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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, 1999 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: $ 17,298,000.
The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately $8,807,100 as of July 21, 1999, based upon the
closing sale price on the American Stock Exchange on that date at which the
stock was last sold.
There were approximately 6,670,000 shares of the Registrants Common Stock issued
and outstanding as of May 31, 1999.
Part III, other than Item 12, is incorporated by reference from the Registrant's
Proxy Statement for its 1999 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of May 31, 1999.
Transitional Small Business Disclosure Format YES (_) NO (X)
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Hi-Shear Technology Corporation
Form 10-KSB
Table of Contents
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PART I.
Item 1 Business........................................................... 1
Item 2 Properties......................................................... 5
Item 3 Legal Proceedings.................................................. 5
Item 4 Submission of Matter to Vote of Security Holders................... 5
PART II.
Item 5 Market for Common Equity and Related Stockholder Matters........... 6
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 6
Item 7 Financial Statements............................................... 10
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure............................................... 10
PART III.
Item 9 Directors, Executive Officers 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
high reliability electronic, pyrotechnic and mechanical products and devices 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 commercial cutters marketed for use by rescue workers and police as
emergency cutters. In addition the Company is continuing to develop 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 90505-5355, 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 include power cartridges and various types of separation
devices designed to meet the need for high performance and reliable 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 have evolved, the Company has designed
supporting electronic systems to sequentially fire the separation devices
according to pre-programmed parameters. These electronic devices are used in
fighter aircraft ejection seat systems and other applications. Aerospace
products are separated into four major groups as follows:
Power Cartridges/Initiators. The Company has for many years manufactured
power cartridges/initiators, including supplying NASA's standard initiator. 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 corrosion resistance and ultra high reliability. The power cartridge's high-
pressure combustion energy, when powering one of the Company's pin pullers,
thrusters, actuators, or cutters are used to open satellite doors, deploy solar
panels, booms, and communications antennae, release missile fins, and provide
emergency back-up separation functions. When used alone, they are employed in
driving system stage separation on many of today's major launch vehicles.
Mechanical 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
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many satellites for deployment of solar arrays and antenna booms and other
devices. The Company maintains an active development program for new designs,
including low shock deployment systems for the increasingly lighter commercial
satellites used in communications and other commercial applications.
Electronic Products. The Company remains a key supplier of sequencers for
the Douglas ACES II crew ejection seat now placed in many of the U.S. Air
Force's fighter aircraft, including the A-10, B-2, F-15 and F-16. The Company
originally developed the Analog Recovery Sequencer ("Analog") which
electronically triggers various ordnance events that deploy parachutes and
rockets in connection with the pilot's ejection from fighter aircraft. These
safety units have a service life of seven years after which they must be
replaced or refurbished.
The Company also 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
electronics without risk to personnel or 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.
Laser Initiation Systems. The Company has been actively pursuing 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.
Commercial Products
Commercial Cutters. The Company's emergency cutters are fast, safe, and
reliable rescue tools for use 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 enable it to quickly
cut through a variety of construction material and auto parts in order that a
victim can readily be extracted from a life threatening situation or access can
be quickly gained to a locked area. This product is being exclusively marketed
and distributed in the United States, Canada and Japan by Hale Products Inc. the
maker and distributor of the Hurst "Jaws of Life". The Company manufactures the
LifeShear and its accompanying power cartridges for sales in these regions.
The Company's European licensee is manufacturing and selling the LifeShear
product in their assigned territory.
Automotive Air Bag Inflators. The Company has identified the automotive air
bag market as a major, fast growing market in which management believes its
inflator 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, increasing numbers of vehicles, worldwide, are being outfitted with
numerous side air bags and other air bag applications. Hi-Shear's inflator
propellant and the gas it produces are benign and environmentally safe in
contrast to the toxic gases and materials used in existing air bag systems.
Concurrent with the worldwide rise in air bag inflator unit volume there has
been a significant decrease in unit price for each of the several air bag
components (sensor, inflator, initiator and bag) and hence, a decrease in
overall air bag prices. This reduction in unit price can enable a low cost
inflator technology, such as the Company is developing, to capture volume
through increased market share.
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Hi-Shear continues to build its proprietary rights in the field of air bag
inflator technology. During the fourth quarter of fiscal 1999, the Company was
awarded an additional patent for its automobile air bag inflator designs by the
United States Patent and Trademark Office. This is in addition to the patent
already awarded to the Company in the prior year. Hi-Shear's 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 inflator 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 employs clean
components, produces clean by-products 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 smart 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.
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, the Boeing Company and Hughes Space &
Communications Co. together accounted for 35% 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 1999. In fiscal year
2000, 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 1999 most of the Company's contracts were on a fixed price
contract basis. 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
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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, it is subject to the failure or inability of
the prime contractor, which is typically a large aerospace company, 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. Traditionally,
the final negotiation of the detailed contract requirements together with the
procurement of long lead-time materials, manufacturing processes and testing,
has taken between 6 and 12 months or more to accomplish. In fiscal year 1999,
the Company initiated major programs to reduce many of its manufacturing lead-
time to help its customers with more timely delivery. This is part of an overall
strategy of moving from a "cold war" mode of doing business to a more modern
"commercial" mode of doing business.
Total requirements included in contracts undertaken by the Company may
contain options that extend beyond one year, and accordingly, portions are
carried forward from one year to the next as part of the 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. Some of the 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.
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
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as well as the proper equipment, facilities and permits. The Company has been
safely handling and processing these fuels and oxidizers for over forty 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.
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. Employees 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, 1999 the Company had 127 employees of whom 118 are full-time
employees, the majority of whom are engineers and technicians. The Company's
success depends on its ability to attract and retain highly qualified personnel.
None of the employees are represented by a labor union and the Company has no
knowledge of any labor organizing activities. The Company has never suffered a
work stoppage and considers its relations with its employees to be excellent.
Item 2. Properties
The Company's executive offices are located in Torrance, California, in a
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. Management is currently negotiating with the landlord to
renew its lease, which expires November 30, 1999.
The Company occupies a 16-acre facility in Santa Clarita, California, which
is used for blending and storing 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 leased the
property until June 4, 1999 when it exercised its option to purchase the
property.
The Company believes that its current facilities in Torrance and Santa
Clarita 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:
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Fiscal Year 1999 ending May 31, 1999
4th Quarter 6-3/4 4-7/8
3rd Quarter 7-1/2 4-1/8
2nd Quarter 6-3/8 4-1/2
1st Quarter 8-7/8 5-7/16
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
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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 67 and the number of beneficial shareholders was approximately
1,400 as of August 10, 1999.
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, 1999 compared with Fiscal Year Ended May 31, 1998
Revenues for fiscal year 1999 were $17.3 million compared to revenues of
$17.6 million for fiscal year 1998. The decrease in revenues was a result of
Army delays in their PAC-3 anti-missile program. The delays related to problems
experienced by the Army with other components related to its aerial flight
tests. This important defensive anti-missile program is moving forward again
with the accomplishment of successful missile range tests.
The Company continues to see an increasing demand from its traditional
customer base for satellite and launch vehicle components. In addition, the
Company is expanding its marketing and manufacturing of additional types of
satellite devices that will result in increasing the revenue dollars realized
from each space vehicle launch. During fiscal year 1999 the Company continued to
make significant investments in the future by more than doubling its Precision
Machining Center (PMC) capabilities beyond the significant expansion carried out
during fiscal year 1998. The new machining configuration will result in much
shorter lead-times for the delivery of products and lower overall costs.
Gross profits decreased during the year to $5.4 million and an average of
31.4% of revenues, compared to $5.9 million and an average of 33.5% of revenues
in fiscal year 1998. Despite improvements in manufacturing efficiencies, which
lowered assembly costs and reduced product turnaround time, the Company's gross
profits performance for fiscal year 1999 was adversely affected by the
combination of non-recurring costs and the inability to recognize revenues
associated with the Army's unexpected delay of its PAC-3 anti-missile program.
Non-recurring costs eroding Gross Profits during fiscal year 1999 included PMC
start-up costs for tooling, fixtures, and the "learning curve", plus several
development jobs that did not yield profit.
During the fiscal years 1999 and 1998 the Company recognized costs of $0
and $772,000, respectively, associated with its decision to execute a plan to
exit from the HEFU/PSA line of business. In May 1996 management approved a plan
to exit 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. With the inclusion of the above costs, Gross Profit after Exit
from Line of Business increased during the fiscal year 1999 to $5.4 million or
31.4% of revenues, compared to $5.1 million or 29.1% of revenues in fiscal year
1998.
Selling, General and Administrative expenses totaled $3.1 million in fiscal
year 1999, compared to $2.7 million in fiscal year 1998. Increased spending for
new business proposals, Year 2000 computer software expenses, and costs related
to several potential product line acquisitions contributed to the overall
increase.
Research and Development expenses were $697,000 in fiscal year 1999,
compared to $794,000 in fiscal year 1998. In addition to core satellite and
launch vehicle products the Company continued key new product developments in
the laser product line, LifeShear commercial cutters, and the air bag inflator
program.
Research and Development efforts led to a successful demonstration for the
United States Army of laser fired artillery rounds. In addition, the Company
developed a version of LifeShear that was enhanced for cutting locks and chains
for law enforcement. During the year, the Company received an additional patent
from the United States Patent and Trademark office for improvements to the air
bag inflator designs. The Company believes its research and development efforts
will result in increased sales in new markets.
