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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 31,1998 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: $ 17,641,000.
The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately $13,248,150 as of July 13, 1998, based upon the
closing sale price on the American Stock Exchange on that date at which the
stock was last sold.
There were approximately 6,668,000 shares of the Registrants Common Stock issued
and outstanding as of May 29, 1998.
Part III, other than Item 12, is incorporated by reference from the Registrant's
Proxy Statement for its 1998 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of May 31, 1998.
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Hi-Shear Technology Corporation
Form 10-KSB
Table of Contents
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Page
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PART I.
Item 1 Business................................................... 1
Item 2 Properties................................................. 6
Item 3 Legal Proceedings.......................................... 6
Item 4 Submission of Matter to Vote of Security Holders........... 6
PART II.
Item 5 Market for Common Equity and Related Stockholder Matters... 7
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 7
Item 7 Financial Statements....................................... 10
Item 8 Changes In and Disagreements With Accountants and
Financial Disclosure....................................... 10
PART III.
Item 9 Directors, Executive Offices and Key Employees............. 11
Item 10 Executive Compensation..................................... 11
Item 11 Security Ownership of Certain Beneficial Owners
and Management............................................. 11
Item 12 Certain Relationships and Related Transactions............. 11
PART IV.
Item 13 Exhibits and Reports on Form 8-K........................... 11
Signatures ........................................................... 12
Exhibit Index ........................................................... 13
Index to Financial Statements................................................. 15
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PART I
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. Customers such as commercial
satellite manufacturers, launch vehicle assemblers, NASA, the U.S. Government,
foreign space agencies and commercial launch ventures, and others in the
aerospace business use the Company's aerospace products. The Company has
introduced two commercial products, the LifeShear rescue cutter, and the
LineShear cable cutter. In addition the Company is developing a low-cost
environmentally safe air bag inflator technology for use in automobile air bag
safety systems.
The Company's executive offices are located at 24225 Garnier Street,
Torrance, CA 90505, Telephone (310) 784-2100 - Facsimile (310) 325-5354.
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 additional products for use in fighter aircraft
ejection seat systems and other applications. Aerospace products are separated
into several product categories as follows:
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. The Company'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. 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. The Company has manufactured 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, lightweight, environment
and corrosive
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resistance and ultra high reliability. The power cartridge's high-pressure
combustion energy is used to open satellite doors and deploy solar panels. It
operates the thrusters, wing/fin actuators, cutters and pin pullers found in
commercial satellites, launch vehicles, and 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. Success in the Army field tests were the basis for establishment of a
Company laser firing system for all ground operations in the X-33 program.
Electronic 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.
Electronic Safe, Arm Fuze. The Company supplies safe, arm fuzes for
tactical and conventional military programs. The Company's upgraded Patriot
(PAC-3) missile system product 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 safety checks, and
also a shelf life estimated at 30 years making it among the longest in the
industry.
Commercial Products
Commercial Cutters. The Company's LifeShear cutters provide for fast,
safe, and reliable use as a rescue tool used in a wide range of emergency
situations for fire and rescue, law enforcement, and military rescue teams. The
LifeShear cutter's light weight, mobility, ease of use, and inexpensive design
will quickly cut through 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 that eliminate the need for cumbersome hydraulic and electrical
connections, and compliments the Company's aerospace power cartridges.
The Company signed a distribution agreement with Hale Products, a
subsidiary of IDEX Corporation. Under this agreement, Hale Products will
exclusively market and distribute the LifeShear cutter to the public safety
markets in North America, Canada and Japan. The Company will manufacture the
LifeShear and its accompanying power cartridges for sales in these regions.
The Company's European licensee is manufacturing and selling LifeShear in
their assigned territory.
The LineShear cutter shares many of the same components as the rescue tool
and 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. Concentration of marketing efforts will be to utility companies
and refineries, located in the Western region of the United States. The
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Company has plans to expand the marketing of these tools through the remainder
of the U.S. and overseas during the next several years.
Automotive Air Bag Inflators. The Company has identified the automotive
air bag market as a major, fast growing market in which management believes its
technology, if developed, marketed and manufactured in conjunction with an
experienced air bag manufacturer, can gain market share. In the U.S. market,
all trucks and cars are required to have both driver and passenger air bags. In
addition, many vehicles worldwide are outfitted with side air bags and other air
bag applications. Forecasters suggest that the worldwide air bag market by
early 2000's automotive model years could exceed 83 million air bag units, up
from 48.7 million for model year 1996. Europe and Asia, where presently only
50% of the cars produced have air bags, are major markets for air bags as well.
Concurrent with this rise in unit volume has been a significant decrease in unit
price for air bag components (sensor, inflator, initiator and bag) and hence, a
decrease in the overall air bag prices. This reduction in unit price can enable
a low cost inflator technology to capture additional volume through increased
market share as compared to inflator designs that cannot be manufactured for
less cost.
The Company's air bag technology was first announced in November 1994 after
the Company made the first of its patent filings. The patent claims generally
relate to its propellant technology, which the Company developed in its work in
the U.S. space program. When the technology is applied to an automotive
inflator application, the fuel produces a gas that inflates the air bag on a
measurable, rapid time basis. The fuel and the gas produced are benign and
environmentally safe in contrast to the toxic gases and materials used in
existing air bag systems.
During the third quarter of fiscal 1998, the Company was awarded a patent
for its automobile air bag inflator technology by the United States Patent and
Trademark Office. This automobile air bag inflator technology with its lower
projected cost, offers the automobile industry a high performance, non-toxic,
low cost alternative to current air bag inflator systems.
To facilitate the final high volume manufacturing design and to market this
low cost air bag inflator for use in air bag safety systems, the Company formed
an alliance with a major air bag manufacturer. The two part alliance calls for
the two companies to first join forces in the final development of a new air bag
inflator for the global automotive market, and then to establish a manufacturing
operation. This partner was selected based on their manufacturing, expertise and
marketing capabilities that will be used to strategically exploit the benefits
of this technology in the marketplace.
The inflator technology to be used in the alliance is absolutely clean and
particulate free and does not require many of the costly parts and fuels
typically used on traditional solid propellant systems. This low cost inflator
technology can be used 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. Hi-Shear's technology particularly suits
these smart systems in that it can produce a range of faster and slower, harder
and softer bag deployments economically on command. These inflator designs 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 partner to exploit this unique technology
in the form of superior air bag inflator products at a competitive price.
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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. Lockheed Martin (26%) and Hughes Space & Communications Co.
(11%) accounted for 37% of the Company's revenues. Lockheed Martin now
comprises what were formerly over twelve customers through its merger and
acquisition activities over the last several years. Lockheed Martin consists of
units formerly known as General Dynamics Space Systems, Sanders, General
Electric 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 21% of revenue in fiscal year 1998. In fiscal year
1999, 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 1998 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 be
encountered over the period of the contract, these fixed price contracts can
also offer significant profit potential. Also, Company contracts that 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 were 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.
Backlog
The Company's book-to-ship cycle is typical of the long lead times required
for highly engineered, custom manufactured, aerospace products. Typically, the
final negotiation of the detailed contract requirements together with the
procurement of long lead-time materials, manufacturing processes and testing,
takes between 6 and 12 months or more to accomplish.
Total requirements included in contracts undertaken by the Company may
contain options which 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 and its prime contractors are
supply contracts and/or multi-year options whose requirements are primarily
based on the Government's demand for 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 business which is considered to be firm, there can
be no assurance that cancellations, changes in quantities, 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.
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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 is
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 that 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 for the purposes of dealing with U.S. Government contracts or
programs.
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 machining
components in the Company's Precision Machining Center (PMC), 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 trademark 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 requires all employees to assign to the Company any
intellectual property developed by the employee during the course and scope of
the employment, and to agree to preserve as confidential all information
pertaining to the Company's business obtained by the employee as a result of
employment with the Company.
Employees
As of May 31, 1998 the Company had 136 employees of which 120 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.
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Item 2. Properties
The Company's executive offices are located in Torrance, California, in a
leased 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 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 that includes a 2,500
square foot blending and loading area. The Company has an option to purchase
the property for $1,080,000 through May 31, 1998 which increases 4% until May
31, 1999.
The Company believes that its current facilities in Torrance and Saugus
will adequately support its operations for the foreseeable future. Management
believes that each of the properties is adequately covered by insurance.
Item 3. Legal Proceedings
The Company is currently a party to several disputes that 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
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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:
High Low
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Fiscal Year 1998 ending May 31, 1998
4th Quarter 9-5/16 7-3/4
3rd Quarter 8-1/2 5-3/4
2nd Quarter 9-5/8 7-3/8
1st Quarter 6-1/2 4-7/8
Fiscal Year 1997 ending 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
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). Dividends 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 number of beneficial shareholders was approximately
1,500 as of May 31, 1998.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Overview
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report. This report,
including this discussion, contains forward-looking statements about business
strategies, market potential, and 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. These include 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.
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Results of Operations
Fiscal Year Ended May 31, 1998 compared with Fiscal Year Ended May 31, 1997
Revenues were up 4% to $17.6 million in 1998 compared to the $16.9 million
in 1997. This increase in revenues was achieved in aerospace products and
primarily represents shipments of satellite and launch vehicle components that
were shipped according to detailed customer requirements within the fiscal
period. Because of the specific delivery requirements of these customers, the
revenue during the fiscal period only partially reflects the growth the Company
realized in the commercial satellite and launch vehicle market.
A total of $23.1 million in new business was received during the year,
which represents a 15% increase over the prior year. This new business consists
of both long and short term customer requirements and reflects the growing
customer demand in the aerospace market. This years new business compares
favorably to the $20.1 million booked in 1997 and the $13.2 million in 1996, an
average annual growth rate of 32% in new business over the three year period.
