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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended May 31,1996 Commission File Number: 001-12810
HI-SHEAR TECHNOLOGY CORPORATION
(Name of Small Business Issuer in its Charter)
DELAWARE 22-2535743
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
24225 GARNIER STREET, TORRANCE,CA 90505-5355
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (310) 784-2100
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
COMMON STOCK AMERICAN STOCK EXCHANGE
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
NONE
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 is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $10,489,000
The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately $10,339,000 as of August 29, 1996, based upon
the closing sale price on the American Stock Exchange on that date at which the
stock was last sold.
There were 6,628,000 shares of the Registrants Common Stock issued and
outstanding as of August 29, 1996.
Part III, other than Item 13, is incorporated by reference from the Registrant's
Proxy Statement for its 1996 Annual Meeting of Stockholders to be filed with the
Commission with 120 days of May 31, 1996.
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HI-SHEAR TECHNOLOGY CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1 BUSINESS ....................................................
ITEM 2 PROPERTIES ..................................................
ITEM 3 LEGAL PROCEEDINGS ...........................................
ITEM 4 SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS ............
PART II.
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................
ITEM 7 FINANCIAL STATEMENTS & INDEX TO FINANCIAL STATEMENTS ........
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE ........................................
PART III.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....
ITEM 10. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................
ITEM 11. FINANCIAL STATEMENTS & INDEX TO FINANCIAL STATEMENTS ........
ITEM 12. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE ........................................
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ............................
SIGNATURES .................................................................
EXHIBIT INDEX ..............................................................
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Item 1. Business
GENERAL OVERVIEW
Hi-Shear Technology Corporation (the "Company") designs and manufactures
highly reliable electronic and pyrotechnic-separation products for the aerospace
and defense industry, and has adapted its technology to a select group of
emerging commercial products. The Company operates through two business groups,
Aerospace and Defense Products and Commercial Products. The Company's Aerospace
and Defense Products are used by customers ranging from NASA and the U.S.
Government to foreign governments and agencies and other aerospace and defense
companies. Its Aerospace and Defense Products are primarily used in space,
strategic missile and weapon systems and advanced fighter aircraft. Beginning in
fiscal year 1993, the Company began the design, testing and development of a
select group of commercial products that utilize its highly reliable aerospace
and defense technology. Since beginning its commercial group, the Company has
completed development of two commercial product lines, the LifeShear rescue
cutters and high security locks. The Company has also accelerated the
development of a low-cost environmentally safe liquid airbag inflator system.
The Company was founded in the 1950's as a division of Hi-Shear Industries
("HSI") and was incorporated in Delaware in 1984 as a wholly owned subsidiary of
HSI. The Company became an independent corporation in June 1993 when it was
acquired from HSI by its senior management. The Company's executive offices are
located at 24225 Garnier Street, Torrance, CA 90505, telephone (310) 784-2100 -
Facsimile (310) 784-5354.
AEROSPACE AND DEFENSE PRODUCTS
The Company's initial products in the 1950's were for the U.S. space
program, and included power cartridges and separation devices designed to meet
the need for high performance, fail-safe devices with the strength to fasten and
hold together two structures under rigorous conditions and then provide quick
release upon command. As the Company's separation devices and power cartridges
evolved, the Company designed supporting electronic systems to sequentially fire
the separation devices according to pre-programmed parameters, which became a
separate product line for fighter aircraft ejection seat systems and other
applications. The Company's early success with NASA led to expanded application
of the Company's products to satellites, advanced fighter aircraft and other
space launch vehicles.
The Company's Aerospace and Defense Products are separated into two
categories: Ordnance Products and Electronic Products.
ORDNANCE PRODUCTS
Historically, Ordnance Products have accounted for a significant portion of
the Company's revenues. Recent cuts in defense and NASA funding have adversely
affected the Company's revenues from traditional Ordnance Products. However,
management believes that future expansion in its Ordnance Products will come
from new products utilizing its capabilities in electronic fuzing, its laser
ignition systems as well as from commercial and foreign space programs.
TIMING DEPENDENT SEPARATION DEVICES: Satellites, missiles, and other space
vehicles require substantial stand-by power to perform certain timing-dependent
functions such as separation, cutting and deployment. Hi-Shear's separation
devices are gas-activated mechanical devices and systems utilized for
satellites, missiles and other space vehicles. These mechanical devices include
separation nuts, separation bolts, thrusters, power cartridges, wing/fin
actuators, cutters and pin pullers. They are designed for use as standard high
strength fastening hardware with the ability to separate and/or release
components or
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structures on command. These devices provide the low shock mechanical force
required for rapid separation of structures or components in multistage launch
vehicles, nose cones and capsules, launching pads and sleds, ejection seats,
booster rockets, tanks and other jettison equipment. For example, the Company
supplies NASA with the separation bolts that are used to fasten and then release
the solid rocket boosters from the Space Shuttle during its launch. Also, the
Company's products are used in many satellites for deployment of solar arrays
and antenna booms. The Company maintains an active development program for new,
lower shock deployment systems for the increasingly lighter commercial
satellites used in communications and other commercial applications.
POWER CARTRIDGES/INITIATORS: Hi-Shear manufactures power
cartridges/initiators, including supplying NASA's standard initiator for many
years. A power cartridge/initiator creates high energy output by igniting fuel
in a controlled chamber. The power cartridges are hermetically sealed electro-
explosive devices characterized by their compactness, light weight, environment
and corrosive resistance and ultra high reliability. The power cartridge's high
pressure combustion energy operate the thrusters, wing/fin actuators, cutters
and pin pullers found in satellites and tactical and strategic missiles where
motion and force are required for operating rotating missile fins, warhead
deployment, opening satellite doors and deploying solar panels. Other examples
of the Company's ordnance products include launching cases for hand-held ground
to air missiles such as the Stinger.
LASER ORDNANCE AND INITIATION SYSTEMS: The Company is a leader in the
research and development of laser ordnance and initiation systems. The Company
began its laser research and development in 1988 and has received two of only
three U.S. Government major laser development program contract awards. In
November 1993, the U.S. Army conducted field tests with a Company developed
laser firing system which demonstrated that laser initiation offered superior
safety and performance to conventional initiation systems. In fiscal year 1996
the U.S. Army took initial delivery from the Company of six Laser Initiated
Arm/Fire Device ("LAFD") systems and has ordered an additional two for its
testing programs. During this last fiscal year, the U.S. Army also issued its
design requirements for its new generation Howitzers, which included laser
ignition.
In addition, during fiscal year 1996, the Company has undertaken further
development programs in laser ignition utilizing glass rod lasers and laser
diodes. This includes programs to optimize propellant mixtures and laser power
thresholds. During fiscal year 1996, the Company also initiated research efforts
to develop commercial applications for the Company's laser technology.
ELECTRONIC PRODUCTS
SEQUENCERS: The Company remains the main supplier of sequencers for the
Douglas ACES II crew ejection seat now placed in many of the U.S. Air Force's
fighter aircraft, including the A-10, B-2, F-15 and F-16. The Company originally
developed the Analog Recovery Sequencer ("Analog") in the 1960s and more
recently developed the Advanced Recovery Sequencer ("ARS"). These electronic
sequencers trigger various ordnance events that deploy parachutes and rockets in
connection with the pilot's ejection from fighter aircraft. The Analog is a
first generation system with resistors and capacitators while the ARS is a
second generation sequencer employing microprocessor-based, digital electronics
for improved performance.
ELECTRONIC, SAFE, ARM FUZE: The Company has recently developed a fuzing
system for strategic and tactical missiles known as Electronic, Safe/Arm Fuze
("ESAF"). The electronic fuzing system employs the latest Application Specific
Integrated Circuits ("ASIC") components with upgraded high voltage networks to
operate exploding foil initiators. In fiscal year 1996, the Company's ESAF was
selected by Loral (now Lockheed Martin) as the warhead fuzing system for its
Upgraded Patriot (PAC-3) missile system. The Company is now in production for
the Improved Patriot. Management believes that
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the ESAF, with modifications, may provide a family of advanced, safe fuzing
systems for new air-to-air missiles or for retrofit to existing air-to-air
missiles (such as the Sparrow or Sidewinder) for the U.S. Air Force, U.S. Navy,
foreign allies of the U.S., and in other applications. The Company's first
modified ESAF contract was with Hughes for its new Sea Sparrow missile program.
Other programs being targeted by the Company include the Hughes' AIM-9X missile.
Most missiles in use today are fuzed with mechanical fuzes designed in the
1950's and 1960's. The Company's primary competition in this market is Motorola
who has substantially greater resources than the Company.
In electronics, programs utilizing the Company's fuzing systems are
expected to be in demand for new missile programs. These include Loral's
Upgraded Patriot (PAC-3) missile where the Company provides the electronic
fuzing system. Contracts with the U.S. Air Force to supply new or refurbished
Sequencers can vary substantially from year to year.
HIGH ENERGY FIRING UNIT/POWER SWITCHING ASSEMBLY (PSA): The High Energy
Firing Unit ("HEFU") was originally designed by the Company in the 1970's for
the Pershing missile program. The HEFU design was updated in the mid-eighties to
support the Titan IV and HEDI missile programs. The PSA is an electronic power
switching assembly specifically for the initial stage of the Titan IV missile
program. As a result, the recent consolidation of Lockheed and Martin into one
company which builds the Titan IV, the Company anticipates a consolidation and
simplification of their missile system ordnance initiation systems. The per unit
event cost of the HEFU/PSA exceeds those available from conventional electro-
mechanical devices and is greater than a multi-output laser system developed by
the Company for Lockheed. In consideration of this analysis, the Company has
decided to discontinue these product lines after completion of the current
contracts and will not accept any future contracts or add-ons to the existing
contracts. As the sole source suppler of the HEFU/PSA, the Company, however, may
be required to produce these products for the U.S. Air Force under certain DOD
regulations. The Company expects that the next generation space shuttle vehicle
(X-33), to be produced by Lockheed Martin, will require a reusable laser
switching system and plans are now underway to develop such a system.
