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
For the fiscal year ended January 1, 2000, or
[ ] Transition report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
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: (775) 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 1, 2000
were: $5,215,000.
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 24, 2000) was approximately $28,300,000. 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 24, 2000, the issuer had outstanding 3,166,458 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 19, 2000 (the "Proxy Statement") are incorporated
by reference into Part III of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
PART I
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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 1999 decreased 58% from 1998 levels as the result of a major
order cancellation by the Company's largest customer. The Company had net loss
of $1,138,000 in 1999 as compared to net income of $2,092,000 during 1998. 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 84%
of the Company's net revenues in 1999 were derived from products designed and
manufactured to meet a particular customer's specifications. The remaining 16%
of net revenues in 1999 were derived from standard products designed by the
Company's engineering staff.
<PAGE>
During 1999, approximately 27% of the Company's revenues were derived from
commercial and industrial private sector programs as compared to approximately
71% in 1998. Sales to the military, aerospace and government sector accounted
for 63% of total revenues in 1999 and accounted for 29% of 1998 total revenues.
1999 sales to the military, aerospace and government sector were slightly down
in absolute dollars from 1998 levels.
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 and declined slightly in 1999. The Company continues
to pursue business in the military market and is actively seeking to expand its
customer base in this area.* 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 defense contractors who are
participating in this area and expects to continue to be an active participant
in this market.*
Segments of the commercial custom hybrid market have 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 recent years.
During 1999, the Company has continued to pursue opportunities in the
medical device and medical instrumentation markets and is currently producing
hybrid devices for a major medical instrument manufacturer. 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 and dropping back down to 84% in 1999.
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. During 1999, sales of TECC products more than doubled over
the prior year. Further, during 1995, the Company introduced its High Speed
Laser Diode Driver (HSLDD). The Company has subsequently introduced three
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 believes the market for these opto-electronic products offers
significant potential for growth and intends to devote additional effort and
resources to expanding its presence in this market.
<PAGE>
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
<PAGE>
utilizing Low Temperature Co-fired Ceramic (LTCC) substrates. This technology
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 84% of the Company's sales in
1999. 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 16% of the Company's sales in
1999. 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 1, 2000, the
Company's direct sales staff consisted of four employees operating from the
<PAGE>
Company's principal office in Carson City. In addition, at such date the Company
had eleven 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 and Class K (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 is certified to the
international quality standard ISO 9001.
Customers
During 1999, the Company's five largest customers accounted for 48 %
of the Company's net revenues. In 1999, Chesapeake Sciences Corp. and TRW, Inc.
accounted for 11% and 10% of net sales, respectively. In 1998, Chesapeake
Sciences Corp. accounted for 64% of the Company's net revenues.
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.
The thick-film hybrid manufacturing process begins with a blueprint, which,
in the case of a custom product, is produced by, or with the assistance of, the
customer. This blueprint is the basis for an engineering print that the Company
produces, which in turn serves to provide a set of artwork for each product. The
artwork consists of up to 20 photographic negatives, one for each layer of
imprint on the substrate described below. The artwork is then photographically
reduced and used to generate stainless steel screens, which are used in the
printing process.
<PAGE>
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.,
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
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
<PAGE>
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 has
maintained its technical engineering staff during 1999 in spite of adverse
business conditions.
During 1999 and 1998 the Company spent $853,000 and $945,000, respectively,
on its total engineering efforts. Of these amounts, approximately $171,000 and
$236,000 were spent on new product or process research and development in 1999
and 1998, respectively. All 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.
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
<PAGE>
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
remains small.
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.
Trademarks, Patents and Licenses
The Company, at this time, has one registered patent (No. 5,521,933) on its
Back-matched 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 1, 2000, the Company employed a total of 70 full-time
employees and 1 part-time employee, of whom 49 were in manufacturing, 4 were in
marketing and sales, 15 were in engineering and development and 3 were in
administration. The Company's success depends in part on its ability to attract
and retain skilled personnel, for whom there is strong demand. None of the
Company's employees are covered under a collective bargaining agreement, and the
Company has not experienced any labor strike or related work stoppage.
Government Contracts
During 1999, the Company derived approximately 63% of its total revenues
from military or 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.
During 1999, 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 40% 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. *
<PAGE>
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.
At January 1, 2000, there were no 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 1, 2000.
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 49, 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 45, 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 20 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 Four
Corner Paper, 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
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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.
<PAGE>
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 1999 were $5,215,000, a 58% decrease from 1998 net sales of
$12,533,000. The large decrease in net sales is directly attributable to a
production "hold" and subsequent cancellation of orders by Chesapeake Sciences
Corp. ("Chesapeake"), the Company's largest customer for the past several years.
Revenues from Chesapeake were approximately $557,000 in 1999 as compared to $8
million in 1998. During 1999, approximately 63% of the Company's net sales were
derived from sales of products to military, aerospace and government funded
agencies (as compared to 29% in 1998) and approximately 27% were derived from
sales for commercial or industrial applications (as compared to 71% in 1998).
