U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from -------------- to --------------
Commission file number 33-17286
LIFSCHULTZ INDUSTRIES, INC.
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(Name of small business issuer in its charter)
DELAWARE 87-0448118
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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641 WEST 59TH STREET, NEW YORK, NY 10019
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(Address of principal executive offices)(Zip Code)
Issuer's telephone number: (212) 397-7788
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Check whether the issuer (1) has 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
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Check if no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is 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. [ ]
The issuer's revenues for its most recent fiscal year were
$15,651,000.
The aggregate market value of the voting and non-voting common
equity of the issuer held by non-affiliates, based upon the closing
price of the Common Stock on October 7, 1998 as reported on The Nasdaq
SmallCap Market, was approximately $2,838,500 (Assumes: (i) full con-
version of all Preferred Stock into Common Stock and (ii) affiliates
include only officers, directors and shareholders known to the issuer
to beneficially own 10% or more of the Company's Common Stock.)
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The number of shares of the issuer's common equity outstanding
as of October 7, 1998 was: 1,117,519 shares of Common Stock, 5,200
shares of Series A Convertible Preferred Stock (convertible into
1,040 shares of common stock), and 21,231 shares of Series E Conver-
tible Preferred Stock (convertible into 4,247 shares of common stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Annual Report to Shareholders for
fiscal year ended July 31, 1998, are incorporated into Parts I and
II of this Form 10-KSB. Portions of the registrant's Proxy State-
ment provided to shareholders in conjunction with its 1998 Annual
Meeting of Shareholders to be held December 14, 1998, are incor-
porated into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
YES NO X
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PART I
TO THE EXTENT IDENTIFIED BELOW, THE INFORMATION CALLED FOR IN PART I
IS INCORPORATED BY REFERENCE FROM THE REGISTRANT'S 1998 ANNUAL
REPORT TO SHAREHOLDERS.
Item 1. Description of Business; see 1998 Annual Report section
entitled "Description of Business" and the following
section entitled "CAUTIONARY FACTORS THAT MAY AFFECT
FUTURE RESULTS".
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS (Cautionary
Statements Under the Private Securities Litigation Reform Act of
1995)
The disclosure and analysis set forth herein and in the 1998
Annual Report to Shareholders of Lifschultz Industries, Inc. (the
"Company") contain certain forward-looking statements, particularly
statements relating to future actions, performance or results of
current and anticipated products, sales efforts, expenditures, and
financial results. From time to time, the Company also provides
forward-looking statements in other publicly-released materials,
both written and oral. Forward-looking statements provide current
expectations or forecasts of future events such as new products,
product approvals, revenues, and financial performance. These
statements are identified as any statement that does not relate
strictly to historical or current facts. They use words such as
"plans", "expects", "will", and other words and phrases of similar
meaning. In all cases, a broad variety of risks and uncertainties,
both known and unknown, as well as inaccurate assumptions, can affect
the realization of the expectations or forecasts in those statements.
Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially.
The Company undertakes no obligation to update any forward-
looking statements, but investors are advised to consult any further
disclosures by the Company on this subject in its subsequent filings
pursuant to the Securities Exchange Act of 1934. Furthermore, as
permitted by the Private Securities Litigation Reform Act of 1995,
the Company provides these cautionary statements identifying factors
that could cause the Company's actual results to differ materially
from expected and historical results. It is not possible to foresee
or identify all such factors. Consequently, this list should not be
considered an exhaustive statement of all potential risks, uncertain-
ties and inaccurate assumptions.
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Competitive Environment
The temperature calibration instrument industry is highly
competitive and subject to significant technological change.
Participation in the industry requires ongoing investment to keep
pace with technological developments and quality. The industry
consists of numerous companies, ranging from start-up to well-
established companies. The competitors and potential competitors
of the Company may succeed in developing or marketing technologies
and products that will be preferred in the marketplace over the
devices manufactured by the Company or that would render its
technology and products obsolete or noncompetitive.
Uncertain Market Acceptance of Products.
There can be no assurance that the new products created by the
Company will gain any significant market acceptance and market share
among its current or potential customers. Market acceptance depends
on a variety of factors, including educating customers on the bene-
fits of new products. Market acceptance and market share are also
affected by the timing of market introduction of competitive products.
Accordingly, the relative speed with which the Company can develop
products and supply the product to the market are expected to be
important factors in market acceptance and market share. The Company
may be unable to continue effective sales and marketing. The failure
by the Company to gain market acceptance of its products could have a
material adverse effect on the Company.
Product Obsolescence
Technological innovation characterizes the marketplace for
temperature calibration equipment. As a result, the Company is
subject to the risk of product obsolescence, whether from prolonged
development or the development of improved products or processes by
competitors. Any development adversely affecting the market for a
product manufactured by the Company could have a material adverse
effect on the Company.
Product Development
The success of the Company will depend to a significant extent
upon its ability to enhance and expand on its current offering of
proprietary products and to develop and introduce additional
innovative products that gain market acceptance. While the Company
maintains research and development programs, there is no assurance
that the Company will be successful in selecting, developing,
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manufacturing, and marketing new products or enhancing its existing
products on a timely or cost-effective basis. Moreover, the Company
may encounter technical problems in connection with its efforts to
develop or introduce new products or product enhancements. Some of
the products currently under consideration by the Company will require
significant additional development and related investment prior to
their commercialization. There can be no assurance that such products
will be successfully developed, be capable of being produced in
commercial quantities at reasonable costs, or be successfully
marketed. The failure of the Company to develop or introduce new
products or product enhancements that achieve market acceptance on a
timely basis could have a material adverse effect on the Company.
Design and Manufacturing Process Risks
While the Company has substantial experience in designing and
manufacturing products, the Company may still experience technical
difficulties and delays with the design and manufacturing of its
products. Such difficulties could cause significant delays in the
Company's production of products and have a material adverse effect on
the Company's revenues. Potential difficulties in the design and
manufacturing process that could be experienced by the Company include
difficulty in meeting required specifications and difficulty in
achieving necessary manufacturing efficiencies.
Expansion of Marketing; Limited Distribution
The Company currently has a limited domestic direct sales force,
complemented by a number of independent distributors. The Company
anticipates that it will need to increase its marketing and sales
capability to more fully cover its target niche markets, particularly
as proprietary products become commercially available. There can be
no assurance that the Company will be able to compete effectively in
attracting and retaining qualified sales personnel or distributors as
needed. There can be no assurance that the Company will be successful
in marketing or selling the Company's services and products.
Dependence Upon Management
The Company is substantially dependent upon its key managerial,
technical, and engineering personnel, particularly. The Company must
also attract and retain highly qualified engineering, technical, and
managerial personnel. Competition for such personnel is intense, the
available pool of qualified candidates is limited, and there can be no
assurance that the Company can attract and retain such personnel. The
loss of its key personnel could have a material adverse effect on the
Company's business, results of operations, and financial condition.
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Suppliers and Shortages of Component Parts
The Company relies on third-party suppliers for each of the
component parts used in manufacturing its customers' devices.
Although component parts are generally available from multiple
suppliers, certain component parts may require long lead times, and
the Company may have to delay the manufacture of products from time to
time due to the unavailability of certain component parts. In
addition, even if component parts are available from an alternative
supplier, the Company could experience additional delays in obtaining
component parts if the supplier has not met the Company's vendor
qualifications. Component shortages for a particular device may
adversely affect the Company's ability to satisfy customer orders for
that device.
Future Capital Requirements
The Company believes that its existing capital resources and
amounts available under the Company's existing bank line of credit,
will satisfy the Company's anticipated capital needs for the next
year. Thereafter, the Company may be required to raise additional
capital or increase its borrowing capacity, or both. There can be no
assurance that alternative sources of equity or debt will be available
in the future or, if available, will be on terms acceptance to the
Company. Any additional equity financing would result in additional
dilution to the Company's shareholders. If adequate funds are not
available, the Company's business, results of operations, and
financial condition could be materially adversely affected.
Reliance on Efficiency of Distribution and Third Parties
The Company believes its financial performance is dependent in
part on its ability to provide prompt delivery of products to its
customers. Accordingly, delays in distribution in its day-to-day
operations or material increases in its costs of procuring and
delivering products could have an adverse effect on the Company's
results of operations. Any failure of either its computer operating
system or its telephone system could adversely affect its ability to
receive and process customer orders and ship products on a timely
basis. Strikes or other service interruptions affecting Federal
Express Corporation, United Parcel Service of America, Inc., the
United States Post Office or other common carriers used by the Company
to receive necessary components or other materials or to ship its
products also could impair the Company's ability to deliver products
on a timely and cost-effective basis.
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Volatility of Revenues and Product Mix
The Company's annual and quarterly operating results are affected
by a number of factors, including the volume and timing of customer
orders. Technical difficulties and delays in the design and manu-
facturing processes may also affect such results. The foregoing
factors may cause fluctuations in revenues and variations in product
mix, which could in turn cause fluctuations in the Company's gross
margin.
Limited Market for Common Stock
Historically, the market for the Company's Common Stock has been
limited due to the relatively low trading volume and the small number
of brokerage firms acting as market makers. No assurance can be
given, however, that the market for the Common Stock will continue or
increase, or that the prices in such market will be maintained at
their present levels.
Possible Volatility of Stock Price
Announcements of technological innovations for new products by
the Company or its competitors, developments concerning the Company's
proprietary rights, or the public concern as to safety of its devices
may have a material adverse impact on the Company's business and on
the market price of its Common Stock. The market price of the
Company's Common Stock may be volatile and may fluctuate based on a
number of factors, including significant announcements by the Company
and its competitors, quarterly fluctuations in the Company's operating
results, and general economic conditions and conditions in the medical
technology industry. In addition, in recent years the stock market
has experienced extreme price and volume fluctuations, which have had
a substantial effect on the market prices for many companies and are
often unrelated to the operating performance of such companies.
Foreign Exchange, Currency, and Political Risk
The Company's international business is subject to risks
customarily encountered in foreign operations, including changes in a
specific country's or region's political or economic conditions, trade
protection measures, import or export licensing requirements,
unexpected changes in regulatory requirements, and natural disasters.
The Company's foreign sales, particularly into Far Eastern markets,
could be adversely affected by an appreciation of the U.S. dollar
relative to other currencies, which in turn could have an adverse
material effect on the Company's consolidated financial position,
results of operations, and the amount and timing of cash flows.
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Year 2000
Many computer systems experience problems handling dates beyond
the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the internal readiness of
its computer systems and the compliance of its computer products and
software sold to customers for handling the year 2000. The Company
expects to implement successfully the internal systems and changes
necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material effect on the Company's
results of operations or financial condition. There can be no
assurance, however, that there will not be a delay in, or increased
costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse
effect on future results of operations. Additionally, there can be no
assurance that the vendors, suppliers, or customers upon which the
Company relies will be not experience difficulties with their systems
or systems upon which they rely, which in turn could have an adverse
effect on the Company.