GOVERNMENT CONTRACTS AND CUSTOMERS
Sales to the United States Government, including both defense and non-
defense agencies, and sales as a subcontractor as well as direct sales
represented 98% of revenue in fiscal year 1996 and 99% of revenues in fiscal
year 1995. The Company's Government customers include the U.S. Air Force, U.S.
Navy, NASA and the U.S. Department of Defense. Most of the Company's products
are generally used in larger contracts, such as the Space Shuttle or satellites
and missiles, and therefore its customers tend to be other large defense or
aerospace prime or subcontractors. In fiscal year 1996, over 50% of the
Company's revenues were accounted for by its two largest customers: the U.S.
Government 21% and Lockheed Martin 33%. For fiscal year 1995, the three largest
customers were the U.S. Government 26%, Lockheed Martin 26% and Hughes Aircraft
7%. Contract awards and contract competition phases will continue to vary and
therefore sales during any one fiscal year should not be considered indicative
of future sales to those customers.
In fiscal year 1996 and fiscal year 1995, all of the Company's Government
contracts, including as a subcontractor, were on a fixed price contract basis.
Under a fixed price contract, the Company agrees to perform certain work for a
fixed price. These fixed price contracts carry certain inherent risks, including
the underestimation of costs, problems with new technologies or the occurrence
of adverse changes over the contract period. Due to economies that can derive
over the period of the contract, these fixed price contracts can also offer
significant profit potential. Also, Company contracts which evolve from the U.S.
Government or from subcontractors to prime government contractors are subject to
termination for convenience by the U.S. Government. However, if a contract is
terminated, the Company would be entitled to payment of costs incurred up to the
date of termination and a reasonable
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termination fee.
In addition to the government's right to terminate, U.S. Government
contracts extending beyond one year are also conditioned upon the continuing
availability of Congressional appropriations. Congress usually appropriates on a
fiscal year basis even though contract performance may take several years.
Additionally, when the Company participates as a subcontractor, it is subject to
the failure or inability of the prime contractor to perform its prime contract.
The Company obtains new business by marketing proposals or ideas for
existing or new products to the U.S. Government, its agencies, the armed forces
or other prime contractors, and by responding to applicable requests for
proposals ("RFPs") when issued for new products within the Company's area of
expertise. The Company's business is also dependent to a large extent upon its
continuing advanced expertise in niche technical areas, such as space separation
devices, sequencers, advanced fuzing systems and laser ignition. It continually
maintains a fail-safe design and manufacturing capability for which it has
become known in the industry.
BACKLOG
The Company's book-to-ship cycle is typical of the long lead times required
for highly engineered, custom manufactured, aerospace products. Typically, the
final negotiation of the detailed contract requirements together with the
procurement of long lead-time materials, manufacturing processes and testing,
takes between 6 and 12 months or more to accomplish. This results in a
significant delay between the addition of a newly awarded contract to backlog
and the resulting recognition of revenues. Due to this delay, a reduction in
contracts booked during a particular fiscal year will normally result in lower
revenues for most periods the following fiscal year. Conversely, an increase in
contracts booked will generally result in an increase in revenues in the
following periods. The Company believes that it will experience a shorter book-
to-ship cycle on its commercial products than on its aerospace and defense
contracts.
Contracts undertaken by the Company may extend beyond one year, and
accordingly, portions are carried forward from one year to the next as part of
backlog. Some of the Company's contracts with the U.S. Government are supply
contracts whose requirements are primarily based on the Government's usage of
products on a periodic basis. Because many factors affect the scheduling of
projects, no assurances can be given as to when revenue will be realized on
projects included in the Company's backlog. Although backlog represents only
business which is considered to be firm, there can be no assurance that
cancellations or scope adjustments will not occur. The majority of backlog
represents contracts under the terms of which cancellation by the customer would
entitle the Company to all or a portion of its costs incurred and potential
fees. See Item 6 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
COMPETITION
To compete in the government aerospace and defense contracts market,
companies must typically be involved in the development stage of the product.
The research and development for "qualifying" the product pursuant to government
plans and specifications is a costly and time consuming process. Each of the
Company's aerospace and defense products are thoroughly tested individually, as
well as tested in conjunction with the end product into which it is
incorporated. After commencement of a given program, it is very costly for
competitors to design new competitive components or for customers to change
suppliers of the components since the customer would then be required to re-
qualify the products. Therefore, due to the Company's extensive financial
investment and years of involvement in the development of its products and the
practical barriers to entry into the market by competitors, competition
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is not a critical factor for subsequent orders. In addition, local, state and
federal permits and licenses which are required to manufacture such pyrotechnic
devices as the Company produces are difficult to obtain and therefore provide
further barriers to entry into the market by competitors.
As an independent corporation, the Company currently qualifies as a small
business entity (having less than $50 million in revenues and less than 500
employees) for the purposes of dealing with U.S. Government contracts or
programs. Federal regulations encourage small business subcontracting and impose
small business subcontracting goals on many government programs. The Government
also promotes direct contracting with small businesses. In many instances, this
requirement is fulfilled by a "small business set aside" provision whereby only
small businesses may compete for a contract. An additional benefit derived from
qualifying as a small business is the Small Business Innovative Research
("SBIR") program, under which a small business is eligible for research and
development awards up to $750,000.
COMMERCIAL PRODUCTS
Prior to senior management's purchase of the Company in 1993, the Company
commenced a program to develop three commercial products that were based on its
proprietary aerospace and defense technology. Initially, the Company had plans
for three products based on commercialization of certain aerospace and defense
technologies: i) a low cost, light weight cutter tool for rescue purposes that
use proprietary power cartridges, ii) high-security locks, and iii) a second
generation initiator for a major air bag manufacturer. The Company completed
development and commercially introduced the rescue cutter in fiscal year 1995,
and the high security locks in 1996. During fiscal year 1996, the Company also
has accelerated development of the LineShear, an industrial tool developed for
high volume use, and its liquid airbag inflator system.
CUTTER TOOLS (LIFESHEAR AND LINESHEAR)
The U.S. Government, with the Cold War winding down in the early 1990's,
sought to foster ways to convert the defense technology previously developed to
new uses in commercial markets. The LifeShear cutter was developed from funds
received from the United States Government's Technology Reinvestment Program
(TRP) and from the research and development funds provided by the Company. The
Company teamed with NASA and the City of Torrance Fire Department to develop the
LifeShear cutter. The Company's line of LifeShear cutters provide emergency
rescue teams with a light weight, substantially less expensive and ready for
immediate use (LifeShear) cutter for a wide range of emergency situations.
LifeShear is designed to quickly cut through metal car posts, roofs or other
pieces of the car so that a person can be quickly extricated. The LifeShear
cutter is substantially smaller, lighter, less costly and easier to use than the
hydraulic equipment currently in use known as the Jaws of Life(R). The LifeShear
cutter employs the Company's proprietary power cartridges which eliminates the
need for cumbersome hydraulic and electrical connections and portable
generators.
The Company has developed the LineShear cutter to offer manufacturers,
utilities and other industrial/commercial firms an industrialized tool for high
volume use for cutting large cables, wires or other objects. LineShear provides
an improved cutting capability and is modified so that the item being cut, e.g.
a cable or other item, will retain its shape after the cut. This capability is
particularly important for heavy cables and other shaped items where they are to
be spliced or form fitted after the cut. The LineShear cutter was requested by
the electric utility industry for its member utilities, which requested that the
cutters also provide remote operation capabilities in addition to the hand held
operation capability.
The LifeShear and LineShear cutters use a small, disposable power cartridge
for each cut that provides power of over 32,000 lbs. psi. The power cartridge is
based upon the design of NASA Standard
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Initiators, regularly produced by the Company. The Company expects that sales of
replacement cartridges will become an increasing source of future revenues as
more cutters are sold and used.
LifeShear is distributed through U.S. and foreign distributors who
specialize in products for fire and rescue. Additionally, the Company attends
selected trade shows in the U.S. as well as sponsors safety and training
functions. Customers include the fire and/or rescue operations in Los Angeles
County, Torrance (CA), San Jose (CA), City of Pittsburgh, Atlanta, FEMA, U.S.
Navy and Marine Corp Air Rescue.
The Company competes in the cutter business with other companies that have
established products that use traditional hydraulic-operated equipment and that
have substantially greater resources than the Company. Sales of these products
to municipalities are also subject to budget and procurement restrictions of
governmental entities.
HIGH SECURITY LOCKS
The Company has previously produced for the U.S. Government and the U.S.
Navy certain high security locks in connection with nuclear weapons and
missiles. The U.S. Defense Appropriations Act of 1993 increased the requirements
for high security locks. In February 1996, the Company was awarded an initial
contract of $1.2 million for its newly designed mechanical combination locks.
The Company intends to market its mechanical lock as well as a new electro-
mechanical lock to the U.S. government, foreign governments and commercial
companies. The Company believes there is limited industry competition. For these
products, however, the recent volume of military base closings coupled with a
1995 declassification Executive Order, has reduced demand and left the U.S.
Government with an inventory of high security locks. Consequently, the near-term
market for high security locks is uncertain.
AUTOMOTIVE AIRBAG INFLATORS
The Company's liquid airbag technology was first announced in November 1994
after the Company made a patent filing, The patent claims generally relate to
its liquid propellant technology applied to automotive airbag use, which the
Company developed in its work in the U.S. space program. When the technology is
applied to an automotive inflator application, the liquid fuels produce a gas
that inflate the airbag on a measurable, rapid time basis. The liquid fuel and
the gas produced is benign and environmentally safe in contrast to the toxic
gases and materials used in existing airbag systems. During fiscal year 1996,
the Company filed another application for a U.S. Patent to protect additional
distinct designs of the Company's liquid powered airbag inflator systems. The
Company believes its design now addresses automobile company demands for
inflator performance, cleanliness, and a lower cost airbag inflation system.