Cost of sales was $4,620,000, or 89% of net revenues in 1999, as compared
to $8,337,000, or 67% of net revenues in 1998. The increase in cost of sales as
a percentage of net revenues is primarily the result of spreading fixed costs
over a significantly smaller revenue base.
Engineering and development expenses were $853,000 in 1999, or 16% of net
revenues, as compared to $945,000, or 8% of net revenues, in 1998. The increase
in these expenses as a percentage of net sales in 1999 was the result of
spreading these costs over a much smaller revenue base. During 1999, the Company
retained all of its engineering and technical staff as these resources are
essential for future growth.
Selling, general and administrative expenses were $1,050,000, or 20% of net
revenues, in 1999, as compared to $1,149,000, or 9% of net revenues, in 1998.
This decrease in dollar amount is primarily attributable to reductions in
supplies, recruiting and relocation and legal and data processing expenses.
Interest income was $182,000 for 1999, as compared to $92,000 in 1998, as a
result of interest payments from Chesapeake as specified in the "Final
<PAGE>
Settlement Agreement". The Company had interest expense of $12,000 in 1999 as
compared to $35,000 interest expense in 1998. The interest expense incurred in
1999 and 1998 results from loan and capital lease obligations utilized to
finance new production equipment.
In 1999, the Company had no federal income tax provision, as compared to an
income tax provision of $66,000 for 1998.
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. Software upgrades provided and installed by the supplier and the
Company's internal efforts on its over 40 workstations have been successful in
eliminating any internal Year 2000 problems as of the date of this filing.
In addition, the Company has not experienced any significant Year 2000
problems through its customers, suppliers or financial institutions.
The cost of the Company's preparations for Year 2000 computer readiness
have been approximately $40,000. All costs have been funded through operating
cash flow.
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.
In previous years the Company has been very dependent on a single large
customer, Chesapeake Sciences Corp. When Chesapeake placed its orders on hold
early in 1999, the Company began negotiations to recover its investment in
inventory and overhead costs associated with this program. The "Final Settlement
Agreement" executed by the Company and Chesapeake sets forth a schedule for
payments of principal and interest such that the Company should recover its
total investment by September, 2000. As of the date of this writing ( March 24,
2000) Chesapeake has made its scheduled principal payments, and is one month
behind on interest payments. The Company has not recorded the Final Settlement
Agreement amount. The Company records payments received as deferred revenue
until inventory is shipped, at which time the revenue is recognized. Any failure
of Chesapeake to meet its financial obligations under this agreement would have
a serious negative effect on the Company's operating results and financial
stability.
The Company's current 2000 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 2000 estimated
revenue range could be subject to further downward revision.
<PAGE>
During 1999, the Company realized 63% of its net revenues from government
or military/aerospace funded sources. 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 positive side of the military/aerospace and government market is that
current media reports indicate that the electronics sector of this market is
anticipated to remain stable and perhaps increase in the future.
The Company is currently dependent on the custom product market for a
substantial majority of its revenue. Custom products accounted for 84% of total
revenues in 1999. 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 significant
investment in inventories, which could be at financial risk in the event of a
major customer cancellation such as the Chesapeake cancellation in 1999.
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 Company's standard products accounted for 16% of net revenues in 1999.
This was a significant percentage and dollar increase over the prior year. Our
opto-electronic products, primarily Thermo-Electric Cooler Controllers (TECCs),
showed a significant gain in revenues. The Company intends to vigorously pursue
expansion in this market area through the use of sales, marketing and
engineering development resources. Should this strategy prove fruitless, this
expenditure would have a negative impact on operating results.
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. In spite of the significant decline in revenues in 1999,
the Company did not lay 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 1999, total assets decreased by $1,478,000 and the net effect of
changes in current assets and current liabilities resulted in a net working
capital decrease of $887,000.
<PAGE>
The Company had $2,515,000 in cash and cash equivalents at January 1, 2000
as compared to $2,637,000 at the 1998 fiscal year end. This decrease is the net
result of $52,000 generated by operating activities (primarily collection of
accounts receivable and depreciation, offset by net losses), $9,000 generated by
issuance of employee stock options, $29,000 used for the purchase of capital
equipment and $155,000 used for principal payments on capital lease obligations
and long-term debt.
Accounts receivable decreased during 1999 to $728,000 at January 1, 2000,
as compared to $1,918,000 at the 1998 fiscal year end. The primary reason for
this large decrease was a significantly lower level of shipments during the
entire year as a result of the Chesapeake cancellation. At January 1, 2000,
accounts in excess of 60 days totaled 1% of total receivables, as compared to
25% at January 2, 1998.
Total inventories increased slightly to $2,606,000 at January 1, 2000 as
compared to $2,482,000 at January 2, 1999. See Notes 2 and 11 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.
