UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from _________ to __________
Commission file number 0-11880
HYTEK MICROSYSTEMS, INC.
(Exact name of small business issuer as specified 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)
Issuer's telephone number: (775) 883-0820
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 _____
As of October 30, 1999, the issuer had outstanding 3,064,758 shares of Common
Stock, no par value.
<PAGE>
HYTEK MICROSYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 2, 1999
INDEX
Page
Number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Balance Sheet at October 2, 1999 (unaudited) and
January 2, 1999 . . . . . . . . . . . . . . 3
Statement of Operations (unaudited) for the Quarter and Nine
Months ended October 2, 1999 and October 3, 1998 . . 4
Statement of Cash Flows (unaudited) for the Quarter and Nine
Months ended October 2, 1999 and October 3, 1998 . . . 5
Notes to Interim Financial Statements (unaudited) . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operation . . . . . . . . . . . 7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . . . . . . 13
Exhibit Index . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements.
HYTEK MICROSYSTEMS, INC.
BALANCE SHEET
<TABLE>
October 2, 1999 January 2, 1999
Assets (Unaudited)
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,989,762 $ 2,637,182
Trade accounts receivable - net of
allowance for doubtful accounts
of $50,000 at 10/2/99 and 1/2/99 620,237 1,918,265
Inventories 2,438,091 2,481,707
Prepaid expenses and deposits 82,173 38,932
--------- ---------
Total current assets 6,130,263 7,076,086
Deferred income taxes 200,000 200,000
Plant and equipment, at cost, less
accumulated depreciation and amortization 743,237 999,027
--------- ---------
Total assets $ 7,073,500 $ 8,275,113
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 214,351 $ 312,430
Accrued employee compensation and benefits 162,371 404,284
Accrued warranty, commissions and other 160,286 193,509
Customer deposits 240,208 -
Current portion of long-term debt 51,459 48,313
Current obligations under capital leases 52,614 53,850
--------- ---------
Total current liabilities 881,289 1,012,386
Long-term debt, less current portion 13,787 52,736
Long-term obligations under capital lease - 38,709
Shareholders' equity:
Common Stock, no par value: 7,500,000 shares
authorized, 3,064,758 shares and 3,039,758
shares issued and outstanding at 10/2/99
and 1/2/99, respectively 5,016,468 5,007,093
Retained earnings 1,161,956 2,164,189
--------- ---------
Total shareholders' equity 6,178,424 7,171,282
--------- ---------
Total liabilities and shareholders equity $ 7,073,500 $ 8,275,113
========= =========
</TABLE>
See accompanying notes.
<PAGE>
HYTEK MICROSYSTEMS, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Quarters and nine months ended October 2, 1999 and October 3, 1998
<TABLE>
Quarter ended Nine months ended
------------- -----------------
10/2/1999 10/3/1998 10/2/1999 10/3/1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 1,014,742 $ 3,026,632 $ 4,002,746 $ 10,303,720
Costs and expenses:
Cost of sales 967,936 1,932,950 3,615,077 6,478,035
Engineering and development 200,339 246,213 646,993 709,755
Selling, general and
administrative 286,294 335,777 805,823 857,762
--------- --------- --------- ---------
Total costs and expenses 1,454,569 2,514,940 5,067,893 8,045,552
--------- --------- --------- ---------
Operating income (loss) (439,827) 511,692 (1,065,147) 2,258,168
Interest income 44,583 31,209 86,745 58,738
Interest expense (1,056) (11,950) (8,966) (21,774)
--------- --------- --------- ---------
Income (loss) before provision
for income taxes (396,300) 530,951 (987,368) 2,295,132
Provision for income taxes - (14,500) (14,865) (34,300)
--------- --------- --------- ---------
Net income (loss) $ (396,300) $ 516,451 $ (1,002,233) $ 2,260,832
========= ========= ========= =========
Basic earnings (loss) per share $ (0.13) $ 0.17 $ (0.33) $ 0.76
Diluted earnings (loss) per share $ (0.13) $ 0.16 $ (0.33) $ 0.72
Shares used in calculating
basic earnings (loss) per share 3,064,758 3,034,647 3,059,996 2,989,900
Shares used in calculating
diluted earnings (loss) per share 3,064,758 3,166,294 3,059,996 3,158,336
</TABLE>
See accompanying notes.