Item 2. Description of Property; see 1998 Annual Report sections
entitled "Hart Scientific, Inc. - Manufacturing and Opera-
tions", Lifschultz Fast Freight, Inc.", and "Office Space".
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to
(or has property which is the subject of) any material pending legal
proceeding except for the following:
LFF is the plaintiff/appellant in a legal action before the
Supreme Court of South Carolina styled Lifschultz Fast Freight, Inc.
v. Haynsworth, Marion, McKay & Gueard, William P. Simpson, Jr.,
William M. Grant, Jr., Julius McKay and John B. McLeod, Case No.
93-CP-40-4260. The case is an appeal from summary judgment entered
against LFF on its claims for professional malpractice, breach of
fiduciary duty, breach of contract and promissory estoppel against the
law firm of Haynsworth, Marion, McKay & Gueard, as well as certain
individual attorneys of such firm. The court has agreed to render a
decision in the case. The facts of the case relate primarily to the
withdrawal by the Haynsworth firm of its representation of LFF in an
antitrust action in which LFF was the plaintiff. LFF maintains that
the Haynsworth firm had agreed to represent LFF on a contingency fee
basis, but later withdrew as LFF's legal counsel over the objection of
LFF and to LFF's detriment. Fast Freight's original complaint was
filed on November 5, 1993 and asked for $3,000,000 in damages. The
ultimate outcome of the case on appeal is uncertain and cannot
reasonably be predicted by the Company.
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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
TO THE EXTENT IDENTIFIED BELOW, THE INFORMATION CALLED FOR IN PART II
IS INCORPORATED BY REFERENCE FROM THE REGISTRANT'S 1998 ANNUAL REPORT
TO SHAREHOLDERS.
Item 5. Market for Common Equity and Related Stockholder Matters;
see 1998 Annual Report section entitled "Market for
Company's Common Stock and Related Stockholder Matters".
Item 6. Management's Discussion and Analysis or Plan of Operation;
see 1998 Annual Report section entitled "Management's
Discussion and Analysis of Financial Condition and Results
of Operations".
Item 7. Financial Statements; see attachment to 1998 Annual Report.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III
TO THE EXTENT IDENTIFIED BELOW, CERTAIN INFORMATION CALLED FOR IN
PART III IS INCORPORATED BY REFERENCE FROM THE REGISTRANT'S PROXY
STATEMENT, TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IN CONNECTION WITH THE REGISTRANT'S 1998 ANNUAL MEETING OF SHARE-
HOLDERS TO BE HELD DECEMBER 14, 1998.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act; see Proxy Statement sections entitled "Directors
and Executive Officers of the Company", "Significant
Employees", and "Section 16(a) Beneficial Ownership
Reporting Compliance".
Item 10. Executive Compensation; see Proxy Statement sections
entitled "Executive Compensation", "Director Compensation",
and "Employment Agreements".
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Item 11. Security Ownership of Certain Beneficial Owners and
Management; see Proxy Statement sections entitled "Security
Ownership of Certain Beneficial Owners and Management".
Item 12. Certain Relationships and Related Transactions; see Proxy
Statement section entitled "Certain Relationships and
Related Transactions".
Item 13. Exhibits and Reports on Form 8-K.
(a) The following Exhibits are attached hereto or incorporated
herein by reference as indicated in the table below:
Exhibit Location if other
No. Title of Document than attached hereto
- - ------- ------------------ --------------------
3.01* Certificate of Incorporation
(as amended to date)
3.02* Bylaws 1991 Form 10-K,
page 74
4.01* Certificate of Designations, Series A 1991 Form 10-K,
Convertible Preferred Stock (as amended) page 94
4.02* Certificate of Designations, Series E 1994 Form 10-KSB,
Convertible Preferred Stock Exhibit 4.05
10.01# Employment Agreement for Dennis Hunter
10.02*# Employment Agreement for James Triplett 1997 Form 10-KSB,
Exhibit 10.2
10.03*# Employment Agreement for Randy Owen 1997 Form 10-KSB,
Exhibit 10.3
10.04*# Employment Agreement for Michael Hirst 1997 Form 10-KSB,
Exhibit 10.4
10.05* Stock Purchase Agreement (with Lease 1991 Form 10-K,
Amendment attached as Exhibit A) page 143
(Lifschultz/Penn Yards)
10.06* Shareholder Voting Agreement 1991 Form 10-K,
(Lifschultz/Penn Yards) page 190
10.07*# Employee Stock Option Agreement; 1995 Form 10-KSB,
Standard Form Exhibit 10.07
10.08*# 1989 Stock Option Agreement for 1995 Form 10-KSB,
Dennis Hunter Exhibit 10.08
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10.09* Lease of Premises for Calorimetry 1995 Form 10-KSB,
Sciences Corporation Exhibit 10.09
10.10* Lease of Premises for Hart Scientific, 1995 Form 10-KSB,
Inc. Exhibit 10.11
10.11* Amendment to Lease of Premises for Hart 1996 Form 10-KSB,
Scientific, Inc. Exhibit 10.11
10.12*# Hart Scientific, Inc. Executive Bonus 1995 Form 10-KSB,
Plan Exhibit 10.12
10.13*# Hart Scientific, Inc. 401(k) Plan 1995 Form 10-KSB
Exhibit 10.13
13.01+ 1998 Annual Report to Shareholders
21.01 List of Subsidiaries of the Registrant
23.01 Consent of Independent Public Accountants
27.01 Financial Data Schedule
- - ------------------
* Denotes exhibits specifically incorporated in this Form 10-KSB by
reference to other filings of the Company pursuant to the provisions
of Securities and Exchange Commission Rule 12b-32 and Regulation S-B,
Item 10(f)(2). These documents are located under File No. 33-17286
at, among other locations, the Securities and Exchange Commission,
Public Reference Branch, 450 5th St., N.W., Washington, D.C. 20549.
# Identifies management or compensatory plans, contracts, or
arrangements.
+ Certain portions of the Company's 1998 Annual Report to
Shareholders, set forth in Exhibit 13.01, are incorporated by
reference into Items 1, 2, 5, 6, and 7 of this Form 10-KSB and,
except as so incorporated, the Annual Report to Shareholders is not
deemed to be filed as part of this Form 10-KSB.
(b) Reports on Form 8-K during last quarter of fiscal year
1998.
None.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIFSCHULTZ INDUSTRIES, INC.
Date October 23, 1998 DAVID K. LIFSCHULTZ
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David K. Lifschultz
Chief Executive Officer
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POWER OF ATTORNEY
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Know all men by these presents, that each person whose signature
appears below constitutes and appoints each of David K. Lifschultz and
Dennis R. Hunter, jointly and severally, his true and lawful attorney
in fact and agent, with full power of substitution for him and in his
name, place and stead, in any and all capacities, to sign any or all
amendments to this report on Form 10-KSB and to file the same, with
all exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission, hereby ratifying and confirm-
ing all that each said attorney in fact or his substitute(s) may do or
cause to be done by virtue hereof.
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.
SIGNATURE TITLE DATE
--------- ----- ----
DAVID K. LIFSCHULTZ Chairman and Chief October 23, 1998
- - -------------------------- Executive Officer
David K. Lifschultz
DENNIS R. HUNTER Director, President October 27, 1998
- - -------------------------- and Chief Financial
Dennis R. Hunter Officer
SIDNEY B. LIFSCHULTZ Director October 27, 1998
- - --------------------------
Sidney B. Lifschultz
Director October __, 1998
- - --------------------------
James E. Solomon
JOSEPH C. FATONY Director October 23, 1998
- - --------------------------
Joseph C. Fatony
TIMOTHY O. PONT Controller October 27, 1998
- - --------------------------
Timothy O. Pont
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EXHIBIT 3.01
CERTIFICATE OF INCORPORATION
OF
LIFSCHULTZ INDUSTRIES, INC.
ARTICLE I
NAME
The name of this corporation is LIFSCHULTZ INDUSTRIES, INC.
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the Corporation in the State of Delaware is
located at 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be now or hereafter organized under the General
Corporation Law of Delaware.
ARTICLE IV
CAPITALIZATION
The total number of shares of all classes of capital stock which this
Corporation shall have authority to issue is ONE MILLION SEVEN HUNDRED FIFTY
THOUSAND (1,750,000) shares of par value stock; ONE HUNDRED THOUSAND (100,000)
shares of $0.01 (One Cent) par value per share to be preferred shares and ONE
MILLION SIX HUNDRED FIFTY THOUSAND (1,650,000) shares of $0.001 (One Tenth
Cent) par value per share to be common shares. All or any part of the shares
of the preferred or common stock may be issued by the Corporation from time to
time and for such consideration as may be determined and fixed by the Board of
Directors, as provided by law, with due regard to the interest of the existing
shareholders; and when such consideration has been received by the
Corporation, such shares shall be deemed fully paid and non-assessable.
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The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article, to provide for the issuance of the
shares of preferred stock in series, and by filing a certificate pursuant to
the applicable law of the State of Delaware, to establish from time to time
the number of shares to be included in each such series, and to fix the
designations, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each such series shall
include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate, if any, on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, and
the relative rights of priority, if any, of payment of shares of that series;
(h) Any other relative rights, preferences, and limitations of that
series.
The Certificates of Designation filed by the Corporation with the
Delaware Secretary of State on January 17, 1991, for Series A Convertible
Preferred Stock and on March 31, 1994, for Series E Convertible Preferred
Stock, as amended by a Certificate of Decrease and Elimination filed February
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26, 1998, shall continue to be valid designations by the Corporation's Board
of Directors of its preferred stock pursuant to the provisions of this Article
IV.
Effective as of 5:00 p.m., Delaware time, January 27, 1998 (the
"Effective Date"), each one share of the Company's Common Stock issued and
outstanding on the Effective Date shall be automatically changed without
further action into one-fiftieth of a fully paid and nonassessable share of
the Company's Common Stock, provided that no fractional shares shall be issued
pursuant to such change. The Company shall issue to each shareholder who,
based on the aggregate number of shares held by such shareholder, would
otherwise be entitled to a fractional share as a result of such change, one
additional whole share.
ARTICLE V
[Omitted in accordance with the provisions of
subsection 245(c) of the Delaware General Corporation Law.]
ARTICLE VI
[Omitted in accordance with the provisions of
subsection 245(c) of the Delaware General Corporation Law.]
ARTICLE VII
NUMBER OF DIRECTORS
The number of directors constituting the Board of Directors shall be that
number as shall be fixed by, or in the manner provided in, the bylaws of the
Corporation.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter or repeal the
bylaws of the Corporation, subject to such restrictions upon such powers as
may be imposed by the stockholders in any bylaws adopted by them from time to
time.
ARTICLE VIII
LIMITATION ON DIRECTORS' LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
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Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit. If the Delaware General Corporation Law is
amended after approval by the stockholders of this article to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated to the fullest extent permitted by the Delaware General Corporation
Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
ARTICLE IX
INDEMNIFICATION
(a) Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director, officer or employee of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an
indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, as provided in paragraph (b) hereof
with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article shall be
a contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however,
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that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking,
by or on behalf of such indemnitee, to repay all amounts so advanced if it
shall ultimately be determined by final judicial decision from which there is
no further right to appeal that such indemnitee is not entitled to be
indemnified for such expenses under this Article or otherwise (hereinafter an
"undertaking").
