UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
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 January 2, 1999, or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 5 (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 the 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 January 2, 1999
were: $12,533,000.
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
National Association of Securities Dealers Automated Quotation (NASDAQ) system
on March 15, 1999) was approximately $3,018,567. 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 15, 1999, the issuer had outstanding 3,064,758 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 14, 1999 (the "Proxy Statement") are incorporated
by reference into Part III of this Annual Report on Form 10-KSB.
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS.
------------------------
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. Further, the Company uses
other technologies such as Low Temperature Co-fired Ceramic substrates (LTCC) to
produce hybrid circuits. In addition to custom hybrid microcircuits, the Company
also manufactures delay lines, thermo-electric cooler controllers and laser
diode driver standard products.
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.
Net revenues in 1998 increased 39% from 1997 levels. The Company had net
income of $2,092,000 in 1998 as compared to net income of $1,662,000 during
1997. During 1998, the Company increased total assets by $985,000 and added $1.7
million to working capital. See "Management's Discussion and Analysis or Plan of
Operation" in Part II, Item 6 hereof.
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 a number
of risks and uncertainties, including, but not limited to, the risk factors set
forth in "Management's Discussion and Analysis or Plan of Operation--Factors
Affecting Future Results" and elsewhere in this report. 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, except as required by law.
PRODUCTS AND MARKETS
Products manufactured by the Company are sold primarily to original
equipment manufacturers (OEMs) serving the oil exploration, military, satellite
systems, industrial electronics and opto-electronic markets. Approximately 96%
of the Company's net revenues in 1998 were derived from products designed and
manufactured to meet a particular customer's specifications. The remaining 4% of
net revenues in 1998 were derived from standard products designed by the
Company's engineering staff.
During 1998, approximately 71% of the Company's revenues were derived from
commercial and industrial private sector programs as compared to approximately
64% in 1997. Sales to the military, aerospace and government sector increased
slightly in absolute dollars during 1998 and accounted for 29% of 1998 total
revenues.
<PAGE>
From 1987, when the Company was certified under MIL-Standard-1772, through
1994, sales of military, aerospace and government products increased. 1995 was
the first year that the Company experienced a decline in the sale of military
and government products. Sales to the military and government sector increased
again in both 1997 and 1998. The Company continues to pursue business in the
military market and is actively seeking to expand its customer base in this
area.* Recent dialog from both Congress and the Executive Branch of the U.S.
Government indicate the potential of increases in spending for national defense
that could foster additional future growth in this market.* Offshore producers
with significantly lower costs have in the 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 commercial products
and have in the past commanded significantly higher prices. However, there is
growing trend in military procurement to buy to the "best commercial standards"
or "commercial off the shelf" (COTS) criteria, which may have a negative impact
on margins in future military business. The Company intends to continue its
efforts to remain competitive in this market. *
While domestic defense and military related spending programs have been
reduced over the past several years, there remains a large global market for
these products and systems. U. S. defense contractors are supplying these
products to "allied" nations who continue to build their defense capabilities.
The Company is currently doing business with certain defense contractors who are
participating in this area and expects to continue to be an active participant
in this market.*
The commercial custom hybrid market has historically been an extremely
competitive, low margin arena. In many commercial applications, such as
automotive, audio and video products and certain communications 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 the past three
years.
During 1998, the Company has pursued opportunities in the medical device
and medical instrumentation markets and has subsequently received an initial
production order for an implantable medical device. The Company intends to
increase its efforts to further expand in this market.
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 three
years with the custom product percentage of total revenues increasing from 88%
in 1995 to 96% in 1998.
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 has subsequently introduced three
<PAGE>
additional design versions of the Laser Diode Driver. 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, thin film hybrid
circuits and co-fired ceramic 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, the Company's primary manufacturing
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.
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 have proven adaptable to integrated
circuit technology; therefore; the Company believes that hybrid technology is an
attractive 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, there continues to be a market
for hybrid circuits produced with thick film technology.
In past years, all of the microcircuits produced by Hytek were manufactured
using thick film hybrid circuit packaging techniques, including thick film
screen print, firing and laser trimming, chip and wire assembly, and automatic
testing. During 1998, the Company began to produce a small number of circuits
utilizing Low Temperature Co-fired Ceramic (LTCC) substrates. This technology
<PAGE>
increases the uniformity of the substrate layers, yielding a higher number of
conductive layers on a substrate. As a result, LTCC technology can produce
higher density, more complex circuits than standard thick-film substrate
technology. The Company will continue to seek and 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 96% of the Company's sales in
1998. These products serve a variety of applications in the oil exploration,
military, satellite systems, industrial electronics and opto-electronic 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 4% of the Company's sales in
1998. These products consist of delay lines, thermo-electric cooler controllers
and laser diode driver products produced for applications in the military,
industrial electronic systems and communications 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.
Military -- communications, guidance systems, control circuitry and
avionics.
Satellite Systems -- power monitoring and control circuits.
Industrial Electronic Systems -- measurement and diagnostics on
rotating machinery.
Opto-Electronics - sub-miniature temperature controls, laser diode
drivers for data transmission.
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 January 2, 1999, the
Company's direct sales staff consisted of five employees operating from the
Company's principal office in Carson City. In addition, at such date the Company
had six independent sales representatives located throughout the United States
and one independent representative located in Israel. The Company also has
distributors in France, Germany, Japan 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, senior members of management of the Company are directly
involved in the marketing and sales activities of the Company.
The Company continues to identify certain existing and potential new
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 certified and qualified to
MIL-PRF-38534, Class H (previously Mil-Std-1772). This certification is a
prerequisite to participate in certain military contracts, and is subject to
periodic audits by the U.S. government. Loss of this certification would have a
material adverse impact on the Company's business prospects and financial
condition. Further, the Company has recently been audited to Class K (Space
Flight) level under MIL-PRF-38534, and anticipates certification to this level
in the near future.*
CUSTOMERS
During 1998, the Company's five largest customers accounted for 82% of the
Company's net revenues. In 1998, Chesapeake Sciences Corp. accounted for 64% of
the Company's net revenues. A large portion (53%) of the Company's backlog of
orders for 1999 and beyond is attributable to Chesapeake Sciences Corporation,
which recently put all of its pending orders on "indefinite hold". This is
expected to have a material adverse effect on the Company's revenues and
operating results for 1999, as discussed further in "Management's Discussion and
Analysis-Factors Affecting Future Results" in Item 6 of Part II of this Form
10KSB. Future delays 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", in Part II, Item 6 hereof.
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.
Occasionally in the past, the Company has experienced isolated technical
manufacturing problems that have resulted in a material negative impact on
quarterly results. While the Company has taken steps to improve its
manufacturing processes and equipment, any future manufacturing problems on
major customer programs could have a material adverse effect on operating
results.
<PAGE>
The thick-film hybrid manufacturing process, which accounted for
approximately 98% of total production in 1998, 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 525(degree)
Celsius to 935(degree) 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 re-tested 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 wire bonding process is very critical
to the overall yield and efficiency of the manufacturing cycle. 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
controls.
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, Hi-Rel
Products, Inc., 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. Nevertheless, any major disruption in the
delivery of raw materials from these suppliers would have a material adverse
impact on the Company's future operations.
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
<PAGE>
believes that its activities conform to present state and federal environmental
regulations. However, there can be no assurance that the Company 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 three 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 Company continued to
add to its engineering staff during 1998.