Significant changes have been occurring in the aerospace industry. Many
well known satellite and launch vehicle companies have been purchased and
consolidated into what has become a small group of major aerospace firms.
Lockheed Martin now comprises what were formerly over twelve Hi-Shear customers
through its merger and acquisition activities. Lockheed Martin consists of
units formerly known as General Dynamics Space Systems, Sanders, General
Electric Aerospace, Goodyear Aerospace, Ford Aerospace, LTV Missile Systems,
Xerox Aerospace and Defense, Unisys Defense and Loral. At the same time the
aerospace industry is also undergoing a structural change in its ordering
practices for satellite and launch vehicle components. The trend is to convert
from defense style contracting to longer-term commercial style buying
agreements. Many benefits will result from this industry change in buying
practices. Shorter lead-times for the delivery of components, lower costs and
improved profitability will be gained for all the parties involved. This change
has resulted in a select number of satellite system and subsystem manufacturers
such as Hi-Shear being identified as strategic suppliers who will work as
partners with the major aerospace firms in the early planning stages of
satellite and launch vehicle design.
During fiscal year 1998, Hi-Shear developed key partnership agreements with
our largest customers who lead the satellite and launch industry. Orders
resulting from these new supplier partnerships were not reflected in the volume
of shipments posted during fiscal 1998 but will be reflected in fiscal 1999 and
beyond. The new business achieved in 1998 together with the new customer
partnerships developed by the Company will result in continued growth in our
aerospace product line over the next several years. The broadcast industry and
other commercial uses of satellite technology will fundamentally drive this
growth.
Gross profits increased during the year to $5.9 million averaging 34% of
revenues as compared to $4.4 million or 26% of revenues in fiscal year 1997.
During 1998 Hi-Shear began machining its own parts in its new Precision
Machining Center to assure quality while reducing cost. The growth in both
gross profitability and the percentage of gross profitability during fiscal 1998
resulted from improved manufacturing productivity and increased product value
added by successfully integrating the Precision Machining Center into the
Company's operations.
Selling, General and Administrative expenses, totaled $2.7 million in
fiscal year 1998, compared to $2.4 million in fiscal year 1997. The expense
increase was incurred in the sales area. Marketing and the preparation of new
product proposals activities were increased to develop the strategic partnership
and new product business that is key to the continued growth in the aerospace
segment.
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Research and Development expenses were $0.8 million for fiscal year 1998 as
compared to $0.5 million in fiscal year 1997. The amount invested in fiscal
year 1998 was increased to provide adequate funding for the Company's
initiatives in the areas of laser firing devices, advanced detonators,
additional commercial cutter developments and continued support of the air bag
inflator joint venture activities.
The Company had income from continuing operations of $2.4 million or 13% of
revenue, before the costs of exiting from the HEFU/PSA line of business. This
is a 60% increase from the operating profit of $1.5 million or 9% of revenues
earned in fiscal year 1997. This increase resulted from improved productivity,
and more product value added as the result of successfully integrating the
Precision Machining Center into the Company's operations.
During the year the Company substantially completed its exit from the
HEFU/PSA line of business. In May 1996 management approved a plan to exit from
this line of business because the technology associated with the product was
outdated, not cost competitive, and the future standardization in the industry
wasn't anticipated to include this business line. In addition, the Company had
historically incurred losses in the development and delivery of these products.
Costs of $772,000 and $224,000 were incurred during the fiscal year 1998 and
1997 to fully exit this line of business. Management determined that it was in
the best interest of the Company to complete this contract in a manner which
provided the highest level of customer satisfaction to its customer, Alliant
Techsystems, and to Lockheed Martin its prime contractor. Existing assets and
personnel associated with this business effort have been successfully reassigned
to other areas of the Company.
Interest expense for the fiscal year was $257,000, a reduction from the
$271,000 incurred in 1997. An improved collection cycle and operating
efficiencies resulted in lower average borrowings required to be financed during
the period.
The Company's fiscal year 1998 provision for income tax credit amounted to
$530,000 compared to a tax expense of $11,000 for fiscal year 1997. During
1998, management determined that it was more likely than not that a portion of
the deferred tax asset would be realized. Management recognized a portion of
the deferred tax asset approximating the amount expected to be realized on a
current basis. The amount of deferred tax assets considered realizable,
however, could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced.
In the fourth quarter of fiscal year 1998, the Company changed its method
of accounting for the costs of start-up activities in accordance with Statement
of Position 98-5 "Reporting on the Costs of Start-Up Activities" which was
issued on April 3, 1998. The unamortized balance of these start-up costs of
approximately $298,000 has been charged to income in 1998.
The Company had a net income of $1.6 million for fiscal year 1998 which
represented $.24 per share up from the net income of $1.0 million or $.15 per
share earned in fiscal year 1997.
Liquidity and Capital Resources
Net cash of $1.7 million was provided by operations during fiscal year 1998
compared to the $0.9 million provided by operations for fiscal year 1997. This
cash flow improvement resulted primarily from the Company's increase in
profitability. During the year the Company invested $1.2 million in capital
expenditures which were primarily used for machining equipment to create our
Precision Machining Center (PMC). This equipment was financed through working
capital and a new $0.8 million long-term credit facility. Management expects
capital expenditures during fiscal year 1999 to be approximately $1.0 million.
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At year-end the Company had $724,000 in commercial inventory, and $220,000
of tooling dedicated to the LifeShear product line. Management plans to
aggressively distribute its commercial products, increase sales and accelerate
the inventory turnover rate of these products. The full realization of these
plans is strengthened by its domestic distribution agreement and the initiation
of the efforts of its European licensee in manufacturing and marketing cutters
in Europe.
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, 1998, there is $1.5 million outstanding on this line of
credit which reflects a $1.0 million reduction in this debt compared to the $2.5
million which was outstanding at May 31, 1997.
The Company believes that its working capital of $5.2 million and the
continuation of its lines of credit will be sufficient for its operations in the
foreseeable future. The Company expects that successful development of its air
bag 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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS No. 130 Reporting Comprehensive
Income and SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires an enterprise to report, by major components
and as a single total, the change in its net assets during the period from
nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
Computer Systems and Year 2000
The Company currently has a plan to insure that its systems and software
infrastructure are Year 2000 compliant. The scheduled implementation of all
phases of the plan is December 1998. Given the relatively small size of the
Company's systems and the predominately new hardware, software and operating
systems, management does not anticipate any significant delays in becoming Year
2000 compliant. However, the Company is unable to control whether its
customers' and suppliers' systems are Year 2000 compliant. To the extent that
customers would be unable to order product or pay invoices or suppliers would be
unable to manufacture and ship product, it could affect the Company's
operations.
Item 7. Financial Statements
The report of the independent accountants and combined statements and notes
listed in the accompanying index are part of this report. See "Index to
Financial Statements" on page 15.
Item 8. Changes In and Disagreements with Accountants and Financial Disclosure
None.
10
<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, 1998 and is incorporated herein by reference.
On June 15, 1998 the Board of Directors named Mr. George W. Trahan
President, and Chief Operating Officer of the Company. Mr. Trahan, a member of
the Board and its executive committee, joined Hi-Shear in 1990 as Vice President
of Finance and Administration and has served as Executive Vice President since
1996. He will be responsible for all operations of the Company.
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, 1998 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, 1998 and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
None
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits: See "Exhibit Index", page 13.
(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, 1998.
11
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
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- F-17
</TABLE>
15
<PAGE>
[LOGO OF MCGLADREY & PULLEN, LLP]
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, 1998, and the related statements of
operations, stockholders' equity and cash flows for the years ended May 31, 1998
and 1997. 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 at May 31, 1998 and
the results of its operations and its cash flows for the years ended May 31,
1998 and 1997 in conformity with generally accepted accounting principles. As
discussed in Note 12, the Company changed its method of accounting for start-up
costs.