Property, plant and equipment, net of accumulated depreciation and
amortization, decreased by $325,000 during 1999 as a result of only minor
additions to machinery and equipment during the year of $29,000, offset by
fiscal 1999 depreciation and amortization of $354,000.
Accounts payable were $265,000 at January 1, 2000, as compared to $312,000
at 1998 fiscal year end. This decrease results from a lower level of business
activity during the year.
Accrued employee compensation and benefits decreased by $270,000 to
$134,000 from the prior fiscal year end. This decrease results from lower
year-end employment levels and the absence of profit sharing accruals. At
January 1, 2000, there was no accrual for the employee profit sharing plan as
compared to $225,000 at January 2, 1999.
Customer deposits were $32,000 at January 1, 2000 as compared to $0 at
January 2, 1999.
Accrued warranty, commissions and other accrued liabilities were $285,000
at January 1, 2000, as compared to $194,000 at January 2, 1999. This increase is
primarily attributable to a $97,000 accrual for a customer pricing adjustment,
which was made at yearend.
At January 1, 2000, the Company had Capital Lease obligations of $39,000
with Bank of the West (successor to SierraWest Bank), which are secured by the
related equipment. The total amount is classified as short-term debt.
The Company did not recognize any federal income tax expense during 1999.
The Company has remaining future tax credit carryforwards for Federal income tax
purposes at January 1, 2000 of approximately $134,000. These carryforwards will
not expire.
On 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
<PAGE>
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. SierraWest Bank was subsequently
acquired by Bank of the West and the line of credit remains in effect. At
January 1, 2000, 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 2000, together with its line of
credit, will provide sufficient cash to meet operating needs without additional
financing activity through 2000. * However, should the Company need to pursue
additional debt or equity financing in the future, there is no certainty that
such financing could be obtained or that the terms on which it might be obtained
would be favorable.
Future Outlook
While 1999 was a disappointing year for both shareholders and employees
alike, we have made some positive accomplishments that will hopefully contribute
to greater stability and growth in the future.
We have increased our outside sales organization to cover expanded
geographical areas and reach a broader range of customers. We believe this
expansion has already had a positive effect on sales of the Company's standard
products. Advertising, promotional and trade show activity increased in 1999 to
further enhance our name recognition in the marketplace. We believe the
expansion of our sales and marketing effort, which will continue during the
ensuing year, will provide positive returns in the future.
The strong growth in our opto-electronic standard products, particularly
Thermo-electric Cooler Controllers (TECCs), was a positive note for fiscal 1999.
The Company intends to expand its depth and variety of products offered in this
market during fiscal 2000 and beyond.
The military, aerospace, industrial and medical markets continue to be an
important part of the Company's future. We will continue to pursue new customers
and applications in these markets while striving to provide the best possible
service to our existing customer base. Continued broadening of our product and
customer base, coupled with a return to profitability, will be our primary goal
over the foreseeable future.
The outlook for the ensuing fiscal year is one of cautious optimism.
Management believes that fiscal 2000 has the potential to show considerable
improvement over 1999 results.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company (including the notes thereto) at
January 1, 2000 and January 2, 1999 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).
<PAGE>
(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 1, 2000.
<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 1, 2000
and January 2, 1999 . . . . . . . . . . . . . . F-3
Statement of Operations for the Years ended
January 1, 2000 and January 2, 1999 . . . . . . . . . . F-4
Statement of Shareholders' Equity for the
Years ended January 1, 2000 and January 2, 1999 . . . . . . . F-5
Statement of Cash Flows for the Years Ended
January 1, 2000 and January 2, 1999 . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . F-7
Report of Independent Auditors . . . . . . . . . . . . . . F-20
Consent of Independent Auditors . . . . . . . . . . . . . . F-21
F-1
<PAGE>
HYTEK MICROSYSTEMS, INC.
Selected Quarterly Financial Data (unaudited)
(In thousands, except per share data)
<TABLE>
Quarter Ended
-----------------------------------------------------------------------------------------
FISCAL 1999 FISCAL 1998
-------------------------------------------- ------------------------------------------
Jan. 1,00 Oct. 2,99 Jul. 3,99 Apr. 3,99 Jan. 2,99 Oct. 3,99 Jul. 4,99 Apr. 4,98
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 1,212 $ 1,015 $ 1,271 $ 1,717 $ 2,230 $ 3,026 $ 3,690 $ 3,587
Gross profit $ 208 $ 47 $ 47 $ 293 $ 370 $ 1,094 $ 1,325 $ 1,407
Net income (loss) $ (136) $ (396) $ (372) $ (234) $ (169) $ 516 $ 827 $ 918
Net income (loss) per share -
basic $ (0.04) (0.13) $ (0.12) $ (0.08) $ (0.06) $ 0.17 $ 0.28 $ 0.31
Net income (loss) per share -
diluted $ (0.04) $ (0.13) $ (0.12) $ (0.08) $ (0.06) $ 0.16 $ 0.26 $ 0.29
Market price range per share
High $ 2.25 $ 1.78 $ 1.94 $ 3.69 $ 4.25 $ 4.75 $ 5.06 $ 3.75
Low $ 1.50 $ 1.28 $ 1.38 $ 1.38 $ 2.38 $ 3.38 $ 3.75 $ 1.94
</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
transactionss.