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Operating Income for fiscal year 1999 increased to $1.7 million from the
$1.6 million reported for fiscal year 1998 due to the factors identified above.
Interest expense for fiscal year 1999 decreased to $213,000 from the
$257,000 incurred in fiscal year 1998. The decrease was a consequence of a
reduction in average borrowings required for financing operations during the
fiscal year.
The Company's Provision for Income Tax Credits amounted to $624,000 and
$530,000 for the fiscal years 1999 and 1998, respectively. For both fiscal years
the Company's management determined that it was more likely than not that some,
but not all of, the net deferred tax assets will be realized. Accordingly, a
portion of the deferred tax asset approximating the amount expected to be
realized within the next one year period was recognized in both fiscal 1999 and
1998. The deferred tax assets considered realizable, however, could be reduced
in the future if estimates of future taxable income during the carryforward
period are reduced.
During 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 start-up costs of $298,000 was charged to
income in fiscal 1998.
The Net Income for fiscal year 1999 increased by 33.1% to $2.1 million and
$0.31 per share, compared to $1.6 million and $0.24 per share for fiscal year
1998.
Liquidity and Capital Resources
Net cash of $0.6 million was provided by operations during fiscal year 1999
compared to $1.7 million provided by operations for fiscal year 1998. The
increase in cash derived from the improvement in profitability was offset by
increased accounts receivable. The primary reason for the increase in the
accounts receivable balance from the end of fiscal year 1998 to the end of
fiscal year 1999 was primarily the result of a larger amount of unbilled revenue
recognized from fixed price contracts accounted for under the cost-to-cost type
of percentage-of-completion method of accounting. Increases in both the
inventories and accounts payable balances occurred as a result of management's
decision in fiscal year 1999 to increase inventory quantities of key stock items
and sub-assemblies in order to achieve its objective of reducing lead times for
delivery of products to customers.
During fiscal year 1999 the Company invested $1.5 million in capital
expenditures, compared to $1.2 million invested in capital expenditures during
fiscal year 1998. Those expenditures in both years were primarily for the
purpose of obtaining machining equipment as part of the Company's expansion of
its Precision Machining Center (PMC) capacity and capability. Purchase of the
equipment has been financed through working capital and long-term credit
facilities of $1.1 million and $0.8 million obtained during fiscal years 1999
and 1998, respectively.
At the end of fiscal year 1999 the Company had $792,000 of commercial
inventory related to the manufacture and service of the LifeShear product line.
The Company and its distribution company are aggressively marketing its
commercial products and are planning for increased sales and inventory turnover
rate of this product line during the coming year. The full realization of these
plans is strengthened by its domestic distribution agreement and the efforts of
its European licensee in manufacturing and marketing these cutters in Europe.
The Company's primary sources of capital during the fiscal year 1999 were
its positive operating cash flow and equipment lease financing. 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, 1999,
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there was $1.7 million outstanding on this line of credit. In addition, the
Company borrowed $1.1 million in June of 1999 to purchase the 16 acre Santa
Clarita property that it had previously been leasing. Management is currently
evaluating alternative plans to either continue its operations in the facility,
or sell the property and relocate the operations.
The Company believes that its working capital of $6.5 million and 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.
Computer Systems and Year 2000
The Company has made an assessment of its Year 2000 compliance program and
has developed a plan to be compliant with all requirements. In considering its
assessment the Company has analyzed its internal IT and non-IT systems and
determined as follows:
IT. The Company is currently installing an MRP system whose software is
--
Year 2000 compliant. Scheduled full implementation of this MRP system is
September 1999. The Company has tested its in-house software and computer
systems infrastructure and it is Year 2000 compliant. Any items that cannot be
determined to be compliant or cannot be upgraded to be compliant are being
replaced if they are deemed to be critical to the operations of the Company.
Non-IT. The Company has determined that some older test equipment contains
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imbedded CPU that are not Year 2000 compliant. Supporting CPU's in this test
equipment have been replaced. These replacements are a part of normal
maintenance and will not add any extraordinary costs to operations.
No unplanned costs are associated with Year 2000 compliance. Hardware and
software upgrades were scheduled as normal maintenance activities.
In consideration of third party effects on business operations the Company
studied its customers and suppliers. The Company's customers are major aerospace
customers, U.S. Government (DoD, NASA, DOE) and foreign agencies. All major
aerospace companies have active Year 2000 compliance programs and have stated
they will be compliant. The Company is working with them to assure them we will
be compliant as suppliers. U.S. Government agencies state they will be
compliant. Foreign agencies represent less than 5% of the Company's business and
are too varied to contact. Since these agencies recognize the problem and are
working on it, the Company has projected that as a minimum 80% will have no
problem. The remaining 20% (1% of the Company's business) would only suffer
delay.
The Company orders common items from multiple suppliers. Major purchases
are raw metals and common electronic parts. These supplies are all available on
a short-term basis from multiple suppliers. Should any one supplier have a
problem, the Company can obtain parts from alternate suppliers.
The Company has determined that a worst case scenario for a Year 2000
problem would be a delay caused by a non-compliant supplier. The effect on the
Company would be a two to four week delay in shipping parts to customers.
Because our build/test cycle is longer than the two to four week delay, the
Company could advise its customer and change schedules to accommodate a problem.
If this were to happen at year-end, it could slide revenues into a new FY. Since
the Company's revenue consists of multiple sales of small lots, this would
affect less than 2% of the Company's revenue on a timing basis.
9
<PAGE>
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 on Accounting 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, 1999 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 joined Hi-Shear
in 1990 as Vice President of Finance and Administration, and served as Executive
Vice President from 1996. He is now 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, 1999 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, 1999 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, 1999.
11
<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 17, 1999 By: /s/ George W. Trahan
--------------- ---------------------------------------------
President and Chief Operating Officer
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 17, 1999 By: /s/ Thomas R. Mooney
--------------- ---------------------------------------------
Chairman of the Board and Chief Executive
Officer
By: /s/ George W. Trahan
--------------------------------------------
Director, President, and Chief Operating
Officer
By: /s/ Gregory J. Smith
--------------------------------------------
Principal Financial and Accounting Officer
By: /s/ Jack Bunis
--------------------------------------------
Director
By: /s/ David W. Einsel
--------------------------------------------
Director
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER DESCRIPTIONS NUMBERED
- -------------- ------------ --------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended*
3.2 Bylaws, as amended**
4.1 Form of Common Stock***
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 Form of Buy/Sell Agreement
10.6 Southern California Bank Credit Facility****
10.6.1 Promissory Note Relating to Southern California Bank Credit Facility
10.6.2 Promissory Note Relating to Southern California Bank Credit Facility
23.1 Consent of Independent Auditor's
27.1 Financial Data Schedule
</TABLE>
___________________
* Previously filed and incorporated by reference to the Company's Form SB-2
Registration Statement No. 33-73972 filed with the Securities and Exchange
Commission on January 10, 1994.
** Previously filed and incorporated by reference to the Company's Form SB-2
Registration Statement No. 33-73972 filed with the Securities and Exchange
Commission on February 1, 1994.
*** Previously filed and incorporated by reference to the Company's Form SB-2
Registration Statement No. 33-73972 filed with the Securities and Exchange
Commission on March 23, 1994.
**** Previoulsy filed and incorporated by reference to the Company's Form 10-KSB
filed with the Securities and Exchange Commission on August 12, 1998.
13
<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-16
</TABLE>
15
<PAGE>
[LETTERHEAD 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, 1999, and the related statements of
operations, stockholders' equity and cash flows for the years ended May 31, 1999
and 1998. 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, 1999 and
the results of its operations and its cash flows for the years ended May 31,
1999 and 1998 in conformity with generally accepted accounting principles. As
discussed in Note 11, in 1998 the Company changed its method of accounting for
start-up costs.
