<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1998 Commission file number 1-7633
HI-SHEAR INDUSTRIES INC.
A DELAWARE CORPORATION I.R.S. EMPLOYER IDENTIFICATION
NO. 11-2406878
3333 NEW HYDE PARK ROAD, NORTH HILLS, NY 11042
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 627-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
---------------------------- -------------------------
Common Stock, $.10 par value Over The Counter Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
On August 18, 1998, 5,854,618 shares of the Registrant's Common Stock were
outstanding. Of these shares, 1,677,218 shares were held by persons who may
be deemed to be affiliates. The aggregate market value (based on the average
bid and ask price of these shares on the Over The Counter Exchange of $2.88 a
share) of the 4,177,400 shares held by non-affiliates of the registrant was
$12,010,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Development of Business
HI-SHEAR INDUSTRIES INC.("the Company"), a Delaware corporation
organized in 1976, was engaged primarily in the manufacture and sale of high
technology Aerospace Fastening Systems products through its wholly-owned
subsidiary, Hi-Shear Corporation ("HSC") until February 26, 1996.
During the fiscal year ended May 31, 1991, the Company adopted a plan to
discontinue the operations of Hi-Shear's Space and Defense segment, comprised of
Hi-Shear Technology Corp. ("HSTC") and Defense Systems Corporation ("DSC"). The
operation of DSC was terminated in March 1991 and in June 1993, the Company
completed the sale of HSTC to a group led by the management of the subsidiary.
On February 26, 1996, the Company completed the sale of Hi-Shear
Corporation and its subsidiaries which included Hi-Shear Automotive Corp.,
Hi-Shear Holdings Limited, and Hi-Shear Fasteners Europe Limited, to GFI
Industries S.A. (GFI") of Belfort, France for $46 million. With the
completion of this sale the Company disposed of its last remaining operating
assets and effectively ceased operations.
(b) Narrative Description of Business
With the sale of its last remaining manufacturing operation on February
26, 1996, the Company no longer conducts an operating business. As outlined
in the Company's "Notice Of Annual Meeting of Stockholders" dated January 8,
1996, the Company currently anticipates that upon final resolution of its
claims against the U.S. Navy, it will complete the distribution of its assets
to stockholders and seek stockholder approval to dissolve the Company.
The Company currently has four full-time employees.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in an office building
at North Hills, New York, where 2,475 square feet of space are leased at a
current annual rental of approximately $61,000 under a lease which expires
October 31, 2002.
HSI Properties, Inc., a wholly-owned subsidiary of the Company, owns 16
acres of land in Saugus, California, with incidental structures (2,700 sq.
ft.) currently being leased to a former subsidiary, Hi-Shear Technology
Corp., for $97,344 per year. The lease expires May 31, 1999.
2
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In 1991, the U.S. Navy terminated for default two contracts held by a
discontinued subsidiary of the Company and sought reimbursement of progress
payments totaling $11.2 million made against these contracts. The Company
appealed the default terminations and on May 31, 1995 its appeal was
sustained. This decision effectively released the Company from any
obligation to repay progress payments received under the contracts. On
January 31, 1996, the Company filed damage claims against the U.S. Navy
totaling $62.9 million. The government has audited these claims but has not
expressed a willingness to negotiate a settlement of these claims with the
Company. As a result, on February 11, 1997, the Company filed an appeal
before the Armed Services Board of Contract Appeals requesting an
adjudication of this dispute. The Board set a hearing date of August 3,
1998, at the conclusion of which, the Board will consider the facts brought
out at the hearing as well as briefs to be filed by both sides in determining
the amount of claim damages to be awarded to the Company. See COMMITMENTS
AND CONTINGENCIES in the notes to consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock had, until August 1, 1996, been traded on the
New York Stock Exchange ("NYSE") under the symbol "HSI." On August 1, 1996,
the Company made an initial liquidating distribution of approximately $23.4
million ($4.00 per share). Prior to that the Company had not paid a dividend
on common stock since August 1990. Concurrent with this distribution, the
NYSE suspended trading in the Company's common stock and made application to
delist the issue. The following table sets forth the high and low prices per
share of the Company's Common Stock, as reported on the NYSE Composite Tape
for the periods indicated through August 1, 1996. The high and low prices
per share for the periods included subsequent to August 1, 1996 were derived
from trades executed on the Over-The-Counter Exchange.