/s/ MCGLADREY & PULLEN, LLP
---------------------------
McGladrey & Pullen, LLP
Anaheim, California
July 21, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
ASSETS (Note 6)
- ------------------------------------------------------------------------------------------------------
Current Assets
<S> <C>
Cash and cash equivalents $ 236,000
Accounts receivable (Note 3) 5,711,000
Inventories (Note 4) 2,662,000
Deferred taxes (Note 7) 540,000
Prepaid expenses and other current assets 109,000
-----------
Total current assets 9,258,000
Equipment, Net (Note 5) 2,351,000
Intangible assets, net 110,000
-----------
$11,719,000
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current Liabilities
<S> <C>
Notes payable to bank (Note 6) $ 1,511,000
Current portion of long-term debt (Note 6) 204,000
Trade accounts payable 1,395,000
Accrued payroll and related costs 525,000
Other accrued liabilities 379,000
-----------
Total current liabilities 4,014,000
Long-Term Debt, less current portion (Note 6) 469,000
-----------
Total liabilities 4,483,000
Excess of Net Assets Acquired Over Purchase Price 691,000
Commitments and contingencies (Notes 3, 4 and 8)
Stockholders' Equity (Notes 6 and 9)
Preferred stock $1.00 par value; 500,000 shares authorized;
no shares issued
Common stock, $.001 par value; 25,000,000 shares authorized;
6,668,000 shares issued and outstanding 7,000
Additional paid-in capital 7,182,000
Accumulated deficit (644,000)
-----------
Total stockholders' equity 6,545,000
-----------
$11,719,000
===========
See Notes to Financial Statements
</TABLE>
F-2
<PAGE>
STATEMENTS OF OPERATIONS
Years Ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenues (Notes 2, 3, 4 and 11) $17,641,000 $16,911,000
Cost of Revenues (Note 4) 11,731,000 12,484,000
----------- -----------
Gross profit 5,910,000 4,427,000
Selling, General and Administrative Expenses 2,742,000 2,422,000
Research and Development Expenses 794,000 478,000
----------- -----------
Income from Continuing Operations before $ 2,374,000 $ 1,527,000
Exit from Line of Business
Exit from Line of Business (Note 10) 772,000 224,000
----------- -----------
Income from Continuing Operations $ 1,602,000 $ 1,303,000
Interest (Expense) (257,000) (271,000)
----------- -----------
Income before Provision for Taxes (credits) $ 1,345,000 $ 1,032,000
and Change in Accounting Method
Provision for Income Taxes (credits) (Note 7) (530,000) 11,000
----------- -----------
Income before Cumulative Effect of Accounting $ 1,875,000 $ 1,021,000
Change
Cumulative Effect of Accounting Change (Note 12) 298,000 -
----------- -----------
Net income $ 1,577,000 $ 1,021,000
=========== ===========
Earnings per Common Share and
per Common Share Assuming Dilution:
Income before Cumulative Effect of Accounting
Change 0.28 0.15
Cumulative Effect of Accounting Change (0.04) -
----------- -----------
Net Income $ 0.24 $ 0.15
=========== ===========
Weighted Number of Common Shares 6,654,000 6,631,000
=========== ===========
Weighted Number of Common Shares
Assuming Dilution 6,702,000 6,644,000
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Exercise of stock
options 32,000 - 181,000 - 181,000
Net income - - - 1,577,000 1,577,000
------------ -------- -------------- ------------- ------------
Balance May 31, 1998 6,668,000 $ 7,000 $ 7,182,000 $ (644,000) $ 6,545,000
=============================================================================
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
STATEMENTS OF CASH FLOWS
Years Ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,577,000 $ 1,021,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in accounting for start-up costs 298,000 -
Depreciation and amortization 320,000 541,000
Amortization of excess of net assets
acquired over purchase price (138,000) (138,000)
Deferred taxes (540,000) -
Changes in assets and liabilities:
Accounts receivable 596,000 (1,985,000)
Inventories (29,000) 1,172,000
Prepaid expenses and other assets (59,000) (42,000)
Accounts payable (368,000) 338,000
Accrued payroll and related costs 102,000 (57,000)
Other accrued liabilities (77,000) 7,000
----------- -----------
Net cash provided by operating activities 1,682,000 857,000
----------- -----------
Cash Flows from Investing Activities
Purchase of equipment and leasehold improvements (1,175,000) (571,000)
----------- -----------
Cash Flows from Financing Activities
Proceeds from note payable to a bank 5,250,000 4,375,000
(Payments) on note payable to a bank (6,250,000) (4,500,000)
Proceeds from long-term debt 750,000 -
Proceeds from stock options exercised 181,000 24,000
Principal payments on long-term debt (221,000) (242,000)
----------- -----------
Net cash (used in) financing activities (290,000) (343,000)
----------- -----------
Net increase (decrease) in cash 217,000 (57,000)
Cash and Cash Equivalents, beginning of period 19,000 76,000
----------- -----------
Cash and Cash Equivalents, end of period $ 236,000 $ 19,000
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 257,000 $ 274,000
=========== ===========
Cash paid during the year for income taxes $ 18,000 $ 8,000
=========== ===========
See Notes to Financial Statements.
</TABLE>
F-5
<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") 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. The Company is listed on the American Stock Exchange (symbol
"HSR"). HSR's aerospace products are procured under both long and short-term
contracts with numerous aerospace contractors, subcontractors and agencies of
the United States Government. The Company is dependent on the continuation of
government sponsored military and aerospace programs in order to maintain its
revenues.
The Company also has diversified into commercial products. In this regard, the
Company has begun commercial production of the LifeShear emergency rescue
cutting tool and LineShear cutter (Cutters). The sales volumes of these new
commercial products have not been significant; however, significant investments
in inventory and tooling 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 commercial air bag
inflator technology. The United States Patent and Trademarks office issued
patents for the inflator and the expanded claims and improvements in February
and June 1998. All costs related to the development of the air bag inflator
have been expensed.
A Summary of the Company's Significant Accounting Policies is as follows:
Recent Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income and
SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires an enterprise to report, by major components
and as a single total, the change in its net assets during the period from
nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
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. The statements disclose
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.
F-6
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 1. Nature of Business and Significant Accounting Policies (continued)
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.
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.
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 method)
or market and represents direct labor, materials and overhead costs incurred in
production.
F-7
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 1. Nature of Business and Significant Accounting Policies (continued)
Equipment:
Equipment is recorded 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
Intangible assets:
Intangible assets consisting primarily of capitalized patent costs, are
amortized over the lesser of the expected economic life or the 17 year life of
the patent.
Excess of net assets acquired over purchase price:
In June 1993, the total purchase price of the Company was allocated to the
assets acquired and liabilities assumed based upon their relative fair values at
the date of the acquisition using the purchase method of accounting. The
resulting net assets acquired over purchase price (also referred to as negative
goodwill) are being amortized into income over a ten-year period. Included in
Selling, General and Administrative expenses is amortization of negative
goodwill totaling $138,000 in 1998 and 1997.
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.
Research and development:
All Company-sponsored research and development cost are charged to this account
as incurred. Certain research and development contracts placed with the Company
by its customers are contained in the Company's revenue and cost of revenue
accounts. These customer funded research and development efforts are not
classified as research and development expense.
F-8
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 1. Nature of Business and Significant Accounting Policies (continued)
Earnings per share:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings Per Share
(EPS). SFAS No. 128 requires dual presentation of EPS and EPS assuming dilution
on the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. EPS is computed as net income divided
by the weighted-average number of common shares outstanding for the period. EPS
assuming dilution reflects the potential dilution that could occur from common
shares issuable through stock options of 48,000 in 1998 and 13,000 in 1997.
Common stock warrants are anti-dilutive. The adoption of this statement did not
affect prior earnings per share.
Fair value of financial instruments:
The estimated fair value of long term debt, 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. The carrying
amount of notes payable to the bank 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 that exceeds the
insurance limits of the FDIC.
Stock-based compensation:
The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to the intrinsic value at the measurement date. Nonemployee stock-
based transactions are accounted for under the requirements of SFAS No. 123
Accounting for Stock Based Compensation which requires compensation to be
recorded based on the fair value of the securities issued or the services
received, whichever is more reliably measurable.
Reclassification:
Revenue and expenses relating to the exit from a line of business in the
Statement of Operations for the year ended May 31, 1997 have been reclassified,
with no effect on net income (or earnings per share), to be consistent with the
classifications adopted for the year ended May 31, 1998.
F-9
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 2. Major Customers
The Company derives a major portion of its revenues directly from certain large
satellite and launch vehicle companies and departments and agencies of the
United States Government. Sales to these major customers, which are in excess
of 10% of total sales, consist of the following:
<TABLE>
<CAPTION>
________________________________________________________________________________
1998 1997
<S> <C> <C>
Lockheed Martin 26% 34%
United States Government 21% 23%
Hughes Space & Communication Co. 11% *
</TABLE>
*For the year ended May 31, 1997, Hughes represented revenue of less than 10% of
total Company revenue.
Note 3. Accounts Receivable
Accounts receivable at May 31, 1998 consist of the following:
<TABLE>
<CAPTION>
________________________________________________________________________________
Due from United States Government, prime and subcontractors under long-term
contracts:
<S> <C>
Billed $ 14,811,000
Unbilled 1,888,000
Progress payments received (11,478,000)
------------
5,221,000
Billed and currently due from foreign sales, long-term contracts 363,000
------------
Total due, long-term contracts 5,584,000
Other receivables 127,000
------------
Total $ 5,711,000
============
</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,
1998, the Company has recorded retentions of $1,588,000 which are awaiting
shipments of contracts in process before payment will be made and claims of
approximately $300,000 net of a reserve of approximately $64,000, 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 1998 and 1997,
the Company generated revenue of approximately $1,148,000 and $1,162,000,
respectively, from sources outside of the United States.
F-10
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 3. Accounts Receivable (continued)
The Company has recorded $225,000 in 1998 and $300,000 in 1997 respectively 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.
Note 4. Inventories
Inventoried costs at May 31, 1998 consist of the following:
________________________________________________________________________________
<TABLE>
<S> <C>
Production cost of contracts in process $ 531,000
Raw materials and components 1,407,000
Commercial inventory:
Raw materials 449,000
Work-in-process 239,000
Finished goods 36,000
------------
Total $ 2,662,000
============
</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, 1998, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Total contracts in process $ 27,246,000
============
Costs incurred to date $ 13,931,000
Estimated profit (loss) recorded 1,959,000
Less billed and unbilled amounts (15,359,000)
------------
Total production costs of contracts in process $ 531,000
============
</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, 1998, would change contract profits or losses
by approximately $75,000.
Contracts undertaken by the Company may contain options which extend beyond one
year and, accordingly, portions are carried forward from one year to the next.
Some of the Company's contracts with the United States Government and its
subcontractors are supply contracts and/or multi-year options whose requirements
are primarily based on the Governments demand for products on a periodic basis.
F-11
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 5. Equipment
The Company's equipment at May 31, 1998 consist of the following:
<TABLE>
<S> <C>
Machinery and equipment $2,602,000
Tooling costs 468,000
Furniture and fixtures 104,000
Leasehold improvements 62,000
Projects in progress 250,000
----------
3,486,000
Less accumulated depreciation and amortization 1,135,000
----------
$2,351,000
==========
</TABLE>
Projects in process include certain internal costs related to the implementation
of the Company's computer system.
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, 1998) plus .75%. The credit agreement expires November 1, 2000. At
May 31, 1998, $1,680,000 was outstanding under the line of credit that includes
a letter of credit issued to Government of Israel of $169,000. Availability
under the line at May 31, 1998, is $1,820,000. 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.