/s/ McGladrey & Pullen, LLP McGladrey & Pullen, LLP
Anaheim, California
July 23, 1999
F-1
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
BALANCE SHEET
MAY 31, 1999
<TABLE>
<CAPTION>
ASSETS (Note 6) 1999
- -------------------------------------------------------------------------------------
<S> <C>
Current Assets
Cash and cash equivalents $ 33,000
Accounts receivable (Note 3) 7,302,000
Inventories (Note 4) 3,275,000
Deferred taxes (Note 7) 1,200,000
Prepaid expenses and other current assets 112,000
---------------
Total current assets 11,922,000
Equipment, Net (Note 5) 3,390,000
Intangible assets, net 105,000
---------------
$ 15,417,000
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------
Current Liabilities
Notes payable to bank (Note 6) $ 1,701,000
Current portion of long-term debt (Note 6) 348,000
Trade accounts payable 2,338,000
Accrued payroll and related costs 673,000
Other accrued liabilities 338,000
---------------
Total current liabilities 5,398,000
Long-Term Debt, less current portion (Note 6) 811,000
---------------
Total liabilities 6,209,000
Excess of Net Assets Acquired Over Purchase Price 553,000
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;
6,670,000 shares issued and outstanding 7,000
Additional paid-in capital 7,193,000
Retained Earnings 1,455,000
---------------
Total stockholders' equity 8,655,000
---------------
$ 15,417,000
===============
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
Years Ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues (Notes 2, 3, and 4) $ 17,298,000 $ 17,641,000
Cost of Revenues (Note 4) 11,858,000 11,731,000
--------------- ---------------
Gross Profit $ 5,440,000 $ 5,910,000
Exit from Line of Business (Note 10) --- 772,000
--------------- ---------------
Gross Profit after Exit from Line of Business 5,440,000 5,138,000
Selling, General and Administrative Expenses 3,055,000 2,742,000
Research and Development Expenses 697,000 794,000
--------------- ---------------
Operating Income $ 1,688,000 $ 1,602,000
Interest (Expense) (213,000) (257,000)
--------------- ---------------
Income before Provision for Tax credits $ 1,475,000 $ 1,345,000
and Change in Accounting Method
Provision for Income Tax credits (Note 7) (624,000) (530,000)
--------------- ---------------
Income before Cumulative Effect of 2,099,000 1,875,000
Accounting Change
Cumulative Effect of Accounting Change (Note 11) --- 298,000
--------------- ---------------
Net Income $ 2,099,000 $ 1,577,000
=============== ===============
Earnings per Common Share and
per Common Share Assuming Dilution:
Income before Cumulative Effect of Accounting
Change 0.31 0.28
Cumulative Effect of Accounting Change --- (0.04)
--------------- ---------------
Net Income $ 0.31 $ 0.24
=============== ===============
Weighted Number of Common Shares 6,669,000 6,654,000
=============== ===============
Weighted Number of Common Shares
Assuming Dilution 6,682,000 6,702,000
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
Additional Retained Total
Common Stock Paid-In Earnings Stockholders'
-------------------------------
Shares Amount Capital (Deficit) Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Exercise of stock
options 2,000 - 11,000 - 11,000
Net income - - - 2,099,000 2,099,000
----------------- ---------- --------------- ---------------- -----------------
Balance May 31, 1999 6,670,000 $ 7,000 $ 7,193,000 $ 1,455,000 $ 8,655,000
============================================================================================
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,099,000 $ 1,577,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in accounting for start-up costs --- 298,000
Depreciation and amortization 481,000 320,000
Amortization of excess of net assets
acquired over purchase price (138,000) (138,000)
Deferred taxes (660,000) (530,000)
Changes in assets and liabilities:
Accounts receivable (1,591,000) 596,000
Inventories (613,000) (29,000)
Prepaid expenses and other assets 2,000 (59,000)
Accounts payable 943,000 (368,000)
Accrued payroll and related costs 148,000 102,000
Other accrued liabilities (41,000) (87,000)
------------- --------------
Net cash provided by operating activities 630,000 1,682,000
------------- --------------
Cash Flows from Investing Activities
Purchase of equipment (1,520,000) (1,175,000)
------------- --------------
Cash Flows from Financing Activities
Proceeds from note payable to a bank 4,425,000 5,250,000
(Payments) on note payable to a bank (4,235,000) (6,250,000)
Proceeds from long-term debt 670,000 750,000
Proceeds from stock options exercised 11,000 181,000
Principal payments on long-term debt (184,000) (221,000)
------------- --------------
Net cash provided by (used in) financing activities 687,000 (290,000)
------------- --------------
Net increase (decrease) in cash (203,000) 217,000
Cash and Cash Equivalents, beginning of period 236,000 19,000
------------- --------------
Cash and Cash Equivalents, end of period $ 33,000 $ 236,000
============= ==============
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 217,000 $ 257,000
============= ==============
Cash paid during the year for income taxes $ 37,000 $ 18,000
============= ==============
</TABLE>
See Notes to Financial Statements.
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. The sales volumes of this new commercial product has not been
significant; however, significant investments in inventory and tooling for the
emergency cutter have been made. The emergency cutter is being exclusively
marketed and distributed in the United States, Canada and Japan by Hale Products
Inc. the maker and distributor of the Hurst "Jaws of Life". The Company's
European licensee is manufacturing and selling the LifeShear product in their
assigned territory. In addition, the Company has developed a commercial air bag
inflator technology. During the fourth quarter of fiscal 1999, the Company was
awarded an additional patent for its automobile air bag inflator designs by the
United States Patent and Trademarks Office. 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:
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.
Revenue recognition:
Sales of commercial products are recognized as deliveries are made. Contract
revenues are derived principally from fixed-price contracts and are recorded as
deliveries are made and milestones achieved (units-of-delivery type of
percentage-of-completion method of accounting). Revenues from certain fixed-
price development contracts are recorded as costs are incurred and include
estimated earned profits calculated on the basis of the relationship between
costs incurred and total estimated costs (cost-to-cost type of percentage-of-
completion method of accounting). Fixed-price development contracts generally
provide for the delivery of a small number of units after a lengthy period of
time over which a significant amount of costs have been incurred.
Provisions for estimated total contract losses on uncompleted contracts are made
in the period in which such losses are determined. Amounts representing
contract change orders are included in revenues only when the amounts can
reliably be estimated and realization is probable. Changes in estimates of
revenues, costs and profits are recognized in the period such changes are made.
F-6
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 1. Nature of Business and Significant Accounting Policies (continued)
The Company submits claims for cost reimbursement related to contract
requirement changes not yet incorporated into its contract or other contract
costs in negotiation. These claims for reimbursement result from changes to
specifications, additional work required to be performed by the Company to
satisfy customer requests beyond contract scope, failure of customer designed
components and adjustments to contract pricing due to the customer reducing unit
quantities. Claims are recorded to the extent of costs incurred when, in
management's opinion, it is probable that the claim will result in additional
revenues and the amount can be reasonably estimated.
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 defense and aerospace 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, and factory and engineering overhead. 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.
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.
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.
Determining impairment on long-term assets:
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
F-7
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 1. Nature of Business and Significant Accounting Policies (continued)
Segment information:
In accordance with FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company has determined that there are
currently two principal operating segments: aerospace and commercial products.
In addition, the Company has determined that it currently has only one reporting
segment, as the 10% threshold requirements (e.g. revenues, operating assets,
etc.) of SFAS No. 131 have not been met for both segments.
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 each of 1999 and 1998.
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 costs 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.
Earnings per share:
Earnings per share (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 13,000 in 1999 and 48,000 in 1998. Common
stock warrants, which were anti-dilutive, expired in March 1999.
F-8
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 1. Nature of Business and Significant Accounting Policies (continued)
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. The Company has not experienced any losses on
such deposits.
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, 1998 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, 1999.
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:
________________________________________________________________________________
1999 1998
Lockheed Martin 15% 26%
United States Government 21% 21%
Boeing Company 14% *
Hughes Space & Communication Co. * 11%
*Total revenues from Hughes Space & Communication Co. in 1999 and from Boeing
Company in 1998 represented less than 10% of the Company's total revenues for
those years.
F-9
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 3. Accounts Receivable
Due from United States Government, prime and subcontractors under long-term
contracts:
Billed $ 15,153,000
Unbilled 2,890,000
Progress payments received (11,086,000)
------------
6,957,000
Billed and currently due from foreign sales, long-term contracts 225,000
------------
Total due, long-term contracts 7,182,000
Other receivables 120,000
------------
Total $ 7,302,000
============
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,
1999, the Company has recorded retentions of $1,652,000 which are awaiting
shipments of contracts in process before payment will be made and claims of
approximately $1,238,000 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 years 1999 and 1998,
the Company generated revenue of approximately $649,000 and $1,148,000,
respectively, from sources outside of the United States.
The Company has recorded $93,000 in 1999 and $225,000 in 1998, 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
Production cost of contracts in process $ 870,000
Raw materials and components 1,613,000
Commercial inventory:
Raw materials 369,000
Work-in-process 387,000
Finished goods 36,000
------------
Total $ 3,275,000
============
F-10
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 4. Inventories (continued)
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, 1999, is as follows:
________________________________________________________________________________
Total contracts in process $ 25,596,000
-------------
Costs incurred to date $ 17,223,000
Estimated profit (loss) recorded 2,700,000
Less billed and unbilled amounts (19,053,000)
-------------
Total production costs of contracts in process $ 870,000
=============
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, 1999 would change contract profits or losses by
approximately $40,000.
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 Government's demand for products on a periodic basis.
Note 5. Equipment
Machinery and equipment $ 3,868,000
Tooling costs 468,000
Furniture and fixtures 226,000
Projects in progress 444,000
-------------
5,006,000
Less accumulated depreciation and amortization 1,616,000
-------------
$ 3,390,000
=============
Projects in process include certain internal costs related to the implementation
of the Company's computer system.
F-11
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
Note 6. Debt
The Company has a line of credit agreement with a bank for the purpose of
obtaining short-term loans up to a maximum of $3,500,000. Borrowings under this
line of credit are collateralized by substantially all of the Company's assets.
Outstanding amounts bear interest at the Wall Street Journal's prime rate (7.75%
at May 31, 1999) plus .50%. The credit agreement expires November 1, 2000. At
May 31, 1999, $1,701,000 was outstanding under the line of credit. Availability
under the line at May 31, 1999, plus various letters of credits issued to
customers totaling $846,000, is $1,799,000. 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, 1999, the Company has met all financial covenant requirements of
the bank.