3
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PER COMMON SHARE
MARKET PRICE
----------------
HIGH LOW
----- -----
Quarter Ended
August 1997......................... $2.45 $2.25
November 1997....................... 2.25 2.00
February 1998....................... 2.50 2.00
May 1998............................ 2.63 2.00
Fiscal Year Ended May 31, 1998 $2.63 $2.00
===== =====
Quarter Ended
August 1996......................... $6.50 $2.50
November 1996....................... 2.88 2.38
February 1997....................... 2.63 2.38
May 1997............................ 2.91 2.38
Fiscal Year Ended May 31, 1997 $6.50 $2.38
===== =====
As of August 18, 1998 there were approximately 700 holders of record of the
Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information of the
Company and its subsidiaries for the five years ended May 31, 1998. This
selected financial information should be read in conjunction with the
Consolidated Financial Statements and notes thereto, and Management's
Discussion and Analysis of Results of Operations and Financial Condition
included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF
OPERATIONS DATA:
Revenues from operations(A) $ - $ - $46,400 $58,639 $56,465
======= ======= =======
Income (loss) before
discontinued operations $(1,161) $(1,283) $ 1,106 $ (545) $(2,974)
Loss from discontinued
operations(B) - - - - (2,616)
------- ------- ------- ------- -------
Net income (loss) $(1,161) $(1,283) $ 1,106 $ (545) $(5,590)
======= ======= ======= ======= =======
Weighted Average Shares
Outstanding 5,855 5,855 5,855 5,855 5,855
======= ======= ======= ======= =======
Per Common Share Data:
Income (loss) before
discontinued operations(A) $ (.20) $ (.22) $ .19 $ (.09) $ (.51)
Loss from discontinued
operations (B) - - - - (.45)
------- ------- ------- ------- -------
Net income (loss) $ (.20) $ (.22) $ .19 $ (.09) $ (.96)
======= ======= ======= ======= =======
</TABLE>
4
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<TABLE>
<CAPTION>
AS OF MAY 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Current assets $ 2,308 $ 5,105 $31,103 $34,846 $35,659
Current liabilities 382 640 1,131 12,563 12,013
Working capital 1,926 4,465 29,972 22,283 23,646
Total assets 6,288 7,555 32,748 49,514 49,115
Long-term debt - - - 9,872 9,953
Stockholders' equity 5,754 6,915 31,617 27,079 27,149
</TABLE>
(A) Includes revenues and income (loss) from operations of HSC through
February 26, 1996 at which date HSC was sold. With the completion of this
sale, the Company disposed of its last remaining operating assets and
effectively ceased operations.
(B) The loss from discontinued operations in fiscal 1994 includes additional
expenses, legal costs and an unexpected shortfall in amounts realized from
the sale of material and equipment of a discontinued operation.
5
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
On February 26, 1996, the Company sold its last remaining operating entity,
Hi-Shear Corporation and its subsidiaries and effectively ceased operations.
The Company had previously disposed of its business activities dealing with
space and defense in June 1993 and had since that time been reporting their
operating activities as discontinued operations. The results of operations
of the Company include the operating activities of Hi-Shear Corporation and
subsidiaries through February 26, 1996.
RESULTS OF OPERATIONS
The Company had no operating activities subsequent to the sale of Hi-Shear
Corporation during fiscal 1996. The $1.3 million and $1.8 million of general
and administrative costs incurred in fiscal 1998 and 1997, respectively,
include professional and other costs associated with the dispute over price
adjustment on the sale of Hi-Shear Corporation as well as the ongoing costs
necessary to pursue the settlement of the Company's dispute with the U.S.
Navy.
The interest income reported in fiscal 1998, 1997 and 1996 was due to
interest earned on the investment of the proceeds from the sale of Hi-Shear
Corporation. The investable proceeds declined considerably after the initial
liquidating distribution to shareholders of approximately $23.4 million on
August 1, 1996. The decline in interest expense is due to the repayment of
amounts outstanding on the Company's loan agreements with the proceeds from
the sale of Hi-Shear Corporation.
The Company did not record a provision or benefit for federal income taxes
due to it's tax loss carryforward position.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have consisted of cash provided
by operating activities and, until the sale of Hi-Shear Corporation, bank
financing. On February 26, 1996, the Company completed the sale of Hi-Shear
Corporation to GFI Industries S.A. for a total purchase price of $46 million
generating net proceeds from the sale, after deducting transaction costs, of
$44.4 million. Of that amount, approximately $13 million was used to repay
all amounts outstanding under the Company's loan agreements and the remaining
balance was deposited in short term investment accounts. With the sale of
Hi-Shear Corporation the Company no longer had operating businesses and
announced its intention to liquidate and distribute the proceeds from the
sale of Hi-Shear Corporation as well as any settlement received from the
resolution of the
6
<PAGE>
Company's long standing dispute with the U.S. Navy. In this regard, the
Company made an initial liquidating distribution to shareholders of
approximately $23.4 million ($4.00 per share) on August 1, 1996. Under the
terms of the agreement for the sale of Hi-Shear Corporation, the Company was
required to maintain working capital of not less than $3,000,000 through
March 31, 1997. Subsequent to that date there are no restrictions on Company
distributions. At May 31, 1998 the Company had $2.3 million remaining in
cash and cash equivalents.
On May 31, 1995 the Company learned that its appeal of the default
terminations filed by the Navy with regard to the two contracts being held by
a subsidiary, Defense Systems Corporation had been sustained and converted to
termination for the convenience of the government. On January 31, 1996 the
Company filed damage claims against the U.S. Navy totaling $62.9 million.
