company has been successful during
1995 and 1996.
Historically, a substantial majority of the Company's revenues have been
derived from custom products that are manufactured to a customer's
specifications for a unique application. This has held true for the past two
years with the custom product percentage of total revenues increasing from
88% in 1995 to 94% in 1996.
In February 1993, the Company announced a new standard commercial
product, the Thermo-Electric Cooler Controller (TECC), which has applications
in fiber optic communications and various "detector" product markets. During
1994, additional TECC devices were designed and introduced. These products
have received favorable response from the marketplace and have been shipped
to a wide variety of customers. Further, during 1995, the Company introduced
its High Speed Laser Diode Driver (HSLDD). The Company expects the market
for these products to grow as new communications technologies develop.* The
Company continues to support these products in addition to its established
digital delay line products.
HYBRID CIRCUIT TECHNOLOGY
Complex electrical circuits require the integration, in a single
package, of various resistors, transistors and other components. The
principal packaging technologies used in producing electrical circuits
include printed circuit boards, integrated circuits, thick film hybrid
circuits and thin film hybrid circuits. These technologies are not
interchangeable in all applications, and the extent to which they are
interchangeable depends on such requirements as size, performance,
reliability and cost.
Thick film hybrid circuit technology is a subminiature electronic
packaging method. The term "thick film network" describes a method for
screen printing conductors, resistors and capacitors onto a ceramic
substrate. This thick film network becomes a hybrid circuit when components
such as integrated circuits, semiconductors, capacitors and inductors are
added to the network in order to form a functioning electrical circuit.
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Theoretically, hybrid circuit packaging techniques can be employed in
virtually any electronic application, but they have various advantages and
disadvantages in any given application as compared with alternative
techniques. In general, the alternative techniques are printed circuit
designs, integrated circuits and thin film hybrid technology.
In those applications in which either hybrid circuits or printed circuit
boards can be used, hybrid circuits often offer the advantages of size
reduction, increased performance, reduced cost and proprietary design.
Hybrid circuit packaging techniques are generally chosen over integrated
circuit designs if the circuits are difficult to integrate, or if the higher
cost of an integrated circuit is not warranted. For example, circuit
applications requiring inductors, large capacitors or devices from several
semiconductor technologies cannot currently be integrated into a silicon
chip. However, as integrated circuit technology advances rapidly, integration
is improving and the advantages of hybrid technology have been eroding away.
Despite this erosion, not all applications are adaptable to integrated
circuit technology; therefore; hybrid technology remains as a stable
alternative for certain applications.
While thin film hybrid technology allows for greater size reductions and
more compact circuits than does thick film hybrid technology, it is a more
expensive process and requires a much larger initial investment in process
equipment. As a result of these cost differences, the Company believes that
there will continue to be a market for hybrid circuits produced with thick
film technology.*
All of the microcircuits currently produced by Hytek are manufactured
using thick film hybrid circuit packaging techniques, including thick film
screen print, firing and laser trimming, chip and wire assembly, and
automatic testing. The Company may, however, seek to develop additional
process technologies in the future that could enable the Company to offer
more sophisticated circuits than those currently provided by Hytek. *
PRODUCT APPLICATIONS
Custom products accounted for approximately 94% of the Company's sales
in 1996. These products serve a variety of applications in the oil
exploration, military, computing, telecommunications, and industrial markets.
In the production of custom products, the Company generally accepts full
responsibility for product design, having received blueprints and/or input
and output specifications from the potential customer. In many cases,
prototypes are developed and delivered to the customer, and are evaluated by
the customer, before a firm order for production quantities is placed. In
the case of a new custom product, a typical production cycle time from
initial customer contact to shipment of the product in commercial quantities
would be 20 to 30 weeks. The Company places a strong emphasis on developing
a working relationship between its own engineering staff and the engineering
staff of a potential customer during the product development phase.
Standard products accounted for approximately 6% of the Company's sales
in 1996. These products consist of delay lines, thermo-electric cooler
controllers and laser diode driver products produced for applications in the
military, computing, industrial electronic systems, telecommunications, and
automatic test equipment markets.
Within the primary markets served by the Company's customers, the
following are some applications in which the Company's custom and standard
products are currently being used:
OIL EXPLORATION -- seismic data acquisition and geophysical
measurement equipment.
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MILITARY -- communications, guidance systems, delay lines, fuses, and
avionics.
COMPUTING -- delay lines, VLSI thick film packages, gate arrays, disk
drive controllers, dynamic memory and networking circuits for data
processing.
TELECOMMUNICATIONS -- video systems, fiber optical data transmission
networks, solid state relays, subscriber line interface circuits,
paging systems and custom logic arrays.
INDUSTRIAL ELECTRONIC SYSTEMS -- measurement and diagnostics on
rotating machinery.
AUTOMATIC TEST EQUIPMENT -- Integrated circuit test systems.
MARKETING
The Company markets its products in the United States through its own
sales staff and through independent sales representatives. At December 28,
1996, the Company's direct sales staff consisted of three employees operating
from the Company's principal office in Carson City. In addition, at such
date the Company had three independent sales representatives located
throughout the United States and one independent representative located in
Israel. In addition, the Company has distributors in Australia, France,
Germany, Japan, Korea and Sweden.
In addition to this marketing organization, the Company uses its
technical engineering staff to assist in its marketing effort. In this
marketing effort, the Company first seeks to identify product types with
component functions that can be well served utilizing hybrid circuit
packaging. The Company then identifies and contacts the manufacturers or
proposed manufacturers of the particular product types. The initial contact
is usually made by a sales representative for the geographic area. If the
proposed sale involves a custom product, the Company's in-house design and
engineering staff supports the sales effort. In addition, at the present
time, senior members of management of the Company are directly involved in
the marketing and sales activities of the Company.
The Company has identified certain existing customers who it feels offer
greater potential for increased levels of future business. The Company
strives to maintain a higher level of contact and customer support for these
"key accounts".
The Company's Carson City, Nevada facility is MIL-Standard-1772
certified and qualified. This certification is a prerequisite to participate
in certain military contracts, and is subject to periodic audits by the U.S.
government. Loss of the MIL-Standard-1772 certification would have a material
adverse impact on the Company's business prospects and financial condition.
CUSTOMERS
During 1996, the Company's five largest customers accounted for 83% of
the Company's net revenues. Those customers were Chesapeake Sciences
Corporation (62%), TRW, Inc. (12%), Carleton Technologies, Inc. (4%),
Lockheed-Martin Corporation (3%), and Litton Applied Technology, Inc. (2%).
The Company anticipates a continuing business relationship with all of these
customers in the future. * A large portion (54%) of the Company's backlog of
orders for 1997 and beyond is attributable to Chesapeake Sciences
Corporation. Any lengthy disruption in the supply of materials for the
Chesapeake Sciences program would have a significant negative effect on
revenues and earnings. Any delay in scheduled shipments to, or cancellation
of orders by Chesapeake, would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Factors Affecting Future Results", page 10.
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MANUFACTURING
Each hybrid product produced by the Company passes through a number of
complex processes, each of which requires a high degree of skill and
precision.
The hybrid manufacturing process begins with a blueprint, which, in the
case of a custom product, is produced by, or with the assistance of, the
customer. This blueprint is the basis for an engineering print that the
Company produces, which in turn serves to provide a set of artwork for each
product. The artwork consists of up to 20 photographic negatives, one for
each layer of imprint on the substrate described below. The artwork is then
photographically reduced and used to generate stainless steel screens, which
are used in the printing process.
The screens are used to print on substrates, which are generally
miniature ceramic wafers. Metallic conductive and non-conductive inks (thick
films) are printed on the substrates. Those films, when fired, will conduct
and resist the flow of electric current. The drying or firing process is
achieved using temperature-controlled furnaces, typically operating in the
range of 525DEG. Celsius to 935DEG. Celsius. Each printing must be fired
before the next one is started.
After printing, resistance values are adjusted by high precision laser
trimming. Laser cuts are made in the resistive films to alter the resistance
value, using computer-controlled laser equipment. During the trimming
process, the electrical characteristics are simultaneously retested against
specification before the substrate is passed to assembly.
In assembly, which is primarily a manual process, other electronic
components, such as integrated circuits, semiconductors, capacitors and
inductors, are added to the thick film substrate, thus resulting in a hybrid
circuit. Positioning is critical, and the work is primarily done under
microscopes. Wire bonding, using miniaturized wire, is also done under
microscopes. Wire bonding provides the electrical connection from the
attached components to the printed substrate. The hybrid circuit is then
packaged and hermetically sealed in metal, ceramic or plastic.
Much of the Company's test equipment is automated and computer
controlled, each unit being subjected to tests at various points in the
production process as well as to a final test by the quality assurance staff.
Product yield is dependent on environmental control as well as stringent
process and production control.
The primary materials from which the Company manufactures its hybrid
products are resistive materials (wire, alloys and inks), ceramic bases and
electronic components (primarily integrated circuits, capacitors and
inductors). The raw materials and components that Hytek purchases are
generally available from several sources. Some of the Company's major
suppliers include Aegis, Inc., Cal-Chip Electronics, Inc., E. I. DuPont,
Electro Science Laboratories, Semi-Films Inc., Harris Semiconductor, Inc. and
Micross Components, Inc.. Although the Company has at times experienced long
lead times with respect to deliveries from its vendors, the Company believes
that adequate alternative sources of supply are currently available for a
majority of the Company's materials requirements.