<PAGE>
HYTEK MICROSYSTEMS, INC.
STATEMENT OF CASH FLOWS (unaudited)
Quarters and Nine Months Ended October 2, 1999 and Ocxtober 3, 1998
Increase (decrease) in cash and cash equivalentS
<TABLE>
Quarter Ended Nine Months Ended
------------- -----------------
October 2, 1999 October 3, 1998 October 2, 1999 October 3, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (396,300) $ 516,451 $ (1,002,233) $ 2,260,832
Adjustments to reconcile net income (loss)
to cash flow provided by (used in) operations:
Depreciation and amortization 85,784 75,735 264,902 177,690
Accounts receivable 207,870 (516,287) 1,298,028 (113,495)
Inventories 16,442 (496,748) 43,616 101,438
Prepaid expenses and deposits (2,305) (12,183) (43,240) (42,419)
Accounts payable 87,369 346,837 (98,079) (421,785)
Accrued employee compensation and benefits 32,204 112,164 (241,913) 95,530
Accrued warranty, commissions and other 1,686 (5,374) (33,223) (44,402)
Customer deposits 240,208 (28,464) 240,208 (28,464)
------- ------- ------- -------
Net cash provided by (used in)
operating activities 272,958 (7,869) 428,066 1,984,925
Cash flows from investing activities:
Cash purchases of equipment (6,911) (293,643) (9,112) (460,059)
------- ------- ------- -------
Net cash used in investing activities (6,911) (293,643) (9,112) (460,059)
Cash flows from financing activities:
Principal payments on long-term debt (12,218) (13,961) (35,804) (31,855)
Payment of capital lease obligations (13,607) (58,834) (39,945) (109,099)
Proceeds from exercise of stock options - 8,200 9,375 32,417
------- ------- ------- -------
Net cash used in financing activities (25,825) (64,595) (66,374) (108,537)
Net increase (decrease) in cash and cash equivalents 240,222 (366,107) 352,580 1,416,329
Cash and cash equivalents at beginning of period 2,749,540 2,971,955 2,637,182 1,189,519
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 2,989,762 $ 2,605,848 $ 2,989,762 $ 2,605,848
========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
HYTEK MICROSYSTEMS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
OCTOBER 2, 1999
(Unaudited)
1. In the opinion of management, the accompanying unaudited financial statements
include all adjustments (consisting of only normal recurring adjustments) that
are necessary in order to make the financial statements contained herein not
misleading. These financial statements, notes and analyses should be read in
conjunction with the financial statements for the fiscal year ended January 2,
1999, and notes thereto, which are contained in the Company's Annual Report on
Form 10-KSB for such fiscal year. The results for the quarter ended October 2,
1999 are not necessarily indicative of the results that may be expected for the
entire year ending January 1, 2000. The Company operates on a 52/53 week fiscal
year, which approximates the calendar year.
2. The Company leases its main Carson City facility pursuant to a continuing
lease expiring in 2005. It also leases a small amount of office space pursuant
to a lease expiring in March 2000. The aggregate future minimum rental
commitments as of October 2, 1999 for these leases were:
1999 $ 44,418
2000 173,747
2001 - 2005 828,678
---------
$1,046,843
---------
3. Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market. Inventories consisted of:
10-2-99 1-2-99
Raw Material $1,274,984 $1,285,543
Work-In-Process 828,336 1,031,896
Finished Goods 334,771 164,268
----------- ------------
$ 2,438,091 $2,481,707
----------- ----------
4. Plant and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful life of the assets, generally three to seven
years.
