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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 31,1997 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: $17,325,000
The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately 10,669,230 as of August 4, 1997, based upon the
closing sale price on the American Stock Exchange on that date at which the
stock was last sold.
There were 6,635,791 shares of the Registrants Common Stock issued and
outstanding as of July 31, 1997.
Part III, other than Items 12 and 13, is incorporated by reference from the
Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of May 31, 1997.
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HI-SHEAR TECHNOLOGY CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1 BUSINESS........................................................1
ITEM 2 PROPERTIES......................................................9
ITEM 3 LEGAL PROCEEDINGS..............................................10
ITEM 4 SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS.............. 10
PART II.
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......11
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................12
ITEM 7 FINANCIAL STATEMENTS & INDEX TO FINANCIAL STATEMENTS...........16
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE..........................................16
PART III.
ITEM 9 DIRECTORS, EXECUTIVE OFFICES AND KEY EMPLOYEES.................17
ITEM 10 EXECUTIVE COMPENSATION.........................................17
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.17
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................17
PART IV.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K...............................18
SIGNATURES....................................................................19
EXHIBIT INDEX.................................................................20
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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
industry, and has adapted its technology to a select group of emerging
commercial products. Its aerospace products are primarily used in commercial
space satellites and launch vehicles, exploration missions, strategic missiles,
advanced fighter aircraft and military systems. The Company's aerospace products
are used by customers ranging from commercial satellite manufacturers, launch
vehicle assemblers, NASA, the U.S. Government, foreign space agencies and
commercial launch ventures, and others in the aerospace business.
The Company was founded as a division of Hi-Shear Industries ("HSI") in the
1950's and was incorporated in Delaware in 1984. The Company became an
independent corporation in June 1993 when it was acquired by its senior
management. Over the last three years the Company has designed, tested,
developed and marketed a select group of commercial products and technology that
utilize both its highly reliable aerospace product experience and expertise.
Since beginning its commercial product developments, the Company has introduced
two commercial product lines, the LIFESHEAR rescue cutters and high security
locks. The Company has also developed a low-cost environmentally safe liquid
airbag inflator system for use in automobile airbag safety systems.
The Company's executive offices are located at 24225 Garnier Street,
Torrance, CA 90505, telephone (310) 784-2100 - Facsimile (310) 784-5354.
AEROSPACE PRODUCTS
The Company's aerospace products were introduced originally 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.
These electronic devices became a separate product line for use in 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, commercial space systems, advanced fighter aircraft and other space
launch vehicles.
MARS PATHFINDER
Hi-Shear is proud to have provided the successful Mars Pathfinder Mission
with its highly reliable hardware. Sixty separate ordnance events on the
Pathfinder spacecraft utilized the Company's aerospace devices. Hi-Shear's
separation system was used to jettison the Mars Lander from the Cruise Module
for its landing on the surface of Mars. An assortment of the Company's highly
engineered cable cutters and separation nuts allowed the back shell to be
released from the Lander. The Company's initiator products were used to trigger
the release of the heat shield from the Lander after entry into the Martian
atmosphere and to initiate the spacecraft's airbags, which cushioned its landing
on Mars. After the landing, several more events were successfully carried out
using our high technology aerospace products. The spacecraft's petals were
opened using a specialized segmented release product and the Rover was released
on command using the Company's products. In addition to these functions crucial
to the success of the mission, Hi-Shear products were also used in several other
key applications during the flight landing and exploration.
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The Company's Aerospace 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. Management believes that future expansion in its
Ordnance Products will come from growing requirements for existing products and
also new products utilizing its capabilities in electronic fuzing and laser
ignition systems as well as from growth in domestic 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 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 and other devices (see Mars
Pathfinder, page 1). The Company maintains an active development program for new
designs, including subdued 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 is used to open satellite doors and
deploy solar panels and to operate the thrusters, wing/fin actuators, cutters
and pin pullers found in commercial satellites, launch vehicles, and also
missiles where motion and force are required for operating rotating missile
fins, and defense system deployments.
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 continued to evolve and enhance laser firing units ever since. The U.S.
Army has been conducting field tests and program improvements on
Company-developed laser firing units since 1993. As the result of this work, the
Army is requesting definitive proposals from Hi-Shear for a breech mounted laser
system for use on howitzer cannons throughout the world. The procurement of
ruggedized laser firing units for army howitzer applications will result in
military operations becoming less costly, less manpower intensive, and produce
less negative impact on the environment. Furthermore, the adaptation of the
Company's laser firing units, both domestic and abroad, provides a potential for
considerable sales growth for the many years to come.
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In addition, the considerable strides made during fiscal year 1997 have
generated much interest in applying laser systems to the space market as well.
Several proposals have been made to customers detailing the Company's laser
initiated solutions to satellite, upgraded shuttle vehicle and unmanned vehicle
launch systems and payloads. The laser firing units provide a consistent and
precise means for the separation and sequencing of events. They also save costs
in areas of logistics support and clean-up since a single firing unit can be
used several times without replacement. The Company is partnered with certain
commercial and military organizations to develop laser based applications for
commercial uses. These opportunities put the Company at the leading edge of
laser technology for ruggedized applications, utilizes our core competence and
support growth objectives.
SBIR AWARD
During the fiscal year the Company received a Phase II, $730,000 Small
Business Innovative Research (SBIR) award from the Army Research Laboratory
(ARL) to fund its laser firing research for both military and commercial
purposes. This is a cost plus contract and demonstrates the customer's
commitment to furthering Hi-Shear developed solutions for use in both military
and commercial applications. This is a two year effort, and will seek to solve
problems associated with reproducible and reliable ignition of large-caliber gun
propulsion systems. The goals of the program are twofold. The short-term goal
involves the elimination of costly heavy metal primers and their replacement
with lasers to ignite bags of the propelling charge. The long-term goal involves
the elimination of all conventional primer and igniter materials from the system
and replaces them with the use of lasers focused through optical fibers to
ignite a charge. Since lasers and associated technologies have reached a stage
of maturity where they will replace conventional ignition sources in both
military and commercial applications, the Company is uniquely positioned to
benefit from this transition through increased sales. Furthermore, the
successful completion of the Phase II effort puts Hi-Shear in good shape to
receive a Phase III award that potentially guarantees sole-source production of
the system for a five-year period.