Government regulations impose various environmental controls on the
chemicals used in electronics manufacturing. The Company employs various
safeguards to avoid the discharge of harmful materials into the environment
and believes that its activities conform to present state and federal
environmental regulations. However, there can be no assurance that the
Company
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will not in the future be exposed to increased costs relating to required
clean-up or compliance with ever-tightening regulations. * The Company
complies with new federal labeling regulations, which took effect in May
1993, regarding the use of Ozone Depleting Chemicals (ODCs) as set forth in
the Clean Air Act of 1990. The new labeling requirements have had only a
minor cost impact on operations. At the present time, the Company is not
aware of any other proposed or pending government regulation that would have
a material impact on the operations or financial condition of the Company. *
However, there can be no assurance that any future government regulation
would not have a material impact on the Company's operations or financial
condition.
ENGINEERING AND DEVELOPMENT
The growth in sales volume over the past two years has been in custom
hybrid products which require intensive engineering effort from the design
phase through final release to production. As a result, the amount of effort
committed to research and new standard product development has been minimal
over the past two years.
During 1996 and 1995, the Company spent $650,000 and $592,000,
respectively, on its total engineering efforts. Of these amounts, it is
estimated that approximately $65,000 and $89,000 were spent on new product
research and development in 1996 and 1995, respectively.
The Company's last new standard product introduced was the High Speed
Laser Diode Driver, in the spring of 1995. Sales of this product have been
minimal to date, which the Company attributes to the high unit cost of the
device as currently designed. As a result, the Company is currently
designing and prototyping a "cost reduced" version of the Laser Diode Driver,
which it hopes will be more suitable for volume commercial applications.*
COMPETITION
Because of the variety of applications in the markets it serves, and a
smaller military market, the Company faces significant competition from a
variety of sources. Many of the Company's competitors have substantially
greater financial, marketing, manufacturing, engineering and management
resources than the Company. However, the Company believes that its smaller
size, in some instances, provides for greater flexibility in meeting customer
requirements, and is not necessarily detrimental to the Company's competitive
position.
The Company believes that the hybrid circuit industry includes large
OEMs, such as IBM, TRW, Inc. and Western Electric, that manufacture
exclusively for their own use (so called "captive" manufacturers), and other
OEMs, such as Teledyne Industries, Inc. and Hughes Aircraft Co., that
manufacture for both their own use and for sale to others. Some of these
large "captive" and OEM hybrid manufacturers have curtailed or reduced their
internal hybrid operations and begun to procure their hybrid requirements
from outside sources. The Company believes that this has led to increased
opportunities for the entire hybrid circuit industry.
In addition, there exists a large number of independent hybrid circuit
manufacturers, such as the Company, that manufacture exclusively for sale to
others. In the past year certain of these manufacturers have left the custom
hybrid arena to specialize in defined markets such as medical or memory
hybrids. These changes have created additional opportunities for the Company.
Further, over 30 of the known independent manufacturers are certified to
MIL-Standard-1772, as is the Company. The Company's current share of the
overall hybrid circuit market is small.
In those applications where hybrid circuits and integrated circuits are
interchangeable, hybrid circuit manufacturers often compete with major
integrated circuit manufacturers.
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The primary factors of competition in the markets served by the Company
are product reliability, timely delivery, price, performance and stability of
the manufacturer. The Company believes that it generally competes favorably
with respect to all of these factors; however, stability has been a concern
to certain of the Company's customers during past years. The improvement in
revenues and earnings for the past two years should help to strengthen the
stability factor. *
TRADEMARKS, PATENTS AND LICENSES
The Company, at this time, has one registered patent (No. 5,521,933) on
its Backmatched Laser Diode Driver, which will expire in 2013. As other new
products are developed, the Company intends to pursue trademarks or patents
as appropriate. The Company currently has no trademarks or licenses
material to the conduct of its business.
EMPLOYEES
As of December 28, 1996, the Company employed a total of 70 full-time
employees, of whom 52 were in manufacturing, 3 were in marketing and sales,
13 were in engineering and development and 2 were in administration. The
Company's success depends in part on its ability to attract and retain
skilled personnel, for whom there is strong demand. None of the Company's
employees are covered under a collective bargaining agreement, and the
Company has not experienced any labor strike or related work stoppage.
GOVERNMENT CONTRACTS
During 1996, the Company derived approximately 24% of its total revenues
from government contracts and subcontracts. Such contracts and subcontracts
generally contain provisions allowing termination for the convenience of the
government. In the event of such termination, the Company would generally be
entitled to receive a termination settlement consisting of (i) the contract
price for completed items accepted by the government or prime contractor and
(ii) the Company's costs incurred in the performance of work completed prior
to termination, together with a reasonable profit on such work. During 1996,
the Company experienced no such termination for government convenience.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases a total of approximately 23,800 square feet
of manufacturing, engineering and support facilities in a single building in
Carson City, Nevada. The current lease term runs through June 2000. The
facility is currently operating at approximately 50% of capacity. The
Company believes that this facility has sufficient additional manufacturing
capacity to significantly increase production levels with only minor
increases in manufacturing overhead costs. *
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of the fiscal year ended December 28, 1996.
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EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the executive officer of the Company who is not
also a director of the Company is set forth below:
Jon B. Presnell, age 46, was promoted to the position of Vice-President
and General Manager of Custom Products for the Company in October 1993. Mr.
Presnell has been an employee of the Company since 1980, and served as
General Manager of the Carson City facility from May 1987 through December
1988. From January 1989 until October 1993, Mr. Presnell served as Director
of Sales and Marketing of the Company. Prior to joining Hytek, Mr. Presnell
was employed as an Electrical Engineer for Texas Instruments, Inc.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Incorporated by reference to the table on page F-2 of this Form 10-KSB
entitled "Selected Quarterly Financial Data (unaudited)" and the text
following such table.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
For purposes of this discussion, all dollar amounts have been rounded to
the nearest $1,000 and all percentages have been rounded to the nearest 1%.
This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the risk factors set forth below and elsewhere in this Report. See
"Factors Affecting Future Results" below. The Company has attempted to
identify forward-looking statements by placing an asterisk immediately
following the sentence or phrase containing the forward-looking statement(s).
Statements made herein are as of the date of filing of this Form 10-KSB with
the Securities and Exchange Commission, and should not be relied upon as of
any subsequent date. The Company expressly disclaims any obligation to
update information presented herein.
RESULTS OF OPERATIONS
Net revenues in 1996 were $8,641,000, a 60% increase from 1995 net
revenues of $5,409,000. The increase in net revenues is attributable to
increased unit shipments to Chesapeake Sciences Corporation ("Chesapeake"),
TRW Inc. and other customers during 1996. Sales to Chesapeake represented
62% of the Company's net revenues in both 1996 and 1995.
During 1996, approximately 76% of the Company's net revenues were
derived from sales of products for commercial and industrial uses and
approximately 24% were derived from sales for military or government
applications.
Cost of sales increased to $5,599,000, or 65% of net revenues in 1996,
as compared to $3,784,000, or 70% of net revenues in 1995. The increase in
dollar amount is the result of the higher volume of products shipped in 1996.
The decrease in cost of sales as a percentage of net revenues is primarily
the result of spreading fixed costs over a larger revenue base, partially
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offset by an increase in the cost of direct materials to 37% of net revenues
in 1996 as compared to 35% of net revenues in 1995.
Engineering and development expenses were $650,000 in 1996, or 8% of net
revenues, as compared to $592,000, or 11% of net revenues, in 1995. The
increase in these expenses in 1996 is the result of increased staffing
levels required to support higher sales volume.
Selling, general and administrative expenses were $675,000, or 8% of net
revenues, in 1996, as compared to $513,000, or 9% of net revenues, in 1995.
This increase in dollar amount is attributable to increased compensation
costs resulting from salary adjustments, together with increases in sales
commission expense, advertising expense, bad debt reserves and
shareholder-related expenses, partially offset by reductions in legal
expenses. Revenues generated from Chesapeake are not subject to sales
commission expense. The decrease in selling, general and administrative
expense as a percentage of net revenues results from revenues increasing
faster than expenses.
Interest income was $13,000 for 1996, as compared to $3,000 in 1995,
reflecting higher average balances in the Company's money market account
during portions of 1996. The Company had interest expense of $3,000 in 1996
as compared to $2,000 interest expense in 1995. The interest expense
incurred in 1996 resulted from a short-term borrowing on the Company's line
of credit.
In 1996 the Company recorded a deferred tax benefit of $200,000 as
compared to no tax benefit or liability for 1995. The deferred tax benefit
relates to the operating loss and credit carryforwards at December 28, 1996
that the Company expects to realize in future periods.
FACTORS AFFECTING FUTURE RESULTS
There are a number of factors that could significantly affect the future
results of operations of the Company, including, but not limited to, the
following.
Currently, the Company is very dependent on a single large customer,
Chesapeake. Chesapeake, which accounted for 62% of the Company's 1996 net
revenues, accounts for $3,474,000, or 54%, of the 1996 ending backlog. The
loss of business from Chesapeake, cancellation of orders by Chesapeake or
major rescheduling of delivery dates to Chesapeake would have a material
adverse effect on the Company's business. The Company experienced a minor
rescheduling of orders from Chesapeake during 1996. Fortunately, this
rescheduling did not have a significant impact on operating results.
However, any future recheduling of significant magnitude would have a
significant adverse effect on operating results.
A disruption in Chesapeake's operations, or their loss of financial
stability, would have a major adverse impact on the Company's future
operations. Further, the products for Chesapeake are ultimately utilized in
undersea geophysical oil exploration. Consequently, any major changes,
either positive or negative, in the nature of the world-wide oil market, or
significant changes in the demand for oil, could have a major impact on the
Company's future business with Chesapeake Sciences.