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operation
For the purposes of the following discussion, dollar amounts have been
rounded to the nearest $1,000 and all percentages have been rounded to the
nearest 1%.
This interim report on Form 10-QSB 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
various factors, including the factors set forth below and under "Future
Outlook" and elsewhere in this section. 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). All statements
made herein are made as of the date of filing of this Form 10-QSB. The Company
disclaims any duty to update such statements after the date of filing of this
Form 10-QSB, except as required by law.
RESULTS OF OPERATIONS
Net revenues for the quarter ended October 2, 1999 decreased by 66%
from net revenues for the quarter ended October 3, 1998. Net revenues for the
quarter ended October 2, 1999 were $1,015,000, as compared to $3,027,000 for the
quarter ended October 3, 1998. Net revenues for the nine months ended October 2,
1999 decreased 61% to $4,003,000 from net revenues for the nine months ended
October 3, 1998 of $10,304,000. The decrease in revenues during the quarter and
nine-month period is the result of the production and shipment hold initiated by
Chesapeake Sciences Corp. in mid-February 1999. Shipments to Chesapeake Sciences
Corp. accounted for approximately $6.8 million in the prior year nine-month
period versus approximately $400,000 for the current nine-month period.
During the quarter ended October 2, 1999 Chesapeake cancelled its
existing orders valued at $4.8 million and signed a definitive contract (Final
Settlement Agreement) with Hytek in the amount of $2.3 million. This contract
provides for payments of principal and interest over a twelve-month period that
will fully reimburse Hytek for all inventory and other costs associated with the
Chesapeake program. The periodic principal payments made over the term of the
Final Settlement Agreement will be accounted for as customer deposits during the
term and converted to sales revenue as shipments occur. This contract is
attached hereto as Exhibit 10.1.
The Company's backlog of customer orders was $3,802,000 at October 2,
1999, as compared to $8,525,000 at October 3, 1998, and $9,390,000 at January 2,
1999. The current backlog does not include any Chesapeake product (see Future
Outlook). Because customers may place orders for delivery at various times
throughout the year, and due to the possibility of customer changes in delivery
schedules (which have been experienced in the past), or cancellation of orders
with little or no penalty, the Company's backlog as of any particular date may
not be indicative of actual future sales.*
Cost of sales was $968,000, or 95% of net revenues, for the quarter
ended October 2, 1999, as compared to $1,933,000, or 64% of net revenues, for
<PAGE>
the quarter ended October 3, 1998. Cost of sales for the nine months ended
October 2, 1999 was $3,615,000, or 90% of net revenues, as compared to
$6,478,000, or 63% of net revenues, for the nine months ended October 3, 1999.
The increase in cost of sales as a percentage of net revenues results primarily
from the spreading of fixed costs over a significantly lower revenue base
combined with inefficiencies inherent in lower production volumes.
Engineering and development expenses were $200,000, or 20% of net
revenues, for the quarter ended October 2, 1999, as compared to $246,000, or 8%
of net revenues, for the quarter ended October 3, 1998. Engineering and
development expenses for the nine months ended October 2, 1999 were $647,000, or
16% of net revenues, as compared to $710,000, or 7% of net revenues, for the
nine months ended October 3, 1998. The Company has only made small reductions in
engineering and development expenditures, as it believes that future growth is
dependent on maintaining its full technical capability.
Selling, general and administrative expenses were $286,000, or 28% of
net revenues, for the quarter ended October 2, 1999, as compared to $336,000, or
11% of net revenues in the quarter ended October 3, 1998. Selling, general and
administrative expenses for the nine months ended October 2, 1999 were $806,000,
or 20% of net revenues, as compared to $858,000, or 8% of net revenues, for the
nine months ended October 3, 1998. The decrease in selling, general and
administrative expenses results from cost reduction measures, primarily salary
reductions, implemented as a result of the Chesapeake shipment hold.