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") which electronically triggers various
ordnance events that deploy parachutes and rockets in connection with the
pilot's ejection from fighter aircraft. These safety units have a service life
of seven years after which they must be replaced or refurbished. The Company has
received requirement contracts from the U.S. Air Force to refurbish units in the
past and it also constructs new units according to the Air Force requirements.
The Company received a U.S. Air Force analog sequencer requirements contract in
February 1997 with an estimated value of up to $20 million over a five-year
period. The Company also has received $.8 million of contracts from the
Government of Israel for its air force analog sequencer needs.
ELECTRONIC, SAFE, ARM FUZE
The Company has earned a reputation as a leader in the fuzing industry for
tactical and conventional military programs. The upgraded Patriot (PAC-3)
missile system is nearing completion of the engineering development phase, and
is entering the low rate initial production (LRIP) and full-scale production
phases. The Company employs a proprietary initiator that when removed permits
full testing of the system without damaging the integrity of the missile system.
This allows for economical system
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safety checks, and also a shelf life estimated at 30 years making it among the
longest in the industry. The Company has combined experience gained on the PAC-3
program with research and development studies and additional tests to build
working models for other applications to be utilized in further marketing the
Company's system. These efforts act to increase revenues in the electronic
product line and augment other engineering development efforts to reduce product
functional cost.
CUSTOMERS AND CONTRACTS
Most of the Company's products are generally used in major commercial
satellite ventures, launch vehicles, the Space Shuttle or military satellites
and missiles, and therefore its customers tend to be large aerospace prime or
subcontractors. Over 43% of the Company's revenues were accounted for by
Lockheed Martin (34%) and McDonnell Douglas (9%). Lockheed Martin now comprises
what was formerly over twelve customers through its merger and acquisition
activities. Lockheed Martin consists of units formerly known as General Dynamics
Space Systems, Sanders, GE Aerospace, Goodyear Aerospace, Ford Aerospace, Xerox
Aerospace and Defense, LTV Missile Systems, Unisys Defense, and Loral. The
Company's Government customers include the U.S. Air Force, U.S. Navy, U.S. Army,
NASA and other agencies of the government. Sales to the United States Government
as direct sales represented 23% of revenue in fiscal year 1997. In fiscal year
1998, contract awards and contract competition phases will continue to vary and
therefore sales distribution among customers during any one fiscal year should
not be considered indicative of future sales to those customers.
In fiscal year 1997 most of the Company's contracts were on a fixed price
contract basis. In addition, the Company has received a cost plus fixed fee
contract for innovative research activities from the U.S. Army. Under its fixed
price contracts, 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 are subject to termination for convenience by
the U.S. Government. However, if this termination for convenience is exercised,
the Company would be entitled to payment of costs incurred up to the date of
termination and a reasonable termination fee. U.S. Government contracts
extending beyond one year are also conditioned upon the continuing availability
of Congressional appropriations because Congress usually appropriates on a
fiscal year basis even though contract performance may take several years. When
the Company participates as a subcontractor, and although the prime contractors
are typically large aerospace companies, 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 its customers, the U.S. Government, its agencies,
the armed forces or other prime contractors, and by responding to applicable
requests for proposals ("RFPs") from customers for new products within the
Company's area of expertise. The Company's business is dependent to a large
extent upon its continuing advanced expertise in niche technical areas, such as
space separation devices, electronic sequencers, advanced fuzing systems,
pyrotechnics 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
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processes and testing, takes between 6 and 12 months or more to accomplish. This
results in a fundamental 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. Due to the shorter lead-times of its commercial
products, the Company believes that it will experience a shorter book-to-ship
cycle on its commercial products than on its aerospace 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, funding changes, 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 aerospace contracts market, companies must typically be
involved in the development stage of the product. The research and development
for "qualifying" the product pursuant to customer plans and specifications is a
costly and time consuming process. Each of the Company's aerospace 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
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. (See SBIR Award, page 3.)
COMMERCIAL PRODUCTS
The LIFESHEAR cutter was among the first recipients of development funds
received from the United States Government's Technology Reinvestment Program
(TRP). The Company's LIFESHEAR cutters provides for fast, safe, and reliable use
for a wide range of emergency situations for fire and rescue, law enforcement,
and military rescue teams. The LIFESHEAR cutter's light weight, mobility, ease
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of use, and inexpensive design will quickly cut though metal car posts, roofs,
and a variety of construction material in order that a victim can readily be
extracted from a life threatening situation. The LIFESHEAR cutter utilizes the
Company's proprietary power cartridges which eliminate the need for cumbersome
hydraulic and electrical connections, and compliments the Company's aerospace
power cartridges. The Company markets the LIFESHEAR cutter through a
well-established worldwide distribution network, and maintains a customer
service desk in the home office to readily assist customer needs.
The Company's European licensee is currently delinquent in its mandatory
payments to the Company pursuant to its product license agreement. This
delinquency in payments could have a negative impact on the continuation of that
licensee and in the near term the fees receivable from that licensee. Due to the
interest that has been expressed by other potential licensees, the Company may
pursue others to replace the European licensee if they fail to perform.
During fiscal year 1997 the Company upgraded its professional sales force
and its domestic regional distributors. The Company continues to monitor each
distributors' performance to assure the best distribution of the LIFESHEAR
products.