During 1996, the Company realized 24% of its net revenues from
government or military funded sources. A significant portion of this
business is dependent on the Company maintaining its MIL-STD-1772
certification and qualification. While the Company fully expects to maintain
this certification and qualification (*), the loss of same would have a
material adverse impact on the Company's ability to capture this type of
business. In addition, the potential for additional decreases in defense
spending exists and could adversely affect future operations.
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The Company is currently dependent on the custom product market for a
substantial majority of its revenue. For example, custom products accounted
for 88% of total revenues in 1995 and 94% of total revenues in 1996. This
market is generally more volatile than the standard product market. Further,
the custom product market is considerably more competitive than the market
for the Company's standard products. The Company must maintain a
cost-effective structure and operation to remain competitive in the custom
product market. Any failure of the Company to remain competitive in the
custom product market would have a material adverse effect on the Company's
results of operations and financial condition.
The recent growth in sales volume has put considerable load on the
Company's engineering resources. Currently, the Company has only 12
full-time engineering and development employees. The Company's ability to
develop new products and to continue to contribute to sales growth is
dependent upon the attraction and retention of such employees, for whom there
is strong demand. Any failure of the Company to attract and retain qualified
engineering personnel could have a material adverse effect on the Company's
results of operations and financial condition.
The Company is dependent on certain key suppliers of raw materials. Any
major disruption in production capability by these suppliers would have an
adverse impact on the Company's future operations.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, total assets increased by $1,789,000 and the net effect of
changes in current assets and current liabilities resulted in a net working
capital increase of $1,575,000.
The Company had $1,427,000 in cash and cash equivalents at December 28,
1996, as compared to $93,000 at the 1995 fiscal year end. This increase is
the net result of $1,510,000 generated from operating activities (primarily
operating income), and proceeds from the exercise of stock options of
$49,000, partially offset by $225,000 used for the purchase of equipment.
Accounts receivable remained stable during 1996. Accounts receivable
were $1,126,000 at December 28, 1996, as compared to $1,180,000 at the 1995
fiscal year end. Further, as a result of increased sales volumes and the
addition of new customers, the Company increased its allowance for doubtful
accounts by $30,000 during 1996, to a total allowance of $50,000. At
December 28, 1996 accounts in excess of 60 days totaled 21% of total
receivables, as compared to less than 1% at December 30,1995. This was the
result of delayed payments from two large customers at year end. Such items
have subsequently been collected.
Inventories remained stable during 1996 totaling $1,269,000 at December
28, 1996 as compared to $1,240,000 at the 1995 fiscal year end.
Property, plant and equipment, net of accumulated depreciation,
increased by $269,000 during 1996 as a result of additions to machinery and
equipment during the year of $327,000 offset by fiscal 1996 depreciation of
$58,000.
Accounts payable were $268,000 at December 28, 1996 as compared to
$674,000 at 1995 fiscal year end. This decrease is attributable to improved
cash flow, which allowed the Company to pay its suppliers in a more timely
manner during 1996.
Accrued employee compensation and benefits increased by $158,000 from
the prior fiscal year end. This increase is attributable to an increase in
the number of employees during 1996 and increased accruals for the employee
profit sharing plan resulting from increased profitability.
11
<PAGE>
At December 28, 1996, $175,000 had been accrued for the employee profit
sharing plan as compared to $75,000 at December 30, 1995.
Customer prepayments were $172,000 at December 28, 1996 as compared to
$179,000 at December 30, 1995. This change is the net result of $88,000 in
additional customer prepayments received in 1996, offset by $95,000 in prior
year prepayments recorded as sales.
Accrued warranty, commissions and other accrued liabilities were
$169,000 at December 30, 1995 as compared to $205,000 at December 30, 1995.
This decrease is attributable to normal ongoing accruals, offset by
reductions in accrued sales commissions.
In December 1996, the Company entered into an Continuing Master
Equipment Lease agreement with Sierra West Bank. The lease agreement bears
an annual interest rate of 10.75% and has a term of three years. This lease
is secured by the related equipment. Under this agreement, the Company
acquired $101,969 of production test equipment, which is accounted for as a
capital lease. The current portion of this indebtedness is $33,990 at
December 28, 1996. The remaining portion, $67,979, is classified as
long-term debt. No such equipment lease agreement was in place at December
30, 1995.
There are no income taxes payable at December 28, 1996 as the Company
utilized a portion of its net operating loss carryforwards to offset the
income taxes computed on its 1996 earnings. The Company has remaining net
operating loss carryforwards for Federal income tax purposes at December 28,
1996 of approximately $4.3 million. These carryforwards will expire between
2004 and 2008.
At December 28, 1996, the Company had long-term debt of $67,979
outstanding its Continuing Master Lease Agreement as described above.
Further, as of December 13, 1996, the Company renewed its line of credit for
$100,000 with Sierra Bank of Nevada. This line of credit is for a term of
one year and bears interest at the prime rate plus 2.00%. At December 28,
1996, the Company was in compliance with all of the covenants of the loan
agreement and no amounts were outstanding. This line of credit is
collateralized by substantially all of the Company's assets. Management
believes that cash generated from operations during 1997, together with its
line of credit, will provide sufficient cash to meet operating needs without
additional financing activity through 1997. * However, should the Company
need to pursue additional debt or equity financing in the future, there is
no certainty that such financing could be obtained or that the terms on which
it might be obtained would be favorable.
FUTURE OUTLOOK
The Company's backlog of unfilled customer orders at December 28, 1996,
has decreased by approximately 18% from the prior fiscal year end. Backlog
at December 28, 1996 was $6,474,000 as compared to $7,912,000 at December 30,
1995. The decrease in backlog is primarily due to the fact that orders
received from Chesapeake in 1996 were significantly below the level received
in 1995. While the Company is currently not aware of any further future
declines in the volume of Chesapeake orders, there can be no assurance that
such future declines will not take place.
At this time, based on current backlog, the Company anticipates that
revenues for the ensuing fiscal year could be 20% to 25% below those for
fiscal 1996. *
In addition, because customers may place orders for delivery at various
times throughout the year, and because of the possibility of customer changes
in delivery schedules or cancellation of orders, the Company's backlog or
revenue projections as of any particular date may not be a reliable indicator
of actual future sales.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company (including the notes thereto) at
December 28, 1996 and December 30, 1995 and for the years then ended, and the
report of independent auditors thereon, are included herein on pages F-3
through F-17 of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information regarding directors of the Company is to be set forth under
the heading titled "Election of Directors - Nominees for Director" in the
Company's Proxy Statement and is hereby incorporated herein by reference.
Information regarding the executive officer of the Company who is not
also a director of the Company is included in Part I of this Form 10-KSB
under the heading "Executive Officers of the Company" and is hereby
incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is to be set forth under the heading titled "Election of
Directors - Section (16) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement and is hereby incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information regarding the Company's remuneration of its executive
officers and directors is to be set forth under the heading "Election of
Directors-Executive Compensation", "Election of Directors-Directors'
Compensation" and "Election of Directors--Directors' Option Plan" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding the security ownership of certain beneficial
owners and management is to be set forth under the heading "Election of
Directors - Security Ownership" in the Company's Proxy Statement, which
information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
13
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The exhibit index at page X-1, which follows the signature
pages, is hereby incorporated by reference into this Item 13 (a).
(b) REPORTS ON FORM 8-K
There were no Current Reports on Form 8-K filed during the
fourth quarter of the Company's fiscal year ended December 28, 1996.
14
<PAGE>
HYTEK MICROSYSTEMS, INC.
INDEX TO SELECTED QUARTERLY FINANCIAL DATA AND FINANCIAL STATEMENTS
REFERENCE PAGE
IN FORM 10-KSB
--------------
Selected Quarterly Financial Data (unaudited) . . . . . . F-2
Balance Sheet, December 28, 1996
and December 30, 1995 . . . . . . . . . . . . F-3
Statement of Income and Accumulated Deficit for the
Years ended December 28, 1996 and December 30, 1995 . . F-4
Statement of Cash Flows for the Years Ended
December 28, 1996 and December 30, 1995 . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . . F-6
Report of Independent Auditors . . . . . . . . . . . F-16
Consent of Independent Auditors . . . . . . . . . . . F-17
F-1
<PAGE>
HYTEK MICROSYSTEMS, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
QUARTER ENDED
------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1995
----------------------------------------- --------------------------------------
Dec. 28 Sept. 28 Jun. 29 Mar. 30 Dec. 30 Sept. 30 Jul. 1 Apr. 1
------- -------- ------- ------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 1,881 $ 2,095 $ 2,628 $ 2,037 $ 1,880 $ 1,309 $ 1,380 $ 840
Gross profit $ 872 $ 688 $ 836 $ 644 $ 562 $ 436 $ 455 $ 172
Net income (loss) $ 686 $ 368 $ 518 $ 354 $ 284 $ 167 $ 176 $ (106)
Net income (loss) per share $ 0.22 $ 0.12 $ 0.17 $ 0.11 $ 0.09 $ 0.06 $ 0.06 $(0.04)
Market price range per share High $ 2.63 $ 2.81 $ 3.19 $ 3.19 $ 3.25 $ 3.13 $ 0.69 $ 0.19
Low $ 1.44 $ 1.25 $ 2.31 $ 1.75 $ 1.50 $ 0.38 $ 0.06 $ 0.06
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Since January 1992, the Company's Common Stock has been traded in the
over-the-counter market but has not been quoted on the National Association
of Securities Dealers, Inc. Automated Quotation (NASDAQ) System. Since March
26, 1992, Hytek's Common Stock has been quoted on the OTC Bulletin Board. The
range of prices reported above indicates the high and low bid quotations as
provided by the National Quotation Bureau, Inc. Such quotations reflect
inter-dealer prices, without retail markups, mark-downs or commissions and
may not represent actual transactions.