The government has audited these claims but has not expressed a willingness
to negotiate a settlement of these claims with the Company. As a result, on
February 11, 1997, the Company filed an appeal before the Armed Services
Board of Contract Appeals requesting an adjudication of this dispute. The
Board has set a hearing date of August 3, 1998. The hearing is expected to
last several weeks after which the Board will render a decision as to the
amount of claim damages to be awarded to the Company. It is not certain at
this time how long it will take the ASBCA to render its decision or whether
the government will try to appeal the Boards decision. Therefore the total
amount or timing of the ultimate recovery cannot be predicted at this time.
The Company's cash requirements include ongoing costs relating to pursuing
the settlement of the Company's dispute with the U.S. Navy and normal
recurring general and administrative expenses. The Company anticipates that
existing cash and cash equivalents will be sufficient to satisfy the
Company's cash requirements through the time of settlement with the U.S. Navy
and final liquidation of the Company. Although management and its legal
counsel cannot currently estimate when these situations will be resolved, the
Company has retained what it considers sufficient funds to allow it to pursue
equitable settlements with regard to all open matters currently pending.
However, should this situation continue beyond a reasonable period of time,
the Company believes it has the ability to acquire additional capital if
necessary.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year thus causing
date-sensitive software to recognize a date using "00" as the year 1900
rather than the year 2000. Since the Company no longer has operating
activities, management believes that the Year 2000 Issue will not have a
material impact on the financial position, operation or cash flows of the
Company.
7
<PAGE>
RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board("FASB") issued SFAS
130, "Reporting Comprehensive Income", which established standards for
reporting and display of comprehensive income and its components. SFAS 130
requires a separate statement to report the components for comprehensive
income for each period reported. The provisions of this statement are
effective for fiscal years beginning after December 15, 1997. Management
believes this statement will not have a significant effect on the Company's
financial statements.
In June 1997, the FASB also issued SFAS 131, "Disclosure About Segments of an
Enterprise and Related Information". The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. The provisions of this
statement are effective for fiscal years beginning after December 15, 1997.
Management of the Company anticipates that, due to its lack of operating
segments, the adoption of SFAS 131 will not have a significant effect on the
Company's financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The provisions of the statement are effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Management of
the Company anticipates that the adoption of SFAS 133 will not have a
significant effect on the Company's results of operations or its financial
position.
FORWARD LOOKING STATEMENTS
The statements in this Management's Discussion and Analysis which are not
historical fact are forward looking statements that are made pursuant to the
Safe Harbor provisions of the Private Securities Litigation Reform Act of
1995. The statements are subject to risks and uncertainties, including, but
not limited to uncertainties surrounding the Company's dispute with the U.S.
Navy which could cause actual results to vary materially from those discussed
herein.
8
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
PAGE
Report of Independent Accountants..................... 10
Consolidated Balance Sheets........................... 11
Consolidated Statements of Operations................. 12
Consolidated Statements of Stockholders' Equity....... 13
Consolidated Statements of Cash Flows................. 14
Notes to Consolidated Financial Statements............ 15
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Hi-Shear Industries Inc.
North Hills, New York
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Hi-Shear Industries Inc. and its subsidiaries at May 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended May 31, 1998 in conformity with generally accepted
accounting principles. 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 of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in the Commitments and Contingencies note to Consolidated
Financial Statements, the Company is involved in a dispute with the U.S. Navy
regarding the termination of certain contracts. The Company has filed damage
claims totaling $62.9 million against the Navy with respect to these
contracts, however, a settlement has not been reached and the claims are
being contested by the Navy. Therefore, the amount or timing of the recovery
cannot be predicted at this time and no recognition of income related to this
claim has been made in the consolidated financial statements.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Summary of
Significant Accounting Policies Note to Consolidated Financial Statements, on
February 26, 1996, the Company sold its last operating asset and effectively
ceased operations. Since that date the Company has suffered recurring losses
and cash flow deficit from operations that raise substantial doubt about its
ability to continue as a going concern. The Company is presently in the
process of liquidation, and management's plans in regard to this matter are
further discussed in the Summary of Significant Accounting Policies Note to
Consolidated Financial Statements. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
July 8, 1998
10
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31,
----------------------
1998 1997
-------- --------
(000 Omitted)
ASSETS
Current assets:
Cash and equivalents $ 2,254 $ 4,952
Other 54 153
-------- --------
Total current assets 2,308 5,105
Property and equipment, at cost:
Land 80 80
Equipment and fixtures 155 126
-------- --------
235 206
Less, accumulated depreciation and amortization (110) (91)
-------- --------
125 115
Other assets 3,703 2,335
-------- --------
Total assets $ 6,136 $ 7,555
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued income taxes $ 25 $ 40
Other accrued expenses 357 600
-------- --------
Total current liabilities 382 640
Commitments and contingencies
Stockholders' equity:
Capital stock:
Preferred stock, $1 par value: authorized 500,000
shares; none issued - -
Common stock, $.10 par value: authorized 10,000,000
shares; issued 6,139,756 shares 614 614
Paid-in capital 11,153 11,153
Accumulated deficit (3,309) (2,148)
Less treasury stock, at cost (285,138 shares) (2,704) (2,704)
-------- --------
5,754 6,915
-------- --------
Total liabilities and stockholders' equity $ 6,136 $ 7,555
======== ========
See notes to consolidated financial statements.