As of May 31, 1998, the Company has met all financial covenant requirements of
the bank.
Long-term debt at May 31, 1998, consists of the following:
________________________________________________________________________________
<TABLE>
<S> <C>
Promissory Note, payable in monthly installments of
$13,346 through 2002, plus interest at prime plus 1%, secured by
substantially all assets $656,000
Others 17,000
--------
673,000
Less current portion 204,000
--------
Long term debt $469,000
========
Maturities of long-term debt are: 1999 - $204,000, 2000 - $160,000, 2001 -
$160,000, and 2002 - $149,000.
</TABLE>
F-12
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 7. Income Taxes
Deferred tax assets provided for in the accompanying balance sheet at May 31,
1998, consist of the following:
________________________________________________________________________________
<TABLE>
<S> <C>
Deferred tax assets:
Depreciation $ 235,000
Net operating loss carryforwards 2,227,000
Other 169,000
-----------
2,631,000
Less valuation allowance (1,853,000)
-----------
778,000
Deferred tax liability, inventories (238,000)
-----------
Net deferred taxes $ 540,000
===========
</TABLE>
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to the expiration of the loss carryforward. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax assets will be realized based upon the Company's recent
history of profitable operation. The amount of the net deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
A reconciliation of expected tax expense credit to the amount computed by
applying the federal statutory income tax rates to income before income taxes is
as follows:
<TABLE>
<CAPTION>
1998 1997
________________________________________________________________________________
<S> <C> <C>
Federal income tax computed at the statutory rate $ 478,000 $ 357,000
Permanent differences, primarily negative goodwill (80,000) -
State taxes, less federal benefit 82,000 62,000
Change in valuation allowance (1,010,000) (408,000)
----------- ---------
$ (530,000) $ 11,000
=========== =========
</TABLE>
As of May 31, 1998, the Company had federal net operating loss carryforwards of
approximately $6,170,000, which expire $224,000 in 2008; $3,436,000 in 2009;
$2,340,000 in 2011; and $170,000 in 2012. The Company also has state net
operating loss carryforwards of approximately $2,142,000 which expire $1,017,000
in 1999; $1,046,000 in 2001; and $79,000 in 2002.
F-13
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 8. Commitments and Contingencies
The Company leases its facilities and certain equipment under operating lease
agreements that expire at various dates through 2002. An unrelated company
guarantees the primary facility lease. Rental expense under operating leases
for the years ended May 31, 1998 and 1997, approximately $551,000 and $606,000
respectively.
Minimum annual rentals under all noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
________________________________________________________________________________
<S> <C>
1999 $ 683,000
2000 315,000
2001 30,000
2002 5,000
----------
$1,033,000
==========
</TABLE>
The Company currently has a plan to insure that its systems and software
infrastructure are Year 2000 compliant. The scheduled implementation of all
phases of the plan is December 1998. Given the relatively small size of the
Company's systems and the predominately new hardware, software and operating
systems, management does not anticipate any significant delays in becoming Year
2000 compliant. However, the Company is unable to control whether its
customers' and suppliers' systems are Year 2000 compliant. To the extent that
customers would be unable to order product or pay invoices or suppliers would be
unable to manufacture and ship product, it could affect the Company's
operations.
The Company's two principal officers and stockholders have employment agreements
covering a period of five years expiring on June 1, 2003. Payments under these
agreements were $500,000 and $455,000 for fiscal year 1998 and 1997
respectively.
The Company is currently a party to disputes that 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 9. 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. At May 31, 1998 warrants covering 73,500 shares remain outstanding
and 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-14
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 9. Stockholders' Equity (continued)
A summary of the status of the options plan and changes during the year ended on
those dates is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
________________________________________________________________________________________
<S> <C> <C> <C> <C>
Outstanding at beginning of year 242,000 $5.95 249,000 $ 6.85
Granted 43,000 6.11 54,000 5.44
Exercised (32,000) 5.69 (8,000) 3.24
Forfeited (35,000) 5.70 (53,000) 10.08
---------------------------------------------------
Outstanding at end of year 218,000 $5.93 242,000 $ 5.95
===================================================
Exercisable at end of year 133,000 $6.19 127,000 $ 6.03
Weighted-average fair value per
option granted during the year $6.02 $ 4.54
</TABLE>
A further summary about fixed options outstanding at May 31, 1998, 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
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.00 to $6.50 207,000 8 years $ 5.71 122,000 $ 5.86
$8.50 to $10.50 11,000 8 years 9.95 11,000 9.95
--------- --------
218,000 $ 5.93 133,000 $ 6.19
========= ========
</TABLE>
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 and earnings per common share would have been reduced to the pro forma
amounts shown below:
F-15
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 9. Stockholders' Equity (continued)
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net income
As reported $1,577,000 1,021,000
Pro forma 1,334,000 886,000
Earnings per common share and
common share assuming dilution
As reported 0.24 0.15
Pro forma 0.20 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 1998 and 1997, respectively. No dividend rate for all years; price
volatility of 64% in 1998 and 70% in 1997, risk-free interest rates of
approximately 6.2% in 1998 and 6.8% in 1997; and expected lives of ten years.
Note 10. Exit of a Business Activity
The HEFU/PSA line of business was a significant line of business when the
Company was acquired from Hi-Shear Industries in 1993. Revenues from this
business activity were approximately $73,000 and $414,000 for fiscal year 1998
and 1997, respectively. Losses on this business activity were, $772,000 and
$224,000 for fiscal year 1998 and 1997, respectively. The Company has
substantially completed the contract related to this business line and no
significant future cost is anticipated.
Note 11. Business Segment Information
The Company operates in two primary segments; (i) aerospace products (ii) non-
aerospace products. The following table provides information on the Company's
non-aerospace segment. All other activities of the Company are concentrated in
the aerospace segment.
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenues from unaffiliated customers $244,000 $ 444,000
Operating profit (loss) including research and development 144,984 (230,000)
Cumulative effect of accounting changes 298,000 -
Assets 881,000 1,211,000
Depreciation and amortization 92,000 207,000
Additions to equipment - 0 - - 0 -
</TABLE>
F-16
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 12. Accounting Change
In the fourth quarter of fiscal 1998, the Company changed its method of
accounting for the costs of start-up activities. The change was made upon the
Company's decision to adopt Statement of Position 98-5 "Reporting on the Costs
of Start-Up Activities" which was issued on April 3, 1998. Previously, the
Company capitalized certain product start-up costs and amortized these costs
over a five-year period. The unamortized balance of these start-up costs of
approximately $298,000 has been charged to income in 1998.
F-17
<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 12, 1998 By: /s/ George W. Trahan
--------------- --------------------
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 12, 1998 By: /s/ Thomas R. Mooney
--------------- --------------------
Chairman of the Board
By: /s/ George W. Trahan
--------------------
Director, President
By: /s/ Jack Bunis
--------------
Director
By: /s/ David W. Einsel
-------------------
Director
12
<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 Auditor's
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.
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is entered into as of June 1, 1998 by and between
Hi-Shear Technology Corporation, a Delaware corporation (hereinafter referred to
as the "Company"), and Thomas R. Mooney (hereinafter referred to as "Executive")
under the following terms and conditions:
RECITALS:
WHEREAS, the Company and Executive are parties to that certain Employment
Agreement dated June 1, 1993, the term of which expired as of May 31, 1998;
WHEREAS, the Company and Executive desire to set forth the terms and
conditions on which (i) the Company shall continue to employ Executive, (ii)
Executive shall continue to render services to the Company, and (iii) the
Company shall compensate Executive for such services; and
WHEREAS, in connection with the continued employment of Executive by the
Company, the Company desires to restrict Executive's rights to compete with the
business of the Company.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT.
The Company hereby employs Executive and Executive hereby accepts
employment with the Company upon the terms and conditions hereinafter set forth.
2. TERM.
2.1 The term of this Agreement (the "Term") shall be for a period
commencing on the Effective Date (as defined in Section 2.3 below) of this
Agreement and shall continue through May 31, 2003, unless sooner terminated as
provided in Paragraph 6. This five-year period, as the same may be extended
hereafter by agreement of the parties or terminated pursuant hereto, is
hereinafter referred to as the "Term".
2.2 For purposes of extending the term of the relationship between the
Company and Executive, the parties agree to enter into good faith negotiations
within sixty (60) days prior to the end of the Term. In the event that the
parties are unable to reach an agreement by the end of the Term, this Agreement
shall be automatically terminated on May 31, 2003.
2.3 The effective date of this Agreement shall be June 1, 1998 (the
"Effective Date").
3. COMPENSATION.
3.1 For all services rendered by Executive under this Agreement, the
Company shall pay or cause one or more of its subsidiaries to pay Executive
during the term hereof a salary at the rate of $275,000 per year, subject to
adjustment as described below. The Company shall pay such compensation to
Executive semi-monthly in accordance with its standard practice for payment of
compensation to its employees. In addition, Executive shall be eligible for
salary increases as may be determined annually by the Compensation Committee of
the Board of Directors.
14
<PAGE>
3.2 As additional compensation, Executive shall be eligible to
participate in the executive bonus pool program established by the Board and
administered by the Compensation Committee.
3.3 All compensation shall be subject to customary withholding tax and
other employment taxes as are required with respect to compensation paid by a
corporation to an employee.
4. DUTIES AND RESPONSIBILITIES.
4.1 Executive shall, during the Term of this Agreement, devote his
full attention and expend his best efforts, energies, and skills, on a full-time
basis, to the business of the Company and any corporation controlled by the
Company (each, a "Subsidiary"). For purposes of this Agreement, the term the
"Company" shall mean the Company and all Subsidiaries. The Company agrees that
the devotion of reasonable amounts of time to business activities separate from
and outside the scope of the business of the Company will not violate the terms
of this Agreement, on the conditions that (i) such activities are not corporate
opportunities of the Company; and (ii) such activities do not interfere with the
performance of Executive's duties hereunder.