The LINESHEAR cutter was designed to supply utility, construction,
refinery, and service firms with an industrialized tool for high volume cutting
of large cables, wires, hoses, and reinforcement material. The unique design and
high tensile strength cutting blade permits an object to be severed while
retaining its original shape after the cut. This is of great benefit to field
crews working to splice or connect cables. The LINESHEAR market is estimated to
grow considerably and open doors to the development of other variations of the
tool to include crimping, ramming, and spreading. The Company is actively
pursuing this market and has established a sales force and distribution network
dedicated to the success of this industrial product line. The near-term
concentration of marketing efforts will be utility companies and refineries,
located in the Western region of the United States. The Company has plans to
expand the marketing of these tools through the remainder of the U.S. and
overseas during the next years. Implementation of the Company's marketing plans
in both the rescue cutters and industrial tools will fully exploit the
significant markets for these unique proprietary products.
The Company has a history of producing security locks for the U.S.
Government and the U.S. Navy. The U.S. Appropriations Act of 1993 increased the
specifications for high security locks. High Security locks have a requirement
for precise dialing of combinations, and to date, the Company has the only lock
that can meet the government specification for this precision dialing. Hi-Shear
has received a request for quotation for substantial quantities of locks to be
purchased by the U.S. Government over the next five years. The Company will
concentrate its efforts to capture this future government requirement. During
the next year the Company will organize a distribution channel for sale of its
locks to potential commercial customers who require the benefit of the
government approved lock design.
AUTOMOTIVE AIRBAG INFLATORS
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 could exceed 100 million units.
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
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airbag components (sensor, inflator, initiator and bag) and hence, a decrease in
the overall airbag price. This reduction in unit price can enable a low cost
inflator unit to capture additional volume through increased market share as
compared to inflator designs that cannot be manufactured for less cost.
The Company's liquid airbag technology was first announced in November 1994
after the Company made the first of its patent filings. 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 inflates 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. In
addition to its original liquid propellant airbag patent application filed in
late 1994, the Company filed another application during fiscal year 1996 for a
U.S. Patent to protect additional distinct designs of the Company's liquid
powered airbag inflator systems.
In late fiscal 1997, notices had been received from the United States
Patent and Trademark office that patent claims have been allowed on the
Company's first two patent applications for its liquid airbag inflator
technology. This notice of allowability received by the Company substantially
supports our expanding proprietary rights in the field of liquid airbag inflator
technology.
The Company has been continuing to develop its technology to result in the
lowest cost inflator while maintaining both its high performance and
cleanliness. Also, the Company has been designing the inflator for economical
use in the smartest airbag deployment systems. Although this has acted to delay
the timeline of the Company's inflator program, the resulting designs fully
address the cost demands which have been evident in the inflator industry over
the last two years. The Company believes its inflator designs now addresses
automobile company demands for inflator performance, cleanliness, and a lower
cost airbag inflation system.
The next phase of the liquid airbag inflator program was to select a
strategic partner to facilitate the final high volume manufacturing design and
to market this low cost airbag inflator for use in airbag safety systems. A
strategic partner will be selected based in part on their facilities, expertise
and marketing capabilities which will be used to strategically exploit the
benefits of this technology in the marketplace.
The liquid inflator technology to be used in the alliance is absolutely
clean and particle free and does not require a pyrotechnic igniter typically
used on traditional solid propellant systems. This low cost inflator technology
can be marketed for economical use in the smartest deployment systems designed
to improve safety by adjusting bag deployment based on the severity of the
accident and the size and position of the occupants. This liquid technology
particularly suits these smart systems in that it can produce a range of faster
and slower, harder and softer bag deployments on command. The liquid inflators
will bring about dramatic reductions in cost and significant improvements in
performance compared with current inflator technology. These attributes will
enable the Company and its strategic partners to exploit this unique technology
in the form of superior airbag inflator products at a competitive price.
The Company believes that the attributes of its liquid technology airbag
inflator designs and the interest it has received from potential candidates,
will enable the Company to form a strategic partnership for final development of
the airbag product.
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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 $.5 million in fiscal year 1997 and $1.4 million in fiscal
year 1996 on Company sponsored research and development.
During these two fiscal years, prototype products were developed and
patents generated or applied for in several areas, including its liquid
propellant automobile airbag inflator. 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 has
received notices from the United States Patent and Trademark Office that patent
claims have been allowed on these first two patent applications for its liquid
airbag inflator technology.
The Company is using its laser technology to aggressively develop unique
commercial products which would be produced by the company in high volumes.
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
has been awarded 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 also has
several existing patents related to certain technologies developed as a result
of contracts with or for the U.S. Government. These patents, issued as a result
of contracts with or for the U.S. Government,- share the rights to these patents
with the U.S. Government.
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 has received notices from the United States Patent and
Trademark Office that patent claims have been allowed on these first two patent
applications for its liquid airbag inflator technology.
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 July 31, 1997 the Company had 135 employees of which 118 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. The Company has negotiated a 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 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.
9
<PAGE>
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
10
<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 1998 Ending May 31, 1998
1st Quarter (1) 6-1/2 4-7/8
Fiscal Year 1997 ended May 31, 1997
4th Quarter 7 5
3rd Quarter 7-1/2 5-1/4
2nd Quarter 6-3/4 5
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
</TABLE>
(1) TRADING ACTIVITY THROUGH JULY 31, 1997.
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 (see note 6, Financial Statements) 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 275 and the estimated number of beneficial shareholders was 1500
as of July 31, 1997.