During 1998 and 1997, the Company spent $945,000 and $769,000,
respectively, on its total engineering efforts. Of these amounts, approximately
$236,000 and $115,000 were spent on new product or process research and
development in 1998 and 1997, respectively. The amounts spent on research and
development were internally funded.
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
originally designed. As a result, the Company re-designed and released in 1997 a
"cost reduced" version of the Laser Diode Driver, which it hopes will be more
suitable for volume commercial applications.* In addition, two additional Laser
Diode Drivers models were introduced in 1997 to cover expanded power and
frequency ranges. In 1998, Sales of Laser Diode Drivers, while still minimal,
increased by more than 200% over 1997 sales.
COMPETITION
Because of the variety of applications in the markets it serves, and a
military market that has been diminishing in size, 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., 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 past years 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-PRF-38534, as is the
Company. The Company's current share of the overall hybrid circuit market is
small but has expanded over the last few years.
In those applications where hybrid circuits and integrated circuits are
interchangeable, hybrid circuit manufacturers often compete with major
integrated circuit manufacturers.
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 in past years. The improvement in revenues
and earnings for the past four years has helped strengthen the Company's
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 registered trademarks or licenses
material to the conduct of its business.
EMPLOYEES
As of January 2, 1999, the Company employed a total of 123 full-time
employees, of whom 97 were in manufacturing, 5 were in marketing and sales, 17
were in engineering and development and 4 were in administration. In February
1999, a total of 30 employees, primarily in the manufacturing area, were laid
off as a cost reduction measure. 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 1998, the Company derived approximately 29% of its total revenues
from government-funded 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.
<PAGE>
During 1998, the Company experienced no such termination for government
convenience.
ITEM 2. DESCRIPTION OF PROPERTY.
------------------------
The Company currently leases a total of approximately 25,000 square feet of
manufacturing, engineering and support facilities in two adjacent buildings in
Carson City, Nevada. The main building, consisting of 23,800 square feet, has a
lease term through June 2005, with an option to extend for an additional five
years. The main facility is currently operating at approximately 65% to 70% 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. *
The second adjacent facility consists of approximately 1,200 square feet of
office space utilized by the Company's Engineering Department. This lease
expires March 31, 2000 and has no formal option to extend. This property is
standard commercial office space and the Company does not anticipate any
difficulty in retaining this space after the formal initial lease expires.*
ITEM 3. LEGAL PROCEEDINGS.
------------------
During October 1997, a complaint of Discrimination under Nevada Revised
Statutes 613.330 was filed against the Company with the Nevada Equal Rights
Commission by a former employee. The complaint claimed sexual harassment and
retaliatory termination and sought unspecified monetary relief. The Company
denied this allegation and filed a complete response to the charge with the
Equal Rights Commission. During 1998, upon advise of counsel, and without any
admission of fault or guilt, the Company elected to settle this claim without a
formal hearing before the Equal Rights Commission. As a condition of the
settlement, the Company received a formal Release of Claims and Covenant Not To
Sue from the plaintiff. The total cost of this settlement, including legal fees,
was approximately $31,000.
At January 2, 1999, there were no other material legal proceedings pending.
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 January 2, 1999.
EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the executive officers of the Company who are not
also directors of the Company is set forth below:
Jon B. Presnell, age 48, was promoted to the position of Vice-President and
General Manager of Custom Products for the Company in October 1993. In May 1998,
Mr. Presnell's title was changed to Vice-President and Chief Operating Officer.
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.
Sally B. Chapman, age 43, re-joined the Company in May 1998, as Controller.
In July 1998, Ms. Chapman was promoted to the position of Chief Financial
Officer and Corporate Secretary. Ms. Chapman has twenty years experience as an
accountant and chief financial officer in various industries and was previously
employed as Accounting Manager for Hytek from June 1995 to June 1996. From 1997
until April 1998 Ms. Chapman was Chief Financial Officer for a paper
manufacturing and distribution company. From 1990 through 1994 Ms. Chapman was
Controller for Sun Bird Security Systems, a security systems and service
provider.
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 Management's Discussion and Analysis 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
a number of risks and uncertainties, including the risk factors set forth in
"Factors Affecting Future Results" below and elsewhere in this Report. 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, except as
required by law.
RESULTS OF OPERATIONS
Net sales in 1998 were $12,533,000, a 39% increase from 1997 net revenues
of $9,020,000. The increase in net sales is primarily attributable to increased
shipments to Chesapeake Sciences Corp. ("Chesapeake"), the Company's largest
<PAGE>
customer. Shipments to Chesapeake increased approximately $3.2 million from the
prior year and represented 64% of the Company's net revenues in 1998 as compared
to 53% in 1997. During 1998, approximately 71% of the Company's net sales were
derived from sales of products for commercial and industrial uses (as compared
to 64% in 1997) and approximately 29% were derived from sales for military,
aerospace or government applications (as compared to 36% in 1997).
Cost of sales was $8,337,000, or 67% of net revenues in 1998, as compared
to $5,740,000, or 64% of net revenues in 1998. The increase in dollar amount is
the result of the higher volume of products shipped in 1998. The increase in
cost of sales as a percentage of net revenues is primarily the result of an
increased cost of direct labor over the prior year. A "tight" labor market in
the local area contributed to this cost increase.
Engineering and development expenses were $945,000 in 1998, or 8% of net
revenues, as compared to $769,000, or 9% of net revenues, in 1997. The increase
in these expenses in 1998 was the result of increased staffing levels required
to support new customer programs and to increase efforts on research and
development.
Selling, general and administrative expenses were $1,149,000, or 9% of net
revenues, in 1998, as compared to $826,000, or 9% of net revenues, in 1997. This
increase in dollar amount is attributable to increased compensation costs
resulting from additions to personnel and salary increases, together with
increases in sales commission expense, travel expenses, legal expenses and
investor relations expenses. Revenues generated from Chesapeake are not subject
to sales commission expense.
Interest income was $92,000 for 1998, as compared to $41,000 in 1997,
reflecting higher balances in the Company's interest bearing accounts during
1998. The Company had interest expense of $35,000 in 1998 as compared to $8,000
interest expense in 1997. The interest expense incurred in 1998 and 1997 results
from loan and capital lease obligations utilized to finance new production
equipment.
In 1998, the Company recorded an income tax provision of $66,000 to cover
alternative minimum tax liabilities, as compared to an income tax provision of
$55,000 for 1997.
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 61% of these suppliers
have responded to this survey and all respondents are anticipating timely Year
2000 compliance. The Company anticipates that its supplier survey will be
complete by June 30, 1999.
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 an effective program in place to
resolve the Year 2000 issue in a timely manner. In the event that the Company
and its third parties do not complete all additional Year 2000 efforts 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 in
the event it does not successfully complete all phases of its Year 2000 efforts.
The Company plans to evaluate the status of its progress in June 1999 and
determine if such a plan is necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income". The Statement established new rules for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. Management of the Company does not
believe this statement has had any material impact on the financial statements
of the Company.
Also in 1997, the Financial Accounting Standards Board issued Statement No.
131. "Disclosures about Segments of an Enterprise and Related Information",
which supersedes FASB Statement No. 14. The new rules change the way that public
companies report information about operating segments in their annual financial
statements. This Statement is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not believe this statement has
had any material impact on the financial statements of the Company, as they
operate exclusively in the hybrid microcircuit industry as one segment, as
defined by the Statement.
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.