(b) Right of Indemnitee to Bring Suit. If a claim under paragraph
(a) of this Article is not paid in full by the Corporation within sixty days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the indemnitee
to enforce a right to indemnification hereunder (but not in a suit brought by
the indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) any suit by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in the
Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee
to enforce a right hereunder, or by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified or to such advancement
of expenses under this Article or otherwise shall be on the Corporation.
(c) Non-Exclusivity of Rights. The rights to indemnification and to
the advancement of expense conferred in this Article shall not be exclusive of
any other rights which any person may have or hereafter acquire under any
statute, this Certificate of Incorporation, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
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(d) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
(e) Indemnification of Agents of the Corporation. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
grant rights to indemnification and to the advancement of expenses, to any
agent of the Corporation to the fullest extent of the provisions of this
Article with respect to the indemnification and advancement of expenses of
directors, officers and employees of the Corporation.
ARTICLE X
CONTRACTS
No contract or other transaction between this Corporation and any other
corporation shall be affected by the fact that a Director or officer of this
Corporation is interested in or is a Director or officer of such other
corporation; and any Director, individually or jointly, may be a party to or
may be interested in any corporation or transaction of this Corporation or in
which this corporation is interested; and no contract or other transaction of
this Corporation with any person, firm or corporation shall be affected by the
fact that any Director of this Corporation is a party to or is interested in
such contract, act or transaction or any way connected with such person, firm
or corporation, and every person who may become a Director of this Corporation
is hereby relieved from liability that might otherwise exist from contracting
with the Corporation for the benefit of himself or any firm, association or
corporation in which he may be in any way interested, provided said Director
acts in good faith.
ARTICLE XI
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by the laws of Delaware, and all rights and powers
conferred herein upon stockholders and directors are granted subject to this
reservation.
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EXHIBIT 10.01
EMPLOYMENT AGREEMENT
--------------------
This Agreement made effective as of the 1st day of August, 1998
between Calorimetry Sciences Corporation of Provo, Utah
(hereinafter referred to as "CSC") and Dennis R. Hunter,
(hereinafter referred to as the "Dennis").
W I T N E S E T H:
- - - - - - - - -
In consideration of the mutual covenants and conditions hereinafter
set forth, and other good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, CSC and Dennis agree
as follows:
1. EMPLOYMENT.
- - -------------
CSC hereby employs Dennis, and he hereby accepts such employment,
to perform the Services as hereinafter defined.
2. TERM OF EMPLOYMENT.
- - ---------------------
The Term of this Agreement shall begin on the date first above
written, and shall end five years thereafter. If CSC or Dennis
chooses not to renew this agreement or not to negotiate a new
agreement, CSC will give Dennis a temporary extension of this
contract for up to one year to give him time to find alternate
employment. Such an extension shall be under the same terms and
conditions as this Agreement and will terminate as soon as Dennis
finds another similar position or in one year whichever is sooner.
CSC, at its sole discretion, may at the end of the fifth year pay
Dennis one year base compensation and terminate this agreement
rather than give the one year extension.
3. SERVICES.
- - -----------
(1) Duties and Title. Dennis shall devote substantial time and
attention to the affairs of CSC as necessary to perform such duties
as may be assigned to him as Chairman, President and CEO of CSC,
from time to time, by the Board of Directors. If Dennis' title or
duties should change during the term of this Agreement, such change
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shall not impact any terms of this Agreement including the base
compensation or benefits.
(2) Other Activities. From time to time Dennis may take or
teach college classes but no more than four credit hours per
semester, participate in professional organizations and/or be
involved in community service activities (such activities to be
limited to 3 working hours per week without special board approval.
CSC recognizes that such activities benefit both CSC and Dennis.
CSC also recognizes that these activities may put certain demands on
the time of Dennis which is not within his control. CSC and Dennis
agree to work in a reasonable manner to resolve any conflicts with
Dennis' duties at CSC caused by such activities.
4. BASE COMPENSATION.
- - ---------------------
For all Services rendered by Dennis under this Agreement, base
compensation shall be paid to him as follows:
(1) Salary. As salary Dennis shall be paid a minimum base
salary of $231,000 per year the first year of this agreement, and
such base salary will rise a minimum of 5% per year for each year of
this Agreement. However, based upon the performance of the company
and Dennis, the Board may set his salary higher than provided for
under this section if the Board so chooses. The minimum base salary
can be increased but not lowered by the Board of Directors at any-
time during the term of this agreement, unless an across the board
reduction in all employees' salaries shall be deemed necessary for
the financial well being and health of CSC. Should such a reduction
occur, Dennis' minimum base salary shall be restored at such time as
the other employees return to their previous base salaries. The base
salary shall be payable in equal installments not less than monthly.
CSC shall deduct and withhold all necessary Social Security and
withholding taxes and any other similar sums required by law from
Dennis' salary.
(2) Business Expenses. CSC will reimburse certain business
expenses of Dennis as the Board of Directors, or other designated
party, from time to time shall specify. Normal business expenses do
not require Board approval for reimbursement.
(3) Benefits. Dennis shall be included in CSCs' major medical
and hospitalization plan and other benefit plans including profit
sharing, incentive compensation, executive bonus plan, pension plan,
group term life insurance and dental plans. In addition, if this
Agreement is terminated Without Cause, or is terminated by Dennis
for Good Reason, CSC agrees to provide Dennis with major medical and
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hospitalization insurance until Dennis is eligible to receive medi-
care. Such insurance shall not provide benefits less than those
provided for other employees through CSCs' group health insurance
plan. The coverage that CSC provides Dennis shall be valid regard-
less of where Dennis lives.
(4) Life Insurance Premiums. CSC shall reimburse Dennis for any
personal life insurance premiums in the amount of $3,000 per year.
Dennis must pay the premium and submit a receipt for reimbursement
by the company.
(5) Vacation and Sick Days. Dennis shall receive 25 days of
vacation per year. He can carry over up to 6 days of vacation each
year for a total of 31 days in any given year; however, he shall not
be entitled to be reimbursed for unused vacation.
(6) Disability. In the event of accident or illness which
prohibits Dennis from performing his normal services for CSC, CSC
agrees to continue Dennis' base compensation and any other compensa-
tion for a period of 180 days, even if he is unable to return to
work for CSC. Also CSC, at its expense, agrees to provide Dennis
with long term disability insurance to cover any long term disabil-
ities beyond the 180 day period covered by CSC. Such insurance
shall provide, at the time of disability, salary replacement of up
to 60% of his salary including Social Security payments (or the
maximum level of such benefits that Hart or CSC disability insurance
covers for any other employee), per year through age 65 and not
require him to accept jobs outside of his own occupation through age
65. CSC does not have to provide Dennis with disability insurance if
either he or the company, as a whole, becomes uninsurable. If Dennis
is disabled during the term of this Agreement and is required to stop
performing his duties for a period of time in excess of 180 days,
this Agreement shall continue in force; however, if Dennis is unable
to perform his duties and is receiving insurance disability payments
after 180 days, CSC may suspend payments of his base salary and bonus
until he is fit to return to work. If Dennis is able to return to CSC
within two years of the suspension of his base salary and bonus, CSC
shall allow him to return to work and resume payment of his compensa-
tion as defined in this Agreement. If Dennis is unable to resume his
duties at CSC within two years of the suspension due to disability
then CSC may, at its' sole discretion, terminate any remaining term
of this Agreement except for medical insurance and hospitalization
benefits, as described in Section 4 paragraph 3, and Life Insurance
Premiums, as described in Section 4 paragraph 4, which shall continue
to be paid by CSC through any remaining term of this agreement.
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(7) Emergency Family Leave. During the term of this Agreement,
if any member of Dennis' family needs major medical care due to
accident, injury or illness, Dennis will be allowed to take up to 4
weeks of emergency family leave, with pay, in any given year. The
Board can require Dennis to provide reasonable details of the family
medical problem he must attend to. Anytime off beyond the 4 weeks
specified herein must be approved by the Board on a case by case
basis.
5. BEST EFFORTS.
- - ---------------
Dennis agrees that he will at all times, faithfully, industriously,
and to the best of his abilities, experience, and talents perform
all duties that may be required of and from him as described in
Section 3, Services. If he fails to perform his duties in a
competent manner, CSC shall warn Dennis in writing identifying the
specific deficiencies to be corrected, except those deficiencies
may not be the result of illness or disability. If Dennis does not
correct such deficiencies to the extent an arbiter would require of
him in a reasonable time period after being warned, then Dennis may
be discharged With Cause after three such warnings in one year and
failure on Dennis' part to correct such deficiencies to the satis-
faction of an arbiter.
6. TERMINATION BY CSC.
- - ---------------------
(1) With Cause Termination. A termination of this agreement by
CSC under this paragraph shall be considered Termination With Cause.
CSC may terminate this Agreement With Cause for the following reasons:
(i) If there is substantial and irrefutable evidence
Dennis embezzled significant assets of CSC,
(ii) If Dennis is convicted of any felony involving a
crime of moral turpitude the result of which causes substantial
embarrassment or hindrance to CSC,
(iii) If Dennis willfully violates the trade secrets pro-
visions contained in Section (9) of this Agreement
(iv) If Dennis is in breach of Section 5, Best Efforts.
In the event of termination upon any item described above, prior
to the completion of the term of employment specified herein, Dennis
shall be entitled to all compensation and other benefits earned by
him as provided for in this Agreement, and said accrued compensation
shall be paid by CSC within thirty (30) days of the termination date.
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(2) Termination for Disability. If Dennis should be disabled
for a period of more than 180 days in any year, then CSC may suspend
Dennis' salary and bonuses with 30 days written notice if CSC has met
the criteria as set out in Section 4, Base Compensation Paragraph 6.
If CSC is not in compliance with Section 4, Base Compensation, Para-
graph 6, and has not insured Dennis for disability, CSC shall be
responsible for Dennis' disability payments during his time of dis-
ability at the same rate as if insurance were in force. If Dennis'
salary and bonuses are suspended because of disability, Dennis shall
be entitled to all compensation due him as of the date of suspension
as provided for in this Agreement, and any such remaining compensation
shall be paid by CSC within thirty (30) days of the suspension date.
When Dennis recovers from his disability he may be allowed to return
to work as described in Section 4, Base Compensation Paragraph 6.
(3) Termination by Death. If Dennis should die during the term
of this Agreement, CSC may terminate this Agreement immediately upon
his death. Dennis' heirs or estate shall be entitled to all compen-
sation and other benefits earned by him as provided for in this
Agreement, and any remaining compensation shall be paid by CSC to
Dennis' estate within thirty (30) days of the termination date.