As of March 1, 2000, 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.
F-2
<PAGE>
Hytek Microsystems, Inc.
Balance Sheet
January 1, 2000 and January 2, 1999
<TABLE>
1999 1998
----------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,514,635 $ 2,637,182
Trade accounts receivable, net of allowance for doubtful
accounts of $50,000 in 1999 and 1998 727,918 1,918,265
Inventories 2,606,389 2,481,707
Prepaid expenses and deposits 74,271 38,932
----------------------------------------
Total current assets 5,923,213 7,076,086
Deferred income taxes 200,000 200,000
Plant and equipment, at cost, less accumulated depreciation and
amortization 674,151 999,027
----------------------------------------
Total assets $ 6,797,364 $ 8,275,113
========================================
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 265,203 $ 312,430
Accrued employee compensation and benefits 134,445 404,284
Accrued warranty, commissions, and other 284,913 193,509
Customer deposits 32,308 -
Current portion of long-term debt - 48,313
Current obligations under capital leases 38,708 53,850
----------------------------------------
Total current liabilities 755,577 1,012,386
Long-term debt, less current portion - 52,736
Long-term obligations under capital leases - 38,709
Commitments and contingencies
Shareholders' equity:
Common stock, no par value:
Authorized shares - 7,500,000
Issued and outstanding shares - 3,064,758 at January 1, 2000
and 3,039,758 at January 2, 1999 5,016,468 5,007,093
Retained earnings 1,025,319 2,164,189
----------------------------------------
Total shareholders' equity 6,041,787 7,171,282
----------------------------------------
Total liabilities and shareholders' equity $ 6,797,364 $ 8,275,113
========================================
</TABLE>
See Accompanying Notes
F-3
<PAGE>
Hytek Microsystems, Inc.
Statement of Operations
Years ended January 1, 2000 and January 2, 1999
<TABLE>
1999 1998
----------------------------------------
<S> <C> <C>
Net sales $ 5,215,314 $12,533,045
Cost of sales 4,620,090 8,336,635
Engineering and development 852,841 945,312
Selling, general and administrative expenses 1,050,448 1,149,194
----------------------------------------
6,523,379 10,431,141
----------------------------------------
Operating income (loss) (1,308,065) 2,101,904
Interest income, net 169,995 56,826
----------------------------------------
Income (loss) before provision for income taxes (1,138,070) 2,158,730
Income tax provision 800 66,435
----------------------------------------
Net income (loss) $ (1,138,870) $ 2,092,295
========================================
Basic earnings (loss) per share $ (0.37) $ 0.70
========================================
Diluted earnings (loss) per share $ (0.37) $ 0.66
========================================
Shares used in calculating basic earnings
(loss) per share 3,061,128 3,004,721
========================================
Shares used in calculating diluted earnings
(loss) per share 3,061,128 3,159,724
========================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Hytek Microsystems, Inc.
Statement of Shareholders' Equity
Years ended January 1, 2000 and January 2, 1999
<TABLE>
Common Stock
-------------------------------
Retained
Shares Amount Earnings Total
--------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
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
Net loss - - (1,138,870) (1,138,870)
Issuance of stock 25,000 9,375 - 9,375
--------------- --------------- ------------------ -----------------
Balance at January 1, 2000 3,064,758 $ 5,016,468 $ 1,025,319 $ 6,041,787
=============== =============== ================== =================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Hytek Microsystems, Inc.
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Years ended January 1, 2000 and January 2, 1999
<TABLE>
1999 1998
------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ (1,138,870) $ 2,092,295
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and 353,755 273,407
amortization
Changes in operating assets and liabilities:
Trade accounts receivable, net 1,190,347 595,403
Inventories (124,682) 99,682
Prepaid expenses and deposits (35,339) 11,103
Accounts payable (47,227) (995,905)
Accrued employee compensation and benefits (269,839) 54,559
Accrued warranty, commissions, and other 91,404 (13,060)
Customer deposits 32,308 (28,464)
------------------------------------
Net cash provided by operating activities 51,857 2,089,020
Investing activities
Purchases of equipment (28,879) (516,589)
------------------------------------
Net cash used in investing activities (28,879) (516,589)
Financing activities
Principal payments on long-term debt (101,049) (43,951)
Principal payments on capital lease obligations (53,851) (113,234)
Proceeds from issuance of common stock 9,375 32,417
------------------------------------
Net cash used in financing activities (145,525) (124,768)
------------------------------------
Net increase (decrease) in cash and cash equivalents (122,547) 1,447,663
Cash and cash equivalents at beginning of year 2,637,182 1,189,519
------------------------------------
Cash and cash equivalents at end of year $ 2,514,635 $ 2,637,182
====================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements
Years ended January 1, 2000 and January 2, 1999
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 1, 2000 ("fiscal 1999")
was a 52-week year, and the year ended January 2, 1999 ("fiscal 1998") was also
a 52-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.