11
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(000 Omitted except per share data)
Revenues:
Net sales $ - $ - $ 45,268
Other - - 1,132
--------- --------- ---------
- - 46,400
--------- --------- ---------
Cost of goods sold - - 37,316
Selling, general and administrative expenses 1,322 1,773 8,870
--------- --------- ---------
1,322 1,773 46,186
--------- --------- ---------
Operating income (loss) (1,322) (1,773) 214
Gain on sale of subsidiary - - 1,768
Interest income 181 515 434
Interest expense - (1) (1,071)
--------- --------- ---------
Income (loss) before income taxes (1,141) (1,259) 1,345
Provision for income taxes 20 24 239
--------- --------- ---------
Net income (loss) $ (1,161) $ (1,283) $ 1,106
========= ========= =========
Weighted average Common shares
outstanding 5,855 5,855 5,855
--------- --------- ---------
Basic net income (loss) per share $ (0.20) $ (0.22) $ 0.19
========= ========= =========
See notes to consolidated financial statements.
12
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Cumulative
Common Stock translation, Treasury Stock
------------------ Retained pension and -------------------
Paid-in earnings other
Shares Amount capital (deficit) adjustments Shares Amount
-------- -------- -------- -------- ----------- -------- --------
(000 Omitted)
<C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 6,140 $ 614 $ 34,572 $ (1,971) $ (3,432) (285) $ (2,704)
Unrealized foreign currency translation adjustments - - - - (265) - -
Realized foreign currency translation and pension
adjustments upon sale of subsidiary - - - - 3,697 - -
Net Income - - - 1,106 - - -
-------- -------- -------- -------- -------- -------- --------
Balance, May 31, 1996 6,140 614 34,572 (865) - (285) (2,704)
Distribution to Stockholders - - (23,419) - - - -
Net Loss - - - (1,283) - - -
-------- -------- -------- -------- -------- -------- --------
Balance, May 31, 1997 6,140 614 11,153 (2,148) - (285) (2,704)
Net Loss - - - (1,161) - - -
-------- -------- -------- -------- -------- -------- --------
Balance, May 31, 1998 6,140 $ 614 $ 11,153 $ (3,309) $ - (285) $ (2,704)
======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
13
<PAGE>
HI-SHEAR INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended May 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(000 Omitted)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,161) $ (1,283) $ 1,106
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Net gain on sale of subsidiary - - (1,768)
Depreciation and amortization 19 13 1,789
Increase in accounts receivable - - (1,181)
Decrease in inventories - - 693
Increase in other assets (1,269) (752) (842)
Increase (decrease) in accrued income taxes (15) (3) 95
Decrease in accounts payable, accrued
salaries and wages and other accrued expenses (243) (488) (1,295)
--------- --------- ---------
Net cash used for operating activities (2,669) (2,513) (1,403)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (29) (30) (3,344)
Net proceeds from sale of subsidiary - - 45,397
Proceeds from sale of property and equipment - - 83
--------- --------- ---------
Net cash provided by (used for) investing activities (29) (30) 42,136
--------- --------- ---------
Cash flows from financing activities:
Liquidating distribution - (23,419) -
Proceeds from (payment of) short-term debt - - (409)
Proceeds from long-term debt - - 39,141
Payment of long-term debt - - (49,188)
--------- --------- ---------
Net cash used for financing activities - (23,419) (10,456)
--------- --------- ---------
Effect of exchange rate changes on cash - - 1
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (2,698) (25,962) 30,278
Cash and cash equivalents - beginning of year 4,952 30,914 636
--------- --------- ---------
Cash and cash equivalents - end of year $ 2,254 $ 4,952 $ 30,914
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $53 $1 $1,049
Income taxes 37 27 341
</TABLE>
See notes to consolidated financial statements
14
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements of Hi-Shear Industries Inc.
and Subsidiaries (the "Company") are summarized below:
Basis of Presentation. The financial statements reflect the operating
results of Hi-Shear Corporation and Subsidiaries ("HSC") until its sale on
February 26, 1996. With the sale of HSC, the Company no longer conducts an
operating business. The Company currently anticipates that upon final
resolution of its claims against the U.S. Navy, it will complete the
distribution of its assets to stockholders and seek stockholder approval to
dissolve the Company. Until that time, management's plans to continue as a
going concern include reducing expenses, the possible sale of certain
property and banks or stockholders' loans, if required.
Principles of Consolidation. The consolidated financial statements
include the accounts of Hi-Shear Industries Inc. and its majority-owned
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates and Assumptions. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. The cash balances on deposit are held principally at one
financial institution and exceed insurable amounts. The Company believes it
mitigates its risks by investing in or through a major financial institution.
Cash and cash equivalents are reflected in the accompanying consolidated
balance sheet at amounts considered by management to reasonably approximate
fair value.