Long-term debt at May 31, 1999, consists of the following:
________________________________________________________________________________
Promissory Note, interest only through August 1999 and
monthly principal payment of $22,917 from September 1999
through February 2002, plus interest at prime plus 0.5%,
secured by substantially all assets. $ 670,000
Promissory Note, payable in monthly installments of
$13,346 through August 2002, plus interest at prime plus 1%,
secured by substantially all assets. $ 489,000
-----------
1,159,000
Less current portion 348,000
-----------
Long term debt $ 811,000
===========
Maturities of long-term debt are: 2000 - $348,000, 2001 - $453,000,
2002 - $349,000, 2003 - $9,000.
Note 7. Income Taxes
Deferred tax assets provided for in the accompanying balance sheet at May 31,
1999, consist of the following:
________________________________________________________________________________
Deferred tax assets:
Depreciation $ 114,000
Net operating loss carryforwards 1,542,000
Other 215,000
-----------
1,871,000
Less valuation allowance (671,000)
-----------
Net deferred taxes $ 1,200,000
===========
F-12
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Income Taxes (continued)
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>
1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal income tax computed at the statutory rate $ 516,000 $ 478,000
Permanent differences, primarily negative goodwill (50,000) (80,000)
State taxes, less federal benefit 92,000 82,000
Change in valuation allowance (1,182,000) (1,010,000)
-------------- ----------------
$ (624,000) $ (530,000)
============== ================
</TABLE>
As of May 31, 1999, the Company had federal net operating loss carryforwards of
approximately $4,156,000, which expire $1,646,000 in 2009; $2,340,000 in 2011;
and $170,000 in 2012. The Company also has state net operating loss
carryforwards of approximately $433,000, which expire; $354,000 in 2001; and
$79,000 in 2002.
The provision for income taxes charged (credited) to operations for the years
ended May 31, 1999 and 1998 include current federal and state taxes of $36,000
and $0, respectively, and deferred tax benefits of $660,000 and $530,000,
respectively.
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, 1999 and 1998 was approximately $543,000 and $551,000
respectively.
Minimum annual rentals under all noncancelable operating leases are as follows:
<TABLE>
---------------------------------------------
<S> <C>
2000 313,000
2001 23,000
2002 4,000
--------------------
$ 340,000
====================
</TABLE>
F-13
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Commitments and Contingencies (continued)
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 had an exercise price of $8.25 per share,
subject to adjustment in accordance with the terms of the warrant agreement. All
unexercised warrants expired on March 31, 1999 without any of the outstanding
warrants at May 31, 1998 covering 73,500 shares being exercised prior to the
expiration date.
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. Options are granted and vested as
determined by the Stock Options Committee.
A summary of the status of the options plan and changes during the year ended on
those dates is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 218,000 $ 5.93 242,000 $ 5.95
Granted 19,000 6.21 43,000 6.11
Exercised (2,000) 5.73 (32,000) 5.69
Forfeited (49,000) 5.94 (35,000) 5.70
----------------------------------------------------------------------
Outstanding at end of year 186,000 $ 5.95 218,000 $ 5.93
======================================================================
Exercisable at end of year 142,000 $ 6.16 133,000 $ 6.19
Weighted-average fair value per
option granted during the year $ 4.00 $ 6.02
</TABLE>
F-14
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Stockholders' Equity (continued)
A further summary about fixed options outstanding at May 31, 1999, 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 $7.00 167,000 7 years $ 5.58 123,000 $ 5.69
$7.50 to $10.50 19,000 8 years 9.20 19,000 9.20
------------ -------------
186,000 $ 5.95 142,000 $ 6.16
============ =============
</TABLE>
Grants under the Company's stock option plans are accounted for following APB
Opinion No. 25 and related interpretations. Accordingly, as the exercise price
equals the fair value, 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:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income
As reported $ 2,099,000 1,577,000
Pro forma 1,909,000 1,334,000
Earnings per common share and
common share assuming dilution
As reported 0.31 0.24
Pro forma 0.29 0.20
</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 1999 and 1998, respectively. No dividend rate for all years; price
volatility of 44% in 1999 and 64% in 1998, risk-free interest rates of
approximately 5.6% in 1999 and 6.2% in 1998; 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 and loss from
this business activity were approximately $73,000 and $772,000 respectively for
fiscal year 1998. The Company has completed the contract related to this
business line.
F-15
<PAGE>
HI-SHEAR TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. 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.
Note 12. Subsequent Event
In accordance with the terms of an operating lease for a facility located in
Santa Clarita, California, the Company exercised an option to purchase the
property in June, 1999. The purchase price was $1,126,000.
Financing of the Company's purchase of the facility was achieved with funds
obtained from a promissory note dated June, 1999. The principal amount of the
loan is $1,200,000 with interest only payments due through March, 2000.
Principal payments of $33,333 are due April, 2000 through March, 2003, plus
interest at prime plus 0.5%. The note is secured by the property purchased.
F-16
<PAGE>
EXHIBIT 10.5
HI-SHEAR TECHNOLOGY CORP.
BUY-SELL AND VOTING AGREEMENT AND IRREVOCABLE PROXY
THIS SHAREHOLDERS BUY-SELL AND VOTING AGREEMENT AND IRREVOCABLE PROXY
("Agreement") is entered into as of August 6, 1999, by and among HI-SHEAR
TECHNOLOGY CORP., a Delaware corporation (the "Company"), and Thomas R. Mooney
and George W. Trahan ("Mooney" and "Trahan", individually, and collectively, the
"Shareholders"), with respect to the following matters:
A. This Agreement shall replace that certain Buy-Sell Agreement
between the Company and the Shareholders dated as of December 20, 1993.
B. The Shareholders together own in excess of a majority of the
outstanding common stock shares of the Company (the "Shares"). As of the
date of this Agreement, Mooney owns 2,700,000 Shares and Trahan owns
2,180,580 Shares. The Shareholders believe it is in their best interests
to create a "voting proxy" between the Shareholders through the grant of a
10-year irrevocable proxy from Mooney to Trahan of one-half of the excess
of the Shares beneficially owned by Mooney over the Shares beneficially
owned by Trahan according to the official stock transfer records of the
Company on and as of the record date, as determined under Section 213 of
the General Corporation Law of Delaware ("record date"), for any
Shareholder vote taken (the "Proxy Shares").
C. The Shareholders acknowledge and agree that (1) on and as of each
record date for a vote or written consent of Shareholders, the Inspector of
Elections ("Inspector") shall determine the number of Proxy Shares subject
to the Irrevocable Proxy, which determination shall be final and conclusive
and (2) in the event the Inspector makes the determination that some or all
of the Proxy Shares are no longer subject to the Irrevocable Proxy, the
certificates evidencing such excess Proxy Shares may have the restrictive
legend set forth in Section 14.2 removed.
D. The Shareholders and the Company believe it to be in their
respective best interests that the Shareholders be restricted in their
right to dispose of Shares of the Company now or hereafter owned by any of
the Shareholders, to protect the Shareholders in the event of certain
transfers, and to provide for the purchase of the Shares upon the death,
divorce, disability, termination or bankruptcy of any Shareholder.
E. The Shareholders are both officers, directors and employees of
the Company.
F. The Shareholders deem it to be in the best interest of the
Company and its shareholders to set forth a mechanism to insure the
continuity of, and provide stability with respect to, the management of the
Company, both presently and during a transitional period of ten (10) years
following the death of either one of the Shareholders; and
G. The Shareholders desire to enter into an agreement to be
specifically enforceable against each of them, or the Decedent's Estate and
their respective Family Members (as defined below), heirs, descendants,
executors, administrators and other legal representatives, pursuant to
which (i) they agree to vote their Shares in the manner and for the
purposes specified herein, and (ii) Trahan shall, for a period of ten (10)
years from the date of this Agreement, have an
<PAGE>
Irrevocable Proxy to vote the Proxy Shares that are owned and registered in
the name of Mooney, in the manner and for the purposes specified herein.
NOW, THEREFORE, in consideration of the foregoing facts and the mutual
agreements set forth herein, the parties agree as follows:
1. Transfer Restriction. During the term of this Agreement, no
--------------------
Shareholder may transfer, assign, hypothecate or otherwise dispose of any of the
Shares except in accordance with this Agreement, and all certificates evidencing
the Shares shall bear the following legend:
"These shares are subject to restrictions on transfer contained in a
Buy-Sell Agreement, a copy of which may be inspected at the principal
office of the Company."
2. Notice of Intent to Transfer. If either Shareholder shall desire to
----------------------------
transfer, assign, hypothecate or otherwise dispose of any Shares (excluding the
Excepted Shares as set forth in Section 5), such Shareholder ("Selling
Shareholder") shall give the Company and the other Shareholder ("Remaining
Shareholder") written notice ("Notice") of such proposed disposition ("Offer")
and i) offer to sell such Shares ("Offered Shares") to the Company and, at the
election of the Company, to the Remaining Shareholder, pursuant to the Right-of-
First-Refusal described in Section 3, and ii) offer Co-Sale Rights to the
Remaining Shareholder as described in Section 4. Such Notice shall also set
forth the intended third party transferee ("Transferee"), and a copy of the
written instrument or agreement involved.