<PAGE>
The Company, historically, has been very dependent on a single large
customer, Chesapeake Sciences Corp., that accounted for 64% of the Company's
1998 net revenues. As recently announced, and as a result of current low market
prices for crude oil combined with a market "glut" on the crude oil supply side,
Chesapeake has placed their current orders with the Company, valued at
approximately $5 million, on an indefinite "hold status". Although no orders
have been cancelled at this point, it cannot be determined at this time when or
if shipments to Chesapeake will resume. The Company currently does not
anticipate any further shipments to Chesapeake for the remainder of 1999*. The
oil exploration market has a history of cyclical activity, and while the Company
believes that this market will eventually recover, there are no firm predictions
as to the timing of any recovery, or any guarantees that such a recovery will
take place. This recent change will have a large negative impact on revenues and
operating results for fiscal 1999. The Company currently estimates that 1999
revenues will be in the $6 to $7 million range.*
In addition to the negative impact of the current Chesapeake "hold status",
the Company has approximately $1,400,000 in raw material, work-in-process and
finished goods inventory for the Chesapeake program. While the Company has
certain rights to recover costs in the event of outright termination of these
orders, there is currently no assurance that all inventory costs can or would be
recovered. The potential for a write-down of inventory value exists in the event
of the future termination of these orders.
Further, the Company anticipates that gross margins will be reduced in 1999
from prior year levels as a result of spreading fixed costs over a smaller
revenue base.
The Company's current 1999 revenue estimate is based on a combination of
firm backlog and a forecast of various orders anticipated to "book" during the
first half of the year. In the event that forecast orders do not become firm
business, or are "booked" later in the year than anticipated, the 1999 estimated
revenue range could be subject to further downward revision.
During 1998, the Company realized 29% of its net revenues from government
or military/aerospace funded sources, a decrease from 36% in 1997. A significant
portion of this business is dependent on the Company maintaining its MIL-PRF-
38534 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. The Company has recently undergone a government audit in regard to
this certification and does not anticipate any negative change in its status.*
The positive side of the military/aerospace and government market is the
current dialog and media reports of proposed increases in U. S. defense spending
for the future. While such increases are only proposed at this time, it is
encouraging for the future that both Congress and the Executive branch appear to
agree in this regard.
The Company is currently dependent on the custom product market for a
substantial majority of its revenue. Custom products accounted for 96% of total
revenues in both 1998 and 1997. This market is generally more volatile than the
standard product market, requiring longer product lead time and greater
investment in product design and manufacturing in advance of shipment and
payment. In addition, the high concentration in the custom market requires
<PAGE>
significant investment in inventories, which could be at financial risk in the
event of a major customer cancellation. 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 continuing healthy state of the economy still supports a heavy demand
for skilled employees. The Company's ability to meet varying demand and to
develop new products that contribute to future sales growth is dependent upon
the attraction and retention of qualified employees, for whom there is strong
demand. Any failure of the Company to attract and retain qualified personnel
could have a material adverse effect on the Company's results of operations and
financial condition. At this juncture the Company has not laid off any of its
technical staff as these employees are essential to our efforts to enter new
markets and capture new business.
The Company is dependent on certain key suppliers of raw materials. See
"Manufacturing" in Part I, Item 1 hereof. 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 1998, total assets increased by $985,000 and the net effect of
changes in current assets and current liabilities resulted in a net working
capital increase of $1,749,000.
The Company had $2,637,000 in cash and cash equivalents at January 2, 1999,
as compared to $1,190,000 at the 1997 fiscal year end. This increase is the net
result of $2,089,000 generated by operating activities (primarily net income),
and $32,000 proceeds from the issuance of common stock to employees and
directors, partially offset by $517,000 used for the purchase of capital
equipment and $157,000 used for principal payments on capital lease obligations
and long-term debt. The Company anticipates reduced cash flow during 1999 as a
result of the Chesapeake "hold" situation.
Accounts receivable decreased during 1998 to $1,918,000 at January 2, 1999,
as compared to $2,514,000 at the 1997 fiscal year end. The primary reason for
this decrease was a significantly lower level of shipments during the fourth
quarter of 1998 as compared to the prior year fourth quarter due to a
rescheduling of shipments by Chesapeake Sciences Corp., the Company's largest
customer. At January 2, 1999, accounts in excess of 60 days totaled 25% of total
receivables, as compared to 15% at January 3, 1998. A majority of this amount
relates to the Company's largest customer and was subsequently collected.
Total inventories remained basically constant at $2,482,000 at January 2,
1999 as compared to $2,581,000 at January 3, 1998. See Note 2 of Notes to
Financial Statements for a comparison of inventory components. As noted above, a
significant portion of the inventory relates to the Chesapeake program and
carries the risk of potential future write-down.
<PAGE>
Property, plant and equipment, net of accumulated depreciation and
amortization, increased by $243,000 during 1998 as a result of additions to
machinery and equipment during the year of $516,000, partially offset by fiscal
1998 depreciation and amortization of $273,000.
Accounts payable were $312,000 at January 2, 1999 as compared to $1,308,000
at 1997 fiscal year end. This significant decrease results from a reduction in
raw material purchases during the fourth quarter of 1998 as a result of
Chesapeake recheduling, combined with a faster vendor payment cycle during the
year.
Accrued employee compensation and benefits increased by $54,000 to $404,000
from the prior fiscal year end. This increase results from increased year-end
employment levels and profit sharing accruals. At January 2, 1999, $225,000 had
been accrued for the employee profit sharing plan as compared to $200,000 at
January 3, 1998.
There were no customer prepayments at January 2, 1999, as compared to
$28,000 at January 3, 1998. This decrease is the result of product shipments
during the year against the prepaid customer orders.
Accrued warranty, commissions and other accrued liabilities were $194,000
at January 2, 1999 as compared to $207,000 at January 3, 1998. This small
reduction is primarily attributable to lower accrued sales commissions.
In December 1997, the Company signed a Promissory Note with SierraWest Bank
in the amount of $145,000 for the purpose of buying additional production
equipment. This note bears an annual interest rate of 9.50% and has a term of
three years. The balance on this note at January 2, 1999 was $101,000. This note
is secured by the related equipment. The Company also has capital lease
obligations with SierraWest Bank totaling $93,000, which are secured by the
related equipment. The current portion of these long-term obligations is
$102,000 at January 2, 1999. The remaining portion, $91,000, is classified as
long-term debt.
The Company recognized federal income tax expense during 1998 of $66,000,
primarily to satisfy alternative minimum tax liabilities. 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.
At January 3, 1998, the Company had long-term debt of $91,000 outstanding
under its Promissory Note and capital lease obligations as described above.
Further, as of October 23, 1998, the Company renewed its line of credit with
SierraWest Bank. At that time, the line of credit was increased by $600,000 to a
total of $1,000,000. This line of credit is for a term of 18 months, expiring in
May 2000, and bears interest at the prime rate. At January 2, 1999, 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 1999, together with its line of credit, will provide sufficient cash to
meet operating needs without additional financing activity through 1999. *
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.
<PAGE>
FUTURE OUTLOOK
During 1998, the Company achieved record levels of revenue and profits for
the current decade. Unfortunately, the outlook for the ensuing year or more is
not as bright.