(4) Termination Without Cause. Any termination of this agreement
except as provided for else where in this section shall be considered
Termination Without Cause. If CSC terminates this agreement Without
Cause anytime before the end of the employment term defined in this
Agreement, Dennis shall be entitled to immediate severance pay of 50%
of the base compensation remaining to be paid over the life of the
agreement contract or one year's base compensation, whichever is
greater. In addition to severance Dennis shall receive all other
compensation due him under this Agreement.
7. TERMINATION BY DENNIS.
- - ------------------------
(1) Termination for Good Reason. Dennis may terminate this
agreement For Good Reason, which shall mean for purposes of this
Agreement:
(i) A change in control of CSC or Hart Scientific. A
Change in Control of CSC or Hart Scientific shall mean a change
in the basic ownership of CSC and/or Hart shares where 45% or
more of the voting shares are acquired or accumulated in one or
several transactions by another entity. A Change in Control
would be considered to have taken place if the Board fails to
re-elect Dennis as President and CEO of Calorimetry Sciences
Corporation except as per Section 5 of this agreement, or fails
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to re-elect Dennis a director of CSC or Hart or removes him from
such offices or directorships, or if at any time during the term
of the employment he fails to be vested by CSC with the powers
and authority of the President of Calorimetry Sciences Corpora-
tion except as per Section 5 or if CSC in any substantive way
diminishes Dennis' responsibilities, duties, power or authority
as set forth under this Agreement. Notwithstanding anything to
the contrary, no Change in Control shall be deemed to have
occurred for purposes of this Agreement by virtue of any trans-
action which results in Dennis, or a group of persons which
includes Dennis, acquiring, directly or indirectly, 45% or more
of the combined voting power of CSCs' securities.
(ii) a failure of CSC to comply with any material provi-
sion of this Agreement which has not been cured within 30 days
after notice of noncompliance has been given by Dennis to CSC.
(iii) any attempted termination by CSC which is not in
compliance with the terms and conditions of this Agreement.
If Dennis terminates this Agreement for Good Reason, Dennis is
due the same compensation as described in Section 6, Termination by
CSC, paragraph 4, which is termination Without Cause.
(2) Voluntary Termination. Dennis may terminate this Agreement
at any time by delivering written notice of such termination to CSC
ninety days prior to such termination. Loss of the compensation
described herein is the only penalty of voluntary early termination
by Dennis.
8. STOCK BUY BACK OPTION.
- - ------------------------
For a three year period after termination or expiration of this
Agreement, Dennis shall have an option to have CSC buy from Dennis
certain common stock share options or any common stock shares
resulting from the exercise of those specific options presently
exercisable and convertible into shares, in Lifschultz Industries,
Inc., that Dennis owns as of the date of this Agreement. The three
year period begins at the time of termination or expiration.
Thereafter, at the end of each year of the three year period, Dennis
may request that CSC buy from him for the price described herein up
to 5,260 options or shares. If CSC is unable to afford to purchase
all of the options or shares in a one time cash transaction, CSC, at
CSCs' discretion, can spread the purchase equally over the next
twelve month period. CSC is under no obligation to purchase more
than 5,260 shares of Lifschultz Industries, Inc. in any given one
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year period and no more than a total of 15,780 shares over the three
years. The 15,780 options or shares from option shall be made up of
12,880 shares (adjusted for reverse split) available to Dennis
under his Option Agreement dated June 6, 1988 and 2,900 of the
shares (adjusted for reverse split) available to Dennis under the
option agreement dated August 2, 1989. The purchase price shall be
$7.50 (adjusted for reverse split) per share for any common shares
which have been obtained by exercise of these options by Dennis or
$5.94 per common share option if purchased by CSC before any
exercise by Dennis. Under no conditions may Dennis sell back to CSC
shares he has acquired on the market or from another individual,
institution or any other source. If Dennis requests that CSC buy
less than the annual total of 5,260 shares in any year of the three
year period, CSC has no obligation to purchase the untendered shares
or options at anytime in the future. This stock buy back option
survives this Agreement in any case except voluntary termination by
Dennis, as defined in Section 7, Termination by Dennis, Paragraph 2.
If Dennis is terminated With Cause, this stock buy back shall become
void. If this Agreement is terminated for any other reason under
Section 6, Termination by CSC, or for Good Reason as defined in
Section 7, Termination by Dennis, paragraph 1, the stock buy back is
still exercisable under the same terms and conditions as stated
herein. In the event of an acquisition by a successor company of CSC
(whether direct or indirect, by purchase, merger, consolidation or
otherwise), the successor company assumes the obligation of the
stock buy back from CSC and CSC is released from any and all
obligations under this section.
9. TRADE SECRETS.
- - -----------------
(1) Secret Information. Dennis recognizes that during his
employment he will receive, develop, or otherwise acquire information
which is of a secret or confidential nature. Except as authorized in
writing by CSC, any information of CSC he obtained during the course
of his employment relating to inventions, procedures, machinery,
apparatus, ideas, technical data, or other information which is of a
secret or confidential nature, whether or not acquired or developed
by Dennis, he shall use his best efforts to keep confidential during
the term of his employment.
(2) Communication and Patents. Dennis will communicate to CSC
promptly and fully all discoveries, improvements, and inventions
(hereinafter called "Inventions") made or conceived by him, either
solely or jointly with others, during his employment and for six
months thereafter, which are similar to actual or anticipated busi-
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ness, work, or investigations of CSC or which result from or are sug-
gested by any work Dennis may do for CSC; and such Inventions, except
as provided below, shall be and remain the sole and exclusive property
of CSC or its nominees. Any product, substance or process for which
a United States patent has been granted and which product, substance
or process is developed directly by Dennis during the term of this
Agreement, shall be owned one-half by CSC and one-half by him. CSC
shall have an exclusive worldwide license to make, use and sell prod-
ucts, substances and processes covered by patents obtained. CSC shall
have sole authority to determine when an application for a patent
shall be pursued for any product, substance or process. If CSC elects
to apply for a patent, all expenses incurred in pursuing any patent
shall be borne entirely by CSC. If CSC elects not to apply for a
patent, the person who should become vested with an interest in the
patent, may pursue a patent application at his sole expense.
(3) Records. Dennis will keep and maintain adequate and current
written records of all such Inventions, in the form of notes,
sketches, drawings, and reports relating thereto, which records
shall be the property of and available to CSC at all times. All
such records shall remain on the premises of CSC at all times and
shall be deemed to be secret and confidential.
(4) Title. Dennis will, during and after his employment, at
CSC's expense, assist CSC and its nominees in every proper way to
obtain and vest in it or them title to patents on such inventions in
all countries by executing all necessary documents, including appli-
cations for patents and assignments thereof.
10. COVENANT NOT TO COMPETE.
- - ---------------------------
After termination of this Agreement Dennis will not divert or attempt
to divert away business from CSC by influencing or attempting to
influence any customers of CSC with whom he may have been dealing;
provided, however, that the restrictions contained in this sentence
shall apply only for a maximum period of two years and to such
capacities, functions, operations and areas as shall be reasonably
necessary for the protection of CSC and shall be construed to be thus
divisible and enforceable provided that CSC has paid Dennis all
compensation and other benefits due him under the terms and condi-
tions of this Agreement. If CSC has not paid the compensation and
other benefits defined herein to him for any reason, this covenant
not to compete shall be null and void.
11. SUCCESSORS.
- - --------------
CSC will require any successor (whether direct or indirect, by
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purchase, merger, consolidation or otherwise) to all or substantially
all of the business or assets of CSC or Hart Scientific (including
acquisition of a controlling interest in the stock of CSC or Hart
Scientific), by agreement in form and substance reasonably satisfac-
tory to Dennis, to expressly assume and agree to perform this Agree-
ment in the same manner and to the same extent that CSC would be
required to perform it if no such succession had taken place. Failure
of CSC to obtain this agreement prior to the effectiveness of any
succession shall be a breach of this Agreement and shall entitle
Dennis to receive immediate payment of severance as described in
Section 6 paragraph 4, Termination Without Cause up to a maximum
of $500,000.
12. INDEMNIFICATION.
- - -------------------
CSC shall indemnify Dennis to the full extent of any expenses,
penalties, damages or other pecuniary loss which he may suffer as a
result of his responsibilities, obligations or duties in connection
with carrying out the employment functions defined in this Agreement
and in managing the business of CSC, and CSC only, and specifically
as a Director and/or Officer of CSC. Such indemnification shall be
paid by CSC to Dennis to the extent that fiduciary liability or
directors and officers insurance is not available to cover the
payment of such items. Expenses incurred by Dennis in defending a
claim against him in a Proceeding shall be paid by CSC as incurred
and in advance of the final disposition of such Proceeding. The
indemnification under this Agreement shall continue as to him even
though he may have ceased to be a Director and/or Officer and shall
inure to the benefit of the heirs and personal representatives of
Dennis. The indemnification under this Agreement shall cover Dennis'
service as a Director and/or Officer and all of his acts in such
capacity, whether prior to, or on or after the date of the
Agreement. This indemnification does not apply to illegal acts.
13. GOVERNING LAW.
- - -----------------
This Agreement shall be subject to and governed by the laws of the
State of Utah.
14. BINDING EFFECT.
- - ------------------
This Agreement shall be binding upon and inure to the benefit of CSC
and Dennis and their respective heirs, legal representatives,
personal representatives, successors, and assigns. If he should die
while any amounts would still be payable if he had continued to
live, all such amounts, unless otherwise provided, shall be paid in
accordance with the terms of this Agreement to his designee or, if
there is no such designee, to his estate.
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15. ENTIRE AGREEMENT.
- - --------------------
This writing contains the entire agreement concerning the employment
arrangements between the parties and shall, as of the date hereof,
supersede all other arrangements between the parties. No waiver or
modification of this Agreement nor of any of the conditions contained
herein shall be valid unless in writing and duly signed by the party
to be charged therewith.
16. ILLEGAL PROVISIONS.
- - ----------------------
If any provision of this Agreement is or becomes or is deemed invalid
illegal or unenforceable in any jurisdiction, each provision shall be
deemed amended to conform to applicable laws so as to be valid and
enforceable or if it cannot be so amended without materially altering
the intention of the parties, it shall be stricken and the remainder
of this Agreement shall remain in full force and effect.
17. SECTION HEADINGS.
- - --------------------
Section headings contained in this Agreement are included for con-
venience only and form no part of the agreement between the parties.
18. WRITTEN CONSENT.
- - -------------------
Neither the Agreement nor any right or obligation arising hereunder
may be assigned by Dennis without the prior written consent of CSC.
19. WARRANTIES.
- - --------------
All representations, warranties, indemnifications, obligations of
confidentiality, rights of confidentiality, proprietary rights and
indemnifications shall survive the termination of this Agreement.