3. Right-of-First-Refusal. The Company shall have the initial option to
----------------------
purchase any or all of the Offered Shares on the terms and conditions presented
in the Offer. The Remaining Shareholder shall then have the option to purchase
any or all of the Offered Shares remaining, (i.e. those not purchased by the
Company), also pursuant to the terms and conditions presented in the Offer. The
Company shall notify the Remaining Shareholder of the number of shares available
for purchase by the Remaining Shareholder within fifteen (15) days of the
Company's receipt of the Notice. The Remaining Shareholder will then have ten
(10) days within which to exercise his option. The Company and/or the Remaining
Shareholder shall have the option for a period of twenty-five (25) days from the
date of the Company's receipt of the Notice to accept such terms and conditions
of the Offer.
3.1 Acceptance. If the Offer is accepted in writing prior to
expiration of the twenty-five (25) day period described in Section 3, the price
for the Offered Shares as set forth in the Offer may be paid within thirty (30)
days of acceptance.
3.2 Rejection. If the Offer has not been accepted in writing prior to
expiration of the twenty-five (25) day period, the Selling Shareholder shall
have the right for a period of sixty (60) days thereafter to dispose of all (but
not less than all) of the Offered Shares in accordance with the terms of the
Offer. If not disposed of by the end of such second sixty (60) day period, the
Offered Shares shall again become subject to the restrictions of this Agreement.
4. Co-Sale Rights. In addition to the Right-of-First-Refusal, the Selling
--------------
Shareholder hereby agrees, in the event of any sale of Shares owned by him to a
third party purchaser, to promptly give Notice to the Remaining Shareholder at
least twenty-five (25) days prior to the closing of such sale. The Notice shall
describe in reasonable detail the proposed sale including, without limitation,
the number of Shares to be sold, the nature of such sale, the consideration to
be paid, and the name and address of each prospective purchaser or transferee.
Remaining Shareholder shall have the right, but not the obligation, to sell a
number of Shares owned by him up to an equal number of Shares being sold by the
Selling Shareholder. To the extent the Remaining Shareholder exercises such
right of co-sale, the
<PAGE>
number of Shares that the Selling Shareholder may sell in the transaction shall
be correspondingly reduced. The co-sale rights of the Remaining Shareholder
shall be automatic and not subject to the election or option of the Company. A
decision by the Remaining Shareholder to sell Shares pursuant to this Section 4
shall be an independent decision to sell by the Remaining Shareholder and shall
not be deemed a joint decision by the Shareholders to sell their Shares.
4.1 Acceptance of Co-Sale. At any time within twenty-five (25) days
after the date of the Notice, the Remaining Shareholder may accept the Offer for
up to such number of Shares as is determined under Section 4 by furnishing to
the Selling Shareholder written notice and an undertaking to deliver, at least
three (3) days prior to the consummation of the sale of the Shares to the
Transferee, the certificates representing the Remaining Shareholder's Shares to
be transferred pursuant to the Offer (the "Included Shares") together with a
limited power of attorney authorizing the Selling Shareholder to transfer the
Included Shares pursuant to the terms of such Offer. If Remaining Shareholder
does not accept the Offer within twenty-five (25) days, the Selling Shareholder
shall have sixty (60) days in which to sell to the Transferee not more than the
number of Shares covered by the Offer on terms not more favorable to the Selling
Shareholder than were set forth in the Notice.
4.2 Consummation of Sale. At the time of consummation of the sale of
the Included Shares to the Transferee, the Selling Shareholder shall cause to be
remitted to the Remaining Shareholder a certified check from such Transferee for
the total sale price of the respective Included Shares sold pursuant thereto,
and the Selling Shareholder shall furnish, or shall cause to be furnished, such
sale agreement and the terms thereof as may be reasonably requested. If, and to
the extent that the end of sixty (60) days following the date on which the
Notice was given the Selling Shareholder has not completed the sale of the
Included Shares in accordance with the terms of the Offer, it shall return to
the Remaining Shareholder all certificates representing the respective Included
Shares that such Remaining Shareholder transmitted pursuant to the terms hereof,
and all the restrictions on sale, transfer or assignment contained in this
Agreement with respect to Shares owned by the Selling Shareholder shall again be
in effect.
5. Excepted Shares. This Agreement shall not restrict the sale of
---------------
"Excepted Shares" by either of the Shareholders. "Excepted Shares" shall mean:
a. Shares sold in brokerage transactions pursuant to Rule 144,
provided that five (5) days advance notice of the sale has been given to
the other Shareholder; and
b. Shares sold in a secondary offering registered under the
Securities Act of 1933, provided that each Shareholder has been afforded an
-------- ----
opportunity to participate equally in such offering.
c. Up to an aggregate 150,000 Shares transferred either by gift to
charitable or religious institutions or to family members directly or
through trusts for estate planning purposes.
6. Death of a Shareholder. Upon the death of any Shareholder, the Company
----------------------
and, to the extent not exercised by the Company, the surviving Shareholder
("Surviving Shareholder") shall have the option to purchase and redeem, pursuant
to Sections 6.1 and 6.2 (the "Purchase Provisions") all of the decedent's
Shares. The Company and/or the Surviving Shareholder must exercise the options
to purchase and redeem within ninety (90) days of the date of knowledge of
decedent's death, or as soon thereafter as decedent's estate shall be legally
entitled to effect the transaction; provided, however, that the Right of First
-------- -------
Refusal under Section 3, the Company's Co-Sale Rights under Section 4 and Rule
144 sale advance notice provision under Section 5(a) shall remain in effect and
be applicable to the Shares of a deceased Shareholder so long as they are held
by a "Family Member" of a deceased Shareholder,
<PAGE>
during the term of this Agreement. "Family Member" shall mean a member of a
deceased Shareholder's family by blood or marriage (including without
limitation, parents, spouse, siblings, children, grandchildren and in-laws).
6.1 Purchase Price. The per share "Purchase Price" shall be the
closing price per share of the Company's stock as listed on the American Stock
Exchange or such other public market upon which the Company's stock is primarily
traded, on the day prior to the date of the triggering death, divorce,
disability, termination or bankruptcy.
6.2 Acceptance. The price for the available Shares may be paid in
cash or by delivery of cash in the amount of 25% of the Purchase Price therefor
and an unsecured promissory note for the balance executed by the Company or the
Surviving or Other Shareholder, as appropriate. Such note shall provide for (1)
interest at the rate of 10% per annum; (2) three equal annual installments of
principal, together with accrued interest; and (3) acceleration upon any sale,
exchange or other disposition of any of the Shares or the sale, outside the
ordinary course of business, of more than 50% (by value) of the assets of the
Company or any merger or reverse merger resulting in a change of control of the
Company. No such disposition of the Shares or of the assets of the Company, or
merger, may be consummated prior to the payment of such note. The term "Other
Shareholder" as used herein shall refer to the Shareholder with the right to
purchase Shares pursuant to Sections 7 through 10 hereof.
6.3 Purchase by Shareholders. To the extent, if any, that the Company
is legally unable to comply with its obligations under this Section 6, the
Surviving Shareholder may effect such purchase in accordance with the terms of
the Purchase Provisions. The Company shall notify the Surviving Shareholder,
within sixty (60) days of its knowledge of the decedent's death, of the number
of shares available for purchase by the Surviving Shareholder. The Surviving
Shareholder will then have thirty (30) days within which to exercise his option.
6.4 Costs. All costs of obtaining appropriate court orders and tax
clearances incident to a purchase under this Section 6 shall be borne by
decedent's estate.
6.5 Decedent's Estate. As used herein, "decedent's estate" shall mean
and include (1) the deceased Shareholder's duly appointed executor, executrix,
administrator or administratrix; (2) the deceased Shareholder's surviving joint
tenant as owner of the Shares; (3) any other person who, by reason of community
property interest or otherwise, acquires any interest in any of the Shares by
reason of such death; and (4) to the extent applicable, any inter vivos or
testamentary trust.
7. Death or Divorce of Spouse of Shareholder. In the event the death of
-----------------------------------------
the spouse of a Shareholder, or the marital dissolution or legal separation of a
Shareholder and his spouse, results in the passing of any interest in the Shares
to someone other than such Shareholder or a trust for which such Shareholder is
a beneficiary, or results in the acquisition of any Shares by such spouse, such
Shareholder shall have the option to purchase from such third person or spouse,
or the legal representative of such spouse's estate, any or all of the Shares so
passing, in accordance with the Purchase Provisions. The option of such
Shareholder to purchase shall be exercisable within thirty (30) days after such
Shareholder receives written evidence of the death of his spouse or of the entry
of the final or preliminary decree of dissolution or legal separation which
purports to transfer rights in the Shares, and shall be exercised by delivering
written notice of such exercise within such thirty (30) day period to such third
person or his spouse or the legal representative of such spouse's estate.
7.1 Option to the Company. If such Shareholder does not exercise his
option to purchase all of the Shares as set forth above, he shall notify the
Company within such thirty (30) day period. For a period of fifteen (15) days
following receipt of such notice (or for a period of fifteen (15) days following
the failure or termination of any unsuccessful attempt to exercise), the Company
shall
<PAGE>
have the option to purchase any of the Shares not purchased by such Shareholder
in accordance with the Purchase Provisions, exercisable by delivery of written
notice of such exercise to such third person, such spouse, or the legal
representative of such spouse's estate. The right of the Company to purchase the
Shares shall not be conditioned upon its receipt of notice from such Shareholder
as provided in this Section 7.1.