As previously announced, in February of this year, Chesapeake Sciences
Corp. placed all current orders on an indefinite "hold status" as a result of
the depressed situation in the world's oil market. Low oil prices combined with
a supply side glut have made further marine oil exploration unfeasible for the
present time. Primary exploration companies are docking their boats and
curtailing operations. In addition, new exploration vessels planned for the
future have been put on hold for indefinite periods or outright cancelled. While
the oil exploration market has a history of cycles, at the present time there is
no firm expectation as to when this situation may reverse. The net effect on
Hytek for the ensuing year is a significant reduction in anticipated revenues
and depressed operating results. The Company is currently predicting 1999
revenues to be in the range of $6 to $7 million and result in a break-even or
possible loss for the year.*
While the Company has taken certain cost reduction measures in response to
the decline in the oil exploration market, we have retained a solid
technological base that we believe provides the key to unlocking further
opportunities in other areas. Subsequent to year-end, Hytek has received an
order for an implantable medical device and is currently in the process of
qualifying circuits for another potential medical customer. We believe there may
be significant opportunities for future growth in the medical device and
instrumentation market.* With health care an ever-growing portion of the
domestic economy, the Company believes this is an area in which to concentrate
our efforts in an attempt to expand and broaden our customer base.
The military/aerospace market continues to be an important part of the
Company's future. While there was only minor growth in this area during 1998,
the prospects for the future look brighter.* Current media reports indicate a
favorable attitude in Washington D. C. for increased defense spending in the
future. The Company will make every effort to be a participant in any resulting
growth opportunities.
While the outlook for the next one or two years currently appears to be a
decline from previous levels, we believe that through concentrated effort the
Company can broaden its base and become less reliant on one large customer in
the future.*
ITEM 7. FINANCIAL STATEMENTS
--------------------
The financial statements of the Company (including the notes thereto) at
January 2, 1999 and January 3, 1998 and for the years then ended, and the report
of independent auditors thereon, are included herein on pages F- 3 through F-21
of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
Not applicable.
<PAGE>
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 "Election of Directors - Nominees for Director" in the Company's Proxy
Statement and is hereby incorporated herein by reference.
Information regarding the executive officers of the Company who are not
also a directors 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 "Election of Directors
- - Section 16(a) 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 headings "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.
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 January 2, 1999.
<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, January 2, 1999
and January 3, 1998 ................................................... F-3
Statement of Income for the Years ended
January 2, 1999 and January 3, 1998 .....................................F-4
Statement of Shareholders' Equity for the
Years ended January 2, 1999 and January 3, 1998 .........................F-5
Statement of Cash Flows for the Years Ended
January 2, 1999 and January 3, 1998 .....................................F-6
Notes to Financial Statements ...............................................F-7
Report of Independent Auditors ............................................ F-21
Consent of Independent Auditors ........................................... F-22
<PAGE>
<TABLE>
HYTEK MICROSYSTEMS, INC.
Selected Quarterly Financial Data (unaudited)
(In thousands, except per share data)
------------------------------------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------------------------------------
FISCAL 1998 FISCAL 1997
------------------------------------------------ ----------------------------------------------
Jan. 2 Oct. 3 Jul. 4 Apr. 4 Jan. 3 Sept. 27 Jun. 28 Mar. 29
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 2,230 $ 3,026 $ 3,690 $ 3,587 $ 3,205 $ 2,047 $ 2,181 $ 1,587
Gross profit $ 370 $ 1,094 $ 1,325 $ 1,407 $ 1,476 $ 659 $ 701 $ 443
Net income (loss) $ (169) $ 516 $ 827 $ 918 $ 950 $ 281 $ 335 $ 95
Net income (loss)
per share - basic $ (0.06) $ 0.17 $ 0.28 $ 0.31 $ 0.32 $ 0.09 $ 0.12 $ 0.03
Net income (loss)
per share - diluted $ (0.05) $ 0.16 $ 0.26 $ 0.29 $ 0.31 $ 0.09 $ 0.11 $ 0.03
Market price range per share
High $ 4.25 $ 4.75 $ 5.06 $ 3.75 $ 2.38 $ 2.44 $ 1.75 $ 2.69
Low $ 2.38 $ 3.38 $ 3.75 $ 1.94 $ 1.88 $ 1.63 $ 1.19 $ 1.63
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From March 26, 1992 through July 24, 1998, the Company's Common Stock was traded
on the OTC Bulletin Board. Since July 27, 1998 Hytek's Common Stock has been
quoted and traded on the NASDAQ Small Cap Market. 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 mark-ups, mark-downs or commissions and may not represent actual
transactions.
As of March 1, 1999, there were approximately 201 holders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock and has no
intentions of paying cash dividends in the foreseeable future. Per the terms of
its loan agreement with SierraWest Bank, the Company is prohibited from paying
cash dividends at this time.
<PAGE>
<TABLE>
HYTEK MICROSYSTEMS, INC.
Balance Sheet
January 2, 1999 and January 3, 1998
1998 1997
----------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,637,182 $ 1,189,519
Trade accounts receivable, net of allowance for doubtful
accounts of $50,000 in 1998 and 1997 1,918,265 2,513,668
Inventories 2,481,707 2,581,389
Prepaid expenses and deposits 38,932 50,035
----------------------------------------
Total current assets 7,076,086 6,334,611
Deferred income taxes 200,000 200,000
Plant and equipment, at cost, less accumulated depreciation and
amortization 999,027 755,845
----------------------------------------
Total assets $ 8,275,113 $ 7,290,456
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 312,430 $ 1,308,335
Accrued employee compensation and benefits 404,284 349,725
Accrued warranty, commissions and other 193,509 206,569
Customer deposits - 28,464
Current portion of long-term debt 48,313 43,951
Current obligations under capital leases 53,850 82,752
----------------------------------------
Total current liabilities 1,012,386 2,019,796
Long-term debt, less current portion 52,736 101,049
Long-term obligations under capital leases 38,709 123,041
Commitments and contingencies
Shareholders' equity:
Common stock, no par value:
Authorized shares - 7,500,000
Issued and outstanding shares - 3,039,758 at January 2, 1999
and 2,941,424 at January 3, 1998 5,007,093 4,974,676
Retained earnings 2,164,189 71,894
----------------------------------------
Total shareholders' equity 7,171,282 5,046,570
----------------------------------------
Total liabilities and shareholders' equity $ 8,275,113 $ 7,290,456
========================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
HYTEK MICROSYSTEMS, INC.
Statement of Income
Years ended January 2, 1999 and January 3, 1998
1998 1997
----------------------------------------
<S> <C> <C>
Net sales $12,533,045 $ 9,019,977
Cost of sales 8,336,635 5,740,404
Engineering and development 945,312 769,277
Selling, general and
administrative expenses 1,149,194 825,972
----------------------------------------
10,431,141 7,335,653
----------------------------------------
Operating income 2,101,904 1,684,324
Interest income, net 56,826 32,353
----------------------------------------
Income before provision
for income taxes 2,158,730 1,716,677
Income tax provision 66,435 55,000
----------------------------------------
Net income $ 2,092,295 $ 1,661,677
========================================
Basic earnings per share $ 0.70 $ 0.56
========================================
Diluted earnings per share $ 0.66 $ 0.54
========================================
Shares used in calculating
basic earnings per share 3,004,721 2,941,241
========================================
Shares used in calculating
diluted earnings per share 3,159,724 3,086,743
========================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
HYTEK MICROSYSTEMS, INC.
Statement of Shareholders' Equity
Years ended January 2, 1999 and January 3, 1998
Common Stock
-------------------------------
Retained
Earnings
(Accumulated
Shares Amount Deficit) Total
--------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Balance at December 28, 1996 2,933,091 $ 4,962,677 $ (1,589,783) $ 3,372,894
Net income - - 1,661,677 1,661,677
Issuance of stock 8,333 11,999 - 11,999
--------------- --------------- ------------------ -----------------
Balance at January 3, 1998 2,941,424 4,974,676 71,894 5,046,570
Net income - - 2,092,295 2,092,295
Issuance of stock 98,334 32,417 - 32,417
--------------- --------------- ------------------ -----------------
Balance at January 2, 1999 3,039,758 $ 5,007,093 $ 2,164,189 $ 7,171,282
=============== =============== ================== =================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
HYTEK MICROSYSTEMS, INC.