20. ARBITRATION.
- - ---------------
Should any dispute arise between the parties concerning the
performance of this Agreement, the parties agree to mediation and,
if not resolved through such mediation within 30 days, final and
binding arbitration in Salt Lake City, Utah in accordance with the
rules of the American Arbitration Association subject Article XII in
the case of alleged breach of Articles X or XI. The decision
rendered in any arbitration proceedings shall be in writing and
shall be set forth the basis therefor. The parties shall abide by
the award rendered in the arbitration proceedings, and such award
may be entered as a final, non appealable judgment, and be enforced
and executed upon, in any court having jurisdiction over the party
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against whom enforcement of such award is sought. Each of the
parties agrees (in connection with any action brought to enforce the
arbitration provisions of this section) not to assert in any such
action, any claim that it is not subject to the personal
jurisdiction of such court, that the action is brought in an
inconvenient forum, that the venue of the action is improper, or
that such mediation or arbitration may not be enforced by such
courts. Each party agrees that service of process may be made upon
it by any method authorized by the laws of the State of Utah.
21. COSTS AND ATTORNEYS' FEES.
- - -----------------------------
If Dennis shall incur any costs resulting from efforts to enforce
this Agreement, whether by institution of suit or otherwise, CSC
shall be liable to Dennis if he is the prevailing party in such
action, including reasonable attorneys' fees.
22. WAIVER.
- - ----------
Any failure by either party to insist upon strict performance of
this Agreement or any terms hereof shall not be deemed to be a
waiver of any of the terms and provisions hereof.
23. DUTY TO MITIGATE.
- - --------------------
Dennis shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or
otherwise and CSC will not be entitled to set off against amounts
payable to him pursuant to this Agreement any amounts earned by him
from other employment during the remaining term of this Agreement.
24. BOARD RESOLUTION.
- - --------------------
This Agreement has been authorized on behalf of CSC at a special
meeting of its' Board of Directors by a resolution adopted by a
majority of the directors of CSC other than Dennis.
25. BREACHES AND REMEDIES.
- - -------------------------
In the event Dennis breaches any portion of this Agreement, all
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remedies and liabilities have been defined herein. No other remedies
or liabilities exist outside of those defined in this Agreement.
Calorimetry Sciences Corporation.
By:EDWIN A. LEWIS
--------------
Edwin A. Lewis
Executive Vice President and Secretary
By:DAVID LIFSCHULTZ Approved by Board of Directors on 8/26/98
----------------
David Lifschultz, Director CSC
DENNIS R. HUNTER
- - ----------------
Dennis R. Hunter
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EXHIBIT 13.01
LIFSCHULTZ INDUSTRIES, INC.
DESCRIPTION OF BUSINESS
OVERVIEW
- - --------
Lifschultz Industries, Inc. (the "Company") is a public company
engaged, through its wholly owned subsidiary, Hart Scientific, Inc.
("Hart"), and Hart's wholly owned subsidiary, Calorimetry Sciences
Corporation ("CSC"), in the development, manufacturing, and marketing
of scientific and industrial instrumentation and instrument
calibration equipment. The Company is also involved in managing the
activities of a nonoperating, wholly owned subsidiary, Lifschultz Fast
Freight, Inc. ("LFF"), which has as its principal remaining asset a
lease on certain real property in New York City. Hart was acquired by
the Company in 1988, while LFF was acquired by the Company in 1991.
The Company's management anticipates that the Company's future sales
growth, to the extent is occurs, will come from growth in sales of
present Hart and CSC product lines and new products which they will
introduce in the future.
HISTORY
- - -------
The Company was organized under another name in 1987 as a
Delaware corporation for the primary purpose of entering into a
business combination with a then-unknown entity. In 1988, the Company
closed a public offering.
In 1988, the Company acquired Hart, a Utah corporation formed in
1984. Hart became a wholly owned subsidiary of the Company, and the
Company changed its own name to Hart Technologies, Inc. At that time,
the management of Hart assumed control of the Company.
In January 1991, the Company acquired Lifschultz Fast Freight,
Inc., a Delaware corporation, which was originally founded as a
Chicago freight-hauling business in 1899. The Lifschultz family
members who owned LFF obtained approximately 70 percent of the voting
stock of the Company as part of the reorganization. In the reorgani-
zation, LFF became a wholly owned subsidiary of the Company. At that
time, Lifschultz family members David K. Lifschultz and Sidney B.
Lifschultz assumed seats on the Company's Board of Directors and the
Board of Directors appointed David K. Lifschultz as Chairman and Chief
Executive Officer of the Company. They retain those positions today.
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The Company's name was changed at that time to its present name.
During the Company's 1994 fiscal year, the management of Hart
elected to separate Hart's calorimetry division from its instrumenta-
tion business by incorporating CSC. CSC, a Utah corporation, is now
a wholly owned subsidiary of Hart. Dennis R. Hunter, formerly the
Chairman of Hart, now serves as President and Chief Executive Officer
of CSC. Except as otherwise noted, the discussion of Hart in the
following paragraphs includes the business of CSC.
DEVELOPMENTS IN FISCAL 1998
- - ---------------------------
Total revenues for the Company rose from $12,214,000 in fiscal
1997 to $15,651,000 in fiscal 1998, an increase of 28%. The Company's
consolidated net earnings of $1,292,000 in fiscal 1997 decreased to
$1,033,000 in fiscal 1998. The decrease is due largely to the fact
that net earnings in 1997 contained a recognition of a deferred tax
asset to be utilized in future periods and an extraordinary gain due
to extinguishment of debt at the Company's Fast Freight subsidiary
(totalling $1,094,000), while net earnings in fiscal 1998 contained no
such items. Thus, earnings before income tax and extraordinary items
increased from $235,000 in fiscal year 1997 to $1,137,000 in fiscal
year 1998, a 384% increase.
The Company's Hart subsidiary has continued to expand sales of
its existing product lines and grew 29% during fiscal 1998. Hart's
pretax net earnings increased by 173%, from $546,000 in fiscal 1997 to
$1,490,000 for fiscal 1998.
The Company's LFF subsidiary continued to improve its overall
financial position by substantially reducing its external debt burden
from $87,000 at the end of fiscal year 1997 to $7,000 at the end of
fiscal year 1998.
RECENT EVENTS
- - -------------
The Nasdaq Stock Market announced in 1997 that it was
implementing additional qualitative and quantitative requirements
applicable to companies listing on the Nasdaq SmallCap Market. The
Company, which has listed its Common Stock on the Nasdaq SmallCap
Market since the early 1990s, has fully complied with the new
requirements in order to maintain that listing. While the Company has
traditionally followed many of the procedures specified in the new
requirements (annual meetings, proxy solicitations, and annual
reports, for example), the Company also undertook three particular
actions in response to the Nasdaq requirements.
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First, the Company needed to exceed a minimum bid price of one
dollar for its Common Stock. Historically, the Company's Common Stock
had been traded below one dollar, ranging from $.03 to $.25 over the
last few years. In January 1998, the Company implemented a one-for
fifty stock combination (reverse stock split). The effect of the
stock combination was to raise the typical trading price of its Common
Stock significantly above one dollar. See "Market For the Company's
Common Stock and Related Stockholder Matters".
Second, the Company recruited and elected two independent (non
employee) directors: Joseph C. Fatony and James E. Solomon. The
Company anticipates that these new directors, who bring substantial
additional business experience to the Board of Directors, will enhance
its management team.
Lastly, the Company established an "audit" committee composed of
David Lifschultz and the two new independent directors to assist the
Company in the auditing process. Overall, the Company believes that
it will benefit from the additional review of its audit performed by
the committee.
HART SCIENTIFIC, INC. AND SUBSIDIARY
- - ------------------------------------
PRODUCTS AND MARKETS. Hart's business strategy is to target
narrow market niches in temperature calibration equipment, build a
solution-oriented product for those niches, and capture a significant
part of the market for each such product category. Products for many
different markets are developed from similar base technologies that
are proprietary to Hart. Hart has products which are marketed to the
battery industry, calibration laboratories, the plastic container
industry, the automotive plastics industry, the medical research
industry, pharmaceutical companies, and the biotechnology industry.
The management of Hart believes that this strategy reduces risk and
results in higher margins, lower development costs, and substantially
greater growth potential for Hart. Products manufactured and marketed
by Hart include biological scanning calorimeters, heat conduction
calorimeters, several specialty calorimeters, ultra-stable constant
temperature baths, microprocessor-based thermometers, parison calori-
meters, a plastics testing device, and various custom instruments.
CUSTOMER SERVICE AND SUPPORT. Most of Hart's products carry a
standard one-year warranty and factory service guarantee. Customer
service is structured around an "800 number" toll-free line and in
factory service, with on-site repair when necessary.
PRODUCT DEVELOPMENT. Hart has typically devoted a substantial
portion of its revenues to product research and development expendi-
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tures as a percentage of revenues have historically been relatively
high at Hart. During the fiscal year ended July 31, 1998, Hart
spent approximately $1,077,000 on Company-sponsored research and
development activities, compared to $866,000 in fiscal 1997. Hart
management believes such expenditures are necessary for Hart to
develop competitive new products and enhancements for its current
product line.
MANUFACTURING AND OPERATIONS. Hart leases a manufacturing and
office facility in American Fork, Utah, while CSC leases a manufac-
turing and office facility in Provo, Utah. Currently, Hart manufac-
tures most of its own instruments, but does sell some instruments
manufactured by other companies, sometimes under the Hart label.
INSURANCE. Hart presently carries property and casualty insur-
ance on the equipment used in its business. Some potential losses
cannot be insured against or cannot be insured against at reasonable
premium rates. The Company could be materially adversely affected
if it or Hart were to incur an uninsured or an underinsured loss.
SUPPLIERS. With the exception of proprietary software, some
machined parts, and product housing units, most of the products sold
by Hart are assembled from standard off-the-shelf items which are
readily available from a variety of suppliers. To date, Hart has not
experienced any significant difficulty in obtaining components. Hart
employs a purchase order system for purchasing supplies and components
and has not found it necessary to enter into any written supplier
contracts.
CUSTOMERS. Hart's customers include research departments of
universities, governmental agencies, and industrial corporations. No
customer accounted for more than 10 percent of total revenues during
fiscal 1998, and the loss of any single customer would not likely
cause a material adverse effect on Hart and the Company.
PATENTS, COPYRIGHTS, AND TRADEMARKS. Hart does not currently
have any patents, copyrights, or trademarks for its products. CSC
licenses some patented product designs from Applied Thermodynamics
and the Johns Hopkins University.
SALES, DISTRIBUTION, AND MARKETING. Hart sells its specialized
instruments directly to customers through direct mailings, including a
catalog, advertisements in technical publications, and participation
in trade shows. Hart is also exploring other distribution channels
for its products, particularly for the European market. CSC utilizes
an exclusive distributor in Japan for some of its calorimeter
products.
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COMPETITION. Hart's temperature instrumentation products com-
pete with similar products from companies such as Techne, Scientific
Electronics, and other bath/thermometer manufacturers. Certain Hart
product lines have much higher performance specifications than most of
the products in these categories and therefore tends to compete less
directly with lower performance products. CSC primarily competes with
MicroCal and Thermometrics in the calorimetry market.