11
<PAGE>
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL OVERVIEW
Hi-Shear Technology Corporation (the "Company") designs and manufactures
highly reliable electronic and pyrotechnic-separation products for the aerospace
industry, and has adapted its technology to a select group of emerging
commercial products. The Company's aerospace products are used by customers
ranging from major aerospace companies, NASA and the U.S. Government to foreign
space agencies and governments. Its aerospace products are primarily used in
commercial space satellites and launch vehicles, exploration missions, advanced
fighter aircraft, missiles and military systems. The Company has designed,
tested and developed a select group of commercial products that utilize its
highly reliable aerospace technology. Since beginning its commercial product
developments, the Company has completed and introduced two commercial product
lines, the LIFESHEAR rescue cutters and high security locks. The Company has
also developed a low-cost environmentally safe liquid airbag inflator for use in
automobile airbag safety systems.
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
commercial products, the acceptance and pricing of its commercial products, the
development and nature of its relationship with key strategic partners, the
allocation of the federal budget and the economy in general.
AEROSPACE PRODUCTS
The Company's aerospace products were introduced originally for use in the
U.S. space program, and included power cartridges and separation devices
designed to meet the need for fail-safe high performance 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, necessary supporting electronic systems were
designed by the Company. Electronic sequencing units designed to sequentially
fire separation devices according to pre-programmed parameters, became a product
line 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 products are separated into two categories: Ordnance
Products and Electronic Products.
Demand for the Company's aerospace products is driven primarily by the
number of satellite launches, space exploration missions, and the requirements
of the U.S. Government, which are realized through a prime contractor or other
subcontractor. The aerospace contracts it receives generally 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.
12
<PAGE>
COMMERCIAL PRODUCTS
The Company is committed to the development of products for commercial
applications. It has incurred substantial expenses throughout its organization
related to the development of new commercial products that complement and
utilize both its aerospace and its defense technology. The Company has marketed
both its high security locks and its rescue cutter and has developed a third
commercial product, an advanced low cost liquid airbag inflator for use in
automobile airbag safety systems.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MAY 31, 1997 COMPARED WITH FISCAL YEAR ENDED MAY 31, 1996
Revenues were $17.3 million in 1997 as compared to $10.5 million in 1996.
The 65% increase in revenues was the result of an increased new order rate for
commercial aerospace products. These orders were received early enough during
the fiscal year to result in increased volumes of products being shipped in the
fiscal year. Orders of $9.6 were received during the first six months of fiscal
1997, an increase of 53% over the first six months of 1996. The increase in
revenues for the year also included revenues of $.4 million from the rescue tool
licensing fees and the sale of LIFESHEAR products.
Orders received during the fiscal year increased 52% over the orders
received in the prior year. In fiscal year 1997 the Company was awarded $20.1
million in new aerospace contracts plus the long term portion of the five year
$20 million analog sequencer contract, as compared to $13.2 million in fiscal
year 1996. This dramatic increase in contracts awarded during fiscal year 1997
resulted in an ending backlog of $16.1 million compared to $15.8 million at the
end of fiscal 1996 despite the substantial increased shipping volume during the
year. The increase in contract awards granted to the Company during fiscal year
1997 was primarily attributable to the increased demand for commercial aerospace
products. The surge in planned commercial satellite launches and launch vehicles
together with government exploration and military activities, drove this
increased demand for the Company's aerospace products.
Gross profits increased threefold to $4.2 million averaging 24.3% of
revenues as compared to $1.4 million or 13.5% of revenues in fiscal year 1996.
This rise in gross profitability resulted from a higher volume of product
shipments and the related revenues to which the Company's overhead base could be
allocated as well as improved effectiveness in the use of labor and materials.
In addition the Company took a one time charge in the prior year in recognition
of the exit from a business activity.
Selling, General and Administrative expenses, excluding research and
development, totaled $2.6 million in fiscal year 1997, the same as in fiscal
year 1996. These general and administrative expenses remained constant despite a
65% increase in revenues due to continued efforts of management to improve
corporate efficiencies and reduce administrative expenses. The Company believes
it will continue to improve on these efficiencies by using its new accounting
and management information system to improve its material control and production
reporting in both its aerospace and commercial product lines. This software has
been installed and is currently being fully integrated into the Company's
business system.
Research and Development expenses were $.5 million for fiscal year 1997 as
compared to $1.4 million in fiscal year 1996. The amount spent in fiscal year
1997 is less than that spent in fiscal year 1996 because the prior year
expenditures included large development expenses for the accelerated development
of its liquid airbag inflator system and the LINESHEAR and LIFESHEAR product
lines. These
13
<PAGE>
important new product efforts continued into fiscal year 1997, however because
of early successes, they did not generate as large an expense as in fiscal year
1996. Management believes the enhancements to performance and technical
advantages made through these research and development efforts in both years
should result in enhanced airbag inflator designs at lower manufacturing cost
and in higher performing commercial cutters for new industrial applications.
These specialized cutters are being marketed to the electric utility and other
industries that have unique cutting requirements. LINESHEAR can substantially
reduce the time and expense compared to current cutting methods.
Amortization of the excess of net assets acquired over purchase price was
$138,000 for fiscal year 1997 compared to $302,000 in fiscal year 1996. This
decrease in amortization was the result of the write-off of $1,150,000 in 1996
related to the Company's exit from a business activity. (See Note 11 to the
financial statements.)
The Company had an operating profit of $1.3 million as compared to an
operating loss of $1.1 million for fiscal year 1996. This operating profit was
the result of a substantial increase in volume and revenue from commercial
aerospace orders coupled with lower general, administrative and development
expenses.
Net interest expense for the fiscal year 1997 was $274,000 which is
comparable to the $249,000 incurred in fiscal year 1996. During 1997, the
increased revenue generated a higher level of average accounts receivables to be
financed during the period.
The Company had a net income, after interest and income taxes, of $1.0
million for fiscal year 1997 as compared to a net loss of $1.3 million for the
prior fiscal year 1996.