Property and Equipment. Land, equipment and fixtures are carried at
cost. For financial reporting purposes, depreciation expense is provided on a
straight line basis, using estimated useful lives of 3 to 10 years for
equipment and fixtures. Accelerated methods have been used for tax purposes
where permitted. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
reflected in earnings for the period.
15
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes. The Company and its subsidiaries file consolidated
federal and state income tax returns. Deferred provision is made for income
taxes resulting from timing differences in the recognition of income and
expense for tax and financial reporting purposes. Effective June 1, 1993 the
Company adopted Statement of Financial Standards No. 109 "Accounting for
Income Taxes" which requires recognition of deferred tax assets and
liabilities for temporary differences and net operating loss (NOL) and tax
credit carryforwards. Under this statement, deferred income taxes are
established based on enacted tax rates expected to be in effect when
temporary differences are scheduled to reverse and NOL and tax credit
carryforwards are expected to be utilized. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
Earnings Per Share. In February 1997, the FASB issued SFAS No.
128,"Earnings Per Share." SFAS No. 128 supersedes and simplified the
previous computational guidelines under APB Opinion No. 15, "Earnings Per
Share." Among other changes, SFAS No. 128 eliminates the presentation of
primary EPS and replaces it with basic EPS for which common stock equivalents
are not considered in the computation. It also revises the computation of
diluted EPS. Basic net income (loss) per share is computed by dividing the
net income (loss) attributable to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed by dividing the net income (loss) attributable
to common shareholders by the weighted average number of common and common
equivalent shares outstanding during the period. The Company did not have
any common equivalent shares outstanding during the years ended May 31, 1998,
1997 and 1996. Net income (loss) per share and weighted-average shares
outstanding for the years ended May 31, 1997 and 1996 have been restated in
acordance with SFAS No. 128.
Recent Accounting Standards. In June 1997, the Financial Accounting
Standards Board("FASB") issued SFAS 130, "Reporting Comprehensive Income",
which established standards for reporting and display of comprehensive income
and its components. SFAS 130 requires a separate statement to report the
components for comprehensive income for each period reported. The provisions
of this statement are effective for fiscal years beginning after December 15,
1997. Management believes this statement will not have a significant effect
on the Company's financial statements.
In June 1997, the FASB also issued SFAS 131, "Disclosure About Segments
of an Enterprise and Related Information ". The standard requires that
companies disclose "operating segments" based on the way management
disaggregates the company for making internal operating decisions. The
provisions of this statement are effective for fiscal years beginning after
December 15, 1997. Management of the Company anticipates that, due to its
lack of
16
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
operating segments, the adoption of SFAS 131 will not have a significant
effect of the Company's financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The provisions of the statement are effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Management of
the Company anticipates that the adoption of SFAS 133 will not have a
significant effect on the Company's results of operations or its financial
position.
SALE OF SUBSIDIARY
On February 26, 1996, pursuant to approval received at the Annual
Meeting of Shareholders on February 23, 1996, the Company sold its aerospace
fastener subsidiary Hi-Shear Corporation and its subsidiaries to GFI
Industries S.A. of Belfort, France for $46 million in cash. The sale was
treated as a sale of stock for accounting purposes. As a result, the Company
recognized a gain of approximately $1.8 million in its statement of
operations and the related balance sheet accounts of Hi-Shear Corporation and
its affiliated companies were removed from the Company's consolidated balance
sheet. The sales price was subject to adjustment based upon a review of the
closing balance sheet of Hi-Shear Corporation and verification by GFI of the
net asset value as required under the terms of the sale. The Company and GFI
were unable to reach an agreement on the net asset value with GFI requesting
downward adjustments to the sales price totaling $6.4 million. The
disagreement was submitted to arbitration as required under the Stock
Purchase Agreement. After reviewing material submitted by both parties, the
arbitrator decided in favor of the Company and essentially finalized the
purchase price at $46 million. Additionally, under the terms of the agreement
for the sale of HSC, the Company was restricted from distributing to its
stockholders, by means of dividend or otherwise, at least $3.0 million of the
purchase price through March 31, 1997. Subsequent to that date, the Company
may distribute all remaining funds.