LIFSCHULTZ FAST FREIGHT, INC.
- - -----------------------------
Lifschultz Fast Freight, Inc. was founded in 1899 in Chicago,
Illinois to "cart" local freight by horse and wagon. Until it became
a wholly owned subsidiary of the Company in January 1991, LFF was
owned by descendants of the original founder, David Lifschultz. LFF
began inter-city freight transport in 1928 and, under the management
of the Lifschultz family, survived the turbulent period from 1929 to
1960, becoming an important factor in several markets. Subsequently,
however, LFF's business began to decline until, in March 1990, LFF
sold the last of its interstate trucking operations to a group of
former employees who did business under the name "Lifschultz Fast
Freight Corp.", but later went out of business.
LFF has an operating lease, expiring at the end of September,
2002 on its former New York trucking terminal. The operating lease
provides for a nominal rental during such time as LFF occupies the
current premises. On October 18, 1991, LFF and the Company completed
a transaction in which the Company issued stock and a stock option to
the landlord, Penn Yards Associates, effectively giving it at that
time ownership on a fully diluted basis of 10 percent of the voting
equity securities of the Company, together with demand registration
rights, in exchange for an amendment to the lease covering the New
York Terminal (the "Lease Amendment"). The Lease Amendment grants to
LFF the right, under certain conditions, to sublet or assign its
interest in the New York Terminal. During the Company's 1994 fiscal
year, LFF entered into two subleases covering portions of the New York
Terminal for eight years at a base rental of $450,000 per year (plus
adjustments tied to the Consumer Price Index). These subleases
produced an annual rent to LFF of $500,000 in fiscal 1998. Subsequent
to the Lease Amendment, Penn Yard Associates transferred its interests
to the present landlord, Hudson Waterfront Associates.
EMPLOYEES
- - ---------
As of September 30, 1998, Hart employed 64 full-time and 6 part
time employees, all of whom are employed in Hart's office/manufactur-
ing facility in American Fork, Utah. Also as of September 30, 1998,
CSC employed 17 full-time employees and two part time employees in
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its office/manufacturing facility in Provo, Utah. LFF employs one
full-time employee and one part-time employee in its New York City
office.
OFFICE SPACE
- - ------------
Hart office, research, and manufacturing operations are located
in a 28,000 square foot building in American Fork, Utah. Beginning in
1996, Hart has leased the building for a 10-year term with a monthly
rent starting at $13,000 per month with 3% annual increases at the
discretion of the landlord after the first three years of the lease.
The building was built in 1996, is in good condition, and is currently
adequate for Hart's needs.
CSC occupies a separate office/manufacturing space totalling
7,500 square feet, located in Provo, Utah. It is leasing those
premises until the year 1999 at a monthly cost of approximately
$5,300. The premises occupied by CSC are of new construction, are
in very good condition and are currently adequate for CSC's needs.
The Company and LFF are presently housed in offices totalling
approximately 5,000 square feet in a warehouse building adjacent to
the LFF New York terminal property. The right to occupy these
offices is included as part of the lease of the New York terminal
property, but LFF is required to share the cost of utilities and
maintenance with a co-tenant in the building. The properties are
in adequate condition for the Company's needs.
REGULATION AND ENVIRONMENTAL COMPLIANCE
- - ---------------------------------------
The Company is subject to various local, state, and federal laws
and regulations including, without limitation, regulations promulgated
by federal and state environmental and health agencies, the Federal
Occupational Safety and Health Administration, and laws pertaining to
the hiring, treatment, safety, and discharge of employees. The
Company's manufacturing operations must also meet federal, state, and
local regulatory standards in the areas of labor, safety, and health.
Historically, regulatory compliance has not had a material adverse
effect on the Company's sales or operations. The Company believes it
is in compliance with applicable laws, including laws related to the
handling and use of environmentally hazardous materials.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
- - -------
The Company designs, manufactures, and markets scientific and
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industrial instrumentation and instrument calibration equipment.
Historically, the Company's growth has come from an expanding base of
new customers and from increasing sales to existing customers. The
Company's current and future growth is largely dependent upon its
ability to continue increasing instrument sales to new and existing
customers and its ability to successfully introduce and market new
or enhanced products. The Company anticipates that over the next 12
months, its primary business strategy and emphasis will be on
expanding domestic and international instrument sales.
Net sales of the Company's products have increased during the
fiscal years ended July 31, 1996, 1997 and 1998. Management currently
hopes that this general trend will continue, but it is uncertain that
it will. In addition to the other possible factors that could reverse
this trend (see "Forward-Looking Statements and Factors That May
Affect Future Results of Operations" below), Management is concerned
about the general negative economic events and trends in parts of the
world and their possible impact upon the Company. The economic
difficulties currently being experienced by countries in the Far East
is of particular concern and could have a negative impact on Company
revenues if sales into such countries continue to decline. Management
is also concerned that such economic difficulties may spread to the
other parts of the world and the United States, negatively affecting
sales into other areas.
COMPARISON OF 1998 VERSUS 1997
- - ------------------------------
NET SALES
---------
Total revenues for the Company increased 28% in fiscal 1998 to
$15,651,000 versus $12,214,000 in fiscal 1997. Hart revenues for
fiscal 1998 were $15,148,000 versus $11,725,000 in fiscal 1997, a 29%
increase for the current fiscal year. (The financial figures given in
this discussion for Hart include the financial figures for its wholly
owned subsidiary CSC, unless specifically stated otherwise.) Manage-
ment believes the increase in revenues in fiscal 1998 is primarily
attributable to increased shipments of some of Hart's more expensive
products and a general growth in the shipments of most other product
lines.
LFF had $502,000 in revenues during the 1998 fiscal year com-
pared to $486,000 in fiscal year 1997. These revenues were generated
primarily from its New York subleases. This revenue will increase
annually through 2002 with modest adjustments for inflation tied to
the Consumer Price Index.
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Exports made up 30% of total Company revenues in fiscal 1998
compared to 35% in fiscal 1997. Export shipments and sale of more
expensive instruments to the Far East decreased significantly during
the second half of the fiscal year. Management expects lower sales
and shipments to this export market for at least the next fiscal year
and possibly longer. Other export markets have shown mixed results
during the year. Economic uncertainties in many export markets and
the world in general make it difficult to predict the impact that
these markets will have on Hart's revenues.
Management expects that future growth in revenues, to the extent
it occurs, will come primarily from increased sales to existing
customers and continued marketing efforts to reach new customers.
GROSS PROFIT
------------
Gross profit margins for Hart were 51% in fiscal 1998 compared
to 49% in fiscal 1997. These margins vary primarily due to shifts in
the product mix shipped and the sales channels used. Products sold
through Hart's own direct sales force have higher margins than
products sold through distributors and representatives of Hart
(primarily exports). Products manufactured by Hart tend to have
better profit margins than products redistributed by Hart. Manage-
ment believes that gross margins increased in fiscal 1998 primarily
due to a product shipment mix of higher margin products.
OPERATING EXPENSES
------------------
General and administrative (G&A) expenses at Hart were 24% of
total revenues in fiscal 1998 versus 26% during fiscal 1997. Actual
spending increased by 21% or $634,000. G&A expenses at LFF were
$593,000 in fiscal 1998 versus $545,000 in fiscal 1997.
Marketing expenses at Hart decreased from 10% of revenues in
fiscal 1997 to 9% of revenues in fiscal 1998. Actual spending
increased by 18%, or $215,000, resulting primarily from sales catalog
production costs. The market environment for Hart's products is
becoming increasingly competitive as other companies recognize market
potential in Hart's market niches and as Hart expands into other
market niches with competitors already in place. In the future,
marketing costs as a percentage of revenue could reasonably be
expected to increase in this market environment and management
expects this will be the case.
Research and development expenditures at Hart were $1,077,000
in fiscal 1998 versus $866,000 in fiscal 1997. Hart continues to
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develop new products and improve existing products. To remain
competitive, R&D spending is likely to increase in the future.
NET EARNINGS
------------
Net earnings for the Company were $1,033,000 in fiscal 1998
versus $1,292,000 for fiscal 1997. The Company's net earnings in
1998 did not include recognition of deferred tax assets to be
utilized in future periods or any extraordinary gain items. In
contrast, the Company's net earnings in 1997 included a recognition
of a deferred tax asset in the amount of $780,000 to be utilized in
future periods and an extraordinary gain of $314,000 from extinguish-
ment of debt at LFF.
Earnings of the Company before income tax and extraordinary gain
for fiscal 1998 were $1,137,000 versus $235,000 for fiscal 1997, a
384% increase. Hart had net pretax income of $1,490,000 for the
current fiscal year versus a net pretax income of $546,000 for fiscal
1997, a 173% increase. Management believes that general increases in
revenue, increased shipments of higher priced instruments with better
margins, and a higher percentage of revenue produced in directs sales
markets with higher margins accounted for the increase in operating
earnings.
As mentioned above, the tax benefit realized by the Company in
1997 was in large part due to a recognition of a deferred tax asset to
be utilized in future periods. Under applicable accounting standards,
if a tax loss carryforward is more likely than not to be utilized in
future years then such loss should be recognized as an asset and a
current income item. It was determined that a portion of the
Company's tax loss carryforward (which, for tax reporting purposes,
currently is $7,686,000) should be recognized as an asset and income
in the 1997 fiscal year. This had the effect of raising net earnings
by $780,000 in 1997. When the deferred tax asset of $780,000 is
amortized, the effect will be a reduction of net earnings in future
years. Furthermore, if it were to be determined in the future that
the Company's remaining tax loss carryforward is more likely than not
to be utilized, similar treatment of the remaining unrecorded tax loss
carryforward in such future years could have the result of initially
increasing assets and net earnings with later reductions in assets and
net earnings upon subsequent amortization.
The LFF subleases are carried on the balance sheet as an asset
equal in value to the cash expected to be generated by the subleases
over their life. As the sublease revenues are received the sublease
asset is amortized by a like amount. The net effect is that, while
these revenues generate cash flow for use by LFF for expenses
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($500,000 in fiscal 1998), they have no impact upon the statement of
earnings of the Company. LFF expenses, such as salaries, are actually
covered by the cash flow from the subleases and payments from Hart,
but these expenses reduce the overall operating profit of the Company
because the revenues from the subleases are offset, on an accounting
basis, by the amortization of the leasehold asset.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company has historically financed its growth through cash
from operations and occasional borrowings under a secured line of
credit. Net cash flows provided by operating activities during fiscal
1998 were $778,000 and $144,000 in fiscal 1997.
As previously mentioned, revenues from the LFF New York subleases
have been historically used to pay for expenses at the New York office
and continuing reduction of debt at the LFF subsidiary. The external
debt of LFF at the end of fiscal 1998 was $7,000, which is down from
$87,000 at the end of fiscal 1997.