Morton International, Inc., a leading airbag manufacturer, was recently granted
a patent for a liquid airbag inflator, which Management and its patent counsel
believes is not in conflict with the Company's patent applications, but which
could prove to be a competitive product in the developing liquid airbag inflator
market. The Company believes, however, that efforts by such leading airbag
manufacturers further substantiates management's own belief in the potential for
a liquid propellant system to address the evolving airbag issues, including
lower cost and environmental impact.
The Company has identified the automotive airbag market as a major, fast
growing market in which management believes its technology, if developed,
marketed and manufactured in conjunction with an experienced airbag
manufacturer, can gain market share. In the U.S. market, all trucks and cars are
required to have both driver and passenger side airbags for the 1999 model year.
Forecasters suggest that the worldwide airbag market by early 2000's automotive
model years could exceed 70 million airbag units, up from 48.7 million for model
year 1996. When the side-impact and back seat markets are included for airbags,
airbag production by the early model year 2000's could exceed 100 million units.
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Europe and Asia, where presently only 50% of the cars produced have airbags, are
major markets for airbags as well. Concurrent with this rise in unit volume has
been a significant decrease in unit price for airbag components (sensor,
inflator, initiator and bag) and hence, a decrease in the overall airbag price.
The Company retained a prominent investment banking firm to assist it in
evaluating options to accelerate the introduction and manufacturing of its
inflator and to consider the financial requirements to complete this
development. The Company, with the advice and assistance of its investment
banking firm, has initiated a program to solicit appropriate experienced airbag
manufacturers, qualify, evaluate and then select one as a strategic partner. The
Company believes that the recent enhancements to its initial design will enable
the Company to bring to conclusion a strategic partnership.
RESEARCH AND DEVELOPMENT
The Company maintains a staff of engineers, other scientific professionals
and support personnel engaged in development of new applications of technology
and improvement of existing products. In addition to the research and
development performed for specific aerospace and defense contracts and programs,
the Company invested $1.4 million in fiscal year 1996 and $.7 million in fiscal
year 1995 on Company sponsored research and development. During the fiscal year,
prototype products were developed and patents generated or applied for in
several areas, including its liquid propellant automobile airbag inflator.
MANUFACTURING AND PRODUCTION
Production of the Company's products consists of fabricating and assembling
the hardware components and separately preparing the pyrotechnic charge in the
power cartridge. Production of the electromechanical devices involves the
purchase of machined components, electrical switches, connectors, seals and
other materials, the mechanical assembly of the components and the testing of
the completed units. Throughout the entire process, strict quality assurance
controls are maintained including customer and, where required, government
inspection. After assembly, the products are functionally tested on a sample
basis. The handling and processing of pyrotechnic materials requires extensive
experience and expertise as well as the proper equipment, facilities and
permits. The Company has been safely handling and processing these fuels and
oxidizers for over thirty years.
INTELLECTUAL PROPERTY
The policy of the Company is to apply for patents and other appropriate
statutory protection when it develops new or improved technology. The Company
presently holds over 40 U.S. patents as well as numerous trademarks and
copyrights. The Company also relies on the laws of unfair competition and trade
secrets to protect its unpatented proprietary rights. The Company has filed two
patent applications with the U.S. Patent and Trademarks office for its liquid
propellant automobile safety airbag inflator technology. The Company also has
several existing patents related to certain technologies developed as a result
of contracts with or for the U.S. Government. However, patents issued as a
result of contracts with or for the U.S. Government do not enjoy the same
proprietary protection or benefits as patents issued on commercial technology or
products.
The Company requires all employees to execute an Assignment of Rights
agreement which assigns to the Company any intellectual property developed by
the employee during the course and scope of the employment. In addition, each
key employee has entered into an agreement with the Company agreeing, to regard
and preserve as confidential all information pertaining to the Company's
business obtained by the employee as a result of employment with the Company.
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REGULATION, LICENSES AND PERMITS
The ability of the Company to pursue its business activities is regulated
by various agencies and departments of the U.S. Government. The Company's
Government contracts are subject to regular audit and periodic review and may be
modified, increased or reduced in the event of changes in governmental
requirements or policies, Congressional appropriations and program progress and
scheduling. The Company is also required to obtain the necessary export licenses
from the U.S. Department of Commerce to export products and technical
information. In its commercial businesses, various U.S. and foreign regulations
may apply, including necessary permits to import power cartridges into a
country.
EMPLOYEES
As of August 29, 1996 the Company had 113 employees of which 107 are full-
time employees, the majority of whom are engineers and technicians. The
Company's success depends on its ability to attract and retain highly qualified
personnel. None of the employees are represented by a labor union and the
Company has no knowledge of any labor organizing activities. The Company has
never suffered a work stoppage and considers its relations with its employees to
be excellent.
ITEM 2. PROPERTIES
The Company's executive offices are located in Torrance, California, in a
75,000 square foot building organized for electronic and pyrotechnic
manufacturing and assembly operations. Approximately 25,000 square feet are
devoted to administrative offices, engineering design activities and a
prototyping facility. The remaining 50,000 square feet are dedicated to
manufacturing and quality assurance operations. The manufacturing area has
approximately 20,000 square feet available for expansion for new or added
product lines. In December 1992, the Company negotiated a new seven year lease
of the Torrance facility which provides for pre-set lease rates and expires on
November 30, 1999. The lease provides the Company with renewal options and a
right of first refusal on the sale of the facility. The lease also provides for
the continuation of a loan ($84,000 outstanding balance at May 31, 1996), from
the lessor to the Company, used for leasehold improvements and extends the loan
due date to October 31, 1999. The lease is guaranteed by HSI.
The Company also leases a 16 acre facility in Saugus, California, which is
used to store large amounts of base mixes. The main building on the facility is
an 8,000 square foot manufacturing and assembly area which includes a 2,500
square foot blending and loading area. The Company leases the Saugus property
from HSI Properties, Inc. pursuant to a lease which expires on May 31, 1999. The
rent is fixed for a period of three years and then increases each June 1st by
four percent of the rent last in effect. The Company has a three year option to
purchase the property for $1.0 million. After June 1, 1996, the purchase price
increases each June 1st by four percent of the purchase price then last in
effect. The Company believes that its current facilities in Torrance and Saugus
will adequately support its operations for the foreseeable future. Management
believes that each of the properties is adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently a party to several disputes which may result in
litigation. After consulting with counsel, it is the opinion of management that
ultimate liability, if any, with respect to these disputes, will not be material
to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "HSR". The following table reflects the high and low sales prices of
the Company's Common Stock, as reported by the American Stock Exchange composite
tape, for the periods set forth below:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year 1997 ended May 31, 1997
2nd Quarter (1) 6-1/2 5-1/4
1st Quarter 7-1/2 4-3/8
Fiscal Year 1996 ended May 31, 1996
4th Quarter 10 6-1/4
3rd Quarter 9-7/8 5-1/4
2nd Quarter 15 8-1/16
1st Quarter 13-1/4 9-5/8
<CAPTION>
Fiscal Year 1995 ended May 31, 1995 HIGH LOW
---- ---
<S> <C> <C>
4th Quarter 13 8-1/2
3rd Quarter 14-1/8 9-1/8
2nd Quarter 12-1/4 3-1/2
1st Quarter(2) 5 3-5/8
</TABLE>
(1) Trading activity through September 9, 1996.
(2) The Company's Common Stock began trading on May 24, 1994.
The Company has never paid a cash dividend and the payment of any cash
dividends in the future are subject to the terms of the Company's credit
facility and will be determined by the Board of Directors in light of the
conditions then existing, including the Company's earnings, financial
requirements and conditions, opportunities for reinvesting earnings, business
conditions and other factors.
The number of holders of record of the Company's Common Stock was
approximately 274 and the estimated number of beneficial shareholders was 1,500
as of August 29, 1996.
<PAGE>
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report. This report,
including this discussion, contains forward-looking statements about business
strategies, market potential, product launches and future financial performance
that involve risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, the acceptance of its new aerospace and
defense products, the acceptance and pricing of its commercial products, the
development and nature of its relationship with key strategic partners, the
resolution of federal budgetary issues and the economy in general.
Hi-Shear Technology Corporation (the "Company") designs and manufactures
highly reliable electronic and pyrotechnic-separation products for the aerospace
and defense industry, and has adapted its technology to a select group of
emerging commercial products. The Company operates through two business groups,
Aerospace and Defense Products and Commercial Products. The Company's Aerospace
and Defense Products are used by customers ranging from NASA and the U.S.
Government to foreign governments and agencies and other aerospace and defense
companies. Its Aerospace and Defense Products are primarily used in space,
strategic missile and weapon systems and advanced fighter aircraft. Beginning in
fiscal year 1993, the Company began the design, testing and development of a
select group of commercial products that utilize its highly reliable aerospace
and defense technology. Since beginning its commercial group, the Company has
completed development of two commercial product lines, the LifeShear rescue
cutters and high security locks. The Company has also accelerated the
development of a low-cost environmentally safe liquid airbag inflator system.
AEROSPACE AND DEFENSE PRODUCTS
The Company's initial products in the 1950's were for the U.S. space
program, and included power cartridges and separation devices designed to meet
the need for high performance, fail-safe devices with the strength to fasten and
hold together two structures under rigorous conditions and then provide quick
release upon command. As the Company's separation devices and power cartridges
evolved, the necessary supporting electronic systems designed by the Company,
e.g. sequencers designed to sequentially fire separation devices according to
pre-programmed parameters, become product lines for, among other applications,
fighter aircraft ejection seat systems. New products from research and
development work conducted by the Company in pyrotechnic laser ignition have
been developed and include laser ignition systems for use on U.S. Army Howitzers
and an Electronic, Safe Arm Fuzing systems that is now being used on Loral's
PAC-3 Upgraded Missile program. The Company's aerospace and defense products are
separated into two categories: Ordnance Products and Electronic Products.