17
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROVISION FOR INCOME TAXES
The components of the income tax provision are summarized as follows:
YEARS ENDED MAY 31,
1998 1997 1996
------- ------- ------
(000 OMITTED)
Current:
Domestic:
Federal................... $ - $ - $ 160
State and local........... 20 24 58
Foreign....................... - - 21
------- ------- ------
Total income tax provision ... $ 20 $ 24 $ 239
======= ======= ======
The components included in determining the provision for income taxes are
shown below:
YEARS ENDED MAY 31,
1998 1997 1996
------- ------- ------
(000 OMITTED)
Tax provision at federal income tax
statutory rate..................... $ (388) $ (428) $ 457
Increase (decrease) in taxes
resulting from:
Alternative minimum tax.......... - - 177
Benefit of operating loss
carryforwards - - (457)
Unrecognized tax benefit 388 430 -
State and local taxes on income,
net of federal tax benefit..... 16 16 38
Other............................ 4 6 24
------- ------- ------
Income tax provision per consolidated
statements of operations.......... $ 20 $ 24 $ 239
======= ======= ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. The major components of
deferred tax liabilities and assets as of May 31, 1998 and 1997 were as follows:
MAY 31,
1998 1997
------- -------
(000 Omitted)
Assets
Federal net operating loss carryforwards $ 4,084 $ 3,081
State net operating loss caryforwards 613 321
Alternative minimum tax credit carryforwards 273 369
Other 142 142
------- -------
Total deferred tax assets 5,112 3,913
------- -------
Valuation allowance (5,112) (3,913)
------- -------
Net deferred taxes $ - $ -
======= =======
18
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of May 31, 1998, the Company had a federal net operating loss
carryforward of approximately $12,000,000 which expires between 2006 and 2013,
state net operating loss carryforwards of approximately $10,100,000 expiring
between 1999 and 2013 and alternative minimum tax credit carryforward of
$273,000 with no expiration.
PENSION AND INCENTIVE COMPENSATION PLANS
Prior to February 26, 1996, the Company maintained a defined benefit
pension plan and deferred investment profit sharing plan covering substantially
all of its eligible domestic employees. The Company also had contractual
arrangements with certain key employees which provided for supplemental
retirement benefits. The Company's policy was to fund pension costs annually
based on accrued amounts and to amortize past service pension costs over a
thirty-year period. Effective with the sale of HSC on February 26, 1996, these
plans and related liabilities and assets were assumed by the purchaser of HSC.
For the fiscal year ended May 31, 1996, the Company incurred total pension costs
of approximately $365,000.
HSC had a discretionary incentive compensation plan which provided current
and deferred compensation to various employees based upon the achievement of
specific levels of operational earnings and other financial performance
criteria. There were no amounts charged to expense under these plans for the
year ended May 31, 1996.
Pension coverage for employees of Hi-Shear Corporation's foreign subsidary
was provided through a separate plan. Obligations under this plan were provided
for by depositing funds with a trustee. The 1996 pension cost for the plan was
$150,000.
Contributions to Hi-Shear Corporation's Deferred Investment Profit Sharing
Plan under Section 401(k) of the Internal Revenue Code were $285,000 for the
year ended May 31, 1996. Subsequent to the sale of HSC, the Company transferred
the balances of its corporate employees who participated in this plan to a new
Hi-Shear Industries Inc. 401(k) Profit Sharing Plan. Company contributions to
this Plan were $9,000 and $12,000 for the years ended May 31, 1998 and 1997,
respectively.
CAPITAL STOCK
Common stock outstanding at May 31, 1998 does not include 284,222 shares
reserved under the Company's stock option incentive plan. At May 31, 1998,
there were no options outstanding under this plan.
19
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OPERATING SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK
Prior to the sale of Hi-Shear Corporation on February 26, 1996, the Company
operated primarily in one industry segment, the manufacture and sale of
precision fastening systems and components. The Company serviced its worldwide
customer base from two manufacturing facilities located in Torrance, California
and Rugby, England. Financial information for fiscal 1996, includes the
operating activity for the nine month period prior to the sale.
Sales and transfers between geographic areas were generally priced to recover
cost plus an appropriate mark-up for profit. Sales and transfers from domestic
to foreign locations amounted to $1,110,000 for fiscal 1996. Sales and
transfers from foreign to domestic locations were not material for any period
presented. Operating profit is revenue less related costs and direct and
allocated operating expenses, excluding interest and corporate expenses.
Corporate assets are those assets maintained for general purposes, principally
cash and cash equivalents and corporate facilities.
In fiscal 1996 , approximately 13% of revenue was attributable to a single
customer who purchases through several different divisions and plants.
A summary of the Company's operations by geographic area is presented below:
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------
Net Revenues to Unaffiliated
Customers:
United States $ - $ - $36,547
Foreign - - 9,853
------- ------- -------
$ - $ - $46,400
======= ======= =======
Operating Profit:
United States $ - $ - $ 2,518
Foreign - - 189
------- ------- -------
- - 2,707
Gain on Sale of Subsidiary - - 1,768
Corporate Expenses (1,322) (1,773) (2,493)
Interest Income (Expense), net 181 514 (637)
------- ------- -------
Profit (Loss) before
income taxes $(1,141) $(1,259) $ 1,345
======= ======= =======
Identifiable Assets
United States $ - $ - $ -
Foreign - - -
Corporate 6,288 7,555 32,748
------- ------- -------
$ 6,288 $ 7,555 $32,748
======= ======= =======
20
<PAGE>
HI-SHEAR INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Foreign operations were conducted primarily in Europe. Certain products were
manufactured in the United States and exported to foreign customers. Export
sales from domestic operations were $4,700,000 for the year ended May 31, 1996.
The Company sold aerospace and transportation fastening systems worldwide,
primarily to major aircraft and automotive manufacturers. Concentrations of
credit risk were limited due to the large number of customers which comprise the
Company's customer base. Credit was extended based upon an evaluation of
each customer's financial condition, and generally, collateral was not required.