As of March 17, 1997, there were approximately 220 holders of record
of the Company's Common Stock.
The Company has never paid any cash dividends on its Commom Stock and
has no intentions of paying cash dividends in the foreseeable future. Per the
terms of its loan agreement with Sierra Bank of Nevada, the Company is
prohibited from paying cash dividends at this time.
F-2
<PAGE>
Hytek Microsystems, Inc.
Balance Sheet
December 28, 1996 and December 30, 1995
1996 1995
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,426,716 $ 92,995
Trade accounts receivable, net of allowance for
doubtful accounts of $50,000 in 1996 and
$20,000 in 1995 1,125,817 1,179,847
Inventories 1,268,881 1,239,785
Prepaid expenses and deposits 42,503 31,585
----------------------------
Total current assets 3,863,917 2,544,212
Deferred income taxes 200,000 --
Plant and equipment, at cost, less accumulated
depreciation and amortization 370,362 101,375
----------------------------
Total assets $ 4,434,279 $ 2,645,587
----------------------------
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 268,462 $ 673,531
Accrued employee compensation and benefits 349,498 191,267
Accrued warranty, commissions, and other 169,376 204,747
Customer deposits 172,080 178,664
Current obligations under capital lease 33,990 --
----------------------------
Total current liabilities 993,406 1,248,209
Long-term obligations under capital lease 67,979 --
Commitments (NOTE 9)
Shareholders' equity:
Common stock, no par value:
Authorized shares - 7,500,000
Issued and outstanding shares - 2,933,091 at
December 28, 1996 and 2,811,425 at December
30, 1995 4,962,677 4,913,806
Accumulated deficit (1,589,783) (3,516,428)
----------------------------
Total shareholders' equity 3,372,894 1,397,378
----------------------------
Total liabilities and shareholders' equity $ 4,434,279 $ 2,645,587
----------------------------
----------------------------
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Hytek Microsystems, Inc.
Statement of Income and Accumulated Deficit
Years ended December 28, 1996 and December 30, 1995
1996 1995
-----------------------------
Net revenues $ 8,640,890 $ 5,409,072
Cost of sales 5,599,417 3,783,726
Engineering and development 649,608 592,395
Selling, general and administrative expenses 675,305 513,258
-----------------------------
6,924,330 4,889,379
-----------------------------
Operating income 1,716,560 519,693
Interest income, net 10,085 1,348
-----------------------------
Income before benefit for income taxes 1,726,645 521,041
Income tax benefit 200,000 --
-----------------------------
Net income 1,926,645 521,041
Accumulated deficit:
Beginning of year (3,516,428) (4,037,469)
-----------------------------
End of year $(1,589,783) $(3,516,428)
-----------------------------
-----------------------------
Net income per common and dilutive common
equivalent share $ 0.62 $ 0.18
-----------------------------
-----------------------------
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Hytek Microsystems, Inc.
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years ended December 28, 1996 and December 30, 1995
1996 1995
-------------------------
OPERATING ACTIVITIES
Net income $1,926,645 $ 521,041
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 58,253 36,063
Changes in operating assets and liabilities:
Trade accounts receivable, net 54,030 (714,568)
Inventories (29,096) (737,945)
Prepaid expenses and deposits (10,918) (1,387)
Deferred income taxes (200,000) --
Other assets -- 5,958
Accounts payable (405,069) 387,674
Accrued employee compensation and benefits 158,231 82,193
Accrued warranty, commissions, and other (35,371) 8,088
Customer deposits (6,584) 162,000
-------------------------
Net cash provided by (used in) operating
activities 1,510,121 (250,883)
INVESTING ACTIVITIES
Purchases of equipment (225,271) (67,208)
FINANCING ACTIVITIES
Proceeds from borrowings on line of credit 50,000 --
Principal payments on line of credit (50,000) --
Proceeds from issuance of common stock 48,871 27,531
-------------------------
48,871 27,531
-------------------------
Net increase (decrease) in cash and cash
equivalents 1,333,721 (290,560)
Cash and cash equivalents at beginning of year 92,995 383,555
-------------------------
Cash and cash equivalents at end of year $1,426,716 $ 92,995
-------------------------
-------------------------
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements
Years ended December 28, 1996 and December 30, 1995
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The principal business of Hytek Microsystems, Inc. (the "Company") is the
engineering, manufacturing and sale of hybrid microcircuits. Products
manufactured by the Company are sold primarily to original equipment
manufacturers (OEMs) serving the computer, telecommunications, military,
medical, industrial electronic system and automatic test equipment markets.
The Company markets its products through its own sales staff and through
independent sales representatives.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's
management to make estimates and assumptions that affect the amounts reported
therein. Actual results could vary from such estimates. In addition, certain
reclassifications have been made to prior years' financial statements to
conform with the 1996 presentation. The Company uses a 52/53 week fiscal
year ending on the last Saturday in December. The years ended December 28,
1996 and December 30, 1995 were 52 week years.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
condition, and generally requires no collateral from its customers.
Non-performance by these parties would result in losses up to the recorded
amount of the related receivables. Management does not anticipate
significant non-performance, and believes the Company has adequately provided
for uncollectible receivables in the Company's allowance for doubtful
accounts.
In 1996, the Company had sales to Chesapeake Sciences and TRW which
aggregated 62% and 12%, respectively, of net revenues. The products sold to
Chesapeake Sciences are used in the eventual production of off-shore
geophysical oil exploration equipment. Any volatility in the oil market
could affect the operating results of the Company. In 1995, the Company had
sales to Chesapeake Sciences which aggregated 62% of net revenues.
F-6
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market funds with
maturities of less than ninety days. The Company maintains the majority of
its cash and cash equivalents in one financial institution. During 1996, the
Company entered into non-cash investing activities whereby machinery and
equipment acquisitions were capitalized under capital leases in the amount of
$101,969. This activity occurred at year end and as such no depreciation was
recorded on these assets for the year ending December 28, 1996. The fair
value of the Company's financial instruments approximated their carrying
value at December 28, 1996 and December 30, 1995.
INVENTORIES
Inventories are stated at the lower of cost (determined using the first-in,
first-out method), or market. Due to its nature, certain of the Company's
inventory at December 28, 1996 and December 30, 1995 is subject to
technological change and potential obsolescence. Management does not
anticipate these amounts to be material, and believes that they have
adequately provided for any losses that may result.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, generally
three to five years. Leasehold improvements are amortized over the term of
the lease or their estimated useful lives, whichever is shorter.
EARNINGS PER SHARE OF COMMON STOCK
Net income per share of common stock is computed by dividing net income by
the weighted average number of shares of common stock and dilutive common
stock equivalents outstanding during the period. The weighted average shares
used to compute net income per share is approximately 3,087,000 and 2,910,000
in 1996 and 1995, respectively. Fully diluted per share amounts are the same
as primary per share amounts for the periods presented.
F-7
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
the Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock option plans. Under APB
25, if the exercise price of the Company's employee stock options equals or
exceeds the fair value of the underlying stock on the date of grant as
determined by the Company's Board of Directors, no compensation expense is
recognized (see Note 6).
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
temporary differences are expected to reverse. Additionally, deferred tax
assets and liabilities are separated into current and non-current amounts
based on the classification of the related assets and liabilities for
financial reporting purposes.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred, and are
included in engineering and development expenses on the accompanying
statement of income and accumulated deficit. During the years ended December
28, 1996 and December 30, 1995, such costs amounted to approximately $65,000
and $89,000, respectively.
ADVERTISING COSTS
The Company expenses the costs of all advertising campaigns and promotions as
they are incurred. Total advertising expense for the years ended December
28, 1996 and December 30, 1995 amounted to approximately $43,000 and $9,000,
respectively, and is included in selling, general and administrative expenses
on the accompanying statement of income and accumulated deficit.
F-8
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
1996 1995
------------------------
Finished goods $ 217,270 $ 21,100
Work-in-process 772,462 547,590
Raw materials 279,149 671,095
------------------------
$1,268,881 $1,239,785
------------------------
------------------------
3. PLANT AND EQUIPMENT
Plant and equipment consists of the following:
1996 1995
-------------------------
Leasehold improvements $ 441,219 $ 425,604
Machinery and equipment 2,428,780 2,105,467
Furniture and fixtures 10,972 10,972
Construction in progress - 11,686
-------------------------
2,880,971 2,553,729
Less accumulated depreciation and amortization (2,510,609) (2,452,354)
-------------------------
$ 370,362 $ 101,375
-------------------------
-------------------------
4. INCOME TAXES
The significant components of the Company's deferred tax assets as of December
28, 1996 and December 30, 1995 are as follows:
1996 1995
----------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,432,610 $ 1,993,000
Credit carryforwards 210,572 -
Other 180,575 186,000
----------------------------
Total deferred tax assets 1,823,757 2,179,000
Valuation allowance (1,623,757) (2,179,000)
----------------------------
Net deferred tax assets $ 200,000 $ -
----------------------------
----------------------------
F-9
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
The valuation allowance as of December 30, 1995 was approximately $2,179,000,
resulting in a net decrease in the allowance of approximately $556,000 for the
year ended December 28, 1996.
The benefit for income taxes differs from the provision amount computed by
applying the statutory federal tax rate to income before taxes due to the
following:
1996 1995
--------------------------
Computed expected tax $ 587,000 $ 177,000
Nondeductible expenses 10,000 2,000
Benefit of operating loss carryforward (597,000) (179,000)
Valuation allowance adjustment (200,000) -
--------------------------
$ (200,000) $ -
--------------------------
--------------------------
The valuation allowance adjustment arose as a result of the Company's profitable
results of operations in 1996 and 1995.