Demand for the Company's aerospace and defense products is driven primarily
by purchases by the U.S. Government through a non-governmental prime contractor
or other subcontractor. The contracts provide for a specific number of
deliveries over a period of time. The Company accounts for these contracts on
the percentage of completion basis. The percentage completed is determined for
most contracts as units are shipped rather than as costs are incurred.
Accordingly, the results for any particular accounting period, or period to
period comparisons, may be significantly affected by the timing of production
deliveries and may not be indicative of future operating results.
<PAGE>
COMMERCIAL PRODUCTS
The Company is committed to the development of products for commercial
applications. The Company has incurred substantial expenses throughout its
organization related to the development of new commercial products that
complement and utilize its aerospace and defense technology. In fiscal year
1996, the Company completed commercial introduction of two of its new product
lines (high security locks and its rescue cutter) and has accelerated
development of its third commercial product, an advanced liquid airbag inflator.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MAY 31, 1996 COMPARED WITH FISCAL YEAR ENDED MAY 31, 1995
Revenues were $10.5 million in 1996 as compared to $11.9 million in 1995.
The 12% decrease in revenues was primarily the result of lower revenues in the
HEFU/PSA line of business. Revenues were also adversely affected by a lower
starting backlog for fiscal year 1996. The Company also experienced a customer
delay in fiscal year 1996 in its Milstar satellite program, as well as other
government contract delays due in part to budgeting problems in passing a final
defense procurement budget including several shut downs of the federal
government. This decrease in revenues was partially offset by initial sales of
its new ESAF and laser ignition systems, and additional sales of its LifeShear
products. Revenues in the fourth quarter of $3.1 million reflect the increase in
order rate experienced by the Company during the second half of fiscal year 1996
and a pick-up in deliveries of previously delayed contracts.
The Company was awarded $13.2 million in new contracts in fiscal year 1996
as compared to $9.2 million in fiscal year 1995. This 43% increase in contracts
awarded during fiscal year 1996 and contract delays caused by government
budgeting considerations resulted in an ending backlog of $15.8 million as
compared to $12.9 million at the end of fiscal year 1995. The increase in awards
granted during fiscal year 1996 was primarily attributable to contracts for its
new products, including the ESAF for the PAC-3 (upgraded patriot missile) and to
the initial award of $1.2 million for the Company's high security locks. As a
result of a 22% higher starting backlog, the Company's plans to aggressively
market and license its LifeShear and LineShear product line, and the initial
sales of its high security locks, the Company has positioned itself to increase
sales in fiscal year 1997.
Cost of revenues increased to $9.1 million in fiscal year 1996 as compared
to $8.6 million. This 6% increase in Cost of Revenues despite lower Revenues for
the fiscal year resulted from a latent defect in a part purchased from a
supplier that was discovered in the fourth quarter which caused the Company to
rework all of the HEFU units ordered by its contract at a loss of approximately
$900,000. The Company determined to complete the contract and to discontinue
this specific line of business. In addition, the Company also adjusted certain
overhead costs related to its LifeShear product line to reflect the lower
Revenues than had previously been estimated.
Gross profits decreased to approximately $1.4 million or 13% of Revenues as
compared to $3.3 million or 28% of revenues in fiscal year 1995. This decrease
resulted from lower Revenues volume to which overhead could be allocated as well
as high Costs of Revenues associated with the completion and discontinuance of
the HEFU contract.
Selling, General and Administrative expenses, excluding research and
development, totaled $2.6 million in fiscal year 1996 versus $2.7 million in
fiscal year 1995. This 6% decrease in Selling, General and Administrative
expenses, is directly attributable to continued efforts of management to improve
corporate efficiencies and reduce administrative expenses. The Company believes
it will continue to
<PAGE>
improve on these efficiencies by utilizing its new accounting and management
information systems ("CINCOM")to improve material control and reporting in both
its aerospace and defense and commercial product groups. The Company expects
this new computer system to be installed and fully operational during fiscal
year 1997.
Research and Development expenses increased to $1.4 million for fiscal year
1996 as compared to $.7 million in fiscal year 1995. This substantial increase
in research and development expenses reflect accelerated development for its
liquid airbag inflator system and the LineShear and LifeShear product lines.
Development of the airbag inflator system consisted of enhancing its design and
lowering its manufacturing cost to meet rapidly changing airbag industry
requirements. It is management's belief that these enhancements to performance
and technical advantages should help the Company secure the right strategic
partner to facilitate commercial production. The development costs incurred in
its LifeShear family of products primarily related to improving the LineShear
cutter blade to the point where it can be used for a volume of cutting far
exceeding that required for rescue cutters. This specialized cutter is to be
marketed to the electric utility and other industries where requirements for
cutting, when addressed by LineShear, can substantially reduce the time and
expense of current cutting methods.
During May 1996, management approved a plan to exit the HEFU/PSA
business. The HEFU/PSA line of business is part of the defense and aerospace
business segment. This line indicates ordnance functions and switches on the
initial stage of the Titan launch vehicle. Management decided to exit this
business line because the technology associated with the product was outdated,
was not cost competitive and the future standardization in the industry was not
anticipated to include this business line. In addition, the Company had
incurred substantial losses in the development and delivery of this business
line. The plan's major components are to complete the existing contracts by
December 1996 and not accept any future new contracts or add-ons to existing
contracts in this specific line of business, unless required under Department of
Defense (DOD) regulations. Management determined that existing assets and
personnel assigned to this business activity can be utilized in other areas of
the Company.
The HEFU/PSA line of business was a significant line of business when the
Company was acquired from HSI in 1993. Management has allocated the negative
goodwill associated with the acquisition to the lines of business that existed
at that date. The method used by the Company was based on the relative size of
the backlog in 1993. Management believes this method was an appropriate
indication of the factors that contributed to their ability to acquire the
business for less than the fair value of the net assets. Unamortized negative
goodwill of $1,150,000 was allocated to this business activity and was written
off in 1996. The remaining negative goodwill of $967,000 will continue to be
amortized over the original ten-year period. Therefore, amortization of negative
goodwill for fiscal year 1997 will be reduced by $165,000.
The Company had an operating loss of $1.1 million as compared to operating
income of $181,000 for fiscal year 1995. This operating loss was primarily the
result of a substantial increase in research and development expenses and a
result of lower revenues for the reasons discussed above. The Company had an
operating loss of $1.6 million for the fourth quarter of fiscal year 1996 as
compared to an operating loss of $505,000 for the fourth quarter of fiscal year
1995. The fiscal year 1996 fourth quarter loss is primarily the result of an
adjustment to the Company's overhead absorption rate to reflect lower revenues
than had previously been estimated and costs to rework the HEFU units. In
addition, the Company also adjusted certain overhead costs related to its
LifeShear family of products to also reflect lower revenues than had been
previously estimated.
Net interest expense for the fiscal year 1996 was $251,000 as compared to
$92,000 in fiscal year 1995. This increase in interest expense is attributed to
increased borrowing to rework and complete the HEFU contract and other working
capital needs.
The Company had a net loss of $1.3 million for fiscal year 1996 as compared
to a net profit of $81,000 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $1.8 million was used in operations during fiscal year 1996
compared to $4.0 million used in operations in fiscal year 1995. Net cash during
fiscal year 1996 was used to rework and complete the HEFU business line which
has been discontinued by the Company, increased research and development costs
related to its airbag inflator system and its cutter tools, to decreased
revenues as a result of delays in government contracts. In addition the Company
also incurred $518,000 of capital expenditures related primarily for its
computer system and tooling for its high security locks.
Management believes that the Company will generate sufficient cash from its
operation to satisfy its obligations as they become due. The Company
anticipates improvements in cash flow will be accomplished through increased
revenues generated from the aerospace and defense business as a result of a
higher starting backlog and from revenues of its new, higher margin products,
especially the ESAF and the laser ignition systems. The Company expects to
reduce research and development costs as a percentage of sales due to the
acceleration of the development of several of its products in fiscal year 1996.
Management also plans to aggressively increase the marketing of its commercial
products, including the pursuit of additional licensing agreements related to
its products. Finally, with the completion of the HEFU/PSA business line in
December, 1996, the Company anticipates receipt of retentions on these contracts
totaling approximately $1 million. Although management believes these targets
are realistic, changes in circumstances and/or delays could cause differences
between expected and actual operating results.
<PAGE>
results.
The Company's primary source of capital during the year was its lines of
credit and the net proceeds from the sale of warrants exercised during the year.
The Company maintains a $3.5 million line of credit with a commercial bank and
pays market interest on the outstanding balance. This Agreement expires on
November 1, 1996. Management believes it will be able to renew this Agreement
under the terms and conditions that will meet the Company's needs for the
foreseeable future. As of May 31, 1996, there is $2.6 million outstanding on
this line of credit. Net proceeds were received in the amount of $593,000 during
the second quarter of fiscal year 1996 from the exercise of warrants to purchase
76,500 shares of common stock pursuant to its warrant agreement with the
underwriter of the Company's Initial Public Offering. In addition, the Company
received $123,000 form the exercise of employee stock options.
The Company believes that its working capital of $3.0 million and its lines
of credit will be sufficient for its operations for the foreseeable future. The
Company expects that development of the liquid airbag inflator system for
commercial high volume production will require additional sources of capital.
There are no assurances such capital will be available, or if available, will be
on terms acceptable to the Company.
ACCOUNTING PRONOUNCEMENTS TO BE IMPLEMENTED
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of financial Accounting Standards No. 121 ("SFAS 121") requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Adoption of SFAS 121 is
required for the Company in the fiscal year ending May 31, 1997 and the Company
does not anticipate that the adoption of SFAS 121 will have a material impact on
its financial statements.