The large increases in engineering and development expense and selling,
general and administrative expense as a percentage of net revenue result from
spreading these expenses over a significantly smaller revenue base.
The Company had an operating loss of $440,000 for the quarter ended
October 2, 1999, as compared to an operating profit of $512,000 for the quarter
ended October 3, 1998. As a result of a 61% decrease in revenues, the Company
had an operating loss of $1,065,000 for the nine months ended October 2, 1999,
as compared to an operating profit of $2,258,000 for the nine months ended
October 3, 1998.
Net interest income increased to $78,000 for the nine months ended
October 2, 1999 as compared to $37,000 for the prior nine-month period as a
result of larger average monthly cash balances in interest-bearing accounts,
reduced interest expense and interest payments received on the Chesapeake
contract.
Income tax expense of $0 and $15,000 was recognized in the quarter and
nine months ended October 2, 1999, respectively. Income tax expense in the prior
periods was $15,000 and $34,000, respectively. The Company has remaining future
tax credit carryforwards for federal income tax purposes at January 2, 1999 of
approximately $134,000. These carryforwards will not expire.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2,990,000 in cash and cash equivalents at October 2,
1999, as compared to $2,637,000 at January 2, 1999. This increase of $353,000
from year end is comprised of $428,000 provided by operating activities
(primarily collection of receivables) partially offset by $9,000 used for the
purchase of capital equipment and $66,000 used in financing activities
(primarily repayment of long-term debt and capital lease obligations).
Accounts receivable were $620,000 at October 2, 1999, as compared to
$1,918,000 at January 2, 1999. This decrease results from the severe reduction
in sales.
Inventories were $2,438,000 at October 2, 1999, as compared to
$2,482,000 at January 2, 1999. Inventory levels have remained high as a result
of the Chesapeake cancellation; however, all Chesapeake inventory will be paid
for under the terms of the Final Settlement Agreement previously mentioned.
Prepaid expenses and deposits were $82,000 at October 2, 1999 as
compared to $39,000 at January 2, 1999. This increase reflects normal ongoing
business transactions that are affected by fiscal month ending dates.
Property, plant and equipment, net, decreased to $743,000 at October 2,
1999, as compared to $999,000 at 1998 fiscal year end. This decrease results
from increased depreciation charges resulting from prior year capital
expenditures together with significantly reduced capital spending during the
current year.
Accounts payable were $214,000 at October 2, 1999, as compared to
$312,000 at January 2, 1999. This decrease is primarily the result of the
significantly lower level of business activity.
Accrued employee compensation and benefits were $162,000 at October 2,
1999, as compared to $404,000 at January 2, 1999. This decrease is the result of
lower employment levels and the absence of profit sharing accruals for the
current year.
Accrued warranty, commissions and other accrued liabilities were
$160,000 at October 2, 1999, as compared to $194,000 at January 2, 1999. This
reduction reflects normal recurring accruals and transactions.
Customer deposits were $240,000 at October 2, 1999 as compared to $0 at
January 2, 1999. This amount consists of a $58,000 order prepayment and a
$182,000 principal payment received from Chesapeake Sciences Corp. in accordance
with the Final Settlement Agreement.
At October 2, 1999, the Company had both short-term and long-term
obligations under loan and capital lease agreements with Bank of the West
(formerly SierraWest Bank) in an aggregate of $118,000. This is a reduction from
$194,000 outstanding at January 2, 1999, as a result of the repayment of
long-term debt and lease obligations. The Company uses these loan and lease
agreements to finance certain purchases of capital equipment.
At October 2, 1999, the Company also maintained a $1,000,000 revolving
line of credit with Bank of the West (formerly SierraWest Bank). At such date,
the Company was in compliance with all covenants of the loan agreement and no
amounts were outstanding. Interest on this line of credit is at the prime rate.