4.2 During the Term of this Agreement, Executive shall serve as the
Chairman and Chief Executive Officer or in such other capacity as determined by
the Board of Directors or its Executive Committee, if any. In the performance of
all of his responsibilities hereunder, Executive shall be subject to all of the
Company's policies, rules, and regulations applicable to its employees of
comparable status and shall report directly to, and shall be subject to, the
direction and control of the Board of Directors of the Company and shall perform
such duties as shall be assigned to him by the Board of Directors or its
Executive Committee. In performing such duties, Executive will be subject to and
abide by, and will use his best efforts to cause other employees of the Company
to be subject to and abide by, all policies and procedures developed by the
Board of Directors or its Executive Committee.
4.3 Without first obtaining the written permission of the Board of
Directors of the Company, Executive will not authorize or permit the Company to
engage the services of, or engage in any business activity with, or provide any
financial or other benefit to, any affiliate of Executive. The phrase "affiliate
of Executive" as used in this Section shall mean and include Executive's family
by blood or marriage (including, without limitation, parents, spouse, siblings,
children and in-laws), and any business or business entity which is directly or
indirectly owned or controlled by Executive or any member of the Executive's
family or in which Executive or any member of the Executive's family has any
direct or indirect financial interest whatsoever.
4.4 To induce the Company to enter into this Agreement, the Executive
represents and warrants to the Company that (a) the Executive is not a party or
subject to any employment agreement or arrangement with any other person, firm,
company, corporation or other business entity, (b) the Executive is subject to
no restraint, limitation or restriction by virtue of any agreement or
arrangement, or by virtue of any law or rule of law or otherwise which would
impair the Executive's right or ability (i) to enter the employ of the Company,
or (ii) to perform fully his duties and obligations pursuant to this Agreement,
and (c) to the best of Executive's knowledge no material litigation is pending
or threatened against any business or business entity owned or controlled or
formerly owned or controlled by Executive.
5. RESTRICTIVE COVENANTS.
5.1 Executive acknowledges that (i) he has a major responsibility for
the operation, administration, development and growth of the Company's business,
(ii) the Company's business is or
15
<PAGE>
may become national or international in scope, (iii) his work for the Company
has brought him and will continue to bring him into close contact with
confidential information of the Company and its customers, and (iv) the
agreements and covenants contained in this Section 5.1 are essential to protect
the business interest of the Company and that the Company will not enter into
this Agreement but for such agreements and covenants. Accordingly, the Executive
covenants and agrees as follows:
5.l(a) Except as otherwise provided for in this Agreement, during the
Term of this Agreement and, if this Agreement is terminated for any reason
during the Term, for two (2) years following such date of termination (the
"Termination Period"), the Executive shall not, directly or indirectly, compete
with respect to any services or products of the Company which are either offered
or are being developed by the Company as of the date of termination; or, without
limiting the generality of the foregoing, be or become, or agree to be or
become, interested in or associated with, in any capacity (whether as a partner,
shareholder, owner, officer, director, Executive, principal, agent, creditor,
trustee, consultant, co-venturer or otherwise) any individual, corporation,
firm, association, partnership, joint venture or other business entity, which
competes with respect to any services or products of the Company which are
either offered or are being developed by the Company as of the data of
termination; provided, however, that the Executive may own, solely as an
investment, not more than one percent (1%) of any class of securities of any
publicly held corporation in competition with the Company whose securities are
traded on any national securities exchange in the United States of America, and
may retain his ownership interest in those entities referred to in Section 4.1
above.
5.1(b) During the term of this Agreement and, if applicable, during
the Termination Period, the Executive shall not, directly or indirectly, (i)
induce or attempt to influence any executive of the Company to leave its employ,
(ii) aid or agree to aid any competitor, customer or supplier of the Company in
any attempt to hire any person who shall have been employed by the Company
within the one (1) year period preceding such requested aid, or (iii) induce or
attempt to influence any person or business entity who was a customer or
supplier of the Company during any portion of said period to transact business
with a competitor of the Company in Company's business.
5.1(c) During the Term of this Agreement, the Termination Period, if
applicable, and thereafter, the Executive shall not disclose to anyone any
information about the affairs of the Company, including, without limitation,
trade secrets, trade "know-how", inventions, customer lists, business plans,
operational methods, pricing policies, marketing plans, sales plans, identity of
suppliers or customers, sales, profits or other financial information, which is
confidential to the Company or is not generally known in the relevant trade, nor
shall the Executive make use of any such information for his own benefit.
5.2 If the Executive breaches, or threatens to commit a breach of Section
5.1 (the "Restrictive Covenants"), the Company shall have the following rights
and remedies, each of which shall be enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity.
5.2(a) The Executive shall account for and pay over to the Company all
compensation, profits, and other benefits, after taxes, which inure to
Executive's benefit which are derived or received by the Executive or any person
or business entity controlled by the Executive resulting from any action or
transactions constituting a breach of any of the Restrictive Covenants.
5.2(b) Notwithstanding the provisions of subsection 5.2(a) above, the
Executive acknowledges and agrees that in the event of a violation or threatened
violation of any of the provisions of Section 5.1, the Company shall have no
adequate remedy at law and shall therefore be entitled to enforce each such
provision by temporary or permanent injunctive or mandatory relief obtained in
any court of competent jurisdiction without the necessity of proving damages,
posting any bond or other
16
<PAGE>
security, and without prejudice to any other rights and remedies which may be
available at law or in equity.
5.3 If any of the Restrictive Covenants, or any part thereof, is held
to be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid or unenforceable portions. Without limiting the generality of the
foregoing, if any of the Restrictive Covenants, or any part thereof, is held to
be unenforceable because of the duration of such provision or the area covered
thereby, the parties hereto agree that the court making such termination shall
have the power to reduce the duration and/or area of such provision and, in its
reduced form, such provision shall then be enforceable.
5.4 The parties hereto intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Restrictive Covenants. In the event that the courts
of any one or more of such jurisdictions shall hold such Restrictive Covenants
wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties hereto that such determination not bar or in any
way affect the Company's right to the relief provided above in the courts of any
other jurisdictions within the geographical scope of such Restrictive Covenants,
as to breaches of such covenants in such other respective jurisdictions, the
above covenants as they relate to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.
6. TERMINATION.
6.1 The Company may terminate the Executive's employment under this
Agreement at any time for Cause. "Cause" shall exist for such termination if
Executive (i) is adjudicated guilty of illegal activities of consequence by a
court of competent jurisdiction, (ii) commits any act of fraud or intentional
misrepresentation, (iii) has, in the reasonable judgment of the Company's Board
of Directors, engaged in serious misconduct, which conduct has, or would if
generally known, materially adversely affect the good will or reputation of the
Company and which conduct the Executive has not cured or altered to the
satisfaction of the Board of Directors within ten (10) days following notice by
the Board of Directors to the Executive regarding such conduct, or (iv) has made
any material misrepresentation to the Company under Sections 4 and 5 hereof.
6.2 If the Company terminates the Executive's employment under this
Agreement pursuant to the provisions of Section 6.1 hereof, the Executive shall
not be entitled to receive any compensation following the date of such
termination.
6.3 The Company may terminate this Agreement without notice if the
Executive is unable due to mental or physical illness or injury to perform
Executive's duties in a normal and regular manner for a period of six
consecutive months. The termination shall be effective as of the end of the
calendar month in which the disability period ends.
Upon termination because of disability, the Executive shall be entitled to
receive compensation for 24 months for the date of such termination (such
payments to be diminished, however, by the extent to which the Executive
receives compensation during such 24 month period from any disability insurance)
in an amount equal to the monthly compensation paid Executive for the month
prior to such termination.
6.4 If the Executive dies during the initial term or during any
renewal terms of this Agreement, this Agreement shall be terminated on the last
day of the calendar month in which the death occurred.
17
<PAGE>
6.5 If Executive's employment with the Company is terminated for any
reason other than: (i) the death or permanent disability of the Executive, (ii)
pursuant to the provisions of Section 6.1 above, or (iii) the Executive's
voluntary termination, the Executive shall continue to receive compensation for
36 months from the date of such termination (provided, however, that (1)
payments by the Company shall be diminished by the extent to which the Executive
receives compensation during such 36-month period from a third party employer,
and (2) total compensation shall not in any event equal or exceed three times
the entire compensation received by Executive during the one-year period
immediately preceding the date of such termination) in an amount equal to the
monthly compensation paid Executive for the month prior to such termination.
7. EXPENSES.
7.1 Executive shall be entitled to reimbursement of all reasonable
expenses actually incurred in the course of his employment. Executive shall
submit to the Company a standardized expense report form, provided by the
Company, and shall attach thereto receipts for all expenditures.
7.2 The Company shall reimburse Executive within fifteen (15) days
after submission by Executive of his expense report.
7.3 In recognition of the requirements for business travel, the
Company shall provide Executive with the use of a Cadillac Seville or other
automobile of equivalent cost of Executive's choice. The automobile may be
purchased by the Executive at the end of the lease term or renewal of a new
lease for $1.00.
8. THE COMPANY'S AUTHORITY
Executive agrees to observe and comply with the reasonable rules and
regulations of the Company as adopted by the Company's Board of Directors or
Executive Committee either orally or in writing, with respect to the performance
of his duties and the carrying out and performance of the orders, directions,
and policies of the Board of Directors as stated by the Board of Directors to
the Executive from time to time, either orally or in writing.