In October 1995, FASB issues SFAS No. 123, Accounting for Stock-Based
Compensation." SFAS NO. 123 encourages a new method of recognizing stock-based
compensation expense using the estimated fair value of employee stock options.
Alternatively, companies may choose to retain the current approach set forth in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and provide expanded footnote disclosure. The statement is effective
for the Company's fiscal year 1997. The Company does not plan to use the
measurement and recognition criteria when it adopts the pronouncement and
therefore does not expect to have a material effect on its financial statements.
See Note 16 to the Financial Statements for additional information on this
statement.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports ............................................
Financial Statements .....................................................
Balance Sheet ............................................................
Statements of Operations .................................................
Statements of Stockholders' Equity .......................................
Statements of Cash Flows .................................................
Notes to Financial Statements ............................................
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Hi-Shear Technology Corporation
Torrance, California
We have audited the accompanying balance sheet of Hi-Shear Technology
Corporation (the "Company") as of May 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 the Company at May 31, 1996,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Anaheim, California
September 6, 1996, except for the first paragraph of
Note 6, as to which the date is September 12, 1996.
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hi-Shear Technology Corporation
Torrance, California
We have audited the accompanying statements of operations, stockholders' equity,
and cash flows of Hi-Shear Technology Corporation (the "Company") for the year
ended May 31, 1995. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations, cash flows, and changes in stockholders'
equity of the Company for the year ended May 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche, LLP
August 14, 1995
Los Angeles, California
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
BALANCE SHEET
MAY 31, 1996
<TABLE>
<CAPTION>
ASSETS (Note 6)
- --------------------------------------------------------------------------------
<S> <C>
Current Assets
Cash (Note 2) $ 76,000
Accounts receivable (Note 3) 4,322.000
Inventories (Note 4) 3,805,000
Prepaid expenses and other current assets 57,000
-------------
TOTAL CURRENT ASSETS 8,260,000
Equipment, net (Note 5) 1,258,000
Other Assets
Deferred costs 417,000
Other intangible assets 150,000
-------------
$ 10,085,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities
Note payable to bank (Note 6) $ 2,636,000
Current portion of long-term debt (Note 6) 242,000
Accounts payable 1,425,000
Accrued payroll and related costs 480,000
Other accrued liabilities (Note 8) 449,000
-------------
TOTAL CURRENT LIABILITIES 5,232,000
Long-Term Debt (Note 6) 144,000
-------------
TOTAL LIABILITIES 5,376,000
-------------
Excess of Net Assets Acquired Over Purchase Price (Note 12) 967,000
-------------
Commitments and Contingencies (Notes 4, 8, 9 and 13)
Stockholders' Equity (Note 11)
Preferred stock, $1.00 par value; 500,000 shares authorized;
no shares issued -
Common stock, $.001 per value; 25,000,000 shares authorized;
6,628,000 shares issued and outstanding 7,000
Additional paid-in capital 6,977,000
Accumulated deficit (3,242,000)
-------------
TOTAL STOCKHOLDERS' EQUITY 3,742,000
-------------
$ 10,085,000
=============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues (Notes 3, 10 and 14) $ 10,489,000 $ 11,937,000
Cost of Revenues (Note 4) 9,072,000 8,633,000
---------------------------
GROSS PROFIT (NOTE 12) 1,417,000 3,304,000
Selling, General and Administrative Expenses
(Notes 8 and 9) 2,566,000 2,730,000
Research and Development Expenses 1,385,000 695,000
Amortization of Excess of Net Assets Acquired
Over Purchase Price (302,000) (302,000)
Write-Off of Excess of Net Assets Acquired Over
Purchase Price Attributed to Exited Line of
Business (Note 12) (1,150,000) -
---------------------------
OPERATING INCOME (LOSS) (1,082,000) 181,000
Interest Income 18,000 109,000
Interest (Expense) (269,000) (201,000)
---------------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,333,000) (89,000)
Provision for Income Taxes (Note 7) - 8,000
---------------------------
NET INCOME (LOSS) $ (1,333,000) $ 81,000
===========================
Net Income (Loss) Per Common and Common
Equivalent Share $ (0.20) $ 0.01
===========================
Weighted Average Number of Common and Common
Equivalent Shares Outstanding During the Year 6,594,000 6,508,000
===========================
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1994 6,500,000 $ 7,000 $ 6,124,000 $ (1,990,000) $ 4,141,000
Exercise of stock
options 27,000 - 137,000 - 137,000
Net income - - - 81,000 81,000
-----------------------------------------------------------------------------------------------
Balance, May 31, 1995 6,527,000 7,000 6,261,000 (1,909,000) 4,359,000
Exercise of stock
options 24,000 - 123,000 - 123,000
Exercise of stock
warrants 77,000 - 593,000 - 593,000
Net (loss) - - - (1,333,000) (1,333,000)
-----------------------------------------------------------------------------------------------
Balance, May 31, 1996 6,628,000 $ 7,000 $ 6,977,000 $ (3,242,000) $ 3,742,000
===============================================================================================
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(1,333,000) $ 81,000
Adjustments to reconcile net income (loss)
to net cash (used in) operating activities:
Depreciation and amortization 473,000 134,000
Amortization and write-off of excess of net
assets acquired over purchase price (1,452,000) (302,000)
Changes in operating assets and liabilities:
Accounts receivable 476,000 (2,272,000)
Inventories (134,000) (2,137,000)
Prepaid expenses and other assets 130,000 (61,000)
Accounts payable 17,000 361,000
Accrued payroll and related costs (29,000) 105,000
Other accrued liabilities 70,000 86,000
-----------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (1,782,000) (4,005,000)
-----------------------------
Cash Flows from Investing Activities,
purchase of equipment (519,000) (104,000)
-----------------------------
Cash Flows from Financing Activities
Net proceeds from note payable to a bank 2,636,000 --
Proceeds (payments) on note payable to a bank (2,000,000) 2,000,000
Proceeds from stock options and
warrants exercised 716,000 137,000
Principal payments on long-term debt (223,000) (134,000)
-----------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,129,000 2,003,000
-----------------------------
NET (DECREASE) IN CASH (1,172,000) (2,106,000)
Cash, beginning of period 1,248,000 3,354,000
-----------------------------
Cash, end of period $ 76,000 $ 1,248,000
-----------------------------
Supplemental Disclosure of Cash Flow
Information
Cash paid during the year for interest $ 249,000 $ 195,000
-----------------------------
Cash paid during the year for income taxes $ -- $ 11,000
=============================
See Notes to Financial Statements.
</TABLE>
6
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
The Hi-Shear Technology Corporation ("HSR" or the "Company") began as a division
of Hi-Shear Industries, Inc. ("HSI") in the 1950's. On June 1, 1993, the
Company was effectively acquired by two members of HSR's senior management and
conducted an initial public offering of its shares in March 1994. The Company
is listed on the American Stock Exchange (symbol "HSR").
The Company is engaged in the design and manufacture of power cartridges,
separation devices, electronic sequencers and other special components used by
the aerospace industry, the military and NASA. HSR's aerospace and defense
products are procured under both long and short-term contracts with agencies of
the United States Government and numerous aerospace and defense prime
contractors and subcontractors. The Company is dependent on the continuation of
government sponsored military and aerospace programs in order to maintain its
revenues.
To compete in the government aerospace and defense contracts market, companies
must typically be involved in the development stage of the product. The
research and development for "qualifying" the product pursuant to government
plans and specifications is a costly and time consuming process. Each of the
Company's aerospace and defense products are thoroughly tested individually, as
well as tested in conjunction with the end product into which it is
incorporated. After commencement of a given program, it is very costly for
competitors to design new competitive components or for customers to change
suppliers of the components since the customer would then be required to
requalify the products. In addition, local, state and federal permits and
licenses which are required to manufacture such pyrotechnic devices, as the
Company produces, are difficult to obtain. For new government contracts, the
Company's success will be dependent upon its ability to compete with other
companies, some of which have greater financial and other resources than the
Company.
The Company purchases the components for its products from various
subcontractors. While some of the components, such as flexible circuits,
mechanical parts, connectors, seals and certain chemicals, are purchased from
single suppliers, they are generally available from several other sources. Most
components are manufactured specifically for the Company to its specifications.
The Company continues to diversify into commercial products, while continuing to
pursue its aerospace and defense business segment. In this regard, the Company
has completed the product development and has begun commercial production of the
Life-Shear emergency rescue cutting tool (Cutter) and a high security lock. The
initial fiscal year 1996 and 1995 sales volumes of these new commercial products
were not significant; however, investments in inventory, tooling, and pre-
production costs for the Cutter have been made. In addition, the Company is
continuing development of a third commercial product, an advanced air bag
inflator system. An initial patent application for a liquid inflator was filed
by the Company in November 1994, and a second patent application covering
expanded claims and improvements was filed in July 1996. All costs related to
the development of the airbag inflator has been expensed.
7
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates:
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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition:
Sales of commercial products are recognized as deliveries are made. Contract
revenues are derived principally from fixed-price contracts and are recorded as
deliveries are made (units-of-delivery type of percentage-of-completion method
of accounting). Revenues from certain fixed-price development contracts are
recorded as costs are incurred and include estimated earned profits calculated
on the basis of the relationship between costs incurred and total estimated
costs (cost-to-cost type of percentage-of-completion method of accounting).
Fixed-price development contracts generally provide for the delivery of a small
number of units after a lengthy period of time over which a significant amount
of costs have been incurred.
Provisions for estimated total contract losses on uncompleted contracts are made
in the period in which such losses are determined. Amounts representing
contract change orders are included in revenues only when the amounts can
reliably be estimated and realization is probable. Changes in estimates of
revenues, costs and profits are recognized in the period such changes are made.