During 1999, the Company realized 63% of its revenues from government or
military/aerospace funded sources. In fiscal 1999, the Company had sales to
Chesapeake Sciences and TRW that accounted for 11% and 10%, respectively, of net
sales. In fiscal 1998, sales to these two companies accounted for 64% and 6%,
respectively, of net sales. The products sold to Chesapeake Sciences are used in
the eventual production of off-shore geophysical oil exploration equipment.
During fiscal 1999, sales to Chesapeake Sciences decreased significantly as a
result of depressed crude oil prices and an over-abundance of the world oil
supply (see Note 11).
F-7
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
1. Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market funds with original
maturities of less than ninety days. The fair value of the Company's financial
instruments approximated their carrying value at January 1, 2000 and January 2,
1999. The Company maintains the majority of its cash and cash equivalents in one
financial institution.
During fiscal 1999 and 1998, the Company paid income taxes of $31,000 and
$45,000, respectively, and interest of $12,000 and $35,000, respectively.
Inventories (Notes 2 and 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 1, 2000 and January 2, 1999 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 and title passes to the customer, upon
shipment of the product from the Company's factory.
F-8
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
1. Accounting Policies (continued)
Stock-Based Compensation
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its employee stock option plans. Under APB 25, if the exercise price of the
Company's employee stock options equals or exceeds the fair value of the
underlying stock on the date of grant as determined by the Company's Board of
Directors, no compensation expense is recognized (see Notes 6 and 7).
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 operations. During fiscal 1999 and 1998, such costs amounted to approximately
$171,000 and $236,000, respectively.
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 fiscal 1999 and 1998 amounted
to approximately $30,000 and $26,000, respectively, and is included in selling,
general and administrative expenses on the accompanying statement of operations.
F-9
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
1. Accounting Policies (continued)
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.
2. Inventories (Note 11)
Inventories consist of the following:
<TABLE>
1999 1998
----------------------------------------
<S> <C> <C>
Finished goods $ 557,689 $ 164,268
Work-in-process 781,142 1,031,896
Raw materials 1,267,558 1,285,543
----------------------------------------
----------------------------------------
$ 2,606,389 $ 2,481,707
========================================
</TABLE>
3. Plant and Equipment
Plant and equipment consists of the following:
<TABLE>
1999 1998
----------------------------------------
<S> <C> <C>
Leasehold improvements $ 519,957 $ 519,957
Machinery and equipment 3,393,511 3,370,279
Furniture and fixtures 29,900 25,888
----------------------------------------
3,943,368 3,916,124
Less accumulated depreciation
and amortization (3,269,217) (2,917,097)
----------------------------------------
----------------------------------------
$ 674,151 $ 999,027
========================================
</TABLE>
F-10
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
4. Income Taxes
The significant components of the Company's deferred tax assets are as follows:
<TABLE>
1999 1998
----------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 381,330 $ -
Credit carryforwards 133,465 134,100
Other 241,020 215,748
----------------------------------------
Total deferred tax assets 755,815 349,848
Valuation allowance (555,815) (149,848)
----------------------------------------
Net deferred tax assets $ 200,000 $ 200,000
========================================
</TABLE>
For the year ended January 1, 2000, the valuation allowance was increased by
$395,671 due to the Company's recent operating history.
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>
1999 1998
--------------------------------------
<S> <C> <C>
Computed expected tax (benefit) $ (397,711) $ 744,491
Nondeductible expenses 2,040 2,152
Benefit of operating loss
carryforward - (656,230)
Benefit of AMT tax credit - (47,675)
State taxes, net 800 23,697
Increase in valuation allowance 395,671 -
--------------------------------------
$ 800 $ 66,435
======================================
</TABLE>
As of January 1, 2000, the Company had net operating loss and tax credit
carryforwards for federal income tax purposes of approximately $1,121,560 and
$133,000, respectively. These net operating loss carryforwards will expire in
2020.
F-11
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
5. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
1999 1998
----------------------------------------
<S> <C> <C>
Numerator:
Net income (loss) $ (1,138,870) $ 2,092,295
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 3,061,128 3,004,721
Effect of dilutive securities:
Employee stock options - 155,003
----------------------------------------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed conversions
3,061,128 3,159,724
========================================
Basic earnings (loss) per share $ (.37) $ .70
========================================
Diluted earnings (loss) per share $ (.37) $ .66
========================================
</TABLE>
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 were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would be anti-dilutive. For the year ended January 1,
2000, all outstanding options were excluded from the computation of diluted net
loss per share because the effect would be anti-dilutive. Therefore, diluted
loss per share would be the same as basic loss per share.