As of December 28, 1996, the Company had a net operating loss and tax credit
carryforwards for Federal income tax purposes of approximately $4.3 million and
$213,000, respectively. These carryforwards will expire between 2004 and 2008.
Future utilization of the Company's net operating losses may be subject to an
annual limitation in amount if there is a greater than fifty percent change in
ownership, as defined in Section 382 of the Internal Revenue Code of 1986, as
amended.
F-10
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTION PLANS
1991 AND 1981 STOCK OPTION PLANS
In February 1995, the Board of Directors of the Company (the "Board"), with the
consent of its shareholders, authorized an increase to the number of shares
reserved for issuance under the 1991 Stock Option Plan (the "1991 Plan") to
276,175 shares of common stock. In February 1997, the Board authorized a
further increase in the number of shares reserved for issuance under the 1991
Plan to 376,175, subject to shareholder approval. The 1991 Plan expires May 2001
and 26,175 shares were available for future grant as of December 28, 1996. The
Company had a 1981 Incentive Stock Option Plan (the "1981 Plan") that expired in
August 1991 and there were 95,000 options outstanding under this Plan at
December 28, 1996. Outstanding stock options under the two plans are
exercisable cumulatively in annual increments of one-third each year beginning
one year after the grant date. Options granted under the 1991 Plan and the 1981
Plan have terms of five years. However, in February 1995, the Board extended
the term of options under the 1981 Plan by five years, deferring expiration
until 2000. The exercise price of these extended options was in excess of the
fair market value of the Company's common stock at the date of extension.
A summary of the Company's 1981 and 1991 Plans' stock option activity and
related information for the years ended December 28, 1996 and December 30, 1995
are as follows:
<TABLE>
<CAPTION>
1995 1996
---------------------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 300,000 $ .42 270,000 $ .53
Granted 185,000 .58 90,000 2.68
Exercised (60,000) .46 (106,666) .43
Canceled (155,000) .38 (20,000) 1.91
---------------------------------------------------------------
Outstanding-end of year 270,000 $ .53 233,334 $ 1.30
---------------------------------------------------------------
---------------------------------------------------------------
Exercisable at end of year 221,666 $ .41 136,667 $ .45
Weighted-average fair value of
options granted during the year $ 1.44 $ 2.68
</TABLE>
F-11
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTION PLANS (CONTINUED)
Exercise prices for options outstanding under the two Plans as of December 28,
1996 ranged from $.38 to $3.07. The weighted-average remaining contractual life
of those options is 3.7 years. A summary of the outstanding and exercisable
options at December 28, 1996, segregated by exercise price ranges, is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
- -----------------------------------------------------------------------------------------------------
Weighted-Average
Weighted- Remaining Weighted-
Exercise Price Average Contractual Average
Range Number Exercise Price Life (in years) Number Exercise Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.38 - $.41 128,334 $.39 3.3 128,334 $.39
$1.44 25,000 1.44 3.6 8,333 1.44
$2.38 - $3.07 80,000 2.72 4.5 - -
------- -------
233,334 $1.30 3.7 136,667 $.45
------- -------
------- -------
</TABLE>
1991 DIRECTORS' STOCK OPTION PLAN
Under the 1991 Directors' Stock Option Plan (the "Directors' Plan"), 100,000
shares of the Company's common stock had been reserved for issuance as of
December 28, 1996, of which options to purchase 60,000 shares at an exercise
price of $0.1875 had been granted. 15,000 of the 60,000 exercisable options had
been exercised as of December 28, 1996. Options granted under the Directors'
Plan become exercisable cumulatively on the first, second and third
anniversaries of the grant date. The Directors' Plan expires February 2001.
F-12
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTION PLANS (CONTINUED)
A summary of the Company's Directors Plan's stock option activity and related
information for the years ended December 28, 1996 and December 30, 1995 are as
follows:
<TABLE>
<CAPTION>
1995 1996
--------------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 60,000 $ .19 60,000 $ .19
Granted - - - -
Exercised - - (15,000) .19
Forfeited - - - -
--------------------------------------------------------
Outstanding-end of year 60,000 $ .19 45,000 $ .19
--------------------------------------------------------
--------------------------------------------------------
Exercisable at end of year 60,000 $ .19 45,000 $ .19
</TABLE>
Exercise prices for options outstanding as of December 28, 1996 were all $.19
per share. The weighted-average remaining contractual life of those options is
4.2 years.
6. STOCK-BASED COMPENSATION
The Company has three stock-based compensation plans: The 1991 Stock Option
Plan, The 1981 Incentive Stock Option Plan, and the 1991 Directors' Stock Option
Plan, all of which are described in Note 5.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6.42% and 6.2%, dividend
yields of 0% and 0%; volatility factors of the expected market price of the
Company's common stock of .952 and .952, and a weighted-average expected life of
the options of 4.5 and 4 years.
F-13
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
6. STOCK-BASED COMPENSATION (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The effect of
applying SFAS 123's fair value method to the Company's stock-based awards
results in net income and earnings per share that are not materially different
from amounts reported.
7. PROFIT SHARING PLAN
In February 1995 the Company's Board adopted the 1995 Profit Sharing Plan (the
"Profit Sharing Plan") which is available to all eligible full-time employees of
the Company, except executive officers of the Company, as defined. Under the
Profit Sharing Plan, the Company will distribute to employees between 10% and
15% of the Company's pre-tax income, as defined. The distribution percentage is
at the discretion of the Company's Board. The Plan, which terminates by its own
terms in December 2005, may be terminated or amended at any time by the Board.
During the years ended December 28, 1996 and December 30, 1995, the Board
authorized $175,000 and $75,000, respectively, in profit sharing distributions
to employees, which amount is included in accrued employee compensation and
benefits in the accompanying balance sheet.
8. BUSINESS LOAN AGREEMENT
In December 1996, the Company entered into a revolving business loan agreement
(the "Loan Agreement") with a bank under which it may borrow up to $100,000 at
the bank's prime rate plus 2.0% (aggregating 10.25% at December 28, 1996).
Interest accrued shall be due and payable monthly up to the maturity date,
December 10, 1997, at which time all unpaid principal and interest become due.
The Loan Agreement is collateralized by substantially all of the Company's
assets. The Loan Agreement imposes certain limitations on the payment of
dividends and incurrence of additional indebtedness. At December 28, 1996, the
Company had no outstanding borrowings under this Loan Agreement.
F-14
<PAGE>
9. COMMITMENTS
The Company leases its administrative and production facility and also leases
certain operating equipment under noncancelable operating lease arrangements
with terms in excess of one year. The Company also leases certain equipment
under noncancelable lease arrangements that are accounted for as capital
leases. Equipment under capital lease arrangements and included in plant and
equipment aggregated $101,970 at December 28, 1996. These capital leases are
secured by the related equipment.
The aggregate future minimum lease payments under noncancelable capital and
operating leases are as follows at December 28, 1996:
Capital Operating
Leases Leases
-----------------------
1997 $ 39,217 $ 172,000
1998 39,217 172,000
1999 39,225 172,000
2000 - 89,000
-----------------------
Total minimum payments 117,659 $ 605,000
----------
----------
Less amount representing interest (15,690)
--------
Present value of minimum lease payments 101,969
Less current obligations (33,990)
--------
Long-term obligations $ 67,979
--------
--------
The Company's net rental expense charged to operations amounted to approximately
$252,000 and $199,000 in 1996 and 1995, respectively.
F-15
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Hytek Microsystems, Inc.
We have audited the accompanying balance sheet of Hytek Microsystems, Inc. at
December 28, 1996 and December 30, 1995, and the related statements of income
and accumulated deficit, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hytek Microsystems, Inc. at
December 28, 1996 and December 30, 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young, LLP
Reno, Nevada
February 7, 1997
F-16
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectuses constituting
a part of the Registration Statements on Form S-8 (File Nos. 2-90789,
33-7452, 33-28848, 33-61717, and 33-42836) pertaining to the Incentive Stock
Option Plan, the Key Employee Stock Purchase Plan, the 1991 Stock Option Plan
and the 1991 Directors' Stock Option Plan, of our report dated February 7,
1997 with respect to the financial statements of Hytek Microsystems, Inc.
/s/ Ernst & Young LLP
Reno, Nevada
March 21, 1997
F-17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HYTEK MICROSYSTEMS, INC.
By: /s/ Charles S. Byrne
-------------------------
Charles S. Byrne
President and Chief
Executive Officer
Date: March 17, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles S. Byrne and Shou-Chen Yih, or
either of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-KSB, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- ------------------------ -------------------------- --------------
/s/ Charles S. Byrne President and Chief March 17, 1997
--------------------- Executive Officer
Charles S. Byrne (Principal Executive
Officer), Chief Financial
Officer (Principal Financial
and Accounting Officer)
and Director
S-1
<PAGE>
SIGNATURE TITLE DATE
- ------------------------ -------------------------- --------------
/s/ Robert Boschert Director March 17, 1997
---------------------
Robert Boschert
/s/ Edward W. Moose Director March 17, 1997
---------------------
Edward W. Moose
/s/ Edward Y. Tang Director March 17, 1997
---------------------
Edward Y. Tang
/s/ Shou-Chen Yih Director March 17, 1997
---------------------
Shou-Chen Yih
S-2
<PAGE>
HYTEK MICROSYSTEMS, INC.
Annual Report on Form 10-KSB
for the fiscal year ended December 28, 1996
EXHIBIT INDEX
-------------
(The Registrant will furnish to any shareholder who so requests a copy of
this Annual Report on Form 10-KSB, including a copy of any Exhibit listed
below, provided that the Registrant may require payment of a reasonable fee
not to exceed its expense in furnishing any such Exhibit.)