Accounts receivable:
Included are amounts billed and currently due from customers under all types of
contracts, amounts earned but unbilled (primarily related to contracts accounted
for under the cost-to-cost type of percentage-of completion method of
accounting) and amounts retained pending contract completion.
Inventories:
Inventory costs for the defense and aerospace segment relate primarily to
production cost of contracts in process under fixed-price type contracts and
represent accumulated contract costs less the portion of such costs allocated to
revenue recognized on units delivered or progress completed. Accumulated
contract costs include direct labor, material costs, factory and engineering
overhead, and production tooling costs. In accordance with industry practice,
such inventoried costs are classified as a current asset and include amounts
related to contracts having production cycles longer than one year. Selling,
general and administrative costs are charged to expense as incurred.
Commercial inventory is stated at the lower of cost (first-in, first-out) or
market and represents direct labor, materials and overhead costs incurred in
production.
8
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equipment:
Equipment is stated at cost. The Company also capitalizes certain material and
labor incurred in connection with the construction of assets. Depreciation and
amortization are charged against income using the straight-line method over the
estimated useful service lives of the related assets. The principal lives used
in determining depreciation and amortization rates are as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment 5 to 10 years
Tooling 5 years
Furniture and fixtures 10 years
Leasehold improvements Shorter of lease term
or useful life
</TABLE>
Other assets:
Deferred costs consist of capitalized pre-production costs, net of accumulated
amortization of $119,000, related to the production of the Company's Life Shear
emergency rescue cutting tool. These costs are amortized over a five-year
period. Other intangible assets consist of the cost for acquired patents and
are amortized over the estimated 17 year life of the patents.
Excess of net assets acquired over purchase price:
In June 1993, the total purchase price of Hi-Shear Technology Corporation was
allocated to the Company's assets and liabilities based upon their relative fair
values at the date of the acquisition using the purchase method of accounting.
However, since the purchase price was less than the fair value of the net assets
acquired, the difference was applied to reduce all noncurrent assets to zero,
principally equipment and leasehold improvements, with the balance being
accounted for as excess of net assets acquired over purchase price (also
referred to as negative goodwill) which is generally being amortized into income
over a ten-year period. The normal amortization of negative goodwill amounted
to $302,000 in 1996 and 1995. (Note 12)
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
9
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and development:
Company-sponsored research and development costs are charged to expenses as
incurred.
Net income (loss) per common and common equivalent share:
Primary income (loss) per share is computed on the basis of the weighted average
number of shares of common stock plus common stock equivalents (stock options)
outstanding during the year. Common stock equivalents are excluded if their
effect is antidilutive. Fully diluted income (loss) per common share is not
presented since such dilution is not material.
Fair value of financial instruments:
In 1995, the Company adopted Financial Accounting Standards (FASB) Statement No.
107, which requires disclosure about the fair value of the Company's financial
instruments. The method and assumptions used to estimate the fair value of the
following classes of financial instruments were: a) Long-term debt: The
estimated fair value, which approximates the carrying value, is based on
interest rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities. b) Note payable to bank: The
carrying amount approximates fair value since the interest rate changes with the
market interest rate.
NOTE 2. CONCENTRATION OF CASH
The Company periodically has cash on deposit with its bank which exceeds the
insurance limits of the FDIC.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at May 31, 1996 consist of the following:
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Due from United States Government,
prime and subcontractors, long-term contracts:
<S> <C>
Billed $ 11,445,000
Unbilled 1,540,000
Progress payments received (8,981,000)
--------------
4,004,000
Billed and currently due from foreign
sales, long-term contracts 194,000
--------------
TOTAL DUE, LONG-TERM CONTRACTS 4,198,000
Commercial receivables 74,000
Other receivables 50,000
--------------
TOTAL $ 4,322,000
==============
</TABLE>
10
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. ACCOUNTS RECEIVABLE (CONTINUED)
Unbilled amounts represent revenues recognized from fixed price contracts for
which billings have not been presented to customers at year-end. As of May 31,
1996, the Company has recorded retentions of $1,424,000 which are awaiting
completion of contracts in process before payment will be made. During the
fiscal year 1996, the Company generated revenue of approximately $700,000 from
sources outside of the United States.
NOTE 4. INVENTORIES
Inventoried costs at May 31, 1996 consist of the following:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Production cost of contracts in process $ 1,276,000
Raw materials and components 1,679,000
Commercial inventory:
Raw materials 390,000
Work-in-process 413,000
Finished goods 47,000
-------------
TOTAL $ 3,805,000
=============
</TABLE>
Raw materials and components represent purchases and production costs of units
manufactured in excess of contractually required quantities.
The Company's government contracts are subject to regular audit and periodic
review by a governmental agency. These audits may result in changes in the
amount of allowable billings on current and/or prior completed contracts. The
last audit of the Company by this agency was performed in 1992.
Production costs of contracts in process are costs incurred to date less billed
and unbilled amounts. The status of the production costs of contracts at May
31, 1996 is as follows:
<TABLE>
<CAPTION>
HEFU/PSA Other
(Note 12) Contracts Total
- ------------------------------------------------------------------------------------------------
<S> <C>
Total contracts in process $ 10,182,000 $ 21,161,000 $ 31,343,000
=====================================================
Costs incurred to date $ 10,969,000 $ 9,573,000 $ 20,542,000
Estimated profit (loss) recorded (1,145,000) 1,178,000 33,000
Less billed and unbilled amounts (9,899,000) (9,400,000) (19,299,000)
------------------------------------------------------
Total production costs of contracts in
process $ (75,000) $ 1,351,000 $ 1,276,000
=====================================================
</TABLE>
11
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4. INVENTORIES (CONTINUED)
Because of the large amount of contracts in process at any point in time,
changes in estimates to complete can have a drastic impact on the ultimate
profitability of the Company. Management estimates that each 1% change in the
estimates to complete at May 31, 1996 would change contract profits or losses by
approximately $85,000. During 1996, management revised the estimate to complete
for certain jobs in process resulting in an adjustment to cost of revenues of
approximately $800,000 primarily related to the HEFU/PSA line of business which
the Company has exited (Note 12).
The Company's backlog consists of aggregate revenues remaining to be earned by
the Company at a given date under contracts, delivery orders or similar orders
in which the Company's obligations are specified and the time and performance by
the Company is fixed. Typically, the final negotiation of the detailed
contract requirements together with the procurement of long lead-time materials,
manufacturing processes and testing, takes between 6 and 12 months or more to
accomplish. This results in a significant delay between the addition of a newly
awarded contract to backlog and the recognition of the related revenue in the
financial statements.
Contracts undertaken by the Company may extend beyond one year and, accordingly,
portions are carried forward from one year to the next as part of backlog. Some
of the Company's contracts with the United States Government are supply
contracts whose requirements are primarily based on the Governments usage of
products on a periodic basis. Because many factors affect the scheduling of
projects, no assurances can be given as to when or if revenue will be realized
on projects included in the Company's backlog. Although backlog represents only
business which is considered firm, there can be no assurance that cancellations
or scope adjustments will not occur. The majority of backlog represents
contracts under the terms of which cancellation by the customer would entitle
the Company to all or a portion of its costs incurred and potential fees. At
May 31, 1996, the Company's backlog, including contracts in process was $15.8
million (unaudited).
NOTE 5. EQUIPMENT
The Company's equipment at May 31, 1996 consist of the following:
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $ 736,000
Tooling costs 438,000
Furniture and fixtures 56,000
Leasehold improvements 22,000
Projects in progress 488,000
------------
1,740,000
Less accumulated depreciation and
amortization 482,000
-------------
$ 1,258,000
=============
</TABLE>
12
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. EQUIPMENT (CONTINUED)
Included above is equipment acquired under capital leases of $664,000.
Accumulated amortization related to these capital leases total $319,000.
Amortization expense related to capital leases is included with depreciation
expense.
Projects in process includes certain internal costs related to the
implementation of the Company's computer system totaling $170,000. It also
includes deposits made on certain tooling being manufactured.
NOTE 6. DEBT
The Company has a line of credit agreement with a bank for the purpose of
obtaining short-term loans up to a maximum of $3,500,000. Borrowings under this
line of credit are collateralized by substantially all of the Company's assets.
Outstanding amounts bear interest at the Wall Street Journal's prime rate (8.25%
at May 31, 1996) plus .75%. The credit agreement expires November 1, 1996. At
May 31, 1996, $2,636,000 was outstanding under the line of credit. The credit
agreement prohibits payments of dividends without prior approval and contains
various financial covenants including minimum working capital, maximum net worth
to total liabilities, minimum cash flow coverage and minimum income before
income taxes.
Long-term debt at May 31, 1996 consists of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Capital lease obligation, payable in
monthly installments of $19,000 through
1997, including interest imputed at 7.5% $ 302,000
Promissory note, guaranteed by HSI,
payable in monthly installments of $3,000
including interest at 11% through 1998 84,000
---------
$ 386,000
Less current portion 242,000
---------
Long-term debt $ 144,000
=========
</TABLE>
Maturities of long-term debt are 1997 $242,000; 1998 $128,000; and 1999 $16,000.
13
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. PROVISION FOR INCOME TAXES
The 1995 provision for income taxes consists of state taxes currently payable.
Deferred income tax assets provided for in the accompanying balance sheet at May
31, 1996 consist of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Depreciation $ 250,000
Contracts in process 400,000
Net operating loss carryforwards 2,220,000
--------------
TOTAL DEFERRED INCOME TAX ASSETS 2,870,000
Valuation allowance (2,870,000)
--------------
NET DEFERRED INCOME TAXES $ --
==============
</TABLE>
Management determined that deferred tax assets should be fully reserved due to
uncertainties as to their ultimate realization. The realization of these assets
is dependent upon the Company generating sufficient taxable income within the
carryforward period.