7.2 Option to Other Shareholder. If any of the Shares are not
purchased by the Company, the Company shall notify the Shareholder who did not
have an option to purchase pursuant to Section 7.1 in writing within its fifteen
(15) day option period. For a period of fifteen (15) days following receipt of
such notice from the Company (it being understood that their option shall not be
conditioned upon delivery of such notice), such Shareholder shall have the
option to purchase any of the Shares not purchased by the Company in accordance
with the Purchase Provisions, exercisable by delivery of written notice of such
exercise to such third person, spouse, or legal representative of the spouse's
estate.
8. Shareholder's Disability. If a Shareholder then employed on a full-
------------------------
time basis by the Company is rendered permanently disabled (as defined below),
the Company may purchase all of the Shares owned by such Shareholder at the time
of his disability in accordance with the Purchase Provisions. If the Company
elects not to purchase any or all of the Shares, the Other Shareholder may
purchase any or all of such Shares in accordance with the Purchase Provisions.
8.1 Permanent Disability. For the purposes of this Section 8 the
terms "permanently disabled" and "permanent disability" shall mean any physical
or mental disability, or combination thereof, causing a Shareholder to be unable
to substantially perform his normal duties as an employee of the Company and
which is (i) determined to be a total disability by the disability insurer then
insuring the Shareholder, or (ii) if no such insurance is then in effect, is
verifiable by medical findings and appears reasonably certain to continue for at
least one year without substantial improvement. In the case of (ii) in the
preceding sentence, the disability shall be established by the opinion of a
physician chosen by the Company and the Other Shareholder.
9. Termination of Employment During Lifetime. If any Shareholder shall
-----------------------------------------
cease to be an employee of the Company for any reason other than death or
permanent disability ("Terminated Shareholder"), the Company, for thirty (30)
days following the termination of his employment, shall have the option to
purchase the Shares owned by such Terminated Shareholder in accordance with the
Purchase Provisions. The Company's option shall be exercised by delivering to
the Terminated Shareholder, within the thirty (30) day option period, a written
notice of election to purchase the Shares. Such option shall not be exercised as
to less than all of the Shares unless the Other Shareholder exercises his option
(as provided in Section 9.1 below) to purchase, concurrently with the purchase
of any Shares by the Company, any Shares not purchased by the Company.
9.1 Option to Other Shareholder. If the Company's option is not
exercised in full, the secretary of the Company shall give, within the thirty
(30) day option period, written notice of that fact by registered or certified
mail to the Other Shareholder, who shall then have the option to purchase the
Shares at the same terms and price as applicable to the Company. Within twenty
(20) days after the mailing of such notice, the Other Shareholder shall deliver
to the secretary a written election to purchase the Shares or a specified number
thereof.
10. Bankruptcy. All proposed judicial transfers and sale of Shares by
----------
order of any court in bankruptcy ("Order") shall be subject to the terms of this
Agreement. In the event a sale or transfer is proposed pursuant to an Order, all
of the terms of the preceding Sections shall apply with the following
modification. Instead of a Notice being delivered to the secretary of the
Company, a copy of the Order shall be delivered to the secretary of the Company
by the proposed transferee which shall state the name
<PAGE>
and address of the proposed transferee and specify the number of Shares to be
sold, the price per share and the terms of proposed transfer. For all other
purposes of this Section 10, the receipt of the Order shall be treated as the
receipt of a Notice. All proposed transfers pursuant to an Order which do not
set forth a purchase price capable of valuation which would allow the Company
and the Other Shareholder to exercise its or his option hereunder are expressly
prohibited.
10.1 Transfers Pursuant to Transfer Order. If the Shares are not
purchased by the Company or Other Shareholder within the time periods and upon
the terms specified above, the Selling Shareholder may transfer the Shares
covered by the Order at any time within ninety (90) days from the date of the
Order to the person and according to the terms and price specified in the Order.
Such person will receive and hold the Offered Shares subject to all of the
provisions and restrictions herein contained and, by the receipt of the Shares,
shall be deemed to consent to the terms of and be a party to this Agreement;
provided, however, if the Company elects, such person shall, as a condition to
the valid transfer of the Shares to him, execute appropriate instruments to
confirm his obligation hereunder with respect to the Shares. Any transfer of the
Shares after the end of the ninety (90) day period or any change in the parties,
terms or price from those set forth in the Order shall require a new notice of
intention to transfer and shall give rise to the options provided in this
Section 10.
11. Vote of the Interested Shareholder. The Shareholder whose shares
----------------------------------
become available through an Offer, death, divorce, disability, termination or
bankruptcy (the "Interested Shareholder"), or such Interested Shareholder's
heirs and assigns, shall abstain from voting either as a director or shareholder
of the Company, and the available or Offered Shares shall not be voted, in any
vote taken regarding whether or not the Company shall exercise its options to
purchase such Shares.
12. Administrative Approvals. The right of the Company to exercise the
------------------------
option to purchase the Shares is subject to the restrictions governing the right
of a corporation to purchase its own stock contained in the Delaware General
Corporate law, and other pertinent government restrictions as are now or may
hereafter become effective. The Company shall apply for and use its best efforts
to obtain all governmental and administrative approvals required in connection
with the purchase and sale of any Shares under this Agreement. The Shareholders
shall cooperate in obtaining such approvals and shall execute any and all
documents that may be required in connection with the approvals.
13. Voting Agreement. As a reasonable mechanism to insure the continued
----------------
continuity of, and to provide stability with respect to, the management of the
Company, each of the Shareholders agrees, while both Shareholders shall be
living, to vote his Shares at all elections of directors in favor of the
election of each Shareholder as a director of the Company.
14. Irrevocable Proxy.
-----------------
14.1 In order to ensure the voting of the Shares with the terms of
this Agreement, Mooney agrees to execute an Irrevocable Proxy, simultaneously
with the execution of this Agreement, substantially in the form of the attached
Exhibit A granting to Trahan for a period of ten (10) years from the date of
this Agreement, to vote, or to execute and deliver shareholder written consents,
in respect of the Proxy Shares now beneficially owned and registered in the name
of Mooney, or as a result of a transfer after the date hereof by reason of
Mooney's death, registered in the name of Mooney's estate, Family Members or
heirs. The Proxy Shares shall be allocated pro rata to Mooney's Family Members,
heirs or estate in the proportion that the Proxy Shares are distributed and held
among such persons pursuant to the laws of descent and distribution unless
provided otherwise in Mooney's will. It is understood and agreed that the
Irrevocable Proxy relates to voting for the election of directors of the Company
and on all other corporate matters which may from time to time be submitted to
the shareholders of the Company for a vote, as set forth in the Irrevocable
Proxy. It is further understood and agreed that on and as of each record date,
the Inspector shall determine the number of Proxy Shares
<PAGE>
subject to the Irrevocable Proxy, which determination shall be final and
conclusive and that in the event the Inspector determines that some or all of
the Proxy Shares are no longer subject to the Irrevocable Proxy, then all of the
certificates evidencing the excess Proxy Shares may have the restrictive legend
referred to in Section 14.2 removed.
14.2 The initial Proxy Shares and any Proxy Shares issued to a
subsequent distributee shall be evidenced by a single certificate for each
distributee, which shall bear a legend, in addition to the legend set forth in
Section 1 of this Agreement, substantially as follows:
"These shares are subject to a certain Shareholders Buy-Sell
and Voting Agreement and Irrevocable Proxy coupled with an
interest in favor of the Proxyholder designated thereon,
granting to the Proxyholder certain voting rights with
respect to the Proxy Shares. A copy of the Shareholders Buy-
Sell and Voting Agreement and Irrevocable Proxy is available
for inspection at the office of the Corporation."
The above legend shall also be set forth on any Proxy Share certificate(s)
issued upon any transfer assignment hypothecation or other disposition of the
Proxy Shares, including by the laws of descent and distribution for so long as
such Proxy Shares are subject to the terms of the Irrevocable Proxy.
15. Changes in Common Stock. In the event that subsequent to the date of
-----------------------
this Agreement any shares or other securities (other than any shares or
securities of another corporation issued to the Company's shareholders pursuant
to a plan of merger) are issued on, or in exchange for, any of the Shares held
by the Shareholders by reason of any stock dividend, stock split, consolidation
of shares, reclassification, or consolidation involving the Company, such shares
or securities shall be deemed to be Shares for the purposes of this Agreement.
16. Representations of Shareholders. Each Shareholder hereby represents
-------------------------------
and warrants to the other Shareholder that (a) he owns and has the right to vote
the number of Shares set forth opposite his name and signature below, (b) he has
full power to enter into this Agreement and has not, prior to the date of this
Agreement, executed or delivered any proxy or entered into any other voting
agreement or similar arrangement other than one which has expired or terminated
prior to the date hereof, and (c) he will not take any action inconsistent with
the purposes and provisions of this Agreement.
17. Enforceability. Each Shareholder expressly agrees that this Agreement
--------------
shall be specifically enforceable in any court of competent jurisdiction in
accordance with its terms against each of the parties hereto and their
respective successors, assigns, Family Members, heirs, executors, administrators
and other legal representatives, as the case may be.