Hart and CSC each carry a line of credit with Key Bank N.A. The
combined companies had a maximum borrowing capacity of $775,000 as of
July 31, 1998. At that time, approximately $625,000 of the credit
lines was available for use. Use of this credit line varies with
product shipments and other factors. Management believes that its
line of credit will be sufficient for Company purposes in the near
future. The line of credit requires that the Company maintain
certain financial ratios and levels of working capital, all of
which were met as of July 31, 1998.
The Company's current ratio as of July 31, 1998 was 3.44 versus
2.87 to 1 on July 31, 1997. The ratio of total debt to total assets
at July 31, 1998 was .20 versus .21 on July 31, 1997.
As of July 31, 1998, the Company's working capital was
$5,035,000.
The Company has no material commitments for capital expenditures.
Under the Company's current plans, the Company believes that the
existing cash, unused borrowing facilities and cashflow from opera-
operations will provide sufficient liquidity and enable it to meet
its working capital requirements during the next year.
YEAR 2000
- - ---------
Many existing computer programs, worldwide, use only the last
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two digits to refer to a year. Such computer programs may not
properly recognize a year beginning with "20" instead of the current
"19". If not corrected, many computer applications could fail or
create incorrect results. This phenomena is often referred to as
the "Year 2000" or "Y2K" problem. There is substantial concern that
if the Year 2000 problem is not adequately addressed, there may be
widespread problems with computer applications in all areas of use,
potentially affecting the global economy.
With regard to the Company, if the Company's internal systems
and products do not correctly recognize date information when the
year changes to 2000, there could be an adverse impact on the
Company's operations. The Company has begun the process of assessing
the impact and necessary resources required to make its systems and
products compatible with the use of dates beyond 1999.
Company management believes that the internal systems of
Lifschultz Industries, the holding company, and LFF, its non-
operating subsidiary, will not be materially affected by the Year
2000 problem because their operations are minimal. Review by Hart
to date indicates that its internal information systems (for inven-
tory control, sales, invoicing, purchasing, manufacturing, payroll,
etc.), its local area network software, and many of its personal
computers are Year 2000 compliant. Review by CSC to date similarly
indicates that its internal information systems (for inventory con-
trol, sales, invoicing, purchasing, manufacturing, payroll, etc.),
its local area network software, and many of its personal computers
are Year 2000 compliant. The Company currently expects continued
review and testing of its internal information systems to be com-
pleted by June 1999 and any repair or replacement work completed by
the end of 1999. Hart is also in the process of contacting vendors
for its facility systems. CSC expects to begin contacting is facility
system vendors before 1999. Company management is not sure when, if
ever, such vendors will respond.
At this time, management of Hart and CSC do not expect any
significant adverse effects from the year 2000 problem with regard to
their respective products. The majority of their products do not use
a date. The remaining products that do use a date have been tested
for Year 2000 compliance and appear to comply, or will comply by
resetting the date after December 31, 1999. Due to the inherent
limitations of real-time clock devices and system BIOS, however,
future testing could exhibit different results. Additionally, in
some cases, problems may be unforeseen, and occur regardless of the
testing that is done. Company management currently believes that if
such problems do arise they can be corrected without a material
adverse effect on the overall financial performance of the Company.
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The Company has also begun the process of assessing the possible
effects of Year 2000 problems on its significant vendors, which could
in turn affect the Company's operations. Lifschultz Industries and
Hart have begun the process of contacting their larger vendors to
determine their Year 2000 compliance. CSC will begin such process
prior to 1999. To date, some vendors have not responded to requests
for information, and management is not sure when, if ever, such
vendors will respond. At the present time, the Company is not able
to determine the extent to which its customers or vendors will have
Year 2000 difficulties and cannot accurately assess the potential for
adverse effects on the Company's operations or financial condition.
Because of the widespread nature of the Year 2000 problems and
the difficulty of analyzing the potential impact of third parties
experiencing Year 2000 problems, the Company is considering
formulating a contingency plan. Among other things, the Company may
begin identifying alternative sources of supplies and services.
The Company's expenses addressing Year 2000 issues to date have
not been material to the Company's operations or financial results.
The Company currently estimates that its Year 2000 costs over the
next two fiscal years related to its internal systems and products
will range from $5,000 to $20,000. The estimated costs are based on
management's best projections, yet there can be no guarantee that
these forecasts will be achieved and actual results could differ
materially from those anticipated. Management anticipates that these
costs will be funded through operating cash flows. The Company has
not yet been able to estimate the costs it may incur as a result of
its vendors and customers experiencing Year 2000 difficulties.
FORWARD-LOOKING STATEMENTS AND FACTORS
THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
- - --------------------------------------------
The statements made herein that include the terms "may", "will",
"management believes"," estimate", "project", "anticipate", "expect",
and similar words are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995 (the "1995 Act").
Such statements are deemed by the Company to be covered by and to
qualify for the safe harbor protection provided by the Private
Securities Litigation Reform Act of 1995 (the "1995 Act"). Investors
and prospective investors in the Company should understand that
several factors govern whether any forward-looking statement con-
tained herein will be or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected
herein. These forward-looking statements include plans and objectives
of management for future operations. The forward-looking statements
included herein are based on current expectations that involve a
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number of risks and uncertainties, including those described in the
Company's 1998 Form 10-KSB and other filings with the Securities and
Exchange Commission. These forward-looking statements are based on
assumptions, among others, that the Company a) will be able to
successfully increase its share of the scientific instrument market,
introduce new product lines to existing customers, enter new markets,
and continue developing new products, and b) will continue to
manufacture and market at current margins high quality products at
competitive prices. Assumptions relating to the foregoing and other
forward-looking statements involve judgments with respect to, among
other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible
to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and,
therefore, there is and can be no assurance that the results
contemplated in any such forward-looking statement will be realized.
Budgeting and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic
revision. The impact of actual experience and business developments
may cause the Company to alter its marketing, capital expenditure
plans or other budgets, which may in turn affect the Company's result
of operations. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of any
such statement should not be regarded as a representation by the
Company or any other person that the objectives or plans of the
Company will be achieved.
Due to factors noted above, the Company's future earnings and
stock price may be subject to significant volatility, particularly
on a quarterly basis. Past financial performance should not be
considered a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in
future periods.
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DIRECTORS AND EXECUTIVE OFFICERS
OF THE COMPANY
--------------------------------
The following table sets forth certain information concerning
directors and executive officers of the Company:
Began Service
as an Officer
Name Age Positions Held or Director
- - ------------------- --- ---------------------- -------------
David K. Lifschultz 52 Chairman and 1991
CEO of the Company
(also President and
Director of LFF)
Dennis R. Hunter 47 President, Director, 1988
and CFO of the Company
(also CEO, President,
and Chairman of CSC and
Director of Hart)
Sidney B. Lifschultz 86 Director of the Company 1991
Joseph C. Fatony 51 Director of the Company 1998
James E. Solomon 48 Director of the Company
and Hart 1995
James C. Triplett 48 Chairman and CEO of Hart 1988
J. Randall Owen 40 President and COO of Hart 1994
Michael Hirst 49 Vice President and 1988
Director of Hart
For further information on these individuals, including
biographies, please refer to the Company's Proxy Statement.
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
-----------------------------------------
The Company's Common Stock has been listed on the Nasdaq Small-
Cap Market since 1991. It trades under the symbol LIFF. The prices
below are for the high and low closing sales prices of the Company's
Common Stock, and are drawn from Nasdaq reports rounded to the near-
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est cent. The prices shown for periods prior to 1998 are adjusted to
reflect the Company's reverse stock split in January 1998.
FISCAL 1997 FISCAL 1998
----------------- ------------------
PRICE RANGE HIGH LOW HIGH LOW
----------- ------ ------ ------ -------
1st Quarter $12.50 $ 8.00 $ 6.25 $ 3.125
2nd Quarter $12.50 $ 6.50 $ 6.25 $ 3.125
3rd Quarter $11.00 $ 4.50 $10.00 $ 4.375
4th Quarter $ 8.00 $ 3.00 $ 8.75 $ 5.625
As of September 8, 1998 there were approximately 338 record
holders of Common Stock (which includes brokerage firms and their
affiliates holding certificates in "street name" for a larger number
of beneficial owners) and 3 holders of Company preferred stock.
No cash dividends have been paid on any class of the Company's
capital stock since inception.
FINANCIAL STATEMENTS
--------------------
The consolidated financial statements of Lifschultz Industries,
Inc. and subsidiaries at July 31, 1998 and 1997 and for each of the
two years ended July 31, 1998 and 1997 appearing at the end of this
Annual Report to Shareholders have been examined by the Company's
independent auditors, as and to the extent set forth in their reports
appearing therein.
LIFSCHULTZ INDUSTRIES, INC. AND SUBSIDIARIES
Page 47
<PAGE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
JULY 31, 1998 AND 1997
Lifschultz Industries, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Report of Independent Certified Public Accountants 1
Consolidated financial statements
Balance sheets 3
Statements of earnings 5
Statements of shareholders' equity 6
Statements of cash flows 8
Notes to consolidated financial statements 10
Page 48
<PAGE>
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Lifschultz Industries, Inc.
We have audited the accompanying consolidated balance sheets of
Lifschultz Industries, Inc. and Subsidiaries (the Company) as of July 31
1998 and 1997, and the related consolidated statements of earnings,
shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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 consolidated financial position of
Lifschultz Industries, Inc. and Subsidiaries as of July 31, 1998 and
1997, and the consolidated results of their operations and their
consolidated cash flows for the years then ended in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Provo, Utah
September 25, 1998
1
Page 49
<PAGE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 31,
ASSETS
1998 1997
------------ -----------
CURRENT ASSETS
Cash and cash equivalents $ 989,000 $ 901,000
Marketable securities 805,000 576,000
Trade accounts receivable, net 2,468,000 1,838,000
Related party receivable 79,000 30,000
Deferred income taxes 234,000 238,000
Inventories 2,386,000 1,888,000
Other current assets 136,000 142,000
------------ -----------
Total current assets 7,097,000 5,613,000
PROPERTY HELD FOR LEASE, NET 2,066,000 2,566,000
PROPERTY AND EQUIPMENT, NET 972,000 876,000
LAND 100,000 -
DEFERRED INCOME TAXES 550,000 542,000
------------ -----------
$ 10,785,000 $ 9,597,000
============ ===========
The accompanying notes are an integral part of these statements.