F-12
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
6. Stock Option Plans
1991 and 1981 Stock Option Plans
In May 1999, 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
500,000 shares of common stock. The 1991 Plan expires in May 2001 and 136,667
shares were available for future grant as of January 1, 2000. The Company had a
1981 Incentive Stock Option Plan (the "1981 Plan") that expired in August 1991
and there were outstanding options to purchase 35,000 shares under this Plan at
January 1, 2000. 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.
A summary of the Company's 1981 and 1991 Plans' stock option activity and
related information for fiscal 1999 and 1998 are as follows:
<TABLE>
1999 1998
--------------------------------- ---------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 225,000 $ 2.37 258,334 $ 1.40
Granted 45,000 1.76 55,000 4.49
Exercised (25,000) .38 (68,334) .39
Canceled - - (20,000) 2.38
------------------------------------------------------------------------
Outstanding-end of year 245,000 $ 2.46 225,000 $ 2.37
========================================================================
Exercisable at end of year 118,750 $ 2.10 102,500 $ 1.28
Weighted-average fair value of
options granted during the year $ 1.20 $ 3.03
</TABLE>
F-13
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
6. Stock Option Plans (continued)
Exercise prices for options outstanding under the two Plans as of January 1,
2000 ranged from $.38 to $5.00. The weighted-average remaining contractual life
of those options is 3.5 years. A summary of the outstanding and exercisable
options at January 1, 2000, 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 35,000 $.38 0.8 35,000 $.38
$1.56 - $2.13 85,000 1.75 3.3 25,000 1.88
$2.30 - $3.07 80,000 2.72 2.3 47,500 2.81
$4.88 - $5.00 45,000 4.97 3.4 11,250 4.97
--------------- ---------------
245,000 $2.46 2.5 118,750 $2.10
=============== ===============
</TABLE>
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 1, 2000, of which options to purchase 120,000 shares at per share
exercise prices that range from $.19 to $2.69 had been granted (100,000 shares
had been granted as of January 2, 1999). 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 1,
2000, January 2, 1999 and January 3, 1998, options to purchase an aggregate of
20,000 shares (60,000 shares total) were granted to the four outside directors
under this amendment. First Options granted under the Directors' Plan vest on
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.
F-14
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
6. Stock Option Plans (continued)
A summary of the Company's Directors' Plan stock option activity and related
information for fiscal 1999 and 1998 are as follows:
<TABLE>
1999 1998
----------------------------------- --------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 55,000 $ 1.86 65,000 $ .83
Granted 20,000 1.81 20,000 2.69
Exercised - - (30,000) .19
------------------------------------------------------------------------
Outstanding-end of year 75,000 $ 1.85 55,000 $ 1.86
========================================================================
Exercisable at end of year 55,000 $ 1.86 35,000 $ 1.38
Weighted average fair value of
options granted during the year $ 1.33 $ 1.96
</TABLE>
Exercise prices per share for options outstanding as of January 1, 2000 ranged
from $.19 to $2.69. The weighted-average remaining contractual life of those
options is 7.4 years. A summary of the outstanding and exercisable directors'
options at January 1, 2000, 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>
$.19 15,000 $.19 1.1 15,000 $.19
$1.81 20,000 1.81 10.0 - -
$2.28-2.69 40,000 2.49 8.5 40,000 2.49
--------------- ---------------
75,000 $1.85 7.4 55,000 $1.86
=============== ===============
</TABLE>
F-15
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
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 1999
and 1998, respectively: risk-free interest rates of 6.7% and 4.8%, dividend
yields of 0% and 0%; volatility factors of the expected market price of the
Company's common stock of .854 and .863, and a weighted-average expected life of
the options of 4.7 and 4.7 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 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.
F-16
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
7. Stock-Based Compensation (continued)
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>
1999 1998
------------------------------------
<S> <C> <C>
Net income (loss) as reported $ (1,138,870) $ 2,092,295
====================================
Pro forma net income (loss) $ (1,260,585) $ 2,039,444
====================================
Earnings (loss) per share as reported:
Basic $ (.37) $ .70
====================================
Diluted $ (.37) $ .66
====================================
Pro forma earnings (loss) per share:
Basic $ (.41) $ .68
====================================
Diluted $ (.41) $ .65
====================================
</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 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 fiscal 1999 and 1998, the Board authorized $0 and $225,000, respectively,
in profit sharing distributions to employees, which amount is included in
accrued employee compensation and benefits in the accompanying balance sheet.
F-17
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
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 8.5% at January 1, 2000).
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 1, 2000, the Company had no outstanding
borrowings under this Loan Agreement.