Exhibit
Number Exhibit Description
- ------- ----------------------------------------------------------
3.1 (1) Amended and Restated Articles of Incorporation
filed on February 10, 1983.
3.2 (2) Certificate of Amendment of Articles of Incorporation
filed June 28, 1988.
3.3 (10) Amended and Restated Bylaws, as amended
through July 27, 1992.
4.1 Reference Exhibits 3.1, 3.2 and 3.3.
9.1 (4) Shareholders' Agreement dated as of April 9, 1990.
10.1a (9) (*) Incentive Stock Option Plan, as amended
July 27, 1992.
10.1b (5) (*) Forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement used under
Incentive Stock Option Plan.
10.2 (11) (*) Form of Amendment to Option Agreements of
Charles S. Byrne, Jay L. Kimball and Jonathan B.
Presnell.
10.3a (11)(*) 1991 Stock Option Plan, as amended
February 10, 1995.
X-1 (Footnotes at end of index)
<PAGE>
Exhibit
Number Exhibit Description
- ------- ----------------------------------------------------------
10.3b (9) (*) Form of Agreement used under the 1991
Stock Option Plan.
10.3c (*) 1991 Stock Option Plan as amended February 7,
1997 (subject to Shareholder approval)
10.4 (7) (*) 1991 Director's Stock Option Plan and form of
Agreement thereunder.
10.5a (3) (*) Key Employee Stock Purchase Plan.
10.5b (5) (*) Form of Stock Purchase Agreement used under
the Key Employee Stock Purchase Plan.
10.6 (7) (*) Form of Indemnification Agreement entered into
by the Registrant with each of its directors and
executive officers.
10. 7 (6) Proprietary Information Agreement dated
as of March 25, 1992, between James M. Phalan
and the Registrant.
10.8 (12) Line of Credit Agreement dated December 13,
1996 between HytekMicrosystems, Inc. and
Sierra Bank of Nevada.
13.1 President's Letter to Shareholders dated
April 8, 1997, which together with
this Form 10-KSB comprises the Registrant's
1996 Annual Report to Shareholders.
21.1 The Registrant has no subsidiaries.
23.1 Consent of Independent Auditors
(see page F- 17).
24.1 Power of Attorney (see page S-1).
27.1 Financial Data Schedule.
(1) Incorporated by reference to Exhibit filed with the
Registration Statement on Form S-1 (File No. 2-82140).
X-2 (Footnotes at end of index)
<PAGE>
(2) Incorporated by reference to Exhibit filed with the
Quarterly Report on Form 10-Q for the quarter ended July 2,
1988.
(3) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-K for the year ended December 29, 1990.
(4) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-K for the year ended December 30, 1989.
(5) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-K for the year ended December 31, 1986.
(6) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-K for the year ended December 28, 1991.
(7) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-K for the year ended December 31, 1988.
(9) Incorporated by reference to Exhibit filed with the Quarterly
Report on Form 10-Q for the quarter ended September 26,
1992.
(10) Incorporated by reference to the Exhibit filed with the
Quarterly Report on Form 10-Q for the quarter ended
June 27, 1992.
(11) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-KSB for the year ended December 31, 1994.
(12) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-KSB for the year ended December 30, 1995.
(*) Management contract or compensatory plan or arrangement in
which any director or executive officer named in the
Registrant's Annual Report on Form 10-KSB or Proxy Statement
has participated or participates.
X-3
<PAGE>
EXHIBIT 10.3c
HYTEK MICROSYSTEMS, INC.
1991 STOCK OPTION PLAN
(Adopted by the Board of Directors and
initially approved by the shareholders on May 10, 1991; amended
on July 27, 1992 and May 12, 1995; amended on February 7, 1997(1))
1. PURPOSES OF THE PLAN. The purposes of this 1991 Stock Option
Plan are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business. Options granted under the Plan may be incentive
stock options (as defined under Section 422 of the Code) or non-statutory
stock options, as determined by the Administrator at the time of grant of an
option and subject to the applicable provisions of Section 422 of the Code
and the regulations promulgated thereunder.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
(d) "COMMITTEE" means a Committee, if any, appointed by the Board
in accordance with paragraph (a) of Section 4 of the Plan.
(e) "COMMON STOCK" means the Common Stock, no par value per share,
of the Company.
(f) "COMPANY" means Hytek Microsystems, Inc., a California
corporation.
(g) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, provided the term Consultant shall not include
persons who are not compensated for their services or are paid only a
Director's fee by the Company.
- ---------------
(1) Subject to shareholder approval at the May 16, 1997 Annual Meeting of
Shareholders.
<PAGE>
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) any leave of absence approved by
the Administrator, including sick leave, military leave, or any other
personal leave; provided, however, that for purposes of Incentive Stock
Options, any such leave may not exceed ninety (90) days, unless reemployment
upon the expiration of such leave is guaranteed by contract (including
certain Company policies) or statute; or (ii) transfers between locations of
the Company or between the Company, its Parent, its Subsidiaries or its
successor.
(i) "DIRECTOR" shall mean a member of the Board.
(j) "DISABILITY" means total and permanent disability, as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Subsidiary. The payment of Directors' fees by
the Company shall not be sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share
of Common Stock shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange (or, if
listed on more than one exchange, the exchange with the greatest volume of
trading in Common Stock) or system on the last market trading day prior to
the day of determination, as reported in the Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System
(but not on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the bid and
asked prices for the Common Stock on the last market trading day prior to the
day of determination, as reported in the Wall Street Journal or such other
source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith
by the Administrator.
-2-
<PAGE>
(n) "INCENTIVE STOCK OPTION" means an Option that satisfies the
provisions of Section 422 of the Code.
(o) "NONSTATUTORY STOCK OPTION" means an Option that is not an
Incentive Stock Option.
(p) "OFFICER" means an officer of the Company within the meaning of
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTIONED STOCK" means the Common Stock subject to an Option.
(s) "OPTIONEE" means an Employee or Consultant who holds an Option.
(t) "PARENT" corporation shall have the meaning defined in
Section 424(e) of the Code.
(u) "PLAN" means this 1991 Stock Option Plan.
(v) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(w) "SUBSIDIARY" corporation shall have the meaning defined in
Section 424(f) of the Code.
In addition, the terms "Rule 16b-3" and "Applicable Laws", the term "10%
Shareholder", and the term "Tax Date" shall have the meanings set forth,
respectively, in Sections 4, 7 and 8 below.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10
of the Plan, the total number of Shares reserved and available for purchase
upon exercise of Options under the Plan shall be three hundred seventy-six
thousand one hundred seventy-five (376,175). The Shares may be authorized,
but unissued, or reacquired stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for other Options under the Plan.
However, should the Company reacquire Shares which were issued pursuant to
the exercise of an Option, such Shares shall not become available for future
grant under the Plan.
-3-
<PAGE>
4. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF ADMINISTRATOR.
(i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND
OFFICERS. With respect to grants of Options to Employees who are also
Officers or Directors of the Company, the Plan shall be administered by (A)
the Board, if the Board may administer the Plan in compliance with the rules
governing a plan intended to qualify as a discretionary plan under Rule 16b-3
promulgated under the Exchange Act or any successor rule ("Rule 16b-3"), or
(B) a Committee designated by the Board to administer the Plan, which
Committee shall be constituted (I) in such a manner as to comply with the
rules governing a plan intended to qualify as a discretionary plan under Rule
16b-3 and (II) in such a manner as to satisfy the legal requirements, if any,
relating to the administration of incentive stock option plans under
applicable state corporate and securities laws and under the Code (the
"Applicable Laws").
(ii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options to Employees or Consultants who
are neither Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board,
which Committee shall be constituted in such a manner as to satisfy the
Applicable Laws.
(iii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by
Rule 16b-3 and by the Applicable Laws, the Plan may (but need not) be
administered by different administrative bodies with respect to Directors,
non-Director Officers, and Employees and Consultants who are neither
Directors nor Officers.
(iv) GENERAL. Once a Committee has been appointed
pursuant to subsection (i) or (ii) of this Section 4(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any Committee
and appoint additional members thereof, remove members (with or without
cause) and appoint new members in substitution therefor, fill vacancies
(however caused) or remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by the Applicable
Laws, and, in the case of a Committee appointed under subsection (i) hereof,
to the extent permitted by Rule 16b-3 as it applies to a plan intended to
qualify thereunder as a discretionary plan.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and, in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
-4-
<PAGE>
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(m) of the Plan;
(ii) to select the Officers, Consultants and Employees to
whom Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each such Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option granted hereunder
(including, but not limited to, whether such Option is an Incentive Stock
Option or a Nonstatutory Stock Option, the exercise price and any restriction
or limitation, or any vesting acceleration or waiver of forfeiture
restrictions regarding any Option or other award and/or the shares of Common
Stock relating thereto, based in each case on such factors as the
Administrator shall determine, in its sole discretion); provided, however,
that in the event of a merger, asset sale or change of control, the
applicable provisions of Section 10 of the Plan shall govern vesting
acceleration;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 7(a)(viii) instead of Common
Stock;
(viii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(ix) to interpret the Plan;
(x) to prescribe, amend and rescind rules and regulations
relating to the Plan;
(xi) with the consent of the holder thereof, to modify or
amend each Option; and
(xii) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
-5-
<PAGE>
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. ELIGIBILITY.
(a) PERSONS ELIGIBLE. Nonstatutory Stock Options may be granted
only to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Optionee who has been granted an Option may, if he or
she is otherwise eligible, be granted additional Options.
(b) NO EMPLOYMENT AGREEMENT. Neither the Plan nor any Option
agreement shall confer upon any Optionee any right with respect to
continuation of employment by or service as a Consultant to the Company, nor
shall it interfere in any way with the Optionee's right or the Company's
right to terminate the Optionee's employment or consulting relationship at
any time.