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years ended January 2, 1999 and January 3, 1998
1998 1997
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,092,295 $ 1,661,677
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 207,747 90,714
Amortization 65,660 44,535
Gain on disposal of equipment (200) -
Changes in operating assets and liabilities:
Trade accounts receivable, net 595,403 (1,387,851)
Inventories 99,682 (1,312,508)
Prepaid expenses and deposits 11,103 (7,532)
Accounts payable (995,905) 1,039,873
Accrued employee compensation and benefits 54,559 227
Accrued warranty, commissions and other (13,060) 37,193
Customer deposits (28,464) (143,616)
------------------------------------
Net cash provided by operating activities 2,088,820 22,712
INVESTING ACTIVITIES
Purchases of equipment (516,589) (362,505)
Proceeds from sale of equipment 200 -
------------------------------------
Net cash used in investing activities (516,389) (362,505)
FINANCING ACTIVITIES
Proceeds from borrowings on long-term debt - 145,000
Principal payments on long-term debt (43,951) -
Principal payments on capital lease obligations (113,234) (54,403)
Proceeds from issuance of common stock 32,417 11,999
------------------------------------
Net cash provided by (used in) financing activities (124,768) 102,596
------------------------------------
Net increase (decrease) in cash and cash equivalents 1,447,663 (237,197)
Cash and cash equivalents at beginning of year 1,189,519 1,426,716
------------------------------------
Cash and cash equivalents at end of year $ 2,637,182 $ 1,189,519
====================================
</TABLE>
See accompanying notes.
<PAGE>
HYTEK MICROSYSTEMS, INC.
Notes to Financial Statements
Years ended January 2, 1999 and January 3, 1998
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 oil exploration, military, satellite systems,
industrial electronic system, opto-electronics and automatic test equipment
markets. The Company markets its products through its own sales staff and
through independent sales representatives.
BASIS OF PRESENTATION
The Company operates under a 52/53 week fiscal year, with the year end being the
Saturday nearest December 31st. The year ended January 2, 1999 ("fiscal 1998")
was a 52-week year, whereas the year ended January 3, 1998 ("fiscal 1997") was a
53-week year.
CONCENTRATION OF CREDIT RISK (Note 11)
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 fiscal 1998, the Company had sales to Chesapeake Sciences Corporation and
TRW, Inc. that accounted for 64% and 6%, respectively, of net sales. In fiscal
1997, sales to these two companies accounted for 53% and 15%, respectively, of
net sales. 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.
<PAGE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and money market funds with original
maturities of less than 90 days. The fair value of the Company's financial
instruments approximated their carrying value at January 2, 1999 and January 3,
1998. The Company maintains the majority of its cash and cash equivalents in one
financial institution.
During fiscal 1997, the Company entered into non-cash investing activities
whereby machinery and equipment acquisitions were capitalized under capital
leases in the amount of $158,226. During fiscal 1998 and 1997, the Company paid
income taxes of $45,000 and $55,000, respectively, and interest of $35,000 and
$8,000, respectively.
INVENTORIES (Note 11)
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 January 2, 1999 and January 3, 1998 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.
REVENUE RECOGNITION
Sales are recorded by the Company upon shipment of the product, net of estimated
provisions for warranty and estimated returns.
<PAGE>
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 Notes 6 and 7).
EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No. 128,
"Earnings per Share". This Statement establishes standards for computing and
presenting earnings per share (EPS) and applies to entities that are publicly
held. The Statement simplifies the standards for computing EPS contained in
Accounting Principles Board Opinion No. 15 "Earnings Per Share". This Statement
replaces the presentation of primary and fully diluted EPS under APB No. 15 with
a presentation of basic and diluted EPS. The Company adopted the provisions of
this Statement during the year ended January 3, 1998.
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. During the years ended January 2, 1999 and January 3, 1998, such
costs amounted to approximately $236,000 and $115,000, respectively.
<PAGE>
PRODUCT WARRANTY COSTS
The Company has provided a liability for estimated future product warranty costs
based upon historical experience and anticipated warranty costs.
ADVERTISING COSTS
The Company expenses the costs of all advertising campaigns and promotions as
they are incurred. Total advertising expense for the years ended January 2, 1999
and January 3, 1998 amounted to approximately $26,000 and $27,000, respectively,
and is included in selling, general and administrative expenses on the
accompanying statement of income.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company's comprehensive
net income was the same as its net income for fiscal years 1998 and 1997.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 superseded Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise".
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 did not affect the Company's results of
operations or financial position, and did not affect the disclosure of segment
information.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from those estimates.
<PAGE>
2. INVENTORIES (Note 11)
---------------------
Inventories consist of the following:
<TABLE>
1998 1997
----------------------------------------
<S> <C> <C>
Finished goods $ 164,268 $ 32,057
Work-in-process 1,031,896 1,287,720
Raw materials 1,285,543 1,261,612
----------------------------------------
$ 2,481,707 $ 2,581,389
========================================
</TABLE>
3. PLANT AND EQUIPMENT
-------------------
Plant and equipment consists of the following:
<TABLE>
1998 1997
----------------------------------------
<S> <C> <C>
Leasehold improvements $ 519,957 $ 514,775
Machinery and equipment 3,370,279 2,868,654
Furniture and fixtures 25,888 18,274
----------------------------------------
3,916,124 3,401,703
Less accumulated depreciation
and amortization (2,917,097) (2,645,858)
----------------------------------------
$ 999,027 $ 755,845
========================================
</TABLE>
4. INCOME TAXES
------------
The significant components of the Company's deferred tax assets are as follows:
<TABLE>
1998 1997
----------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ - $ 834,534
Credit carryforwards 134,100 264,786
Other 215,748 155,441
----------------------------------------
Total deferred tax assets 349,848 1,254,761
Valuation allowance (149,848) (1,054,761)
----------------------------------------
Net deferred tax assets $ 200,000 $ 200,000
========================================
</TABLE>
The valuation allowance as of January 3, 1998 was approximately $1,055,000,
resulting in a net decrease in the allowance of approximately $905,000 for the
year ended January 2, 1999.
<PAGE>
The provision (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:
<TABLE>
1998 1997
----------------------------------------
<S> <C> <C>
Computed expected tax $ 744,491 $ 584,000
Nondeductible expenses 2,152 6,000
Benefit of operating loss carryforward (656,230) (590,000)
Benefit of AMT tax credit (47,675) -
State taxes, net 23,697 -
Other - 55,000
----------------------------------------
$ 66,435 $ 55,000
========================================
</TABLE>
As of January 2, 1999, the Company had tax credit carryforwards for Federal
income tax purposes of approximately $134,000. These carryforwards will not
expire.
5. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
1998 1997
---------------------------------------
<S> <C> <C>
Numerator:
Net income $ 2,092,295 $ 1,661,677
Denominator:
Denominator for basic earnings per
share--weighted average shares 3,004,721 2,941,241
Effect of dilutive securities:
Employee stock options 155,003 145,502
---------------------------------------
Denominator for diluted earnings
per share--adjusted weighted average
shares and assumed conversions 3,159,724 3,086,743
=======================================
Basic earnings per share $ 0.70 $ 0.56
=======================================
Diluted earnings per share $ 0.66 $ 0.54
---------------- ----------------
</TABLE>
<PAGE>
Options to purchase 45,000 shares of common stock at prices ranging from $4.88
to $5.00 per share were outstanding during fiscal 1998, but these options were
not included in the computation of diluted earnings per share because such
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
6. STOCK OPTION PLANS
------------------
1991 AND 1981 STOCK OPTION PLANS
In February 1997, 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
376,175 shares of common stock. The 1991 Plan expires in May 2001 and 57,842
shares were available for future grant as of January 2, 1999. The Company had a
1981 Incentive Stock Option Plan (the "1981 Plan") that expired in August 1991
and there were outstanding options to purchase 60,000 shares under this Plan at
January 2, 1999. Outstanding stock options under the two plans are exercisable
cumulatively in annual increments that range between one-third and one-fourth
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 certain 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.
<PAGE>
A summary of the Company's 1981 and 1991 Plans' stock option activity and
related information for fiscal 1998 and 1997 are as follows:
<TABLE>
1998 1997
------------------------------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 258,334 $ 1.40 233,334 $ 1.30
Granted 55,000 4.49 50,000 1.88
Exercised (68,334) .39 (8,333) 1.44
Canceled (20,000) 2.38 (16,667) 1.44
------------------------------------------------------------------------
Outstanding-end of year 225,000 $ 2.37 258,334 $ 1.40
========================================================================
Exercisable at end of year 102,500 $ 1.28 148,334 $ .70
Weighted-average fair value of
options granted during the year $ 3.03 $ 1.31
</TABLE>
Exercise prices for options outstanding under the two Plans as of January 2,
1999 ranged from $.38 to $5.00. The weighted-average remaining contractual life
of those options is 3.0 years. A summary of the outstanding and exercisable
options at January 2, 1999, segregated by exercise price ranges, is as follows:
<TABLE>
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 60,000 $ .38 1.8 60,000 $ .38
$1.63 - $2.13 50,000 1.88 3.5 12,500 1.88
$2.30 - $3.07 70,000 2.76 2.0 30,000 2.84
$4.88 - $5.00 45,000 4.97 4.4 - -
--------------- ---------------
225,000 $2.37 3.0 102,500 $1.28
=============== ===============
</TABLE>
<PAGE>
1991 DIRECTORS' STOCK OPTION PLAN
Under the 1991 Directors' Stock Option Plan (the "Directors' Plan"), 200,000
shares of the Company's common stock had been reserved for issuance as of
January 2, 1999, of which options to purchase 100,000 shares at per share
exercise prices that range from $.19 to $2.69 had been granted (80,000 shares
had been granted as January 3, 1998). The Directors' Plan provides for the
automatic grant of an option to purchase 15,000 shares upon first becoming an
outside director (a "First Option"). In September 1997, the Directors' Plan was
amended whereby non-employee directors who serve on the Board of Directors of
the Company for five years or more receive an automatic grant of 5,000 shares (a
"Subsequent Option") on the last business day of each fiscal year at an exercise
price equaling the fair value of the Company's stock on such date. At January 2,
1999 and January 3, 1998, options to purchase an aggregate of 20,000 shares
(40,000 shares total) were granted to the four outside directors under this
amendment. First Options granted under the Directors' Plan vest on the first
anniversary of the grant date and become exercisable cumulatively on the first,
second and third anniversaries of the grant date. Subsequent Options vest and
become fully exercisable on the first anniversary of the grant date. The
Directors' Plan expires February 2001.
A summary of the Company's Directors' Plan stock option activity and related
information for fiscal 1998 and 1997 are as follows:
<TABLE>
1998 1997
------------------------------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 65,000 $ 0.83 45,000 $ 0.19
Granted 20,000 2.69 20,000 2.28
Exercised (30,000) 0.19 - -
------------------------------------------------------------------------
Outstanding-end of year 55,000 $ 1.86 65,000 $ 0.83
========================================================================
Exercisable at end of year 35,000 $ 1.38 45,000 $ 0.19
Weighted-average fair value of
options granted during the year $ 1.96 $ 1.70
</TABLE>
<PAGE>
Exercise prices per share for options outstanding as of January 2, 1999 ranged
from $.19 to $2.69. The weighted-average remaining contractual life of those
options is 7.5 years. A summary of the outstanding and exercisable directors'
options at January 2, 1999, segregated by exercise price ranges, is as follows:
<TABLE>
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>
$0.19 15,000 $0.19 2.1 15,000 $0.19
$2.28 20,000 2.28 9.0 20,000 2.28
$2.69 20,000 2.69 10.0 - -
--------------- ---------------
55,000 $1.86 7.5 35,000 $1.38
=============== ===============
</TABLE>
7. 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 6 above.
Pro forma information regarding net income and earnings per share is required by
SFAS 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 1998
and 1997, respectively: risk-free interest rates of 4.8% and 5.6%, dividend
yields of 0% and 0%; volatility factors of the expected market price of the
Company's common stock of .863 and .889, and a weighted-average expected life of
the options of 4.7 and 4.6 years.
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
<PAGE>
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 pro forma information as follows:
<TABLE>
1998 1997
----------------------------------------
<S> <C> <C>
Net income as reported $ 2,092,295 $ 1,661,677
========================================
Pro forma net income $ 2,039,444 $ 1,640,060
========================================
Earnings per share as reported:
Basic $ 0.70 $ 0.56
========================================
Diluted $ 0.66 $ 0.54
========================================
Pro forma earnings per share:
Basic $ 0.68 $ 0.56
========================================
Diluted $ 0.65 $ 0.53
========================================
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to December
15, 1994, its pro forma effect will not be fully reflected until fiscal 2000.
8. 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 January 2, 1999 and January 3, 1998, the Board authorized
$225,000 and $200,000, respectively, in profit sharing distributions to
employees, which amount is included in accrued employee compensation and
benefits in the accompanying balance sheet.
<PAGE>
9. LONG-TERM DEBT
--------------
In October 1998, the Company renewed an existing revolving business loan
agreement (the "Loan Agreement") with a bank under which it may borrow up to
$1,000,000 at the bank's prime rate (aggregating 7.75% at January 2, 1999).
Interest is payable monthly up to the maturity date, May 15, 2000, at which time
all unpaid principal and interest become due. The Loan Agreement is
collateralized by the Company's inventory and accounts receivable. The Loan
Agreement imposes certain limitations on the payment of dividends and incurrence
of additional indebtedness. At January 2, 1999, the Company had no outstanding
borrowings under this Loan Agreement.
In December 1997, the Company entered into a $145,000 promissory note (the
"Note") with the same bank for the purpose of acquiring equipment. Interest on
the Note accrues at a rate of 9.5%. Interest and principal are payable in
monthly installments of $4,654, with a final payment due in December 2000. The
Note is collateralized by a piece of equipment with a net book value of
approximately $106,000. The Note imposes certain limitations on the incurrence
of additional indebtedness. At January 2, 1999, the Company had an outstanding
balance of $101,049 under this Note.
Following are the scheduled principal reductions of the Note by fiscal year of
the Company:
1999 $ 48,313
2000 52,736
-------------------
$ 101,049
===================
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
LEASES
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.
Plant and equipment includes assets under capital leases amounting to $121,307
(net of accumulated amortization of $36,919) and $220,958 (net of accumulated
amortization of $39,237) at January 2, 1999 and January 3, 1998, respectively.
These capital leases are secured by the related equipment.