9. PAID VACATION; SICK LEAVE; INSURANCE.
9.1 Executive shall be entitled to a paid vacation each year equal to
eight (8) weeks per year.
9.2 The Executive shall be entitled to reasonable periods of paid sick
leave during the Term of this Agreement in accordance with the Company's policy
regarding such sick leave.
9.3 The Company shall provide Executive, at the Company's full
expense, participation in group medical, dental, and life insurance plans of the
Company as may be provided by the Company from time to time, subject to and to
the extent that, the Executive is eligible under such benefit plans in
accordance with their respective terms. Coverage under the Company's group
medical, dental and life insurance plans at the Company's full expense will be
extended to Executive for five (5) years after the termination of this Agreement
except in the case of termination under Section 6. 1 above.
10. MISCELLANEOUS.
10. 1 The Company may, from time to time, apply for and take out, in
its own name and at its own expense, life, health, accident, disability or other
insurance upon the Executive in any sum or sums that it may deem necessary to
protect its interests, and the Executive agrees to aid and cooperate in
18
<PAGE>
all reasonable respects with the Company in procuring any and all such
insurance, including without limitation, submitting to the usual and customary
medical examinations, and by filling out, executing and delivering such
applications and other instruments in writing as may be reasonably required by
an insurance company or companies to which an application or applications for
such insurance may be made by or for the Company. In order to induce the Company
to enter this Agreement, the Executive represents and warrants to the Company
that to the best of his knowledge the Executive is insurable at standard (non-
rated) premiums.
10.2 This Agreement is a personal contract, and the rights and
interests of the Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated except as otherwise expressly permitted by the
provisions of this Agreement. The Executive shall not under any circumstances
have any option or right to require payment hereunder otherwise than in
accordance with the terms hereof. Except as otherwise expressly provided herein,
the Executive shall not have any power of anticipation, alienation or assignment
of payments contemplated hereunder, and all rights and benefits of the Executive
shall be for the sole personal benefit of the Executive, and no other person
shall acquire any right, title or interest hereunder by reason of any sale,
assignment, transfer, claim or judgment or bankruptcy proceedings against the
Executive; provided, however, that in the event of the Executive's death, the
Executive's estate, legal representative or beneficiaries (as the case may be)
shall have the right to receive all of the benefit that accrued to the Executive
pursuant to, and in accordance with, the terms of this Agreement.
10.3 The Company shall have the right to assign this Agreement to any
successor of substantially all of its business or assets, and any such successor
shall be bound by all of the provisions hereof.
11. NOTICES.
All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and (unless otherwise specifically
provided herein) shall be deemed to have been given at the time when mailed in
any general or branch United States Post Office, enclosed in a registered or
certified postpaid envelope, addressed to the parties stated below or to such
changed address as such party may have fixed by notice:
TO THE COMPANY: Hi-Shear Technology Corporation
24225 Garnier Street
Torrance, CA 90505-5323
Attn: President
EXECUTIVE: Thomas R. Mooney
Hi-Shear Technology Corporation
24225 Garnier Street
Torrance, CA 90505-5323
COPY TO: Michael B. Jeffers, Esq.
JEFFERS, WILSON, SHAFF & FALK
18881 Von Karman Ave., Suite 1400
Irvine, CA 92612
12. ENTIRE AGREEMENT.
This Agreement supersedes any and all agreements, whether oral or
written, between the parties hereto, with respect to the employment of Executive
by the Company and contains all of the
19
<PAGE>
covenants and agreements between the parties with respect to the rendering of
such services in any manner whatsoever. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements,
orally or otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not embodied herein, and that no other agreement, statement
or promise with respect to such employment not contained in this Agreement shall
be valid or binding. Any modification of this Agreement will be effective only
if it is in writing and signed by the parties hereto.
13. PARTIAL INVALIDITY.
If any provision in this Agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall nevertheless continue in full force and effect without being impaired or
invalidated in any way.
14. ATTORNEYS' FEES.
Should any litigation or arbitration be commenced between the parties
hereto or their personal representatives concerning any provision of this
Agreement or the rights and duties of any person in relation thereto, the party
prevailing in such litigation or arbitration shall be entitled, in addition to
such other relief as may be granted, to a reasonable sum as and for its or their
attorneys' fees in such litigation or arbitration which shall be determined by
the court or arbitration board.
15. ARBITRATION.
Any matter of disagreement arising under this Agreement shall be
submitted for decision to a panel of three neutral arbitrators with expertise in
the subject matter to be arbitrated. One arbitrator will be selected by each
party and the two arbitrators so selected shall select the third arbitrator. The
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. The decision and award rendered by the arbitrators
shall be final and binding. Judgement upon the award may be entered in any court
having jurisdiction thereof. Any arbitration shall be held in Orange County,
California, or such other place which may be mutually agreed upon by the
parities.
16. GOVERNING LAW.
This Agreement will be governed by and construed in accordance with
the laws of the State of California.
17. BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective representatives, heirs, successors and
assigns.
18. WAIVER.
No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute a waiver of any other provision, whether or not similar, nor
shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
19. CORPORATE APPROVALS.
The Company represents and warrants that the execution of this
Agreement by its corporate officer named below has been duly authorized by the
Board of Directors of the Company, is
20
<PAGE>
not in conflict with any Bylaw or other agreement and will be a binding
obligation of the Company, enforceable in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date above written.
THE COMPANY: HI-SHEAR TECHNOLOGY CORPORATION
By: /s/ George W. Trahan
-------------------------
EXECUTIVE: /s/ Thomas R. Mooney
-------------------------
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is entered into as of June 1, 1998 by and between
Hi-Shear Technology Corporation, a Delaware corporation (hereinafter referred to
as the "Company"), and George W. Trahan (hereinafter referred to as "Executive")
under the following terms and conditions:
RECITALS:
WHEREAS, the Company and Executive are parties to that certain Employment
Agreement dated June 1, 1993, the term of which expired as of May 31, 1998;
WHEREAS, the Company and Executive desire to set forth the terms and
conditions on which (i) the Company shall continue to employ Executive, (ii)
Executive shall continue to render services to the Company, and (iii) the
Company shall compensate Executive for such services; and
WHEREAS, in connection with the continued employment of Executive by the
Company, the Company desires to restrict Executive's rights to compete with the
business of the Company.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT.
The Company hereby employs Executive and Executive hereby accepts
employment with the Company upon the terms and conditions hereinafter set forth.
2. TERM.
2.1 The term of this Agreement (the "Term") shall be for a period
commencing on the Effective Date (as defined in Section 2.3 below) of this
Agreement and shall continue through May 31, 2003, unless sooner terminated as
provided in Paragraph 6. This five-year period, as the same may be extended
hereafter by agreement of the parties or terminated pursuant hereto, is
hereinafter referred to as the "Term".
2.2 For purposes of extending the term of the relationship between the
Company and Executive, the parties agree to enter into good faith negotiations
within sixty (60) days prior to the end of the Term. In the event that the
parties are unable to reach an agreement by the end of the Term, this Agreement
shall be automatically terminated on May 31, 2003.
2.3 The effective date of this Agreement shall be June 1, 1998 (the
"Effective Date").
3. COMPENSATION.
3.1 For all services rendered by Executive under this Agreement, the
Company shall pay or cause one or more of its subsidiaries to pay Executive
during the term hereof a salary at the rate of $270,000 per year, subject to
adjustment as described below. The Company shall pay such compensation to
Executive semi-monthly in accordance with its standard practice for payment of
compensation to its employees. In addition, Executive shall be eligible for
salary increases as may be determined annually by the Compensation Committee of
the Board of Directors.
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3.2 As additional compensation, Executive shall be eligible to
participate in the executive bonus pool program established by the Board and
administered by the Compensation Committee.
3.3 All compensation shall be subject to customary withholding tax and
other employment taxes as are required with respect to compensation paid by a
corporation to an employee.
4. DUTIES AND RESPONSIBILITIES.
4.1 Executive shall, during the Term of this Agreement, devote his
full attention and expend his best efforts, energies, and skills, on a full-time
basis, to the business of the Company and any corporation controlled by the
Company (each, a "Subsidiary"). For purposes of this Agreement, the term the
"Company" shall mean the Company and all Subsidiaries. The Company agrees that
the devotion of reasonable amounts of time to business activities separate from
and outside the scope of the business of the Company will not violate the terms
of this Agreement, on the conditions that (i) such activities are not corporate
opportunities of the Company; and (ii) such activities do not interfere with the
performance of Executive's duties hereunder.
4.2 During the Term of this Agreement, Executive shall serve as the
President and Chief Operating Officer or in such other capacity as determined by
the Board of Directors or its Executive Committee, if any. In the performance of
all of his responsibilities hereunder, Executive shall be subject to all of the
Company's policies, rules, and regulations applicable to its employees of
comparable status and shall report directly to, and shall be subject to, the
direction and control of the Board of Directors of the Company and shall perform
such duties as shall be assigned to him by the Board of Directors or its
Executive Committee. In performing such duties, Executive will be subject to and
abide by, and will use his best efforts to cause other employees of the Company
to be subject to and abide by, all policies and procedures developed by the
Board of Directors or its Executive Committee.
4.3 Without first obtaining the written permission of the Board of
Directors of the Company, Executive will not authorize or permit the Company to
engage the services of, or engage in any business activity with, or provide any
financial or other benefit to, any affiliate of Executive. The phrase "affiliate
of Executive" as used in this Section shall mean and include Executive's family
by blood or marriage (including, without limitation, parents, spouse, siblings,
children and in-laws), and any business or business entity which is directly or
indirectly owned or controlled by Executive or any member of the Executive's
family or in which Executive or any member of the Executive's family has any
direct or indirect financial interest whatsoever.