<PAGE>
INFORMATION AND DATA PROCESSING SYSTEMS ( YEAR 2000 )
The Company relies on an internal computer network for much of its
day-to day operating and financial information. The software for this network is
a commercial `off-the-shelf' package provided and maintained by a reputable
supplier. As of the date of this filing, the supplier has installed at the
Company software revisions that were represented by the supplier to have
eliminated any anticipated potential problems with the Year 2000.
Further, the Company has over 40 individual computer work-stations
attached to the network, all of which have been individually tested and found to
be Year 2000 compliant. The Company has also initiated a survey of its major
material suppliers regarding their state of preparation and action to avert Year
2000 problems. As of the date of this filing, approximately 80% of these
suppliers have responded to this survey and all respondents are anticipating
timely Year 2000 compliance.
The cost of the Company's preparations for Year 2000 computer readiness
have been minimal thus far and as of this filing are estimated to be
approximately $25,000. All costs have been funded through operating cash flow.
Future costs are not expected to be material at this time.
In addition, the Company believes that its major customers and
financial institutions have taken, or are in process of taking, actions
sufficient to protect the Company from adverse effects of the Year 2000 in their
own internal systems.
Management of the Company believes it has established an effective program
to resolve any major Year 2000 issues at this time. In the event that the
Company and its third parties have not resolved all Year 2000 issues in a timely
manner, or that its remediation efforts do not resolve the anticipated problems,
disruptions in the Company's day-to-day operations may occur. In addition,
disruptions in the economy in general resulting from Year 2000 issues could also
materially adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
At the present time, the Company does not have a formal contingency
plan, as it believes its internal efforts will have proved sufficient.
FUTURE OUTLOOK
The Chesapeake "Hold", and subsequent cancellation, of major orders has
had a serious negative impact on operating results for the first nine months of
1999. However, on the positive side, the Final Settlement Agreement (contract)
between the Company and Chesapeake protects the Company from major inventory
write-downs and allows for shipment of product at full sales price if
Chesapeake's demand for the products arises. Subsequent to October 2, 1999,
Chesapeake has placed an order for delivery of 5,300 units over the next four
months with a projected sales value of approximately $800,000. While this event
should improve operating results for the fourth quarter of 1999, there is no
assurance at this time that shipments to Chesapeake will return to historical
levels during the ensuing year.*
<PAGE>
During the past nine months the Company has put considerable effort
into expanding its sales and marketing resources. We have doubled our outside
sales representative force, created and distributed new promotional materials
and begun a program of participation in industry specific trade shows. The
Company believes that continuing efforts in this regard will provide potential
opportunities for future growth.*
The Company's cash position remains strong at October 2, 1999, at
approximately three million dollars. We believe that this cash position,
together with our line of credit, will provide sufficient cash to meet operating
needs for the next twelve months.*
The foregoing discussion contains statements that are forward-looking.
Actual results could differ materially. The primary factors that could cause a
material difference in actual results include failure to expand the customer
base, customer cancellation or rescheduling of orders, problems affecting
delivery of vendor-supplied raw materials and components or the inability to
attract and retain qualified personnel sufficient to meet customer requirements.
The Company disclaims any responsibility to update the forward-looking
statements contained herein, except as may be required by law.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Final Settlement Agreement dated as of August 17, 1999
between the Registrant and Chesapeake Sciences Corp.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended
October 2, 1999.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HYTEK MICROSYSTEMS, INC.
(Registrant)
Date: November 8, 1999 By: /s/ Sally B. Chapman
--------------------
Sally B. Chapman
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
HYTEK MICROSYSTEMS, INC.
Quarterly Report on Form 10-QSB
for the Quarter ended October 2, 1999
EXHIBIT INDEX
Exhibit
Number Exhibit Description
10.1 Final Settlement Agreement dated as of August 17, 1999
between the Registrant and Chesapeake Sciences Corp.