FOURTH QUARTER RESULTS
The Company had revenues of $6.5 million and a net income of $.4
million for the fourth quarter of fiscal year 1997 compared to revenues of $3.0
million for the fourth quarter of fiscal year 1996 which resulted in a net loss
for that period. The fiscal year 1997 fourth quarter increase in revenue and net
income is primarily the result of increased commercial aerospace orders,
resulting in higher shipments, and lower administrative expenses as compared to
the fourth quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $.9 million was provided by operations during fiscal year 1997
compared to the $1.8 million used in operations for fiscal year 1996. This
improvement resulted from an increase in profitability and a reduction of net
inventory. The Accounts Receivables balance was higher at year end than last
year due to the growth of shipments made in the fourth quarter. Also included in
the positive cash flow for the year were insurance proceeds of $173,000 for a
business interruption claim. During the year, the Company invested in $570,000
of capital expenditures primarily for additions and improvements to its computer
system, automated test equipment and capital tooling.
At May 31, 1997 the Company had reduced its total inventories to $2.6
million from $3.8 million at May 31, 1996 while significantly increasing
manufacturing activity during the year. At year-end the Company had $692,000 in
commercial inventory, $298,000 in unamortized deferred costs and $220,000 of
tooling dedicated to the LIFESHEAR product line. Management plans to
aggressively increase the distribution of its commercial products to increase
sales and accelerate the inventory turn-over rate. The full realization of these
plans is dependent upon the Company's ability to carry out the strengthening of
its commercial distribution to fully exploit both the rescue and industrial
market for these products.
14
<PAGE>
In the normal course of business, the Company submits claims for cost
reimbursement related to contract requirements, changes not yet incorporated
into its contract or other contract costs in negotiation. These claims for
reimbursement result from changes to specifications, additional work required to
be performed by the Company to satisfy customer requests beyond contract scope,
failure of customer designed components and adjustments to contract pricing due
to the customer reducing unit quantities. May 31, 1997, the Company's
outstanding claims totaled $905,000 and are recorded as unbilled receivables.
Although there is no guarantee that all claims will be fully reimbursed,
management believes that the history of reimbursement for claims supports the
Company's claim submittal procedures.
The Company's primary source of capital during the year was its positive
operating cash flow. The Company also continues to maintain a $3.5 million line
of credit with a commercial bank and pays market interest on the outstanding
balance. As of May 31, 1997, there is $2.5 million outstanding on this line of
credit.
The Company believes that its net working capital of $3.7 million and its
lines of credit will be sufficient for its operations for the foreseeable
future. Management believes it will be able to renew its annual credit agreement
under terms and conditions that will meet the Company's needs for the
foreseeable future. The Company expects that successful development of its
liquid airbag inflator system for commercial high volume production may require
additional capital. Although there are no assurances, the Company believes that
any capital required for such production could be met through either additional
debt or equity financing.
ACCOUNTING PRONOUNCEMENTS TO BE IMPLEMENTED
The Financial Accounting Standard Board (FASB) has issued Statement No.
128, "EARNINGS PER SHARE", which supersedes APB Opinion No. 15. Statement No.
128 requires the presentation of earnings per share by all entities that have
common stock or potential common stock, such as options, warrants and
convertible securities outstanding that trade in a public market. Those entities
that have only common stock outstanding are required to present basic earnings
per share amounts. Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce a loss or increase the income per common share from continuing
operations. All entities required to present per share amounts must initially
apply Statement No. 128 for annual and interim periods ending after December 31,
1997. Earlier application is not permitted. The adoption of Statement No. 128
would have no effect on reported earnings (loss) per share.
The FASB has also issued Statement No. 131 "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION." Statement No. 131 modifies the
disclosure requirements for reportable segments and is effective for the
Company's year ending May 31, 1999. The Company has not determined the effect of
the adoption of this Statement would have on the Company's reported segments.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's' Report .................................. F-1
Balance Sheet......................................................... F-2
Statements of Operations.............................................. F-3
Statements of Stockholders' Equity.................................... F-4
Statements of Cash Flows.............................................. F-5
Notes to Financial Statements......................................... F-6-19
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. (McGladrey & Pullen, LLP has conducted the
audit of the Company's financial statement for the years ended May 31, 1996 and
1997.) McGladrey and 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 or
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.
16
<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, 1997, and the related statements of
operations, stockholders' equity and cash flows for the years ended May 31, 1997
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of May 31, 1997,
and the results of its operations and its cash flows for the years ended May 31,
1997 and 1996 in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Anaheim, California
July 21, 1997
F-1
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE SHEET
MAY 31, 1997
ASSETS (NOTE 6)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
Current Assets
Cash $ 19,000
Accounts receivable (Note 3) 6,307,000
Inventories (Note 4) 2,633,000
Prepaid expenses and other current assets 50,000
-----------
TOTAL CURRENT ASSETS 9,009,000
Equipment, net (Note 5) 1,491,000
Other Assets, net
Deferred costs 298,000
Other intangible assets 115,000
-----------
$ 10,913,000
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities
Note payable to bank (Note 6) $ 2,511,000
Current portion of long-term debt (Note 6) 128,000
Accounts payable 1,763,000
Accrued payroll and related costs 423,000
Other accrued liabilities (Note 8) 456,000
----------
TOTAL CURRENT LIABILITIES 5,281,000
Long-Term Debt (Note 6) 16,000
-----------
TOTAL LIABILITIES 5,297,000
---------
Excess of Net Assets Acquired Over Purchase Price (Note 11) 829,000
-----------
Commitments and Contingencies (Notes 3,4, 8 and 9)
Stockholders' Equity (Notes 6 and 10)
Preferred stock, $1.00 par value; 500,000 shares authorized:
no shares issued
Common stock, $.001 per value; 25,000,000 shares authorized;
6,636,000 shares issued and outstanding 7,000
Additional paid-in capital 7,001,000
Accumulated deficit (2,221,000)
----------
Total stockholders' equity 4,787,000
----------
$ 10,913,000