6. TERM OF PLAN. Subject to Section 15 of the Plan, the Plan shall
become effective upon the earlier to occur of its adoption by the Board or
its approval by the shareholders of the Company as described in Section 15.
It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 12 of the Plan.
7. OPTIONS.
(a) GRANTS. The Administrator, in its discretion, may grant
Options to eligible participants and shall determine whether such Options
shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option
shall be evidenced by a written Option agreement which shall expressly
identify the Options as Incentive Stock Options or as Nonstatutory Stock
Options, and be in such form and contain such provisions as the Administrator
shall from time to time deem appropriate. Without limiting the foregoing,
the Administrator may, at any time, or from time to time, authorize the
Company, with the consent of the respective recipients, to issue Options in
exchange for the surrender and cancellation of any or all outstanding
Options. Option agreements shall contain the following terms and conditions:
(i) EXERCISE PRICE; NUMBER OF SHARES. The per Share
exercise price for the Shares issuable upon exercise of an Option shall be
such price as is determined by the Administrator, but shall in no event be
less than 100% of the Fair Market Value of Common Stock, determined as of the
date of grant of the Option. In the event that the Administrator shall
subsequently amend the Option to reduce the exercise price, the exercise
price shall be no less than 100% of the Fair Market Value as of the date of
that amendment.
The Option agreement shall specify the number of Shares to which it
pertains.
-6-
<PAGE>
(ii) WAITING PERIOD; EXERCISABILITY; TERM. At the time
an Option is granted, the Administrator will determine the terms and
conditions to be satisfied before Shares may be purchased, including the
dates on which Shares subject to the Option may first be purchased or the
conditions which must be satisfied prior to purchase. The Administrator may
specify that an Option may not be exercised until the completion of the
service period specified at the time of grant. (Any such period is referred
to herein as the "waiting period".) At the time an Option is granted, the
Administrator shall fix the period within which the Option may be exercised,
which shall not be less than the waiting period, if any, nor more than ten
(10) years from the date of grant.
(iii) FORM OF PAYMENT. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash, (2) check, (3) promissory note, (4) other
Shares which (x) in the case of Shares acquired upon exercise of an Option,
have been owned by the Optionee for more than six months on the date of
surrender and (y) have a Fair Market Value on the date of surrender equal to
the aggregate exercise price of the Shares as to which said Option shall be
exercised, (5) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the Company the
amount of sale or loan proceeds required to pay the exercise price, (6) any
combination of the foregoing methods of payment, or (7) such other
consideration and method of payment for the issuance of Shares to the extent
permitted under Applicable Laws.
(iv) SPECIAL INCENTIVE STOCK OPTION PROVISIONS. In
addition to the foregoing, Options granted under the Plan which are intended
to be Incentive Stock Options under Section 422 of the Code shall be subject
to the following terms and conditions:
(A) DOLLAR LIMITATION. To the extent that the
aggregate Fair Market Value of (i) the Shares with respect to which Options
designated as Incentive Stock Options plus (ii) the shares of stock of the
Company, Parent and any Subsidiary with respect to which other incentive
stock options are exercisable for the first time by an Optionee during any
calendar year under all plans of the Company and any Parent and Subsidiary
exceeds $100,000, such Options shall be treated as Nonstatutory Stock
Options. For purposes of the preceding sentence, (i) Options shall be taken
into account in the order in which they were granted, and (ii) the Fair
Market Value of the Shares shall be determined as of the time the Option or
other incentive stock option is granted.
(B) GENERAL. Except as modified by the preceding
provisions of this subsection 7(a)(iv) and except as otherwise limited by
Section 422 of the Code, all of the provisions of the Plan shall be
applicable to the Incentive Stock Options granted hereunder.
-7-
<PAGE>
(v) 10% SHAREHOLDER. If any Optionee to whom an Incentive
Stock Option is to be granted pursuant to the provisions of the Plan is, on the
date of grant, the owner of Common Stock (as determined under Section 424(d) of
the Code) possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any Subsidiary (a "10% Shareholder"), then
the following special provisions shall be applicable to the Option granted to
such individual:
(A) The per Share Option price of Shares subject to
such Incentive Stock Option shall not be less than 110% of the Fair Market
Value of Common Stock on the date of grant; and
(B) The Option shall not have a term in excess of
five (5) years from the date of grant.
(vi) RULE 16b-3. Grants of options to Directors,
Officers and 10% Shareholders must comply with the applicable provisions of
Rule 16b-3 and such Options shall contain such additional conditions or
restrictions, if any, as may be required by Rule 16b-3 to be in the written
Option Agreement in order to qualify for the maximum exemption from Section
16 of the Exchange Act with respect to Plan transactions.
(vii) OTHER PROVISIONS. Each Option granted under the
Plan may contain such other terms, provisions, and conditions not
inconsistent with the Plan as may be determined by the Administrator.
(viii) BUYOUT PROVISIONS. The Administrator may at any
time offer to buy out, for a payment in cash or Shares, an Option previously
granted, based on such terms and conditions as the Administrator shall
establish and communicate to the Optionee at the time that such offer is
made. Any such cash offer made to an Officer or Director shall comply with
the provisions of Rule 16b-3 relating to cash settlement of stock
appreciation rights. This provision is intended only to clarify the powers
of the Administrator and shall not in any way be deemed to create any rights
on the part of Optionees to receive buyout offers or payments.
(b) METHOD OF EXERCISE.
(i) EXERCISABILITY. Any Option granted hereunder shall
be exercisable at such times and under such conditions as determined by the
Administrator and as shall be permissible under the terms of the Plan.
(ii) NO FRACTIONAL SHARES. An Option may not be
exercised for a fraction of a Share.
-8-
<PAGE>
(iii) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. An
Option shall be deemed to be exercised when the Company receives: (i)
written notice of such exercise in accordance with the terms of the Option
from the person entitled to exercise the Option and (ii) full payment for the
Shares with respect to which the Option is exercised. Full payment may
consist of any consideration and method of payment allowable under subsection
7(a)(iii) of the Plan, as authorized by the Administrator (and, in the case
of an Incentive Stock Option, determined at the time of grant) and permitted
by the Option Agreement. Shares issued upon exercise of an Option shall be
issued in the name of the Optionee or, if requested by the Optionee, in the
name of the Optionee and his or her spouse. Until the issuance (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 10 of the Plan.
(iv) EFFECT OF EXERCISE. Exercise of an Option in any
manner shall result in a decrease in the number of Shares which thereafter
shall be available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(c) EFFECT OF TERMINATION OF EMPLOYEE OR CONSULTANT STATUS.
(i) TERMINATION OF EMPLOYMENT OR CONSULTING
RELATIONSHIP. In the event an Optionee's Continuous Status as an Employee or
Consultant terminates (other than upon the Optionee's death or Disability),
the Optionee may exercise his or her Option, but only within such period of
time not to exceed six months as is determined by the Administrator (with
such determination being made at the time of grant and not exceeding three
(3) months in the case of an Incentive Stock Option) from the date of such
termination, and only to the extent that the Optionee was entitled to
exercise it at the date of such termination (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement).
If, at the date of termination, the Optionee is not entitled to exercise his
or her entire Option, the Shares covered by the unexercisable portion of the
Option shall be returned to the Plan as of the termination date. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and all remaining Shares
covered by such Option shall be returned to the Plan at the end of such
period.
(ii) DISABILITY OF OPTIONEE. In the event an Optionee's
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option, but only
within six months from the date of such termination, and only to the extent
that the Optionee was entitled to exercise it at the date of such termination
(but in no event later than the expiration of the term of such Option as set
forth in the Option Agreement). If, at the date of termination due to
Disability, the Optionee is not entitled to
-9-
<PAGE>
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall be returned to the Plan as of the date of
Disability. If, after such termination, the Optionee does not exercise his
or her Option within the time specified herein, the Option shall terminate,
and all remaining Shares covered by such Option shall be returned to the Plan
at the end of such period.
(iii) DEATH OF OPTIONEE. In the event of an Optionee's
death, the Optionee's estate or a person who acquired the right to exercise
the deceased Optionee's Option by bequest or inheritance may exercise the
Option, but only within six months following the date of death, and only to
the extent that the Optionee was entitled to exercise it at the date of death
(but in no event later than the expiration of the term of such Option as set
forth in the Option Agreement). If, at the time of death, the Optionee was
not entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall be returned to the Plan as of the
date of death. If, after death, the Optionee's estate or a person who
acquired the right to exercise the Option by bequest or inheritance does not
exercise the Option within the time specified herein, the Option shall
terminate, and all remaining Shares covered by such Option shall be returned
to the Plan at the end of such period.
8. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS.
(a) ABILITY TO USE STOCK FOR WITHHOLDING. At the discretion of
the Administrator, Optionees may satisfy withholding obligations as provided
in this Section 8. When an Optionee incurs tax liability in connection with
the exercise of an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company
an amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option that number
of Shares having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
(b) ELECTION TO HAVE STOCK WITHHELD. All elections by an Optionee
to have Shares withheld for this purpose shall be made in writing in a form
acceptable to the Administrator and shall be subject to the following
restrictions:
(i) the election must be made on or prior to the
applicable Tax Date;
(ii) once made, the election shall be irrevocable as to
the particular Shares of the Option as to which the election is made (unless
otherwise permitted by applicable tax regulations under the Code);
-10-
<PAGE>
(iii) all elections shall be subject to the consent or
disapproval of the Administrator; and
(iv) if the Optionee is a Director, Officer or 10%
Shareholder, the election must comply with the applicable provisions of Rule
16b-3 and shall be subject to such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption from Section
16 of the Exchange Act with respect to Plan transactions.