27.1 Financial Data Schedule.
FINAL SETTLEMENT AGREEMENT
RE CANCELLATION OF CHESAPEAKE SCIENCES CORPORATION
PURCHASE ORDERS 98B-1819, 98B-1914, 98B-1915, & 98B-2056
Exhibit 10.1
This Agreement made effective as of the seventeenth day of August, 1999,
regardless of the date of last signature hereto, is by and between Chesapeake
Sciences Corporation, 1127B Benfield Boulevard, Millersville, Maryland 21108
("CSC"), and Hytek Microsystems, Inc., 400 Hot Springs Road, Carson City, NV
89706 ("HYTEK").
WITNESSTH
- ---------
WHEREAS CSC issued Purchase Orders 98B-1819, 98B-1914, 98B-1915, & 98B-2056
("the CSC Purchase Orders") to HYTEK for delivery of specific quantities of
specific hybrid assemblies, and
WHEREAS HYTEK accepted the CSC Purchase Orders and began production of the
specific quantities of specific hybrid assemblies, and
WHEREAS CSC wishes to cancel all remaining undelivered items on the CSC Purchase
Orders.
NOW, THEREFORE, upon conclusion of negotiations between the parties and in
consideration of the premises and covenants contained herein, and with the
intent to be legally bound, CSC and HYTEK agree:
1. Upon execution of this Agreement by authorized representatives of the
parties, the CSC Purchase Orders shall be cancelled and null and void with
respect to the rights and obligations of the parties relevant to all
remaining undelivered items on the CSC Purchase Orders.
2. Appendix A, attached hereto and made a part hereof, is a detailed listing
with values of the current inventory of Finished Goods ("FGI"),
Work-in-Process ("WIP"), and Components & Other ("RAW") materials related
to all remaining undelivered items on the CSC Purchase Orders grouped by
hybrid assembly type by inventory category (FGI, WIP, and RAW) with values
and notation of the physical location of the material and warranted by
HYTEK as being complete, true, and accurate. The total value of the current
inventory of FGI, WIP, and RAW materials related to all remaining
undelivered items on the CSC Purchase Orders is $2,304,306.00.
3. Appendix B, attached hereto and made a part hereof, is a detailed best
efforts estimate by HYTEK of the probable yield quantities of the specific
hybrid assemblies into FGI if the WIP & RAW materials were utilized to
complete the specific hybrid assemblies.
4. In full and final settlement of all claims by HYTEK related to the
cancellation of the CSC Purchase Orders, CSC shall pay to HYTEK
$2,304,306.00 plus interest at 9.5% per annum. Payments to HYTEK are
calculated as 66.65% applied to the following payment schedule:
<TABLE>
Date or Event Amount
<S> <C>
Upon execution of this Agreement by $300,000.00 ($272,629.53 Principal +
authorized representatives of the parti $27,370.47 Interest @ 9.5%)
30 September 1999 25,212.16 (Interest @ 9.5%)
29 October 1999 25,212.16 (Interest @ 9.5%)
30 November 1999 25,212.16 (Interest @ 9.5%)
31 December 1999 300,000.00 ($274,787.84 Principal +
$25,212.16 Interest @ 9.5%)
31 January 2000 23,036.75 (Interest @ 9.5%)
29 February 2000 23,036.75 (Interest @ 9.5%)
31 March 2000 400,000.00 ($376,963.25 Principal +
$23,036.75 Interest @ 9.5%)
28 April 2000 20,052.46 (Interest @ 9.5%)
31 May 2000 20,052.46 (Interest @ 9.5%)
30 June 2000 400,000.00 ($379,947.54 Principal +
$20,052.46 Interest @ 9.5%)
31 July 2000 17,044.54 (Interest @ 9.5%)
31 August 2000 2,170,039.38 ($2,152,994.84 Principal +
$17,044.54 Interest @ 9.5%)
</TABLE>
<PAGE>
The FGI, WIP, and RAW inventory material ("Inventory") shall be held by HYTEK as
collateral against payment hereunder. Upon receipt by HYTEK of the final payment
above, free and clear title to the Inventory shall vest in CSC. The foregoing
notwithstanding, at any time after any principal payment is received by HYTEK
hereunder, CSC shall have the right to issue written notice to HYTEK to deliver
to CSC at a specified location, and HYTEK shall so deliver, specific quantities
of completed specific hybrid assemblies held in FGI provided that the aggregate
value of such quantities, as determined by application of the Unit Prices given
in paragraph 7 below, shall not exceed the accrued principal payments made to
the date of such notice to deliver. Immediately upon CSC's receipt of such
specific quantities of completed specific hybrid assemblies, free and clear
title to them shall vest in CSC. At any time following the vesting in CSC of
free and clear title to the Inventory or any portion thereof and/or while all or
any portion of the Inventory remaining following such event is in the care,
custody and control of HYTEK, HYTEK shall, at CSC's request, execute promptly
financing statement(s) required to perfect and protect the interests of CSC in
the Inventory or any portion thereof.