=================
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues (Notes 2, 3, 4 and 12) $ 17,325,000 $ 10,489,000
Cost of Revenues (Note 4) 13,122,000 9,072,000
-----------------------------------------
GROSS PROFIT (NOTE 11) 4,203,000 1,417,000
Selling, General and Administrative Expenses 2,560,000 2,566.000
Research and Development Expenses 478,000 1,385,000
Amortization of Excess of Net Assets Acquired
Over Purchase Price (138,000) (302,000)
Write-Off of Excess of Net Assets Acquired Over
Purchase Price Attributed to Exited Line of Business
(Note 11) - (1,150,000)
-----------------------------------------
OPERATING INCOME (LOSS) 1,303,000 (1,082,000)
Interest Income 1,000 18,000
Interest (Expense) (272,000) (269,000)
-----------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 1,032,000 (1,333,000)
Provision for Income Taxes (Note 7) 11,000 -
-----------------------------------------
NET INCOME (LOSS) $ 1,021,000 $ (1,333,000)
==========================================
Net Income (Loss) Per Common and Common
Equivalent Share $ 0.15 $ (0.20)
==========================================
Weighted Average Number of Common and Common
Equivalent Shares Outstanding During the Year 6,631,000 6,594,000
==========================================
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Stockholders'
------------------------------
Shares Amount Capital Deficit Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock
options 8,000 - 24,000 - 24,000
Net income - - - 1,021,000 1,021,000
----------------------------------------------------------------------------------------
Balance, May 31, 1997 6,636,000 $ 7,000 $ 7,001,000 $ (2,221,000) $ 4,787,000
========================================================================================
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (loss) $ 1,021,000 $ (1,333,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 541,000 473,000
Amortization and write-off of excess of net assets
acquired over purchase price (138,000) (1,452,000)
Changes in operating assets and liabilities
Accounts receivable (1,985,000) 476,000
Inventories 1,172,000 (134,000)
Prepaid expenses and other assets (42,000) 130,000
Accounts payable 338,000 17,000
Accrued payroll and related costs (57,000) (29,000)
Other accrued liabilities 7,000 70,000
------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 857,000 (1,782,000)
------------------------------------
Cash Flows from Investing Activities, purchase
of equipment (571,000) (519,000)
------------------------------------
Cash Flows from Financing Activities
Proceeds from note payable to a bank 4,375,000 2,636,000
(Payments) on note payable to a bank (4,500,000) (2,000,000)
Proceeds from stock options and warrants exercised 24,000 716,000
Principal payments on long-term debt (242,000) (223,000)
-----------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (343,000) 1,129,000
-----------------------------------
NET (DECREASE) IN CASH (57,000) (1,172,000)
Cash, beginning of period 76,000 1,248,000
-----------------------------------
Cash, end of period $ 19,000 $ 76,000
====================================
Supplemental Disclosure of Cash Flow information
Cash paid during the year for interest $ 274,000 $ 249,000
=====================================
Cash paid during the year for income taxes $ 8,000 $ -
=====================================
</TABLE>
See Notes to Financial Statements.
F-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 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
LIFESHEAR emergency rescue cutting tool and LINESHEAR cutter (Cutters) and a
high security lock. The sales volumes of these new commercial products have not
been significant; however, significant investments in inventory, tooling, and
pre-production costs for the Cutter have been made. The realization of these
investments is dependent upon the Company's ability to establish a market for
these products. In addition, the Company has developed a third commercial
product, an airbag inflator system. An initial patent application for a liquid
inflator was filed by the Company in November 1994, with a second patent
application covering expanded claims and improvements filed in July 1996. All
costs related to the development of the airbag inflator has been expensed.
F7
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
NEW ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standard Board (FASB) has issued Statement No. 128,
"EARNINGS PER SHARE", which supersedes APB Opinion No. 15. Statement No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants and convertible
securities outstanding that trade in a public market. Those entities that have
only common stock outstanding are required to present basic earnings per share
amounts. Diluted per share amounts assume the conversion, exercise or issuance
of all potential common stock instruments unless the effect is to reduce a loss
or increase the income per common share from continuing operations. All entities
required to present per share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 31, 1997. Earlier application
is not permitted. The adoption of Statement No. 128 would have no material
effect on reported earnings (loss) per share.
The FASB has also issued Statement No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED Information." Statement No. 131 modifies the disclosure
requirements for reportable segments and is effective for the Company's year
ending May 31, 1999. The Company has not determined the effect of the adoption
of this Statement would have on the Company's reported segments.
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 and milestones achieved (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.
F-8
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION: (CONTINUED)
The Company submits claims for cost reimbursement related to contract
requirement changes not yet incorporated into its contract or other contract
costs in negotiation. These claims for reimbursement result from changes to
specifications, additional work required to be performed by the Company to
satisfy customer requests beyond contract scope, failure of customer designed
components and adjustments to contract pricing due to the customer reducing unit
quantities. Claims are recorded to the extent of costs incurred when, in
management's opinion, it is probable that the claim will result in additional
revenues and the amount can be reasonably estimated.
Included in 1997 revenues is approximately $173,000 related to payments received
on a business interruption insurance policy in excess of direct costs incurred.
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.
F-9
<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:
- --------------------------------------------------------------------------------
Machinery and equipment 5 to 10 years
Tooling 5 years
Furniture and fixtures 10 years
Leasehold improvements Shorter of lease term or useful
life
OTHER ASSETS:
Deferred costs consist of capitalized pre-production costs, net of accumulated
amortization of $238,000 related to the production of the Company's LIFESHEAR
emergency rescue and LINESHEAR cutting tools. These costs are amortized over a
five-year period. Other intangible assets consist of the cost for acquired
patents and are amortized over the lesser of the expected economic life or the
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
$138,000 and $302,000 in 1997 and 1996, respectively (Note 11).
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.