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 $89,662
(net of accumulated amortization of $68,564) and $121,307 (net of accumulated
amortization of $36,919) at January 1, 2000 and January 2, 1999, respectively.
These capital leases are secured by the related equipment.
The aggregate future minimum lease payments under noncancelable capital and
operating leases are as follows at January 1, 2000:
<TABLE>
Capital Operating
Leases Leases
---------------------------------------
<S> <C> <C>
2000 $ 39,992 $ 188,000
2001 - 189,000
2002 - 194,000
2003 - 199,000
2004 - 200,000
Thereafter - 288,000
--------------------------------------
Total minimum payments 39,992 $ 1,258,000
==================
Less amount representing interest (1,284)
--------------------
Present value of minimum lease payments 38,708
Less current obligations (38,708)
--------------------
Long-term obligations $ -
====================
</TABLE>
F-18
<PAGE>
Hytek Microsystems, Inc.
Notes to Financial Statements (continued)
10. Commitments and Contingencies (continued)
The Company's total rental expense charged to operations amounted to
approximately $276,000 and $287,000 in fiscal 1999 and 1998, 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. Chesapeake Inventory
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. Chesapeake subsequently canceled all remaining undelivered
items on these purchase orders. On August 17, 1999, the Company entered into an
agreement (the "Final Settlement Agreement") with Chesapeake whereby Chesapeake
will pay to the Company $2.3 million, plus interest at 9.5% per year, in full
and final settlement of all claims by the Company related to the cancellation of
these purchase orders. Final payment of $1.4 million is to be received by the
Company in August 2000. At any time after any principal payment is received by
the Company, Chesapeake shall have the right to order specified quantities of
the related inventory, provided the aggregate value of such quantities does not
exceed the total principal payments received by the Company. The Company has not
recorded the Final Settlement Agreement amount. The Company records payments
received as deferred revenue until the inventory is shipped, at which time the
revenue is recognized. The Company has recorded a liability in the amount of
$32,308 on the accompanying balance sheet for principal payments received from
Chesapeake in excess of quantities of inventory shipped to Chesapeake as of
January 1, 2000.
At January 1, 2000, 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 under the Final Settlement Agreement, 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 Chesapeake defaults under the
Final Settlement Agreement. Management of the Company has reserved approximately
$300,000 against the inventory at January 1, 2000.
F-19
<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 1, 2000 and January 2, 1999, and the related statements of operations,
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 auditing standards generally accepted
in the United States. 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 1, 2000 and January 2, 1999, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Reno, Nevada /s/Ernst & Young LLP
January 28, 2000
F-20
<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, 2000,
with respect to the financial statements of Hytek Microsystems, Inc.
/s/Ernst & Young LLP
Reno, Nevada
March 23, 2000
F-21
<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 24, 2000
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 24, 2000
Charles S. Byrne Executive Officer,
Director
/s/ Sally B. Chapman Chief Financial Officer March 24, 2000
Sally B. Chapman (Principal financial and
accounting officer)
S-1
<PAGE>
SIGNATURE TITLE DATE
/s/ Robert Boschert Director March 24, 2000
Robert Boschert
/s/ Edward W. Moose Director March 24, 2000
Edward W. Moose
/s/ Edward Y. Tang Director March 24, 2000
Edward Y. Tang
/s/ Shou-Chen Yih Director March 24, 2000
Shou-Chen Yih
S-2
<PAGE>
HYTEK MICROSYSTEMS, INC.
Annual Report on Form 10-KSB
for the fiscal year ended January 1, 2000
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.)
<TABLE>
Exhibit
Number Exhibit Description
- ------------- --------------------------------------------------------------
<S> <C>
3.1 (1) Amended and Restated Articles of Incorporation
filed on February 10, 1983.
3.2 (2) Certificate of Amendment of Articles of
Incorporation filed June 28, 1988.
3.3 (X) Composite Article of Incorporation, as amended
through June 28, 1988.
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.
</TABLE>
X-1 (Footnotes at end of index)
<PAGE>
<TABLE>
Exhibit
Number Exhibit Description
- ------------- --------------------------------------------------------------
<S> <C>
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 HytekMicrosystems, 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.
10.13 (14) Final Settlement Agreement with Chesapeake Sciences Corp.
dated August 17, 1999.
13.1 President's Letter to Shareholders dated
April 1, 2000, which together with
this Form 10-KSB comprises the Registrant's
1999 Annual Report to Shareholders.
21.1 The Registrant has no subsidiaries.
23.1 Consent of Independent Auditors
(see page F- 21).
24.1 Power of Attorney (see page S-1).
27.1 Financial Data Schedule.
</TABLE>
X-2
<PAGE>
<TABLE>
Footnotes:
- ----------
<S> <C>
(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.
(14) Incorporated by reference to Exhibit filed with the quarterly
report on Form 10-QSB for the period ended October 2, 1999.