18. Termination. This Agreement shall terminate upon the earliest to occur
-----------
of the following: (a) the written agreement of all parties to terminate this
Agreement; (b) the dissolution, bankruptcy or insolvency of the Company; (c) at
such time as only one Shareholder remains, except that the provisions of
Sections 6, 11 and 14 shall continue in effect following the death of a
Shareholder; or (d) August 6, 2009. This Agreement may be extended annually or
from time to time by the Shareholders at any time after August 6, 2000 by the
execution by the Shareholders of an extension agreement (the "Extension
Agreement"), substantially in the form of the attached Exhibit B, extending the
term of the Agreement for an additional one-year term, or longer period so that
the remaining term of the Agreement shall be for a period of 10 years from the
date of each extension period, it being the intent of the parties by entering
into Extension Agreement(s) that this Agreement shall have a perpetual 10-year
term.
<PAGE>
19. Arbitration. Any controversy or claim arising out of this Agreement,
-----------
or any breach of this Agreement, including any controversy or claim as to
arbitrability or rescission, shall be settled by arbitration in accordance with
the commercial arbitration rules of the American Arbitration Association.
19.1 Location. Arbitration shall be conducted in either Los Angeles
County or Orange County, California or such other location as is mutually
agreeable to all of the parties to this Agreement.
19.2 Judgment. Any judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
arbitrators shall not, under any circumstance, have any authority to award
punitive, exemplary or similar damages.
19.3 Equitable Remedies. Either party may pursue the remedy of
specific performance of this Agreement, or seek a preliminary or permanent
injunction against the breach of this Agreement or in aid of the exercise of any
power granted hereunder, or any combination thereof, in any court having
jurisdiction thereof without resort to arbitration.
20. Notices. All notices, requests, demands and other communications
-------
permitted or required hereunder shall be in writing, and either (i) delivered in
person, (ii) sent by express mail or other overnight delivery service providing
receipt of delivery, or (iii) sent by telecopy or other facsimile transmission
as follows:
If to the Company:
Hi-Shear Technology Corporation
24225 Garnier Street
Torrance, CA 90505-5323
Facsimile: (310) 784-7806
If to Thomas R. Mooney:
Hi-Shear Technology Corporation
24225 Garnier Street
Torrance, CA 90505-5323
Facsimile: (310) 784-7806
If to George Trahan:
Hi-Shear Technology Corporation
24225 Garnier Street
Torrance, CA 90505-5323
Facsimile: (310) 784-7806
21. Miscellaneous. Each Shareholder's will or, if applicable, inter vivos
-------------
trust, shall contain a direction and authorization to comply with the provisions
of this Agreement and to sell the Shareholder's Shares in accordance with this
Agreement, but the failure of any Shareholder to do so shall not affect the
validity or enforceability of this Agreement. Should any one or more of the
provisions of this Agreement be determined to be illegal or unenforceable, all
other provisions of the Agreement shall be given effect separately from such
provisions, and the other provisions shall not be affected by such illegality or
unenforceability. In any action at law or in equity to enforce any of the
provisions or rights under this Agreement, the unsuccessful party or parties to
such litigation, as determined by the court in a final judgment or decree, shall
pay to the successful party or parties all costs, expenses and reasonable
<PAGE>
attorneys' fees incurred by the successful party or parties (including without
limitation, costs, expenses and fees on any appeals), and if the successful
party or parties recovers judgment in any such action or proceedings, such
costs, expenses and attorneys' fees shall be include as part of the judgment.
21.1 Binding Agreement. All of the covenants and agreements contained
in this Agreement shall be binding upon, and inure to the benefit of, the
respective parties and their successors, assigns, Family Members, heirs,
executors, administrators and other legal representatives, as the case may be.
21.2 Entire Agreement. This Agreement constitutes the entire
agreement between the Shareholders with respect to the subject matter hereof,
and supersedes any and all prior and contemporaneous agreements and
understandings of the parties, whether written or oral, with respect thereto.
21.3 Governing Law. Except with regard to arbitration, which shall be
governed by the provisions of Section 19 above, this Agreement, and the rights
of the parties hereto, shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware, without regard to conflicts
of laws rules and principles.
21.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original but all of which together
shall constitute one and the same instrument.
21.5 No Waiver. No waivers of any breach of this Agreement extended
by any party hereto to any other party shall be construed as a waiver of any
rights or remedies of any other party hereto or with respect to any subsequent
breach.
21.6 Number and Gender. Whenever the context of this Agreement shall
so require, the use of the singular number shall include the plural and the use
of any gender shall include all genders.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HI-SHEAR TECHNOLOGY CORP.
By: /s/ Linda A. Nespole
-----------------------
Its: Corporate Secretary
-----------------------
/s/ Thomas R. Mooney 2,700,000 Shares
- -------------------- ---------
Thomas R. Mooney
/s/ George W. Trahan 2,180,580 Shares
- -------------------- ---------
George W. Trahan
<PAGE>
SPOUSAL CONSENT
I acknowledge that I have read the foregoing Shareholders Buy-Sell and
Voting Agreement and Irrevocable Proxy dated as of August 6, 1999 and that I
know its contents. I am aware that by its provisions, my spouse has agreed to
vote his Shares of the Company, including any such Shares in which I may have
community property interest, in accordance with the terms of said agreement and
to sell all Shares, excluding the Excepted Shares (as defined therein), of the
Company, including my community interest in them. I hereby approve of the
provisions of the Shareholders Buy-Sell and Voting Agreement and Irrevocable
Proxy, including my spouse's granting of an Irrevocable Proxy to become
effective immediately, and agree that I will not take any action to frustrate
the purpose and intent of, nor challenge the provisions of, the Shareholders
Buy-Sell and Voting Agreement and Irrevocable Proxy. I also hereby consent to
the sale, approve of the provisions of the Shareholders Buy-Sell and Voting
Agreement and Irrevocable Proxy and agree that I will not bequeath the Shares or
any of them or any interest in them by my will if I predecease my spouse.
DATED: August 6, 1999 ___________________________
<PAGE>
EXHIBIT A
HI-SHEAR TECHNOLOGY CORP.,
a Delaware corporation
IRREVOCABLE PROXY
The undersigned Thomas R. Mooney ("Grantor") agrees to, and hereby
grants to George W. Trahan ("Proxyholder") an Irrevocable Proxy, to become
effective immediately, pursuant to the provisions of Section 212 of the General
Corporation Law of Delaware to vote, or to execute and deliver written consents
or otherwise act with respect to one-half (1/2) of the excess of the shares of
capital stock beneficially owned by Grantor over the shares of capital stock
beneficially owned by Proxyholder according to the official stock transfer
records of HI-SHEAR TECHNOLOGY CORP. (the "Corporation") on and as of the record
date as determined under Section 213 of the General Corporation Law of Delaware
(the "Proxy Shares") that are owned and registered in the name of Grantor, as
fully, to the same extent and with the same effect as Grantor might or could do
under any applicable laws or regulations governing the rights and powers of
shareholders of a Delaware corporation in connection with all corporate matters
which may be submitted to the shareholders for a vote from time to time,
including but not limited to (i) all elections of directors of the Corporation,
(ii) proposals to amend the Corporation's Certificate of Incorporation, (iii)
proposals regarding the merger, consolidation, or reorganization of the
Corporation, or a sale of all or substantially all of the Corporation's assets,
as provided in that certain Shareholders Buy-Sell and Voting Agreement and
Irrevocable Proxy, dated as of August 6, 1999 (the "Agreement"), among the
Grantor and Proxyholder and the Corporation. Grantor and Proxyholder
acknowledge and agree that on and as of each record date, the Inspector of
Elections shall determine the number of Proxy Shares subject to the Irrevocable
Proxy, which determination shall be final and conclusive. This Irrevocable
Proxy shall become immediately effective and may be exercised by Proxyholder,
his estate, Family Members and other heirs for a period of ten (10) years from
the date hereof, and for such longer period as this proxy shall be extended by
mutual written agreement between the parties hereto (not to exceed a term of 10
years from the date of any such extension), unless sooner terminated in
accordance with the provisions of the Agreement.
This Irrevocable Proxy shall be transferable upon the death of
Proxyholder to Proxyholder's estate and thereafter to such Family Member or
other heir of Proxyholder who then owns the majority of Proxyholder's Shares
distributed by the laws of descent and distribution. This Irrevocable Proxy
shall expire and terminate automatically by its terms if Proxyholder, his
estate, Family Members, and other heirs, collectively, at any time, own
beneficially and of record less than 500,000 shares of the Corporation's common
stock.
This Irrevocable Proxy is given as a condition of the Agreement and as
such is coupled with an interest and is irrevocable, and further by virtue of
Grantor's and Proxyholder's ownership of Shares and their positions with the
Corporation.
All defined terms not defined herein, shall have the meaning assigned
in the Agreement.
Grantor affirms that the giving of this Irrevocable Proxy is in the
best interest of the Corporation in order to provide "voting parity" between
Grantor and Proxyholder, and to ensure the continuity of stability with respect
to the management of the Corporation during the term of the Agreement, including
a transitional period after the death of either or both of Grantor and
Proxyholder.
<PAGE>
THIS PROXY SHALL REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE
AGAINST ANY DONEE, TRANSFEREE, OR ASSIGNEE OF THE SHARES, INCLUDING, WITHOUT
LIMITATION, THE UNDERSIGNED'S FAMILY MEMBERS (AS DEFINED IN THE AGREEMENT),
OTHER HEIRS, AND HIS ESTATE.