5. In addition to the above $2,304,306.00 inventory value plus interest at
9.5% per annum according to the above payment schedule, CSC shall pay HYTEK
$400.00 per month in arrears as a storage fee while the Inventory is in the
care, custody and control of HYTEK. In the event that the last storage
period is a partial month of storage, such fee shall be prorated for that
period. The storage fee shall be invoiced by HYTEK to CSC monthly and shall
be due and payable Net 30.
6. While all or any portion of the Inventory is in the care, custody and
control of HYTEK, HYTEK shall:
a. Not move the Inventory to a location other than that specified in
Appendix A without CSC's prior written agreement.
b. Not commingle the Inventory with inventory of its own or third parties
but will store it separately and specifically identify it as the
Inventory subject to this Agreement.
c. Not represent to any person for any reason that the Inventory belongs
to HYTEK or to any third party except as provided for hereunder.
d. Not attempt to sell, mortgage, pledge, assign, borrow against or
otherwise create a security interest in favor of third parties in the
Inventory without the prior written consent of CSC. Upon any breach of
the foregoing, CSC shall have the right to terminate this Agreement
without liability for payments, termination charges or any other
amounts of any kind excepting only payments then due HYTEK from CSC.
<PAGE>
e. Not use the Inventory for any purpose except for the performance of
this Agreement.
f. Maintain records of all Inventory material and any use, loss or other
event that may diminish the Inventory in any way.
g. Allow CSC, or third party CSC representatives, to enter HYTEK's
premises periodically, on reasonable notice and during normal business
hours, to inspect the Inventory, conduct physical inventories and to
audit the Inventory records.
h. Maintain the Inventory in a safe manner so as to prevent loss from any
cause or deterioration.
i. Assume all risk of loss, destruction or damage to the Inventory while
in HYTEK's custody. HYTEK will immediately notify CSC, in writing, of
any such loss, destruction or damage.
j. Credit against the Inventory value due hereunder until the final
payment is made in accordance with paragraph 3 above, or pay to CSC in
the event that title to the Inventory has vested in CSC in accordance
with paragraph 3 above, for Inventory lost, destroyed or damaged at
the value stated in Appendix A hereof or the Inventory item's
then-current replacement cost if such specific Inventory item's value
is not individually stated in Appendix A hereof. HYTEK shall maintain
insurance adequate, but not less than $3,457,323.00, to fulfill its
responsibilities herein; and shall provide CSC with a certificate of
insurance prior to commencing performance of its obligations hereunder
naming CSC as an additional insured and a Loss Payee as its interests
are at the time of loss.
k. Pay all personal property taxes and assessments that may be levied on
the Inventory until such time as free and clear title to the Inventory
vests in CSC in accordance with paragraph 3 above.
l. Defend, indemnify and hold harmless CSC from all claims, liabilities,
costs and expenses (including attorneys' fees) arising as a result of
HYTEK's storage of all or any portion of the Inventory.