(c) SECTION 83(b) ELECTION. In the event the election to have
Shares withheld is made by an Optionee, no election is filed under Section
83(b) of the Code and the Tax Date is deferred under Section 83 of the Code,
the Optionee shall receive the full number of Shares with respect to which
the Option is exercised but such Optionee shall be unconditionally obligated
to tender back to the Company the proper number of Shares on the Tax Date.
9. NON-TRANSFERABILITY OF OPTIONS. Options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than
by will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act, or the rules thereunder. The designation of
a beneficiary by an Optionee does not constitute a transfer. An Option may
be exercised, during the lifetime of the Optionee, only by the Optionee or a
transferee permitted by this Section 9.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER,
ASSET SALE OR CHANGE OF CONTROL.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of Shares covered by each
outstanding Option, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the aggregate number of issued Shares effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed
for this purpose to have been "effected without receipt of consideration".
Such adjustment shall be made by the Administrator, whose determination in
that respect shall be final, binding and conclusive.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, all outstanding Options will
terminate immediately prior to the consummation of such proposed action. The
Administrator may, in the exercise of its sole discre-
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<PAGE>
tion in such instances, declare that all Options shall terminate as of a date
fixed by the Administrator and give each Optionee the right to exercise his
or her Option as to all or any part of the Optioned Stock, including Shares
as to which the Option would not otherwise be exercisable.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation or the sale of substantially all of the
assets of the Company, each outstanding Option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of such successor corporation. However, the Administrator may, in
lieu of such assumption or substitution, provide each Optionee with the right
to exercise his or her Options in full as to all of the Optioned Stock,
including Shares as to which such Options would not otherwise be exercisable.
If the Administrator makes an Option fully exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee that the Option shall be fully exercisable for a
period of time determined by the Administrator from the date of such notice,
and the Option will terminate upon the expiration of such period. For the
purposes of this paragraph, the Option shall be considered assumed if,
immediately following the merger or sale of assets, the option confers the
right to purchase, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale
of assets by holders of Common Stock for each Share held on the effective
date of the transaction (and, if such holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority
of the outstanding Shares); provided, however, that if such consideration
received in the merger or sale of assets was not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent
of the successor corporation and the participant, provide for the
consideration to be received upon the exercise of the Option for each Share
of Optioned Stock subject to the Option to be solely common stock of the
successor corporation or its Parent equal in Fair Market Value to the per
share consideration received by holders of Common Stock in the merger or sale
of assets.
(d) CHANGE IN CONTROL. In the event of a "Change in Control" of
the Company, as defined in paragraph (e) below, unless otherwise determined
by the Administrator prior to the occurrence of such Change in Control, any
Options outstanding on the date such Change in Control is determined to have
occurred that are not yet exercisable and vested on such date, whether such
Options were granted before or after the amendment of the Plan to include
this provision, shall become fully exercisable and vested.
(e) DEFINITION OF "CHANGE IN CONTROL". For purposes of this
Section 10, a "Change in Control" means the happening of any of the following:
(i) When any "person", as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a
Company employee benefit plan,
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<PAGE>
including any trustee of such plan acting as trustee) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the Company's then
outstanding securities; or
(ii) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the
shareholders of the Company approve an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets; or
(iii) A change in the composition of the Board as a result of
which fewer than a majority of the directors in office are Incumbent
Directors. "Incumbent Directors" shall mean directors who either (A) are
directors of the Company as of the date this Section 10(e) was added to the
Plan by the Board, or (B) are elected, or nominated for election, to the
Board with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include
an individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the
Company).
(f) NO OTHER ADJUSTMENTS. Except as expressly provided or
authorized herein, no issuance by the Company of shares of stock of any
class, or securities convertible into or exercisable for shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares subject to an Option.
11. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the
determination granting such Option, or such other later date as is determined
by the Administrator. Notice of the determination shall be given to each
Employee or Consultant to whom an Option is so granted within a reasonable
time after the date of such grant.
12. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend, or terminate the Plan. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Rule 16b-3 promulgated under the Exchange Act or Section 422 of
the Code (or any other applicable law or regulation, including the
requirements of any exchange or quotation system on which the Common Stock is
listed or quoted) in such a manner and to such a degree as is required by
such law or regulation.
-13-
<PAGE>
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee
with respect to Options already granted unless mutually agreed otherwise
between the Optionee and the Administrator, which agreement must be in a
writing signed by the Optionee and the Company.
13. CONDITIONS UPON ISSUANCE OF SHARES.
(a) COMPLIANCE WITH LAWS. Shares shall not be issued upon
exercise of an Option unless such exercise and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, the Securities Act of 1933, as amended,
the Exchange Act, the rules and regulations promulgated thereunder, state
securities laws and the requirements of any stock exchange or quotation
system upon which the Shares may then be listed or quoted, and shall be
further subject to the approval of counsel for the Company with respect to
such compliance.
(b) INVESTMENT INTENT. As a condition to the exercise of an
Option or the issuance of Shares upon exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required.
(c) NO COMPANY LIABILITY. Inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the non-issuance or sale of such Shares as to which such requisite
authority shall not have been obtained.
(d) GRANTS EXCEEDING ALLOTTED SHARES. If the Optioned Stock
covered by an Option exceeds, as of the date of grant, the number of Shares
which may be issued under the Plan without additional shareholder approval,
such Option shall be void, and shall not be exercisable, with respect to such
excess Optioned Stock, unless shareholder approval of an amendment
sufficiently increasing the number of Shares subject to the Plan to permit
full exercise of the Option is timely obtained in accordance with Sections 12
and 15 of the Plan.
14. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan and the Options granted
hereunder.
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<PAGE>
15. SHAREHOLDER APPROVAL.
(a) REQUIREMENT. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before
or after the date the Plan is adopted as provided in Section 6 and at or
prior to the first annual meeting of shareholders held subsequent to the
first granting of an Option hereunder. Such shareholder approval shall be
obtained in the manner and to the degree that is required under applicable
federal and state laws.
(b) MANNER OF SOLICITATION. Approval of the Plan by the
shareholders of the Company shall be solicited substantially in accordance
with Section 14(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
16. PERFORMANCE-BASED PLAN LIMITATION. The following limitations shall
apply to grants of Options to Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 50,000 Shares.
(ii) In connection with his or her initial employment, an
Employee may be granted Options to purchase up to an additional 50,000
Shares, which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 10.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 10), the cancelled Option will be counted against the
limit set forth in this Section 16. For this purpose, if the exercise price
of an Option is reduced, the transaction will be treated as a cancellation of
the Option and the grant of a new Option.
-15-
<PAGE>
April 8, 1997
Exhibit 13.1
TO THE SHAREHOLDERS OF HYTEK MICROSYSTEMS, INC.:
As the result of a very strong beginning backlog, 1996 has been an
exceptional year for the Company. In addition to the significant growth in
revenues and earnings, the Company has added new customers and increased the
percentage of new orders received from customers other than its largest
customer (Chesapeake Sciences Corp.). However, total customer orders
received in 1996 were approximately $7,000,000, down from over $10,000,000 in
1995.
Revenues in 1996 were $8,641,000, an increase of 60% over 1995 revenues
of $5,409,000. In 1996, the Company reported net income of $1,927,000 as
compared to net income of $521,000 in 1995. During 1996, sales related to
military or government-funded projects increased in amount by over $400,000
but decreased to approximately 24% of revenues, from 30% of revenues in 1995.
The Company's largest customer, Chesapeake Sciences Corporation, accounted
for 62% of revenues in both 1996 and 1995.
The increase in net income was the primary reason for the Company's
improved liquidity in 1996, as cash balances increased in excess of $1.3
million. In addition, the Company increased working capital and total assets
by over $1.5 million and $1.7 million, respectively.
Again, as in the past several years, custom products accounted for the
vast majority (94%) of Company revenues for 1996. New standard product
development efforts were minimal during 1996 as increased production volumes,
combined with many new custom products, absorbed the vast majority of the
Company's engineering resources during the year.
While 1996 was an exceptional year, we must caution that at this time we
do not anticipate the Company can achieve similar results in 1997.* Current
projections based on forecasts from the Company's largest customer indicate
that 1997 revenues could be 20% to 25% below 1996 levels.* The Company
intends to vigorously pursue all new business opportunities in an effort to
reduce our reliance on a single large customer.*
Yours sincerely,
Charles S. Byrne
President and Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AT
12/28/96 AND STATEMENT OF INCOME AND ACCUMULATED DEFICIT AT 12/28/96 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 1,426,716
<SECURITIES> 0
<RECEIVABLES> 1,175,817
<ALLOWANCES> 50,000
<INVENTORY> 1,268,881
<CURRENT-ASSETS> 3,863,917
<PP&E> 2,880,971
<DEPRECIATION> 2,510,609
<TOTAL-ASSETS> 4,434,279
<CURRENT-LIABILITIES> 993,406
<BONDS> 67,979
0
0
<COMMON> 3,372,894<F1>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,434,279
<SALES> 8,617,180
<TOTAL-REVENUES> 8,640,890
<CGS> 5,599,417
<TOTAL-COSTS> 6,924,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,069
<INCOME-PRETAX> 1,726,645
<INCOME-TAX> (200,000)
<INCOME-CONTINUING> 1,926,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,926,645
<EPS-PRIMARY> .657
<EPS-DILUTED> .624
<FN>
<F1>COMMON STOCK AS REPORTED ABOVE IS NET OF $1,589,783 ACCUMULATED DEFICIT.
</FN>
</TABLE>