Dated as of August 6, 1999.
/s/ Margery Stratemeyer /s/ Thomas R. Mooney
- ------------------------- ----------------------
WITNESS
/s/ Lisa Howiler
- -------------------------
WITNESS
<PAGE>
SPOUSAL CONSENT
I acknowledge that I have read the foregoing Shareholders Buy-Sell and
Voting Agreement and Irrevocable Proxy dated as of August 6, 1999 and that I
know its contents. I am aware that by its provisions, my spouse has agreed to
vote his Shares of the Company, including any such Shares in which I may have
community property interest, in accordance with the terms of said agreement. I
hereby approve of the provisions of the Shareholders Buy-Sell and Voting
Agreement and Irrevocable Proxy, including my spouse's granting of an
Irrevocable Proxy to become effective upon his death, and agree that I will not
take any action to frustrate the purpose and intent of, nor challenge the
provisions of, the Shareholders Buy-Sell and Voting Agreement and Irrevocable
Proxy.
DATED: August 6, 1999 _____________________________
<PAGE>
EXHIBIT B
HI-SHEAR TECHNOLOGY CORP.
EXTENSION AGREEMENT
THIS EXTENSION AGREEMENT ("Agreement") is entered into as of ______, 2___,
by and among HI-SHEAR TECHNOLOGY CORP., a Delaware corporation (the "Company"),
and Thomas R. Mooney ("Mooney") and George W. Trahan ("Trahan") (collectively,
the "Shareholders"), with respect to the following facts:
A. The Company and the Shareholders are parties to that certain
Shareholders Buy-Sell and Voting Agreement and Irrevocable Proxy dated
August 6, 1999 (the "Shareholders Agreement").
B. Mooney is the Grantor of that certain Irrevocable Proxy attached
as Exhibit A to the Agreement (the "Irrevocable Proxy").
C. The Company and the Shareholders believe it to be in their
respective best interests that each of the Shareholders Agreement and the
Irrevocable Proxy (collectively, the "Agreements") have a perpetual ten-
year term.
NOW, THEREFORE, in consideration of the foregoing facts and the mutual
agreements set forth herein, the parties agree as follows:
1. Extension of Agreements. The term of each of the Shareholders
-----------------------
Agreement and the Irrevocable Proxy is extended until _______, 2____, which date
is ten years from the date of the execution of this Agreement.
2. Replacement of Irrevocable Proxy. Mooney shall execute and deliver to
--------------------------------
Trahan a new Irrevocable Proxy in the form of Exhibit A attached hereto, to
reflect the extended term of the Irrevocable Proxy set forth in paragraph 1
above, and which shall replace, cancel and revoke all prior Irrevocable Proxies
executed by Grantor.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Extension Agreement as
of the date first above written.
HI-SHEAR TECHNOLOGY CORP.
By:_____________________________
Its:____________________________
________________________________
Thomas R. Mooney
________________________________
George W. Trahan
<PAGE>
EXHIBIT 10.6.1
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
$1,100,000.00 01-28-1999 08-01-2003 462171720 54 5025 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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Borrower: Hi-Shear Technology Corporation Lender: SOUTHERN CALIFORNIA BANK
(TIN: 22-2535743) ORANGE COUNTY
24225 Garnier St. CORPORATE BANKING
Torrance, CA. 90505 P.O. BOX 588
LA MIRADA, CA. 90637
====================================================================================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Principal Amount: $1,100,000.00 Initial Rate: 8.2500% Date of Note: January 28, 1999
</TABLE>
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 One Million One Hundred Thousand &
00/100 Dollars ($1,100,000.00) 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 MARCH 1, 1999, AND ALL SUBSEQUENT INTEREST
PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. THEN ON
AUGUST 1, 1999, THE ENTIRE OUTSTANDING PRINCIPAL BALANCE WILL BE
AMORTIZED OVER A 48 MONTH PERIOD, WITH MONTHLY PRINCIPAL PAYMENTS
IN THE AMOUNT OF $22,916.67 PLUS ACCRUED INTEREST BEGINNING
SEPTEMBER 1, 1999. BORROWER'S FINAL PAYMENT WILL BE DUE ON AUGUST
1, 2003, 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 Index 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 7.750%. The interest rate to be applied to the unpaid principal
balance of this Note will be at a rate of 0.500 percentage
<PAGE>
points over the Index, resulting in an initial rate of 8.250%. 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 any 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 material 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 5.500 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. Lender and Borrower hereby
waive the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. 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, President; Thomas Mooney, Chief Executive
Officer; and S.Y. Yoshimoto, Controller. Effective August 1, 1999, 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, President Thomas Mooney, Chief Executive Officer
<PAGE>
EXHIBIT 10.6.2
SOUTHERN CALIFORNIA BANK CREDIT FACILITY
PROMISSORY NOTES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$1,200,000.00 06-09-1999 03-01-2003 462172051 54 5015 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.
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Borrower: Hi- Shear Technology Corp.(TIN: 22-2536743) Lender: SOUTHERN CALIFORNIA BANK
24228 Garnier Street ORANGE COUNTY CORPORATE BANKING
Torrance, CA 90505-5323 P.O. BOX 588
LA MIRADA, CA 90637
==========================================================================================================
</TABLE>
Principal Amount: $1,200,000.00 Initial Rate: 8.250% Date of Note: June 9, 1999
PROMISE TO PAY. Hi-Shear Technology Corp. ("Borrower") promises to pay to
SOUTHERN CALIFORNIA BANK ("Lender"), or order, in lawful money of the United
States of America, the principal amount of One Million Two Hundred Thousand &
00/100 Dollars ($1,200,000.00) 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 July 1, 1999, and all subsequent interest payments are due on the
same day of each month after that. Then on March 1, 2000, the entire
outstanding principal balance will be amortized equally over a 36 month
period, with principal plus interest monthly payments to begin April 1,
2000. Borrower's final payment will be due on March 1, 2003, and will be
for all principal and all accrued interest not yet paid.
The annual interest rate for this Note is computed on a 365\360 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 Index 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 7.750%. The interest rate to be applied to the unpaid principal
balance of this Note will be at a rate of 0.500 percentage points over the
Index, resulting in an initial rate of 8.250%. 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 than 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 any 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 material 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 the Note to 5.500 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 expanses 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 on
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.
<PAGE>
RIGHT OF SETOFF. Borrower grants to Lender a contractual 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 checking, 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.
COLLATERAL. Borrower acknowledges this Note is secured by, in addition to any
other collateral, a Deed of Trust dated June 9, 1999, to a trustee in favor of
Lender on real property located in Los Angeles County, State of California. That
agreement contains the following due on sale provisions Lender may, at its
option, declare immediately due and payable at sums secured by this Note upon
the sale or transfer, without the Lender's prior written consent, of all or any
part of the Real Property, or any interest in the Real Property. A "sale or
transfer" means the conveyance of Real Property or any right, title or interest
therein whether legal, beneficial or equitable; whether voluntary or
involuntary; whether by outright sale, deed, installment sale contract, land
contract, contract for deed, leasehold interest with a term greater than three
(3) years, lease--option contract, or by sale, assignment, or transfer of any
beneficial interest in or to any land trust holding title to the Real Property,
or by any other method of conveyance of Real Property Interest. If any Trustor
is a corporation, partnership or limited liability company, transfer also
includes any change in ownership of more than twenty-five percent (25%) of the
voting stock, partnership interests or limited liability company interests, as
the case may be, of Trustor. However, this option shall not be exercised by
Lender if such exercise is prohibited by applicable law.
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 by an
authorized person. Lender may, but need not, require that all oral requests 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 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, President
Thomas Mooney, Chief Executive Officer; and S.Y. Yoshimoto, Controller. 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 searching 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 foreclosures pursuant
to California Code of Civil Procedure Section 726, or any similar provision in
any other state, the commencement of such an action will not constitute a waiver
of the right to arbitrate and the court shall refer to arbitration as much of
such action, including counterclaims, as lawfully may be referred to
arbitration. Judgment upon any award rendered by any arbitrator may be entered
in any court having jurisdiction. Nothing in this Note shall preclude any party
from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
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 rights 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 maker 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 the consent of or notice to
anyone other than the party with whom the modification is made.
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 COMPLETE COPY OF THE NOTE.
BORROWER:
Hi-Shear Technology Corp.
X /s/ George Trahan X /s/ S. Y. Yoshimoto
--------------------------- ----------------------------
George Trahan S. Y. Yoshimoto
================================================================================
Variable Rate. Line of Credit
<PAGE>
EXHIBIT 23.1
[LOGO OF MCGLADREY & PULLEN, LLP APPEARS HERE]
CONSENT OF INDEPENDENT AUDITOR'S
We hereby consent to the incorporation of our report, dated July 23, 1999,
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 16, 1999
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-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 481
<TOTAL-ASSETS> 15,417
<CURRENT-LIABILITIES> 5,398
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 8,648
<TOTAL-LIABILITY-AND-EQUITY> 15,417
<SALES> 17,298
<TOTAL-REVENUES> 17,298
<CGS> 11,858
<TOTAL-COSTS> 15,610
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> 1,475
<INCOME-TAX> (624)
<INCOME-CONTINUING> 2,099
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,099
<EPS-BASIC> .31
<EPS-DILUTED> .31
</TABLE>