7. At its sole option and discretion CSC may at any time, and as many times as
CSC may choose to do so, issue to HYTEK, and HYTEK shall accept, Purchase
Orders for the completion of all or any portion of the WIP and/or RAW
inventory into Finished Goods for delivery to CSC. In such event:
a. The Unit Price for the completed specific hybrid assemblies shall be as
follows:
<TABLE>
CSC Part Number Description Unit Price
<S> <C> <C>
65-400001 OSC/ATTEN $210.00
65-400002 Old PREAMP $150.00
65-400003 TRACK/EQUAL $160.00
65-400004 West PREAMP $150.00
</TABLE>
b. Delivery lead-times shall be mutually agreed between the parties at the time.
c. For the initial Purchase Order issued under this provision, there will
be a one-time charge not to exceed $48,500.00 to restart the production
line.
<PAGE>
d. Credit for payments hereunder in excess of the value of any FGI
delivered to CSC as provided in paragraph 4 above may be treated and
accounted for, at CSC's sole discretion, as Progress Payments under the
Purchase Orders.
8. This Agreement shall be construed, governed, interpreted and applied in
accordance with the laws of the State of Maryland.
9. The parties hereto acknowledge that this Agreement sets forth the entire
agreement and understanding of parties hereto as to the subject matter
hereof, and shall not be subject to any change or modification except by
the execution of a written instrument subscribed to by the parties hereto.
10. Whenever possible each provision of this Agreement shall be interpreted in
the same manner as to be effected and valid under applicable law. The
provisions of this Agreement are severable, and in the event that any
provisions of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity or enforceability
of the remaining provisions hereof.
11. The failure of either party to assert a right hereunder or to insist upon
compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or any other right hereunder and shall
not excuse a similar subsequent failure to perform any such term or
condition by the other party.
12. All notices and correspondence provided for herein shall be given by
depositing same in the United States Mail, first class postage prepaid,
mailed to the following addresses:
If to CSC: If to HYTEK:
Chesapeake Sciences Corporation. Hytek Microsystems, Inc.
Attention: President Attention: President
1127B Benfield Boulevard 400 Hot Springs Road
Millersville, MD 21108 Carson City, NV 89706
The above addresses are the registered offices of the parties. Changes in
address shall be given by utilizing the notice provisions of this
paragraph.
13. This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
14. Neither party shall be construed as being empowered to act on behalf of the
other for any purpose.
IN WITNESS THEREOF, the parties have duly executed this Agreement to be
effective as of the date set forth above regardless of the date of last
signature hereto below.
AGREED ON BEHALF OF AGREED ON BEHALF OF
CHESAPEAKE SCIENCES CORPORATION HYTEK MICROSYSTEMS, INC.
By: /s/ John C. McDaris By: /s/ Charles Byrne
- ------------------------------- --------------------------
John C. McDaris Charles Byrne
Title: President Title: President
Date: 9/16/99 Date: 9/14/99
------- -------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Balance Sheet at October 2, 1999, Statement of Income at April 3, 1999. Other SE
is retained earnings. Interest Expense is net interest income.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 2,989,762
<SECURITIES> 0
<RECEIVABLES> 670,237
<ALLOWANCES> 50,000
<INVENTORY> 2,438,091
<CURRENT-ASSETS> 6,130,263
<PP&E> 3,925,236
<DEPRECIATION> 3,181,999
<TOTAL-ASSETS> 7,073,500
<CURRENT-LIABILITIES> 881,289
<BONDS> 13,787
<COMMON> 5,016,468
0
0
<OTHER-SE> 1,161,956
<TOTAL-LIABILITY-AND-EQUITY> 7,073,500
<SALES> 4,002,746
<TOTAL-REVENUES> 3,999,793
<CGS> 3,615,077
<TOTAL-COSTS> 5,067,893
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (77,779)
<INCOME-PRETAX> (987,368)
<INCOME-TAX> 14,865
<INCOME-CONTINUING> (1,002,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,002,233)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