(*) Management contract or compensatory plan or arrangement in
which any director or executive officer named in the
Registrant's Annual Report on Form 10-KSB or Proxy Statement
has participated or participates.
(X) Incorporated by reference to Exhibit filed with the Annual
Report on Form 10-KSB for the year ended January 2, 1999.
</TABLE>
X-3
Exhibit 13.1
Message To Shareholders
April 1, 2000
Dear Fellow Shareholders:
1999 was a "stumbling block" after four prior years of growth in revenues. As
announced early in 1999, our business in data acquisition circuits for
geophysical exploration with Chesapeake Sciences Corp. came to an abrupt halt in
mid-February of 1999 and has become a much smaller component of our business
since that time. While we anticipate additional future business in this market,
there is currently no reliable indication as to when this may occur.
Accordingly, our efforts during 1999 have been focused on capturing repeat
business from other existing customers and developing new customer
opportunities.
Financial Performance
- ---------------------
For the fourth quarter of 1999, Hytek reported a net loss of $137,000, or $0.05
per share, on revenues of $1.2 million. This compares with a net loss of
$169,000, or $0.06 per diluted share, on revenues of $2.2 million for the fourth
quarter of fiscal 1998.
For the year ended January 1, 2000, net losses were $1.1 million, or $0.37 per
share, on revenues of $5.2 million, as compared to net income of $2.1 million,
or $0.66 per diluted share, on revenues of $12.5 million for the prior year
ended January 2, 1999. Revenues attributable to Chesapeake Sciences were
slightly over one-half million dollars in fiscal 1999 as compared to over $8
million in fiscal 1998.
Markets and Applications
- ------------------------
During 1999, approximately 63% of Company revenues were derived from military,
aerospace or government funded programs. Applications within this market are
many and varied. Examples of "mil-aero" applications include cryogenic
controllers, circuits for inertial guidance systems, control and monitoring
circuits for underwater re-breathing apparatus, video circuits and power
regulation and control circuits in satellite systems. We believe that the
military and aerospace market will remain stable for the foreseeable future and
are committed to maintaining an active and aggressive position in the market.
In the commercial arena, during 1999, the Company began production volume
shipments to a major medical device manufacturer. We anticipate increased
activity and additional customer opportunities in this market in the future.
1999 showed significant growth in the Company's Opto-Electronic standard
products, which include Thermo-Electric Cooler Controllers (TECC's) and Laser
Diode Drivers. Applications for these products include fiber optic networks,
"free space" data transmission and certain "detector" product markets. We feel
there is significant opportunity for growth in this area and intend to pursue
development of additional new products and customers. Overall, during 1999, the
Company's standard products, which also include digital delay-lines, accounted
for approximately 15% of total 1999 revenues, a significant increase in both
percentage and real dollars over the prior year.
<PAGE>
Processes and Technology
- ------------------------
The Company's traditional technology has utilized thick-film ceramic substrates
combined with "chip and wire" assembly processes and hermetic sealing of the
packaged circuits. In 1998, we expanded our technology base by utilizing Low
Temperature Co-fired Ceramic (LTCC) substrates in certain applications requiring
higher circuit density. As new market and customer opportunities evolve, new and
expanded process and technology approaches will be required to meet these
opportunities. The Company will continue to expand its processes and technology
base through investment in personnel and equipment in situations where
additional market expansion and a positive return to shareholders can result.
Going Forward
- -------------
1999 is behind us, and while we have emerged with some scars and bruises, we
believe that the worst is over. We begin the year 2000 with a strong cash
position, a contractual agreement in place to recover our investment in the
Chesapeake program and a positive outlook for growth in both custom and standard
products. Hytek's management and staff are committed to growth over the
long-term and increasing shareholder value as we progress.
We deeply appreciate the loyalty and support of our shareholders, customers and
employees and look forward to a positive return for all in the future.
Sincerely yours,
Charles S. (Chuck) Byrne
President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Balance Sheet at January 1, 2000; Statement of Operations at January 1, 2000.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 2,514,635
<SECURITIES> 0
<RECEIVABLES> 777,918
<ALLOWANCES> 50,000
<INVENTORY> 2,606,389
<CURRENT-ASSETS> 5,923,213
<PP&E> 3,943,368
<DEPRECIATION> 3,269,217
<TOTAL-ASSETS> 6,797,364
<CURRENT-LIABILITIES> 755,577
<BONDS> 0
<COMMON> 5,016,468
0
0
<OTHER-SE> 1,025,319
<TOTAL-LIABILITY-AND-EQUITY> 6,797,364
<SALES> 5,211,699
<TOTAL-REVENUES> 5,215,314
<CGS> 4,620,090
<TOTAL-COSTS> 6,523,379
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (169,995)
<INCOME-PRETAX> (1,138,070)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,138,870)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,138,870)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
<FN>
<F1> Tag 32 is Net Interest Income
</FN>
</TABLE>