4.4 To induce the Company to enter into this Agreement, the Executive
represents and warrants to the Company that (a) the Executive is not a party or
subject to any employment agreement or arrangement with any other person, firm,
company, corporation or other business entity, (b) the Executive is subject to
no restraint, limitation or restriction by virtue of any agreement or
arrangement, or by virtue of any law or rule of law or otherwise which would
impair the Executive's right or ability (i) to enter the employ of the Company,
or (ii) to perform fully his duties and obligations pursuant to this Agreement,
and (c) to the best of Executive's knowledge no material litigation is pending
or threatened against any business or business entity owned or controlled or
formerly owned or controlled by Executive.
5. RESTRICTIVE COVENANTS.
5.1 Executive acknowledges that (i) he has a major responsibility for
the operation, administration, development and growth of the Company's business,
(ii) the Company's business is or may become national or international in scope,
(iii) his work for the Company has brought him and will
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continue to bring him into close contact with confidential information of the
Company and its customers, and (iv) the agreements and covenants contained in
this Section 5.1 are essential to protect the business interest of the Company
and that the Company will not enter into this Agreement but for such agreements
and covenants. Accordingly, the Executive covenants and agrees as follows:
5.l(a) Except as otherwise provided for in this Agreement, during the
Term of this Agreement and, if this Agreement is terminated for any reason
during the Term, for two (2) years following such date of termination (the
"Termination Period"), the Executive shall not, directly or indirectly, compete
with respect to any services or products of the Company which are either offered
or are being developed by the Company as of the date of termination; or, without
limiting the generality of the foregoing, be or become, or agree to be or
become, interested in or associated with, in any capacity (whether as a partner,
shareholder, owner, officer, director, Executive, principal, agent, creditor,
trustee, consultant, co-venturer or otherwise) any individual, corporation,
firm, association, partnership, joint venture or other business entity, which
competes with respect to any services or products of the Company which are
either offered or are being developed by the Company as of the data of
termination; provided, however, that the Executive may own, solely as an
investment, not more than one percent (1%) of any class of securities of any
publicly held corporation in competition with the Company whose securities are
traded on any national securities exchange in the United States of America, and
may retain his ownership interest in those entities referred to in Section 4.1
above.
5.1(b) During the term of this Agreement and, if applicable, during
the Termination Period, the Executive shall not, directly or indirectly, (i)
induce or attempt to influence any executive of the Company to leave its employ,
(ii) aid or agree to aid any competitor, customer or supplier of the Company in
any attempt to hire any person who shall have been employed by the Company
within the one (1) year period preceding such requested aid, or (iii) induce or
attempt to influence any person or business entity who was a customer or
supplier of the Company during any portion of said period to transact business
with a competitor of the Company in Company's business.
5.1(c) During the Term of this Agreement, the Termination Period, if
applicable, and thereafter, the Executive shall not disclose to anyone any
information about the affairs of the Company, including, without limitation,
trade secrets, trade "know-how", inventions, customer lists, business plans,
operational methods, pricing policies, marketing plans, sales plans, identity of
suppliers or customers, sales, profits or other financial information, which is
confidential to the Company or is not generally known in the relevant trade, nor
shall the Executive make use of any such information for his own benefit.
5.2 If the Executive breaches, or threatens to commit a breach of
Section 5.1 (the "Restrictive Covenants"), the Company shall have the following
rights and remedies, each of which shall be enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity.
5.2(a) The Executive shall account for and pay over to the Company all
compensation, profits, and other benefits, after taxes, which inure to
Executive's benefit which are derived or received by the Executive or any person
or business entity controlled by the Executive resulting from any action or
transactions constituting a breach of any of the Restrictive Covenants.
5.2(b) Notwithstanding the provisions of subsection 5.2(a) above, the
Executive acknowledges and agrees that in the event of a violation or threatened
violation of any of the provisions of Section 5.1, the Company shall have no
adequate remedy at law and shall therefore be entitled to enforce each such
provision by temporary or permanent injunctive or mandatory relief obtained in
any court of competent jurisdiction without the necessity of proving damages,
posting any bond or other
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security, and without prejudice to any other rights and remedies which may be
available at law or in equity.
5.3 If any of the Restrictive Covenants, or any part thereof, is held
to be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid or unenforceable portions. Without limiting the generality of the
foregoing, if any of the Restrictive Covenants, or any part thereof, is held to
be unenforceable because of the duration of such provision or the area covered
thereby, the parties hereto agree that the court making such termination shall
have the power to reduce the duration and/or area of such provision and, in its
reduced form, such provision shall then be enforceable.
5.4 The parties hereto intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Restrictive Covenants. In the event that the courts
of any one or more of such jurisdictions shall hold such Restrictive Covenants
wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties hereto that such determination not bar or in any
way affect the Company's right to the relief provided above in the courts of any
other jurisdictions within the geographical scope of such Restrictive Covenants,
as to breaches of such covenants in such other respective jurisdictions, the
above covenants as they relate to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.
6. TERMINATION.
6.1 The Company may terminate the Executive's employment under this
Agreement at any time for Cause. "Cause" shall exist for such termination if
Executive (i) is adjudicated guilty of illegal activities of consequence by a
court of competent jurisdiction, (ii) commits any act of fraud or intentional
misrepresentation, (iii) has, in the reasonable judgment of the Company's Board
of Directors, engaged in serious misconduct, which conduct has, or would if
generally known, materially adversely affect the good will or reputation of the
Company and which conduct the Executive has not cured or altered to the
satisfaction of the Board of Directors within ten (10) days following notice by
the Board of Directors to the Executive regarding such conduct, or (iv) has made
any material misrepresentation to the Company under Sections 4 and 5 hereof.
6.2 If the Company terminates the Executive's employment under this
Agreement pursuant to the provisions of Section 6.1 hereof, the Executive shall
not be entitled to receive any compensation following the date of such
termination.
6.3 The Company may terminate this Agreement without notice if the
Executive is unable due to mental or physical illness or injury to perform
Executive's duties in a normal and regular manner for a period of six
consecutive months. The termination shall be effective as of the end of the
calendar month in which the disability period ends.
Upon termination because of disability, the Executive shall be entitled to
receive compensation for 24 months for the date of such termination (such
payments to be diminished, however, by the extent to which the Executive
receives compensation during such 24 month period from any disability insurance)
in an amount equal to the monthly compensation paid Executive for the month
prior to such termination.
6.4 If the Executive dies during the initial term or during any
renewal terms of this Agreement, this Agreement shall be terminated on the last
day of the calendar month in which the death occurred.
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6.5 If Executive's employment with the Company is terminated for any
reason other than: (i) the death or permanent disability of the Executive, (ii)
pursuant to the provisions of Section 6.1 above, or (iii) the Executive's
voluntary termination, the Executive shall continue to receive compensation for
36 months from the date of such termination (provided, however, that (1)
payments by the Company shall be diminished by the extent to which the Executive
receives compensation during such 36-month period from a third party employer,
and (2) total compensation shall not in any event equal or exceed three times
the entire compensation received by Executive during the one-year period
immediately preceding the date of such termination) in an amount equal to the
monthly compensation paid Executive for the month prior to such termination.
7. EXPENSES.
7.1 Executive shall be entitled to reimbursement of all reasonable
expenses actually incurred in the course of his employment. Executive shall
submit to the Company a standardized expense report form, provided by the
Company, and shall attach thereto receipts for all expenditures.
7.2 The Company shall reimburse Executive within fifteen (15) days
after submission by Executive of his expense report.
7.3 In recognition of the requirements for business travel, the
Company shall provide Executive with the use of a Cadillac Seville or other
automobile of equivalent cost of Executive's choice. The automobile may be
purchased by the Executive at the end of the lease term or renewal of a new
lease for $1.00.
8. THE COMPANY'S AUTHORITY
Executive agrees to observe and comply with the reasonable rules and
regulations of the Company as adopted by the Company's Board of Directors or
Executive Committee either orally or in writing, with respect to the performance
of his duties and the carrying out and performance of the orders, directions,
and policies of the Board of Directors as stated by the Board of Directors to
the Executive from time to time, either orally or in writing.
9. PAID VACATION; SICK LEAVE; INSURANCE.
9.1 Executive shall be entitled to a paid vacation each year equal to
eight (8) weeks per year.
9.2 The Executive shall be entitled to reasonable periods of paid sick
leave during the Term of this Agreement in accordance with the Company's policy
regarding such sick leave.
9.3 The Company shall provide Executive, at the Company's full
expense, participation in group medical, dental, and life insurance plans of the
Company as may be provided by the Company from time to time, subject to and to
the extent that, the Executive is eligible under such benefit plans in
accordance with their respective terms. Coverage under the Company's group
medical, dental and life insurance plans at the Company's full expense will be
extended to Executive for five (5) years after the termination of this Agreement
except in the case of termination under Section 6.1 above.
10. MISCELLANEOUS.
10.1 The Company may, from time to time, apply for and take out, in
its own name and at its own expense, life, health, accident, disability or other
insurance upon the Executive in any sum or sums that it may deem necessary to
protect its interests, and the Executive agrees to aid and cooperate in
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all reasonable respects with the Company in procuring any and all such
insurance, including without limitation, submitting to the usual and customary
medical examinations, and by filling out, executing and delivering such
applications and other instruments in writing as may be reasonably required by
an insurance company or companies to which an application or applications for
such insurance may be made by or for the Company. In order to induce the Company
to enter this Agreement, the Executive represents and warrants to the Company
that to the best of his knowledge the Executive is insurable at standard (non-
rated) premiums.