<PAGE>
The aggregate future minimum lease payments under non-cancelable capital and
operating leases are as follows at January 2, 1999:
<TABLE>
Capital Operating Leases
Leases
---------------------------------------
<S> <C> <C>
1999 $ 59,823 $ 180,000
2000 39,992 174,000
2001 - 175,000
2002 - 180,000
2003 - 186,000
Thereafter - 288,000
---------------------------------------
Total minimum payments $99,815 $ 1,183,000
===================
Less amount representing interest (7,256)
--------------------
Present value of minimum lease payments 92,559
Less current obligations (53,850)
====================
Long-term obligations $ 38,709
====================
</TABLE>
The Company's total rental expense charged to operations amounted to
approximately $287,000 and $281,000 in fiscal 1998 and 1997, respectively.
LEGAL PROCEEDINGS
In the course of business, the Company occasionally receives inquiries
relating to various legal matters. In the opinion of management, any liability
resulting from such inquiries will not have a material adverse effect on the
Company's financial position or results of operations.
11. SUBSEQUENT EVENT
----------------
On February 25, 1999, the Company was notified by its largest customer,
Chesapeake Sciences Corp., to place all open orders on an indefinite "hold"
status, citing continuing depressed crude oil prices and an over-abundance of
the world oil supply. Although no orders have been cancelled at this point, it
cannot be determined when or if shipments to Chesapeake will resume. The
Company currently does not anticipate any further shipments to Chesapeake for
the remainder of 1999. At January 2, 1999, approximately $1.4 million of the
Company's total inventory balance related to the Chesapeake program. While the
Company may have certain rights to recover costs in the event of an
<PAGE>
outright termination of these orders, there is currently no assurance that all
inventory costs can or will be recovered. The potential for a write-down of
inventory exists in the event of the future termination of these orders.
Management of the Company believes that a recovery of the world oil market is
likely, that orders with Chesapeake will resume, and that no reserve against the
related inventory is appropriate as of January 2, 1999.
<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. as of
January 2, 1999 and January 3, 1998, and the related statements of income,
shareholders' equity, 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
January 2, 1999 and January 3, 1998, 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
January 28, 1999, except for Note 11,
as to which the date is February 25, 1999
<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, 33-42836 and 333-27899) 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 January 28, 1999,
except for Note 11 as to which the date is February 25, 1999 with respect to the
financial statements of Hytek Microsystems, Inc.
/s/Ernst & Young LLP
Reno, Nevada
March 30, 1999
<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 19, 1999
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 Annual 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 or her 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 19, 1999
--------------------
Charles S. Byrne Executive Officer,
Director
/s/ Sally B. Chapman Chief Financial Officer March 19, 1999
--------------------
Sally B. Chapman (Principal financial and
accounting officer)
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert Boschert Director March 23, 1999
-------------------
Robert Boschert
/s/ Edward W. Moose Director March 23, 1999
-------------------
Edward W. Moose
/s/ Edward Y. Tang Director March 23, 1999
------------------
Edward Y. Tang
/s/ Shou-Chen Yih Director March 23, 1999
-----------------
Shou-Chen Yih
<PAGE>
HYTEK MICROSYSTEMS, INC.
Annual Report on Form 10-KSB
for the fiscal year ended January 2, 1999
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 Incorp-
oration filed June 28, 1988.
3.3 Composite Article of Incorporation, as amended
through June 28, 1998.
3.4 (9) Amended and Restated Bylaws, as amended
through July 27, 1992.
4.1 Reference Exhibits 3.1, 3.2, 3.3 and 3.4.
9.1 (4) Shareholders' Agreement dated as of April 9, 1990.
10.1a (8) (*) 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 (10) (*) 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 7, 1997.
10.3b (8) (*) Form of Agreement used under the 1991
Stock Option Plan.
(Footnotes at end of index)
<PAGE>
10.4 (12) (*) 1991 Directors' Stock Option Plan as amended
September 11, 1997, 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 (13) Line of Credit Agreement dated October 23,
1998 between Hytek Microsystems, Inc. and
SierraWest Bank.
10.9 Lease dated March 12, 1990 for the facility at
400 Hot Springs Road, Carson City, Nevada.
10.10 Fiscal 1998 Incentive Compensation Agreement
with Charles S. Byrne.
10.11 Fiscal 1998 Incentive Compensation Agreement
with Jonathan B. Presnell.
10.12 (12) Promissory Note and line of credit agreement
dated October 14, 1997 between Hytek Microsystems,
Inc. and SierraWest Bank.
13.1 President's Letter to Shareholders dated
April 2, 1999, which together with
this Form 10-KSB comprises the Registrant's
1998 Annual Report to Shareholders.
21.1 The Registrant has no subsidiaries.
23.1 Consent of Independent Auditors
(see page F- 22).
24.1 Power of Attorney (see page S-1).
27.1 Financial Data Schedule.
<PAGE>
Footnotes:
- ----------
(1) Incorporated by reference to Exhibit filed with the
Registration Statement on Form S-1 (File No. 2-82140).
(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.
(8) Incorporated by reference to Exhibit filed with the Quarterly
Report on Form 10-Q for the quarter ended September 26,
1992.
(9) Incorporated by reference to the Exhibit filed with the
Quarterly Report on Form 10-Q for the quarter ended
June 27, 1992.
(10) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-KSB for the year ended December 31, 1994.
(11) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-KSB for the year ended December 28, 1996.
(12) Incorporated by reference to Exhibit filed with the Quarterly
Report On Form 10-QSB for the quarter ended September 27,
1997.
(13) Incorporated by reference to the Exhibit filed with the
Quarterly Report on Form 10-QSB for the quarter ended
October 3, 1998.
(*) 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.
<PAGE>
Exhibit 3.3
COMPOSITE ARTICLES OF INCORPORATION
OF
HYTEK MICROSYSTEMS, INC.
A California Corporation
(As amended through June 28, 1988)
ONE: This corporation elects to be governed by all of the provisions
of the General Corporation Law effective January 1, 1977, not otherwise
applicable to it under Chapter 23 thereof.
TWO: The name of this corporation is HYTEK MICROSYSTEMS, INC.
THREE: The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business,
or the practice of a profession permitted to be incorporated by the California
Corporations Code.
FOUR: (a) This corporation is authorized to issue two classes of
shares to be designated respectively "Preferred Stock" and "Common Stock". The
number of shares of Preferred Stock authorized is 250,000. The number of shares
of Common Stock authorized is 7,500,000.
(b) The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is authorized to fix the number of shares
of any series of Preferred Stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges, and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
FIVE: (a) Limitation of Directors' Liability. The liability of the
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
(b) Indemnification of Corporate Agents. This corporation is
authorized to provide indemnification of agents of the corporation (as defined
in Section 317 of the California General Corporation Law), through bylaw
provisions, through agreements with its agents, by vote of its shareholders
or disinterested directors or otherwise, in excess of the indemnification
otherwise permitted by said Section 317 for said agents to the fullest extent
permissible under California law, subject only to the applicable limitations set
forth in Section 204 of the California General Corporation Law with respect to
actions for breach of duty to this corporation and its shareholders.
(c) Repeal or Modification. Any repeal or modification of this
Article FIVE or any provision hereof shall not adversely affect any right of
indemnification or limitation of liability of an agent of this corporation
relating to acts or omissions occurring prior to such repeal or modification.