F-10
<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:
The method and assumptions used to estimate the fair value of financial
instruments were: 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;
note payable to bank: the carrying amount approximates fair value since the
interest rate changes with the market interest rate.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
The Company periodically has cash on deposit with its bank which exceeds the
insurance limits of the FDIC.
NOTE 2. 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>
- --------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
United States Government 23% 21%
Lockheed Martin 34% 33%
McDonnell Douglas * 11%
</TABLE>
*For the year ended May 31, 1997, McDonnell Douglas represented revenue of less
than 10% of total Company revenue.
F-11
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Accounts receivable at May 31, 1997 consist of the following:
- --------------------------------------------------------------------------------------------------------------------
Due from United States Government, prime and subcontractors under long-term
contracts:
<S> <C>
Billed $ 13,965,000
Unbilled 2,273,000
Progress payments received (10,543,000)
----------------
5,695,000
Billed and currently due from foreign sales, long-term contracts 296,000
Total due, long-term contracts 5,991,000
Commercial receivables 87,000
Other receivables 229,000
----------------
Total $ 6,307,000
================
</TABLE>
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,
1997, the Company has recorded retentions of $1,373,000 which are awaiting
completion of contracts in process before payment will be made and claims of
approximately $900,000 net of a reserve of approximately $274,000, which are
recorded at amounts which management believes will ultimately be realized. The
ultimate realization of the claims may be different than the amount estimated
and the difference could be significant. During the fiscal year 1997 and 1996,
the Company generated revenue of approximately $1,162,000 and $700,000,
respectively, from sources outside of the United States.
The Company has recorded $300,000 in revenues related to a license agreement to
manufacture and sell the LifeShear and LINESHEAR cutting tools. The license
agreement is an exclusive agreement to sell the product outside the United
States, Canada and Japan and it is for an indefinite period of time. The
agreement 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 agreement. Included in other receivables is a $150,000 mandatory fee
receivable from the licensee which is delinquent. Management believes that the
Company will ultimately collect this amount and no reserve has been recorded.
The licensee claims that the Company breached the agreement and requests to be
reimbursed extra costs in the total amount of $784,000, most of which consist of
future anticipated costs. No such provisions exist in the license agreement.
Management believes these claims have been made in an attempt to avoid payment,
that the claims are without merit and will ultimately result in no material
adverse effect on the Company's financial statements. Accordingly, no amounts
for this claim have been accrued in the financial statements.
F-12
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
Inventoried costs at May 31, 1997 consist of the following:
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Production cost of contracts in process $ 540,000
Raw materials and components 1,401,000
Commercial inventory:
Raw materials 385,000
Work-in-process 301,000
Finished goods 6,000
--------------
TOTAL $ 2,633,000
==============
</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.
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,
1997, is as follows:
<TABLE>
<CAPTION>
HEFU/PSA Other Contracts Total
(Note 11)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total contracts in process $ 4,594,000 $ 32,389,000 $ 36,983,000
==============================================================
Costs incurred to date $ 5,886,000 $ 14,406,000 $ 20,292,000
Estimated profit (loss) recorded (1,492,000) 1,932,000 440,000
Less billed and unbilled amounts (4,372,000) (15,820,000) (20,192,000)
--------------------------------------------------------------
Total production costs of contracts in process $ 22,000 $ 518,000 $ 540,000
==============================================================
</TABLE>
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, 1997, would change contract profits or losses
by approximately $75,000. During 1997 and 1996, management revised the estimate
to complete related to the HEFU/PSA line of business which the Company has
exited (Note 11). These revisions resulted in an increase to cost of revenues of
approximately $515,000 and $800,000, respectively.
F-13
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INVENTORIES (CONTINUED)
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, 1997, the Company's backlog, including contracts in process was
approximately $16.1 million.
NOTE 5. EQUIPMENT
<TABLE>
<CAPTION>
The Company's equipment at May 31, 1997 consist of the following:
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Machinery and equipment $ 919,000
Tooling costs 468,000
Furniture and fixtures 138,000
Leasehold improvements 40,000
Projects in progress 746,000
-----------------
2,311,000
Less accumulated depreciation and amortization 820,000
-----------------
$ 1,491,000
=================
</TABLE>
Included above is equipment acquired under capital leases of $604,000.
Accumulated amortization related to these capital leases total $520,000.
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 $247,000. It also
includes deposits made on certain tooling being manufactured.
F-14
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 (8.5%
at May 31, 1997) plus .75%. The credit agreement expires November 1, 1997. At
May 31, 1997, $2,511,000 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. Availability under the line at May 31, 1997, is $989,000.
<TABLE>
<CAPTION>
Long-term debt at May 31, 1997, consists of the following:
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Capital lease obligation, payable in monthly installments of
$19,000 through 1997, including interest imputed at 7.5% $ 92,000
Promissory note, guaranteed by HSI, payable in monthly installments
of $3,000, including interest at 11% through 1998 52,000
--------------------
144,000
Less current portion 128,000
--------------------
Long term debt $ 16,000
====================
</TABLE>
Maturities of long-term debt are 1998 $128,000 and 1999 $16,000.
NOTE 7. PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
The 1997 provision for income taxes consists of state taxes currently payable.
Deferred income tax assets provided for in the accompanying balance sheet at May
31, 1997, consist of the following:
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Depreciation $ 242,000
Net operating loss carryforwards 2,220,000
----------------------
TOTAL DEFERRED INCOME TAX ASSETS 2,462,000
Valuation allowance (2,462,000)
---------------------
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.
F-15
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. PROVISION FOR INCOME TAXES (CONTINUED)
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>
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal income tax (credits) computed at the statutory rate $ 357,000 (466,000)
State taxes, less federal benefit 62,000 -
Purchase adjustments related to acquisition - (479,000)
Change in valuation allowance (408,000) 945,000
-----------------------------------------
$ 11,000 $ -
=========================================
</TABLE>
As of May 31, 1997, 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
approximately $2,940,000 which expire $1,350,000 in 2009 and $1,590,000 in 2011.