10.2 This Agreement is a personal contract, and the rights and
interests of the Executive hereunder may not be sold, transferred, assigned,
pledged or hypothecated except as otherwise expressly permitted by the
provisions of this Agreement. The Executive shall not under any circumstances
have any option or right to require payment hereunder otherwise than in
accordance with the terms hereof. Except as otherwise expressly provided herein,
the Executive shall not have any power of anticipation, alienation or assignment
of payments contemplated hereunder, and all rights and benefits of the Executive
shall be for the sole personal benefit of the Executive, and no other person
shall acquire any right, title or interest hereunder by reason of any sale,
assignment, transfer, claim or judgment or bankruptcy proceedings against the
Executive; provided, however, that in the event of the Executive's death, the
Executive's estate, legal representative or beneficiaries (as the case may be)
shall have the right to receive all of the benefit that accrued to the Executive
pursuant to, and in accordance with, the terms of this Agreement.
10.3 The Company shall have the right to assign this Agreement to any
successor of substantially all of its business or assets, and any such successor
shall be bound by all of the provisions hereof.
11. NOTICES.
All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and (unless otherwise specifically
provided herein) shall be deemed to have been given at the time when mailed in
any general or branch United States Post Office, enclosed in a registered or
certified postpaid envelope, addressed to the parties stated below or to such
changed address as such party may have fixed by notice:
TO THE COMPANY: Hi-Shear Technology Corporation
24225 Garnier Street
Torrance, CA 90505-5323
Attn: President
EXECUTIVE: George W. Trahan
Hi-Shear Technology Corporation
24225 Garnier Street
Torrance, CA 90505-5323
COPY TO: Michael B. Jeffers, Esq.
JEFFERS, WILSON, SHAFF & FALK
18881 Von Karman Ave., Suite 1400
Irvine, CA 92612
12. ENTIRE AGREEMENT.
This Agreement supersedes any and all agreements, whether oral or
written, between the parties hereto, with respect to the employment of Executive
by the Company and contains all of the
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covenants and agreements between the parties with respect to the rendering of
such services in any manner whatsoever. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements,
orally or otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not embodied herein, and that no other agreement, statement
or promise with respect to such employment not contained in this Agreement shall
be valid or binding. Any modification of this Agreement will be effective only
if it is in writing and signed by the parties hereto.
13. PARTIAL INVALIDITY.
If any provision in this Agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall nevertheless continue in full force and effect without being impaired or
invalidated in any way.
14. ATTORNEYS' FEES.
Should any litigation or arbitration be commenced between the parties
hereto or their personal representatives concerning any provision of this
Agreement or the rights and duties of any person in relation thereto, the party
prevailing in such litigation or arbitration shall be entitled, in addition to
such other relief as may be granted, to a reasonable sum as and for its or their
attorneys' fees in such litigation or arbitration which shall be determined by
the court or arbitration board.
15. ARBITRATION.
Any matter of disagreement arising under this Agreement shall be
submitted for decision to a panel of three neutral arbitrators with expertise in
the subject matter to be arbitrated. One arbitrator will be selected by each
party and the two arbitrators so selected shall select the third arbitrator. The
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. The decision and award rendered by the arbitrators
shall be final and binding. Judgement upon the award may be entered in any court
having jurisdiction thereof. Any arbitration shall be held in Orange County,
California, or such other place which may be mutually agreed upon by the
parities.
16. GOVERNING LAW.
This Agreement will be governed by and construed in accordance with
the laws of the State of California.
17. BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective representatives, heirs, successors and
assigns.
18. WAIVER.
No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute a waiver of any other provision, whether or not similar, nor
shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
19. CORPORATE APPROVALS.
The Company represents and warrants that the execution of this
Agreement by its corporate officer named below has been duly authorized by the
Board of Directors of the Company, is
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not in conflict with any Bylaw or other agreement and will be a binding
obligation of the Company, enforceable in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date above written.
THE COMPANY: HI-SHEAR TECHNOLOGY CORPORATION
By: /s/ Thomas R. Mooney
--------------------
EXECUTIVE: /s/ George W. Trahan
--------------------
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EXHIBIT 10.6
SOUTHERN CALIFORNIA BANK CREDIT FACILITY
PROMISSORY NOTE
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$750,000.00 08-06-1997 08-01-2002 407169719 01 0066 385
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item
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</TABLE>
Borrower: Hi-Shear Technology Corporation Lender: SOUTHERN CALIFORNIA BANK
(TIN: 22-2535743) LAGUNA HILLS OFFICE
24225 Garnier St. 16420 VALLEY VIEW AVENUE
Torrance, CA. 90505 P.O. BOX 588
LA MIRADA, CA. 90637-0588
================================================================================
Principal Amount: $750,000.00 Initial Rate: 9.500% Date of Note: August 6, 1997
PROMISE TO PAY. Hi-Shear Technology Corporation ("Borrower") promises to pay to
SOUTHERN CALIFORNIA BANK ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Seven Hundred Fifty Thousand & 00/100
Dollars ($750,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
accordance with the following payment schedule:
BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST
BEGINNING SEPTEMBER 1, 1997, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE
DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. THEN ON JULY 1, 1998,
THE ENTIRE OUTSTANDING PRINCIPAL BALANCE WILL BE AMORTIZED EQUALLY OVER
48 MONTH PERIOD, WITH LEVEL PRINCIPAL PAYMENTS PLUS ACCRUED INTEREST
DUE MONTHLY BEGINNING AUGUST 1, 1998. BORROWER'S FINAL PAYMENT WILL BE
DUE ON AUGUST 1, 2002, AND WILL BE FOR ALL PRINCIPAL AND ACCRUED
INTEREST NOT YET PAID.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will
be applied first to accrued unpaid interest, then to principal, and any
remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the WALL
STREET JOURNAL PRIME RATE (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notice to Borrower. Lender will tell Borrower the current rate upon Borrower's
request. Borrower understands that Lender may make loans based on other rates
as well. The interest rate change will not occur more often than each DAY. The
index currently is 8.500% per annum. The interest rate to be applied to the
unpaid principal balance of this Note will be at a rate of 1.000 percentage
<PAGE>
point over the Index, resulting in an initial rate of 9.500% per annum. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is entitled
to a minimum interest charge of $250.00. Other than Borrower's obligation to
pay any minimum interest charge, Borrower may pay without penalty all or a
portion of the amount owed earlier that it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation
to continue to make payments of accrued unpaid interest. Rather, they will
reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $5.00 whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any materiel respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is impaired.
(I) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, increase the variable interest rate on this Note to 6.000 percentage points
over the Index. Lender may hire or pay someone else to help collect this Note
if Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any court
costs, in addition to all other sums provided by law. This Note has been
delivered to Lender and accepted by Lender in the State of California. If there
is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of ORANGE County, the State of California. Subject
to the provisions of arbitration, this Note shall be governed by and construed
in accordance with the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $16.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether check, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts Borrower
may open in the future, excluding however all IRA and Keogh accounts, and all
trust accounts for which the grant of a security interest would be prohibited by
law. Borrower authorizes Lender, to the extent permitted by applicable law, to
charge or setoff all sums owing on this Note against any and all such accounts.
<PAGE>
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or as
provided in this paragraph. Lender may, but need not, require that all oral
request be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized as provided
in this paragraph to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: George Trahan, Chief Financial Officer; Thomas
Mooney, President; and S.Y. Yoshimoto, Controller. Effective July 1, 1998, the
remaining availability under the line shall be terminated and no additional
advances will be allowed. Borrower agrees to be liable for all sums either:
(a) advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (a)
Borrower or any guarantor is in default under the terms of this Note or any
agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims
or otherwise attempts to limit, modify or revoke such guarantor's guarantee of
this Note or any other loan with Lender; (d) Borrower has applied funds provided
pursuant to this Note for purposes other than those authorized by Lender; or (e)
Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note or otherwise, including without limitation contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Lender and
Borrower agree that in the event of an action for judicial foreclosure pursuant
to California Code of Civil procedure Section 726, or any similar provision in
any other state, the commencement of such an action will not constitute a waiver
of the right to arbitrate and the court shall refer to arbitration as much as
such action, including counterclaims, as lawfully may be referred to
arbitration. Judgment upon any award rendered by any arbitrator may be entered
in any count having jurisdiction. Nothing in this Note shall preclude any party
from seeking equitable relief from a court of competent jurisdiction. This
statue of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes.
The Federal Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its right or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation make or endorser, shall be
released from liability. All such parties agree that Lender may renew or extend
(repeatedly and for any length of time) this loan, or release any party or
guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without consent of or notice to anyone
other than the party with whom the modification is made.
<PAGE>
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
Hi-Shear Technology Corporation
By: /s/ George W. Trahan By: /s/ Thomas R. Mooney
-------------------- --------------------
George Trahan, Chief Financial Officer Thomas Mooney, President
<PAGE>
EXHIBIT 23.1
[LOGO OF MCGLADREY & PULLEN, LLP]
CONSENT OF INDEPENDENT AUDITOR'S
We hereby consent to the incorporation of our report, dated July 21, 1998,
included in this Form 10-KSB in the previously filed registration statement of
Hi-Shear Technology on Form S-8 (No.33-868989).
/s/ MCGLADREY & PULLEN, LLP
---------------------------
McGladrey & Pullen, LLP
Anaheim, California
August 7, 1998
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-KSB AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000918027
<NAME> HI-SHEAR TECHNOLOGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 320
<TOTAL-ASSETS> 11,719
<CURRENT-LIABILITIES> 4,014
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 6,538
<TOTAL-LIABILITY-AND-EQUITY> 11,719
<SALES> 17,641
<TOTAL-REVENUES> 17,641
<CGS> 11,731
<TOTAL-COSTS> 16,039
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 1,345
<INCOME-TAX> (530)
<INCOME-CONTINUING> 1,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 298
<NET-INCOME> 1,577
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