<PAGE>
EXHIBIT 10.10
Incentive Compensation Agreement for Charles S. Byrne
for the Fiscal Year Ending January 2, 1999
Upon completion of the audit for the fiscal year 1998 and certification of the
Company's financial statements for the year, Hytek will pay the following
incentive to Charles S. Byrne based upon achievement of the following criteria:
<TABLE>
Criteria Maximum Incentive
- -------- -----------------
<S> <C>
1. Achieve 1998 original forecast pre-tax profit
of $2,542,000: $10,000
Achieve additional $458,000 pre-tax profit for
1998 (total $3,000,000): additional $5,000 $15,000
2. Achieve additional revenue over the 1998 forecast
($12,035K) of $3,000,000 payable in increments:
Additional $1,500,000 = $3,000
Additional $3,000,000 = $6,000 $6,000
3. Thorough additional efforts in working with the
financial community, achieve a year-end stock
price of $7.00 per share or greater. $6,000
-------
Total Potential Incentive $27,000
</TABLE>
Each criteria above is a separate item and will be awarded if such item is
achieved. This incentive program is authorized by the Compensation Committee of
the Board of Directors as of May 15, 1998, and is duly recorded in the minutes
of such meeting.
/s/ Charles S. Byrne
- --------------------
Secretary
<PAGE>
EXHIBIT 10.11
Incentive Compensation Agreement for Jon B. Presnell
for the Fiscal Year Ending January 2, 1999
Upon completion of the audit for the fiscal year 1998 and certification of the
Company's financial statements for the year, Hytek will pay the following
incentive to Jon B. Presnell based upon achievement of the following criteria:
<TABLE>
Criteria Maximum Incentive
- -------- -----------------
<S> <C>
1. Achieve 1998 forecast confident bookings
of $9,300,000. $2,500
2. Book an additional $5,000,000 in business over
the forecast confident bookings.
Payable in increments:
Additional $1,500,000 = $2,500
Additional $3,000,000 = $5,000
Additional $5,000,000 = $10,000 $10,000
3. Achieve 1998 forecast sales of $12,035,000. $5,000
4. Achieve 1998 forecast gross margin of
$4,597,000. $2,500
5. Achieve additional 1998 sales of $3,000,000.
Additional $1,500,000 = $2,000
Additional $3,000,000 = $4,000 $4,000
------
Total Potential Incentive $24,000
</TABLE>
Each criteria above is a separate item and will be awarded if such item is
achieved. This incentive program is authorized by the Compensation Committee of
the Board of Directors as of May 15, 1998, an is duly recorded in the minutes of
such meeting.
By: /s/ Charles S. Byrne
--------------------
Charles S. Byrne, C.E.O.
<PAGE>
EXHIBIT 13.1
Message To Shareholders
Dear Fellow Shareholders: April 2, 1999
1998 was another year of growth in earnings and revenues for our Company. This
growth was fueled by increasing customer demand during the year. To accommodate
this growth, the Company expanded its employee base and acquired additional
production equipment.
Unfortunately, and as previously announced, this trend will not be continuing
during 1999. In February 1999, Chesapeake Sciences Corp., the Company's largest
customer, placed all current orders on an "indefinite hold" status. As a result,
the Company expects a severe decline in revenues for 1999 and anticipates that
operating results will be essentially break-even. In addition, as a cost
reduction measure, the Company laid off 30 employees in February 1999, reducing
the work-force to 90 employees.
FINANCIAL PERFORMANCE
For the fourth quarter of 1998, Hytek reported a net loss of $169,000, or $0.06
per share, on lower than originally anticipated revenues of $2.2 million. This
compares with net income of $950,000, or $0.31 per share, on revenues of $3.2
million for the same period last year.
For the year, net income was $2.1 million, or $0.66 per share, on revenues of
$12.5 million, as compared to net income of $1.7 million, or $0.54 per share, on
revenues of $9.0 million for the prior year ended January 3, 1998. The 39%
increase in revenue over the prior year is primarily the result of an increased
level of shipments of geophysical exploration circuits to Chesapeake Sciences
Corp. that accounted for 64% of total revenues in 1998 as compared to 53% of
1997 revenues.
MARKETS AND CUSTOMERS
As noted above, the geophysical exploration market (Chesapeake Sciences Corp.)
represented the largest percentage of the Company's revenues during 1998, as has
been the case for the past several years. While there was significant growth in
this market during 1998, the current low price of crude oil combined with the
current "glut" in world-wide crude oil supplies has effectively halted new
exploration efforts, resulting in Chesapeake's recent action. While we are
unable to predict or forecast a reversal of the current slump in this market,
there is historically little doubt that this situation will ultimately reverse.
When that occurs, we believe that Hytek will be well positioned to participate
in the geophysical exploration market again.
During 1998, revenues related to military, aerospace or government-funded
programs accounted for approximately 29% of revenues as compared to 36% of
revenues during 1997. While lower as a percentage of total revenues in 1998,
this market sector had a small increase in absolute dollar revenue for the year
and resulted in several new customers, which bodes well for potential future
growth. We will continue to maintain an active and aggressive presence in this
market, particularly in light of the current potential for increases in U.S.
Government defense spending.
Further, during 1998, the Company began discussions, and provided prototype
circuits, to a manufacturer of implantable medical devices. We have subsequently
<PAGE>
received an initial production release for this device. In addition, we are
currently in the qualification process with a second medical market manufacturer
and anticipate production orders from this potential customer during the ensuing
year. The Company intends to concentrate a significant portion of its sales
efforts toward further penetration of the medical device and instrumentation
market.
TECHNOLOGY
Traditionally, the Company's business has been based on a single, proven
technology: thick-film substrate technology. During 1998, applications from new
military/aerospace customers brought a new technology into the fold: Low
Temperature Co-fired Ceramic substrates (LTCC). LTCC technology provides
advantages over thick-film technology in applications where higher circuit
density and complexity are critical to performance or required by customer
design criteria. This additional technology will allow the Company to pursue
opportunities that were previously beyond the reach of our thick-film
capabilities. The Company will continue to evaluate new and different
technologies in an effort to expand our ability to satisfy diversified customer
requirements.
FOCUS ON EXPANDING CUSTOMER AND PRODUCT BASE
As we pass from a year of growth to a year of decline in our largest market, we
must focus our energy and efforts on reducing our dependency on a single large
customer or market. Our sales staff will be concentrating on developing new
customers and any available resources will be allocated to this effort. In
addition, we will continue to explore other vehicles that could broaden our base
and enhance our position in the market, such as strategic alliances or
acquisition opportunities.
We sincerely appreciate the support of our shareholders and our customers and
thank our employees for their continued hard work, loyalty and commitment to the
Company. We will keep you advised of new developments and our progress over the
ensuing year.
Sincerely yours,
Charles S. (Chuck) Byrne
President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Balance Sheet at January 2, 1999; Statement of Income at January 2, 1999.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 2,637,182
<SECURITIES> 0
<RECEIVABLES> 1,968,265
<ALLOWANCES> 50,000
<INVENTORY> 2,481,707
<CURRENT-ASSETS> 7,076,086
<PP&E> 3,916,124
<DEPRECIATION> 2,917,097
<TOTAL-ASSETS> 8,275,113
<CURRENT-LIABILITIES> 1,012,386
<BONDS> 91,445
<COMMON> 5,007,093
0
0
<OTHER-SE> 2,164,189
<TOTAL-LIABILITY-AND-EQUITY> 8,275,113
<SALES> 12,529,270
<TOTAL-REVENUES> 12,533,045
<CGS> 8,336,635
<TOTAL-COSTS> 10,431,141
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (66,435)
<INCOME-PRETAX> 2,158,730
<INCOME-TAX> 66,435
<INCOME-CONTINUING> 2,092,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,092,295
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.66
</TABLE>