Credit losses, if any, have been provided for in the financial statements, and
have been consistently within management's expectations.
COMMITMENTS AND CONTINGENCIES
In March 1991, the Company terminated the operations of one of its
subsidiaries, Defense Systems Corporation in Reno, Nevada. As a result of
shutting down operations at this facility, two contracts with the U.S. Navy were
terminated for default. The Company appealed the default terminations and on
May 31, 1995 its appeals from the default terminations was sustained by the
Armed Services Board of Contract Appeals. This decision released the Company
from any obligation to repay progress payments received under the contracts, and
entitled the Company to recover contract and additional costs expended in
connection with the contracts. On January 31, 1996, the Company filed damage
claims against the U.S. Navy totaling $62.9 million. The government has audited
these claims but has not expressed a willingness to negotiate a settlement of
these claims with the Company. As a result, on February 11, 1997, the Company
filed an appeal before the Armed Services Board of Contract Appeals requesting
an adjudication of this dispute. The Board set an appeal hearing date of August
3, 1998, at the conclusion of which, the Board will consider the facts brought
out at the hearing as well as briefs to be filed by both sides in determining
the amount of claim damages to be awarded to the Company. As a result of the
above, the amount or timing of the recovery cannot be predicted at this time.
The Company had previously written off additional costs associated with this
matter due to the uncertainty of the outcome, however, since the rendering of
the favorable decision, the company began accruing additional costs incurred,
primarily claims preparation and legal, as claims receivable. At May 31, 1998
claims receivable of $3.5 million are included as other long term assets on the
balance sheet, as management believes such amounts are reasonable and
collectable. Since the ultimate recovery of these claims cannot presently be
determined, no recognition from any settlement proposal, other than the claim
receivable noted above,has been reflected in the accompanying financial
statments.
21
<PAGE>
HI-SHEAR INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Subsequent to the completion of the trial against the U.S. Navy, certain
individuals involved in preparing the case were promised a discretionary
bonus contingent upon the successful recovery of monetary claims. In this
regard, the Company has entered into agreements with two of these
individuals providing for the payment of bonuses totalling 8% of the claim
proceeds recovered.
The Company is involved in various other actions arising in the normal
course of business with respect to contracts and employment claims. Management,
after taking into consideration legal counsel's evaluation of all contingent
matters believes that the disposition of these matters will not have a material
adverse effect on the Company's financial position, net income or cash flows.
The Company's operations were conducted from leased facilities, all of
which were under operating leases which expired at various dates through 2004.
The Company also had operating leases covering machinery and equipment which
provided for the Company to pay operating expenses. All leases, other than the
lease of corporate office space, were assigned to the purchaser of HSC or
terminated.
In addition to related property taxes and insurance, the Company made net
rental payments of approximately, $96,000, $138,000 and $950,000, for the years
ended May 31, 1998, 1997 and 1996, respectively. At May 31, 1998 the Company's
commitment for future minimum lease payments under noncancellable operating
leases is $289,000.
22
<PAGE>
HI-SHEAR INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SUMMARY OF QUARTERLY RESULTS (Unaudited)
The following summarizes unaudited quarterly financial data for the fiscal
years ended May 31, 1998 and May 31, 1997:
For The Quarter Ended
---------------------------------------------
Aug 31, Nov 30, Feb 28, May 31,
1997 1997 1998 1998
--------- --------- --------- ---------
(000 Omitted, except per share data)
Revenues $0 $0 $0 $0
========= ========= ========= =========
Gross profit $0 $0 $0 $0
========= ========= ========= =========
Net loss ($382) ($283) ($337) ($159)
========= ========= ========= =========
Net loss per share ($0.07) ($0.05) ($0.06) ($0.03)
========= ========= ========= =========
Aug 31, Nov 30, Feb 28, May 31,
1997 1997 1998 1998
--------- --------- --------- ---------
Revenues $0 $0 $0 $0
========= ========= ========= =========
Gross profit $0 $0 $0 $0
========= ========= ========= =========
Net loss ($277) ($242) ($425) ($339)
========= ========= ========= =========
Net loss per share ($0.05) ($0.04) ($0.07) ($0.06)
========= ========= ========= =========
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. Directors and Executive Officers of the Company
NAME PRINCIPAL OCCUPATION AND POSITION
- ---- ---------------------------------
Harold L. Bernstein Lawyer. Secretary of the Company. Director of
Pressure Piping Components, Inc. (until 1985 a
manufacturer of industrial products).
Victor J. Galgano Vice President and Chief Financial Officer of the
Company. Director of Pressure Piping Components, Inc.
Philip M. Slonim Private investor. Chairman of Pressure Piping
Components, Inc.
David A. Wingate Chairman of the Board, Chief Executive Officer and
President of the Company. Director of Pressure Piping
Components, Inc.
Arthur M. Winston Investment Manager, Glickenhaus & Co. Director of Lea
Ronal, Inc. (a processor of chemical specialties for
the electronics and metal finishing industries).