A reconciliation of expected tax expense to the amount computed by applying the
federal statutory income tax rates to income (losses) before income taxes is as
follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Federal income tax (credits) computed
at the statutory rate $ (466,000) $ 31,000
State taxes 8,000
Purchase adjustments related to
acquisition (479,000) (479,000)
Change in valuation allowance 945,000 448,000
----------------------------------
$ -- $ 8,000
----------------------------------
</TABLE>
As of May 31, 1996, the Company had federal net operating loss carryforwards of
approximately $6,000,000, which expire $2,830,000 in 2009 and $3,170,000 in
2011. The Company also has state net operating loss carryforwards of approx
imately $2,940,000 which expire $1,350,000 in 2009 and $1,590,000 in 2011.
14
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a contributory profit sharing plan under Section 401(k) of the
Internal Revenue Code that covers all full-time employees. There were no
contributions made to the Plan during the years ended May 31, 1996 and 1995.
In conjunction with the stock acquisition by Hi-Shear Technology Acquisition
Corp. in June 1993, substantially all of the pension assets and liabilities were
retained by Hi-Shear Industries, Inc. with the Company assuming the pension
liability for three active employees. The pension expense under this
arrangement amounted to $18,000 for years 1996 and 1995. The accompanying
balance sheet at May 31, 1996 includes a $158,000 accrued pension liability
which is the projected benefit obligation for the covered employees.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating lease
agreements that expire at various dates through 2000. The primary facility
lease is guaranteed by HSI. Rental expense under operating leases for the years
ended May 31, 1996 and 1995 approximated $631,000 and $605,000, respectively.
Minimum annual rentals under all noncancelable operating leases are as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1997 $ 585,000
1998 594,000
1999 636,000
2000 279,000
------------
$ 2,094,000
============
</TABLE>
The Company's two principal officers and stockholders have employment agreements
covering a period of five years expiring on June 1, 1998. Aggregate minimum
annual payments under these agreements was $455,000 for fiscal years 1996 and
1995.
The Company is currently a party to disputes which involve or may involve
litigation. It is the opinion of Company's management that the ultimate
liability, if any, with respect to these disputes will not be material to the
Company's financial statements.
15
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. MAJOR CUSTOMERS
The Company derives a major portion of its revenues directly from departments
and agencies of the United States Government and certain large United States
aerospace and defense contractors. Sales to these major customers, which are in
excess of 10% of total sales, consist of the following:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------
<S> <C> <C>
United States Government 21% 26%
Customer A 33% 26%
Customer B 11% 7%
</TABLE>
NOTE 11. STOCKHOLDERS' EQUITY
Upon completion of the initial public offering of common stock in March 1994,
the Company sold warrants to purchase 150,000 additional shares to its
underwriters for $100. These warrants have an exercise price of $8.25 per
share, subjec t to adjustment in accordance with the terms of the warrant
agreement. During 1996, 76,500 of these warrants were exercised. The proceeds
were recorded net of approximately $38,000 in registration costs. The remaining
warrants, covering 73,500 shares, expire on March 31, 1999.
The Board of Directors and stockholders of the Company have adopted and approved
a 1993 Stock Option Plan, pursuant to which options to purchase, up to an
aggregate 500,000 shares of common stock, can be granted to officers, directors
and employees, and to consultants, vendors, customers and others expected to
provide significant services to the Company. At May 31, 1996, options for the
purchase of 249,000 shares of the Company's common stock were outstanding, of
which 108,000 were exercisable. There are 200,000 shares remaining in the
option plan which are available for grant in the future years.
The status of the optioned shares is as follows:
<TABLE>
<CAPTION>
Shares Under
Option
- -----------------------------------------------------------
<S> <C>
Outstanding at May 31, 1994, at $5 per share 150,000
Granted, at prices ranging from $5 111,000
to $10.50 per share
Exercised, at $5 per share (28,000)
Canceled, at $5 per share (62,000)
------------
Outstanding at May 31, 1995 at prices
ranging from $5 to $10.50 per share 171,000
Granted, at prices ranging from $5
to $13.25 per share 122,000
Exercised, at $5 per share (24,000)
Canceled, at $5 per share (20,000)
------------
Outstanding at May 31, 1996, at prices
ranging from $5 to $10.50 per share 249,000
============
Average price of outstanding options $ 7.20
============
</TABLE>
16
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. EXIT OF A BUSINESS ACTIVITY
During May 1996, management approved a plan to exit the HEFU/PSA business. The
HEFU/PSA line of business is part of the defense and aerospace business segment.
This line initiates ordnance functions and switches on the initial stage of the
Titan launch vehicle. Management decided to exit this business line because the
technology associated with the product was outdated, was not cost competitive
and the future standardization in the industry was not anticipated to include
this business line. In addition, the Company had incurred substantial losses in
the development and delivery of this business line. The plan's major components
are to complete the existing contracts by December 1996 and not accept any
future new contracts or add-ons to existing contracts in this specific line of
business, unless required under Department of Defense (DOD) regulations.
Management determined that existing assets and personnel assigned to this
business activity can be utilized in other areas of the Company. All costs to
complete the contracts (including incurred and accrued costs at May 31, 1996,
totaling approximately $1,060,000) have been recorded in 1996 operations.
The HEFU/PSA line of business was a significant line of business when the
Company was acquired from HSI in 1993. Management has allocated the negative
goodwill associated with the acquisition to the lines of business that existed
at that date. The method used by the Company was based on the relative size of
the backlog in 1993. Management believes this method was an appropriate
indication of the factors that contributed to their ability to acquire the
business for less than the fair value of the net assets. Unamortized negative
goodwill of $1,150,000 was allocated to this business activity and was written
off in 1996. The remaining negative goodwill of $967,000 will continue to be
amortized over the original ten-year period. Revenues from this business
activity were approximately $324,000 and $1,150,000 (unaudited) for fiscal year
1996 and 1995, respectively. Losses on this business activity, prior to the
write-off of negative goodwill were $737,000 and $289,000 (unaudited) for fiscal
year 1996 and 1995, respectively.
NOTE 13. MANAGEMENT'S PLANS
The Company has generated negative cash flow from operations for 1996 and 1995.
Management attributes the cash flow losses in 1996 primarily to the exited
HEFU/PSA line, increased research and development costs related to its cutter
tools and airbag inflator system, and to decreased revenues as a result of
delays in government contracts. Management believes that the Company will
generate sufficient cash from its operations to satisfy its obligations as they
become due. The Company anticipates improvements in cash flow will be
accomplished through increased revenues generated from the aerospace and defense
business as a result of a higher starting backlog and from revenues of its new,
higher margin products, especially the ESAF and the laser ignition systems. The
Company expects to reduce research and development costs as a percentage of
sales due to the acceleration of the development of several of its products in
fiscal year 1996. Management also plans to aggressively increase the marketing
of its commercial products, including the pursuit of additional licensing
agreements related to its products. Finally, with the completion of the HEFU/PSA
business line in December, 1996, the Company anticipates receipt of retentions
on these contracts totaling approximately $1 million. Although management
believes these targets are realistic, changes i n circumstances and/or delays
could cause differences between expected and actual operating results.
17
<PAGE>
Hi-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14. BUSINESS SEGMENT INFORMATION
The Company operates in two primary segments; (i) commercial products and (ii)
defense and aerospace. The following table provides information on the
Company's commercial products segment. All other activities of the Company are
concentrated in the defense and aerospace segment.
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Revenues to unaffiliated customers $ 144,000 $ (a)
Operating (loss) including research
and development (906,000) (a)
Depreciation and amortization 250,000 (a)
Additions to equipment 537,000 (a)
Assets 1,576,000 2,116,000
(a) Amounts were not significant
</TABLE>
NOTE 15. SUBSEQUENT EVENT
In August 1996, the Company signed a memorandum of agreement to license
production of its Life-Shear and Line-Shear cutting tools in Europe and certain
parts of Asia. The memorandum, which still requires final approval of the
licensee's Board, provides for certain mandatory up-front license fees as well
as fixed fees based on minimum sales volumes and royalty fees for each unit sold
under the license agreement. The Company expects this approval during the
second quarter of fiscal year 1997; however, there can be no assurances as to
when or if this agreement will ever be completed.
NOTE 16. NEW ACCOUNTING PRONOUNCEMENT -- ACCOUNTING FOR STOCK-BASED
COMPENSATION
In 1995 the FASB issued Statement No 123, "Accounting for Stock-based
Compensation". Statement No. 123, establishes financial accounting and
reporting standards for stock-based employee compensation plans such as a stock
purchase plan. The Statement generally suggests, but does not require, stock-
based compensation transactions with employees be accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. An enterprise may
continue to follow the requirements of Accounting Principles Board (APB) Opinion
No. 25, which does not require compensation to be recorded if the consideration
to be received is at least equal to the fair value at the measurement date. If
an enterprise elects to follow APB Opinion No. 25, it must disclose the pro
forma effects on net income as if compensation were measured in accordance with
the suggestions of Statement No. 123. Nonemployee stock-based transactions
occurring after December 15, 1995 must be accounted for at fair value. The
Company had no stock based transactions during fiscal year 1996 with
nonemployees. The Company has determined that it will continue to follow the
measurement principles of APB Opinion No. 25 for stock-based employee
compensation, therefore, adoption of this pronouncement in fiscal year 1997 is
not expected to have a material impact on the financial statements.
18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
On June 7, 1996, the Company filed a form 8-K which disclosed that the
Board of Directors approved the engagement of McGladrey & Pullen, LLP as the
Company's independent accountants to conduct an audit of the Company's financial
statements for the period ended May 31, 1996. McGladrey & Pullen, LLP replaced
the accounting firm of Deloitte & Touche LLP, who had been engaged to audit the
Company's financial statements for the fiscal years ended May 31, 1993 through
May 31, 1995. A change in accountants had been recommended by the Company's
Audit Committee. The audit reports provided by Deloitte & Touche LLP for the
fiscal years ended May 31, 1993 through May 31, 1995 did not contain any adverse
opinion or a disclaimer of opinion nor was any report qualified in any respect,
and management of the Company knows of no past disagreements between the Company
and Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing, scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Information required by this item will be contained in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after May 31, 1996 and is incorporated herein by reference.