NOTE 8. EMPLOYMENT 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 Company
contributions made to the Plan during the years ended May 31, 1997 and 1996.
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 1997 and 1996. The accompanying balance sheet at
May 31, 1997, includes a $147,000 accrued pension liability which is the
projected benefit obligation for the covered employees.
F-16
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1997 and 1996, approximated $606,000 and $631,000, respectively.
<TABLE>
<CAPTION>
Minimum annual rentals under all noncancelable operating leases are as follows:
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $ 625,000
1999 667,000
2000 282,000
--------------------
$ 1,574,000
====================
</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 1997 and
1996.
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.
NOTE 10. 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,
subject to adjustment in accordance with the terms of the warrant agreement.
During 1997, no warrants were exercised. During 1996, 76,500 warrants were
exercised. The remaining warrants, covering 73,500 shares, expire on March 31,
1999.
STOCK OPTION PLAN:
The Company has an option plan under which it may grant options to purchase
common stock, with a maximum term of 10 years. Options for up to 500,000 shares
may be granted to employees under the Plan. Under the Plan, options are granted
and vested as determined by management.
F-17
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the two fixed plans and changes during the year ended
on those dates is as follows:
<TABLE>
<CAPTION>
1996 1997
--------------------------------- ---------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 171,000 $ 6.85 249,000 $ 6.85
Granted 122,000 6.16 54,000 5.44
Exercised (24,000) 4.89 (8,000) 3.24
Forfeited (20,000) 5.00 (53,000) 10.08
---------------------------------------------------------------------
Outstanding at end of year 249,000 $ 6.85 242,000 $ 5.95
=====================================================================
Exercisable at end of year 108,000 $ 8.27 127,000 $ 6.03
Weighted-average fair value per
option granted during the year $3.87 $4.54
</TABLE>
A further summary about fixed options outstanding at May 31, 1997, is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$5.00 to $6.50 213,000 8 years $ 5.76 116,000 $ 5.66
$8.50 to $10.50 11,000 8 years 9.95 11,000 9.95
--------------- ----------------
242,000 $ 5.95 127,000 $ 6.03
=============== ================
</TABLE>
F-18
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
Grants under the Company's stock option plans are accounted for following APB
Opinion No. 25 and related interpretations. Accordingly, no compensation cost
has been recognized for grants under the plan. Had compensation cost for the
stock-based compensation plans been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), reported net
income (loss) and earnings (loss) per common share would have been reduced to
the proforma amounts shown below:
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss)
As reported $ (1,333,000) 1,021,000
Pro forma (1,375,000) 886,000
Net income (loss) per common and
common equivalent share
As reported (0.20) 0.15
Pro forma (0.21) 0.13
</TABLE>
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996 and 1997, respectively: no dividend rate for all
years; price volatility of 69% in 1996 and 70% in 1997, risk-free interest rates
of approximately 5.9% in 1996 and 6.8% in 1997; and expected lives of ten years.
NOTE 11. 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.
The product produced in this line of business initiate ordnance functions and
switches on the initial stage of the Titan launch vehicle. Management decided to
exist 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 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 estimated costs to complete the contracts (including incurred
and accrued costs at May 31, 1996, totaling approximately $1,060,000 were
recorded in 1996 operations, however, as discussed in Note 4, the Company
changed the estimated cost to complete the project in 1997.
F-19
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. EXIT OF A BUSINESS ACTIVITY (CONTINUED)
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 $414,000 and $324,000 for fiscal year 1997 and 1996,
respectively. Losses on this business activity, prior to the write-off of
negative goodwill were, $224,000 and $737,000 (unaudited) for fiscal year 1997
and 1996, respectively.
NOTE 12. 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>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues from unaffiliated customers $ 444,000 144,000
Operating (loss) including research and development (230,000) (906,000)
Depreciation and amortization 207,000 250,000
Additions to equipment - 537,000
Assets 1,211,000 1,576,000
</TABLE>
F-20
<PAGE>
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, 1997 and is incorporated herein by reference.
Mr. Timothy R. Pagano has joined Hi-Shear Technology in July of 1997 as
Vice President and General Manager of Aerospace Products replacing Mr. John
Wenckus. Mr. Pagano came to Hi-Shear from the Optical Corporation of America (a
unit of Corning Glass) where he held the position of Vice President, Operations.
He will be responsible for the design, engineering, manufacture, and shipment of
the Company's aerospace products. Mr. Pagano has extensive experience in
manufacturing, engineering, product assurance, precision machining and the new
product development of both commercial and military products.
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, 1997 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, 1997 and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
17
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See "Exhibit Index", page 20.
(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, 1997.
18
<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: August 8, 1997 By: /s/ George W. Trahan
-------------- ------------------------
Executive Vice President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: August 8, 1997 By: /s/ Thomas R. Mooney
-------------- -----------------------------------
Chairman of the Board and President
By: /s/ George W. Trahan
----------------------------------
Director, Executive Vice
President, Chief Financial
Officer (Chief Accounting Officer)
By: /s/ David W. Einsel
---------------------------
Director
By: /s/ Jack Bunis
---------------------------
Director
19
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBER DESCRIPTIONS NUMBERED
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 Independent Auditors
27.1 Financial Data Schedule
- -------------------
* 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.
20
<PAGE>
[LOGO]
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR'S
We hereby consent to the incorporation of our report, dated July 21, 1997,
included in this Form 10-K SB in the previously filed registration statement of
Hi-Shear Technology on Form S-8 (No.33-868989).
/s/ McGladrey & Pullen, LLP
Anaheim, California
August 5, 1997
21
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FINANCIAL DATA SCHEDULE WORKSHEET FOR HI-SHEAR TECHNOLOGY CORPORATION
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