Director of Pressure Piping Components, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for services rendered
to the Company and its subsidiaries during the fiscal years 1998, 1997 and 1996,
paid to or accrued for those persons who were, at May 31, 1998, the Company's
Chief Executive and all of the other executive officers of the Company and
subsidiaries whose total annual salary and bonus exceeded $100,000:
24
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
---------------
SALARY BONUS
NAME AND PRINCIPAL POSITION YEAR $ $
- --------------------------- ---- ------ -----
David A. Wingate 1998 $325,000 $ 0
Chairman, President & Chief Executive 1997 325,000 0
1996 462,000 0
Robert A. Schell 1998 175,000 50,000
Vice President & Chief Operating 1997 175,000 0
Officer/Space and Defense 1996 175,000 0
Victor J. Galgano 1998 162,000 0
Vice President and Chief Financial 1997 162,000 0
Officer 1996 162,000 0
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 18, 1997, certain information
concerning the persons known to management to be the beneficial owners of more
than 5% of the Company's common stock, and for all of the Company's officers and
directors as a group. Except as otherwise indicated, the persons listed have
sole voting and investment power with respect to shares beneficially owned by
them.
PERCENT
OF
NAME AND ADDRESS OF AMOUNT COMMON
BENEFICIAL OWNER BENEFICIALLY OWNED STOCK
- ------------------- ------------------ -------
GAMCO Investors, Inc. 1,417,540 (1)(2) 24.21%
One Corporate Center
Rye, NY 10580
David A. Wingate 1,181,494 (3) 20.18%
3333 New Hyde Park Road
North Hills, NY 11042
Corbyn Invesment Management 1,124,200 (4) 19.20%
2330 West Joppa Rd., Suite 108
Lutherville, MD 21093
Philip M. Slonim 446,067 (5) 7.62%
P.O. 27835
San Diego, CA 92128
All directors and officers as a
group 1,677,218 28.65%
25
<PAGE>
(1) Firm and related entities have investment discretion regarding this
aggregatenumber of shares, which are beneficially owned by many investment
clients.
(2) Share ownership is based upon information in Amendment No. 46 to Schedule
13D filed with the Securities and Exchange Commission.
(3) Include shares held by Mr. Wingate as the sole trustee of The Wingate
Family Trust of 1980 and shares held by Mr. Wingate's spouse as the sole trustee
of a revocable trust. Does not include 150,000 shares owned by The David A. &
Shoshanna Wingate Foundation Inc. of which Mr. Wingate is one of four directors.
(4) Share ownership is based upon information in Schedule 13G filed with the
Securities and Exchange Commission.
(5) Mr. Slonim and spouse hold these shares as trustees of a revocable trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - See "Index to Consolidated Financial
Statements" in Part II Item 8 herein.
(a) (2) Financial Statement Schedules
All schedules have been omitted because they are inapplicable, not
required, or the required information is included elsewhere in the financial
statements or notes thereto.
(a) (3) Exhibits
(3)(a) Certificate of Incorporation of the Company, restated to
include amendments adopted September 30, 1980, filed as an Exhibit to the
Company's Report on Form 10-K filed with the Commission on August 28, 1981 and
incorporated herein by reference.
(3)(b) By Laws of the Company, as amended March 27, 1986, filed as an
Exhibit to the Company's Report on Form 10-K filed with the Commission on August
26, 1986 and incorporated herein by reference.
26
<PAGE>
(10)(a) Contingent Compensation Agreement between the Company and an
executive signed as of December 26, 1985 (updated November 17, 1987), filed as
an Exhibit to the Company's Report on Form 10-K filed with the Commission on
August 26, 1986 and incorporated herein by reference.
(10)(b) Employment agreement dated October 16, 1989 between the
Company and an executive, filed as an Exhibit to the Company's Report on Form
10-K filed with the Commission on August 24, 1991 and incorporated herein by
reference.
(22) Subsidiaries of the Company, filed herewith.
All other required exhibits have been previously reported in the Company's
prior 10-K's.
ITEM 14 (b) REPORTS ON FORM 8-K
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HI-SHEAR INDUSTRIES INC.
By /s/ David A. Wingate
------------------------------
David A. Wingate, Chairman,
President and Chief
Executive
By /s/ Victor J. Galgano
------------------------------
Victor J. Galgano, Vice
President and Chief
Financial Officer
August 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By /s/ Harold L. Bernstein
---------------------------------
Harold L. Bernstein, Director
August 24, 1998
----------------------
Date
By /s/ Philip M. Slonim
---------------------------------
Philip M. Slonim, Director
August 24, 1998
----------------------
Date
By /s/ Arthur M. Winston
---------------------------------
Arthur M. Winston, Director
August 24, 1998
----------------------
Date
28
<PAGE>
Exhibit 22
SUBSIDIARIES OF THE COMPANY
State or Country
Subsidiaries of the Company of Incorporation
- --------------------------- ----------------
Defense Systems Corporation Nevada
HSI Properties, Inc. Delaware
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