Mr. Sidney Wing resigned as a director for personal reasons in June 1996.
The board unanimously elected Mr. Jack Bunis as a director effective September
2, 1996, to fill the vacancy. Mr. Bunis is the Chairman, President and CEO of
Cair Systems Inc. a Los Angeles based provided of automation services to the
insurance and health care industries. He has held executive positions with IBM
and the Boeing Company and served as Vice President of Cybertek Computer
Products. Mr. Bunis held the position of Senior Vice President and Chief
Operating Office at Mitchellmax and more recently founded the management
consulting firm of Bunis & Associates. He is a director of Keysor-Century
Corporation and Modern Props Incorporated. Mr. Bunis received his Bachelors
Degree in Finance and Science from Long Island University and has attended
numerous graduate programs including studies in Chemistry from Rutgers
University, a Business Economics Masters Program from Claremont Graduate School,
and the Sloan Marketing Executive Program from Stanford University.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after May 31, 1996 and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days after May 31, 1996 and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See "Exhibit Index", page ____.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year ended May 31, 1996. A Form 8-K was filed
during the First Quarter on June 7, 1996 reporting the change in
accountants and filing the former accountant's letter as required by
Item 304 of Regulation S-B
<PAGE>
SIGNATURE
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.
HI-SHEAR TECHNOLOGY CORPORATION
Date: September 12, 1996 By: /s/ George W. Trahan
-------------------------------------
George W. Trahan,
Vice President and Chief Financial
Officer
By: /s/ Thomas R. Mooney
-------------------------------------
Thomas R. Mooney,
Chairman of the Board and President
By: /s/ David W. Einsel
-------------------------------------
David W. Einsel,
Director
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIALLY
NUMBER NUMBERED
<S> <C> <C>
3.1 Certificate of Incorporation, as amended*
3.2 Bylaws, as amended**
4.1 Form of Common Stock***
9.1 Form of Buy/Sell Agreement**
10.1 1993 Stock Option Plan**
10.2 Employment Agreement with Thomas R. Mooney*
10.3 Employment Agreement with George W. Trahan*
10.4 Torrance Property Lease and HSI Guaranty*
10.5 Saugus Property Lease*
10.6 Southern California Bank Credit Facility
23.1 Consent of McGladry & Pollen, LLP
27 Financial Data Schedule
</TABLE>
- -------------------
* Previously filed and incorporated by reference to the Company's Form SB-2
Registration Statement No. 33-73972 filed with the Securities and Exchange
Commission on January 10, 1994.
** Previously filed and incorporated by reference to the Company's Form SB-2
Registration Statement No. 33-73972 filed with the Securities and Exchange
Commission on February 1, 1994.
*** Previously filed and incorporated by reference to the Company's Form SB-2
Registration Statement No. 33-73972 filed with the Securities and Exchange
Commission on March 23, 1994.
<PAGE>
EXHIBIT 10.6
[LOGO OF SOUTHERN
CALIFORNIA BANK]
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,500,000.00 10-27-1995 11-01-1995 405168614 0066 382
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Borrower: HI-SHEAR TECHNOLOGY CORPORATION (TIN: LENDER: SOUTHERN CALIFORNIA BANK
22-2535743) TUSTIN/LA PALMA OFFICE
24225 GARNIER ST. 3800 EAST LA PALMA AVENUE
TORRANCE, CA 90505 ANAHEIM, CA 92807-1798
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THIS COMMERCIAL SECURITY AGREEMENT is entered into between HI-SHEAR TECHNOLOGY
CORPORATION (referred to below as "Grantor"); and SOUTHERN CALIFORNIA BANK
(referred to below as "Lender"). For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by
law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
Collateral. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
All inventory, chattel paper, accounts, equipment, general intangibles
and fixtures
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts,
supplies, increases, and additions to and all replacements of and
substitutions for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, contract rights, general intangibles, instruments,
rents, monies, payments, and all other rights, arising out of a sale,
lease, or other disposition of any of the property described in this
Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
Grantor. The word "Grantor" means HI-SHEAR TECHNOLOGY CORPORATION, its
successors and assigns.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor, or any one or more of them,
whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
Lender. The word "Lender" means SOUTHERN CALIFORNIA BANK, its successors
and assigns.
Note. The word "Note" means the note or credit agreement dated October 27,
1995, in the principal amount of $3,500,000.00 from Grantor to Lender,
together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
DEPOSIT ACCOUNTS. Grantor hereby grants Lender a contractual possessory
security interest in and hereby assigns, conveys, delivers, pledges, and
transfers all of Grantor's right, title and interest in and to Grantor's
accounts with Lender (whether checking, savings, or some other account),
including all accounts held jointly with someone else and all accounts Grantor
may open in the future, excluding however all IRA, Keogh, and trust accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. This is a continuing Security Agreement and will continue in
effect even though all or any part of the Indebtedness is paid in full and
even though for a period of time Grantor may not be indebted to Lender.
No Violation. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
Location of the Collateral. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased or being used by Grantor; and (d)
all other properties where collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
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records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall
not remove the Collateral from its existing locations without the prior
written consent of Lender. To the extent that the Collateral consists of
vehicles, or other titled property, Grantor shall not take or permit any
action which would require application for certificates of title for the
vehicles outside the State of California, without the prior written consent
of Lender.
Transactions involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer
in partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or charge, other than
the security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if junior
in right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
Collateral Schedules and Locations. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse
judgment before enforcement against the Collateral. Grantor shall name
Lender as an additional obligee under any surety bond furnished in the
contest proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis
reasonably acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. Grantor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that
coverages will not be cancelled or diminished without at least ten (10)
days' prior written notice to Lender and not including any disclaimer of
the insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Grantor or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest, Grantor
will provide Lender with such loss payable or other endorsements as Lender
may require. If Grantor at any time fails to obtain or maintain any
insurance as required under this Agreement, Lender may (but shall not be
obligated to) obtain such insurance as Lender deems appropriate, including
if it so chooses "single interest insurance," which will cover only
Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender
of any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or
restoration. If Lender does not consent to repair or replacement of the
Collateral, Lender shall retain a sufficient amount of the proceeds to pay
all of the Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after their
receipt and which Grantor has not committed to the repair or restoration
of the Collateral shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have
an independent appraiser satisfactory to Lender determine, as applicable,
the cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due
on the Indebtedness.
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Other Defaults. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
Insolvency. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral of any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days, or such lesser time as required by state law, before
the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and shall
be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at
law, in equity or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of ORANGE
County, State of California. Subject to the provisions on arbitration, this
Agreement shall be governed by and construed in accordance with the laws
of the State of California.
Arbitration. Lender and Grantor agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment of imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Lender and Grantor agree that in the event of an action for judicial
foreclosure pursuant to California Code of Civil Procedure Section 726, or
any similar provision in any other state, the commencement of such an
action will not constitute a waiver of the right to arbitrate and the court
shall refer to arbitration as much of such action, including counterclaims,
as lawfully may be referred to arbitration. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction.
Nothing in this Agreement shall preclude any party from seeking equitable
relief from a court of competent jurisdiction. The statute of limitations,
estoppel, waiver, laches, and similar doctrines which would otherwise be
applicable in an action brought by a party shall be applicable in any
arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation,
and enforcement of this arbitration provision.
Attorney's Fees; Expenses. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorney's fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorney's fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the Borrowers
signing below is responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for
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notices under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Grantor, notice to any Grantor will constitute notice to all Grantors.
For notice purposes, Grantor agrees to keep Lender informed at all times of
Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor,
to execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
Preference Payments. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right to demand strict compliance with that provision or any other
provision of this agreement or prior waiver by Lender, nor any consent or
waiver between Lender and Grantor, shall constitute a waiver of any of
Lender's rights or any of Grantor's obligations as to any future delay or
omission whenever the consent of Lender is required under this Agreement,
the granting of such a waiver by Lender in any instance shall not
constitute a continuing consent to subsequent instances where such consent
is required and in any case such consent may be granted or withheld in
discretion of Lender.
Waiver of Co-obligor's Rights. If more than one person is obligated for the
Indebtedness, borrower irrevocably waives, disclaims and relinquishes all
claims against such other person as such borrower has or would otherwise
have by virtue of payment of the Indebtedness or any part thereof,
specifically including but not limited to rights of indemnity, contribution
or exonoration.
GRANTOR ACKNOWLEDGES HAVING READ ALL PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER
27, 1995.
GRANTOR:
HI-SHEAR TECHNOLOGY CORPORATION
By: /s/ George W. Trahan By: /s/ Thomas R. Mooney
--------------------------------- ----------------------------------
GEORGE W. TRAHAN, Chief Financial THOMAS R. MOONEY, President
Officer
================================================================================
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITOR'S
We hereby consent to the incorporation by reference in the November 30, 1994
registration statement on Form S-8 of our report, dated September 6, 1996, on
the financial statements of Hi-Shear Technology Corporation as of and for the
year ended May 31, 1996.
McGladrey & Pullen, LLP
Anaheim, California
September 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
OPERATIONS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 76
<SECURITIES> 0
<RECEIVABLES> 4,332
<ALLOWANCES> 0
<INVENTORY> 3,805
<CURRENT-ASSETS> 8,260
<PP&E> 1,258
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,085
<CURRENT-LIABILITIES> 5,232
<BONDS> 0
0
0
<COMMON> 3,742
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,085
<SALES> 10,489
<TOTAL-REVENUES> 10,489
<CGS> 9,072
<TOTAL-COSTS> 11,571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 251
<INCOME-PRETAX> (1,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,333)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