Page 50
<PAGE>
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
CURRENT LIABILITIES ------------- -------------
Notes payable to banks $ 154,000 $ 153,000
Accounts payable 519,000 473,000
Income taxes payable 34,000 101,000
Accrued liabilities 1,318,000 1,157,000
Note payable to shareholder 3,000 50,000
Current maturities of capital
lease obligations 32,000 22,000
Current maturities of long-term obligation 2,000 -
------------- -------------
Total current liabilities 2,062,000 1,956,000
LONG-TERM OBLIGATION,
less current maturities 7,000 -
CAPITAL LEASE OBLIGATIONS,
less current maturities 110,000 101,000
COMMITMENTS - -
SHAREHOLDERS' EQUITY
Convertible preferred stock, par value $0.01;
authorized 100,000 shares
Series A; issued and outstanding 5,200
shares in 1998 and 1997. - -
Series E; issued and outstanding 21,231
shares in 1998 and 1997 - -
Common stock, par value $0.001;
authorized 1,650,000 shares;
issued 1,117,519 shares in 1998 and
1,111,390 shares in 1997 1,000 1,000
Additional paid-in capital 11,060,000 11,042,000
Common stock subscriptions
receivable from related parties - (15,000)
Treasury stock, at cost
(23,000 common shares) (157,000) (157,000)
Accumulated deficit (2,298,000) (3,331,000)
------------- -------------
Total shareholders' equity 8,606,000 7,540,000
------------- -------------
$ 10,785,000 $ 9,597,000
============= =============
Page 51
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended July 31,
1998 1997
----------- ------------
Net sales $15,651,000 $12,214,000
Costs and expenses
Cost of products sold 7,416,000 6,013,000
Selling, general and administrative 5,967,000 5,056,000
Research and development 1,077,000 866,000
Interest 54,000 44,000
----------- ------------
14,514,000 11,979,000
----------- ------------
Earnings before income taxes and
extraordinary item 1,137,000 235,000
Income tax expense (benefit) 104,000 (743,000)
----------- ------------
Earnings before extraordinary item 1,033,000 978,000
----------- ------------
Extraordinary item - gain on extinguish-
ment of debt (less applicable
income taxes of $7,000 in 1997) - 314,000
----------- ------------
NET EARNINGS $ 1,033,000 $ 1,292,000
=========== ============
Net earnings per common share - basic
Earnings before extraordinary item 0.95 0.95
Extraordinary item - 0.30
----------- ------------
Net earnings $ 0.95 $ 1.25
=========== ============
Net earnings per common share -
assuming dilution
Earnings before extraordinary item 0.88 0.82
Extraordinary item - 0.26
----------- ------------
Net earnings $ 0.88 $ 1.08
=========== ============
The accompanying notes are an integral part of these statements.
5
Page 52
<PAGE>
<PAGE>
<TABLE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended July 31, 1998 and 1997
Preferred Stock Common Stock
--------------------- Addt'l Subscrip-
Common Series Series Series Paid-In tions Treasury Accumulated
Stock A B E Capital Receivable Stock Deficit Total
------ ---- ------- ------- ----------- --------- ---------- ------------ ----------
<C> <S> <S> <S> <S> <S> <S> <S> <S> <S>
Balance at
8/1/96 $1,000 - $8,000 $1,000 $11,021,000 $(15,000) $(157,000) $(4,623,000) $6,236,000
Stock issued
upon exercise
of options - - - - 4,000 - - - 4,000
Tax effect of stock
options exercised - - - - 8,000 - - - 8,000
Preferred stock
series transfers - - (8,000) (1,000) 9,000 - - - -
Net earnings - - - - - - - 1,292,000 1,292,000
------ ---- ------- ------- ----------- --------- ---------- ------------ ----------
Balance at 7/31/97 1,000 - - - 11,042,000 (15,000) (157,000) (3,331,000) 7,540,000
Stock issued
upon exercise
of options - - - - 10,000 - - - 10,000
Tax effect of stock
options exercised - - - - 8,000 - - - 8,000
Compensation
to officers - - - - - 15,000 - - 15,000
Net earnings - - - - - - - 1,033,000 1,033,000
------ ---- ------- ------- ----------- --------- ---------- ------------ ----------
Balance at 7/31/98 $1,000 - $ - $ - $11,060,000 - $(157,000) $(2,298,000) $8,606,000
====== ==== ======= ======= =========== ========= ========== ============ ==========
</TABLE>
6
Page 53
<PAGE>
<PAGE>
<TABLE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31,
<C>
1998 1997
------------- ------------
<S> <S>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 1,033,000 $ 1,292,000
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation and amortization 262,000 277,000
Amortization of leasehold interest 500,000 407,000
Provision for bad debt (15,000) (13,000)
Compensation to officers 15,000 -
Deferred income taxes 4,000 (780,000)
Extraordinary gain - (321,000)
(Gain) loss on sale of property and
equipment (5,000) 6,000
Changes in assets and liabilities
Accounts receivable (615,000) (51,000)
Related party receivable (49,000) 4,000
Inventories (498,000) (400,000)
Other current assets 6,000 (82,000)
Accounts payable 46,000 162,000
Accrued liabilities 161,000 (344,000)
Income taxes payable (67,000) (13,000)
------------- ------------
Total adjustments (255,000) (1,148,000)
------------- ------------
Net cash provided by
operating activities 778,000 144,000
------------- ------------
Cash flows from investing activities
Purchase of property and equipment (412,000) (540,000)
Proceeds from sale of property and equipment 6,000 -
Purchase of marketable securities (786,000) (805,000)
Proceeds from maturities of
marketable securities 557,000 830,000
------------- ------------
Net cash used in
investing activities (635,000) (515,000)
------------- ------------
</TABLE>
Page 54
<PAGE>
<PAGE>
(continued)
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended July 31,
1998 1997
------------- ------------
Cash flows from financing activities
Net change in notes payable to banks 1,000 (29,000)
Proceeds from issuance of long term debt 10,000 -
Principal payments on long-term obligations (48,000) -
Principal payments on capital lease
obligations (28,000) (7,000)
Principal payments on note payable to
creditor - (120,000)
Net proceeds from issuance of common stock 10,000 4,000
------------- ------------
Net cash used in
financing activities (55,000) (152,000)
------------- ------------
Net increase (decrease)
in cash and cash equivalents 88,000 (523,000)
Cash and cash equivalents at beginning of year 901,000 1,424,000
------------- ------------
Cash and cash equivalents at end of year $ 989,000 $ 901,000
============= ============
Supplemental disclosures of cash flow information
- - -------------------------------------------------
Cash paid during the year for
Interest $ 54,000 $ 45,000
Income taxes 42,000 166,000
Noncash investing and financing activities
- - ------------------------------------------
During 1998, common stock subscriptions receivable totaling $15,000 were
relieved in exchange for compensation to officers.
During 1998 and 1997, the Company entered into capital leases for
$47,000 and $130,000 of equipment, respectively.
Also during 1998 and 1997, the tax effect of exercising stock options was
an $8,000 increase to additional paid-in-capital.
During 1997, as described in Note K, holders of the various series of
the Company's preferred stock converted part of those respective shares
for common stock approximating 237,000 shares.
The accompanying notes are an integral part of these statements.
Page 55
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended July 31,
Also during 1997, as described in Note O, the Company was relieved of
$321,000 in past due accounts payable and accrued liabilities.
The accompanying notes are an integral part of these statements.
8
Page 56
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
1. Principles of consolidation
---------------------------
The consolidated financial statements of Lifschultz Industries, Inc. and
Subsidiaries (the Company) include the accounts of Lifschultz Industries,
Inc. a non-operating holding company, and its wholly-owned subsidiaries,
Hart Scientific, Inc. (Hart), Lifschultz Fast Freight, Inc. (Fast
Freight), and Calorimetry Sciences Corporation (Calorimetry), which is a
wholly-owned subsidiary of Hart. All significant intercompany trans-
actions and balances have been eliminated. The Company currently only
has one line of business from which it derives revenues.
2. Business activity
-----------------
Hart is engaged in the design, manufacturing, and marketing of high
precision calibration instruments and sensors for use in laboratories
and industry. Hart is also engaged in related research and development
projects.
Calorimetry is engaged in the design, manufacturing and marketing of
scientific instruments.
Fast Freight is currently a non-operating freight-hauling company.
3. Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
4. Marketable securities
---------------------
Investments are comprised of government securities, which mature in one
year or less and are classified as available-for-sale. Available-for-
sale securities are measured at fair value with net unrealized gains
Page 57
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
and losses reported in equity. There were no significant net unrealized
holding gains or losses during 1998 and 1997.
5. Inventories
-----------
Inventories are valued at the lower of cost or market using the
first-in, first-out method.
6. Property and equipment
----------------------
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to operations as incurred, whereas major replace-
ments and improvements are capitalized and subsequently depreciated or
amortized. For financial reporting purposes, depreciation and amortiza-
tion is provided on a straightline basis over the lesser of the estimated
useful lives of the assets or the life of the respective lease, if appli-
cable. Accelerated methods of depreciation are used for tax purposes.
7. Property held for lease
-----------------------
Property held for lease represents a non-operating trucking terminal
under a lease and is carried at the undiscounted cash flows which result
from the underlying sublease. The property held for lease is being
amortized through the year 2002, which is the life of the sublease.
8. Research and development
------------------------
Research and development costs have been charged to expense as incurred.
9. Revenue recognition and deferred revenue
----------------------------------------
Sales are recorded when the product is shipped to a customer. Payments
received for unshipped products are recorded as deferred revenue and
are included in accrued liabilities.
Page 58
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. Earnings per share
------------------
Basic earnings per common share are based on the weighted average
number of shares outstanding during each year. Diluted earnings per
common share are based on shares outstanding (computed as under
basic) and potentially dilutive common shares. Potential common
shares included in the dilutive earnings per share calculation
include stock options granted and convertible preferred stock.
11. Income taxes
------------
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined
based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. An allowance
against deferred tax assets is recorded in whole or in part when it
is more likely than not that such tax benefits will not be realized.
12. Use of estimates
----------------
In preparing the Company's financial statements in conformity with
generally accepted accounting principles, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
13. Fair value of financial instruments
-----------------------------------
The carrying value of the Company's cash and cash equivalents, market-
able securities, trade receivables, notes payable and trade payables
approximates their fair values due to their short-term nature.
Page 59
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Common stock
------------
The Company records amounts received upon the exercise of options by
crediting common stock and additional paid-in-capital. No charges
are reflected in the consolidated statements of earnings as a result
of the grant or exercise of stock options. The Company realizes an
income tax benefit from the exercise of certain stock options. This
benefit results in a decrease in current income taxes payable and an
increase in additional paid-in-capital.
15. Certain reclassifications
-------------------------
Certain non-material reclassifications have been made to the 1997
financial statements to conform with the 1998 presentation
16. Recently issued accounting statements not yet adopted
-----------------------------------------------------
Comprehensive income
--------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires
entities presenting a complete set of financial statements to include
details of comprehensive income that arise in the reporting period.
Comprehensive income consists of net earnings or loss for the current
period and other comprehensive income, which consists of revenue,
expenses, gains, and losses that bypass the statement of earnings and
are reported directly in a separate component of equity. Other
comprehensive income includes, for example, foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses
on certain investment securities. SFAS 130 requires that components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This statement is effective for fiscal years beginning after
December 15, 1997, and requires restatement of prior period financial
statements presented for comparative purposes.
Page 60
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Disclosure of segments
----------------------
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information." This statement requires an
entity to report financial and descriptive information about their
reportable operating segments. An operating segment is a component
of an entity for which financial information is developed and
evaluated by the entity's chief operating decision maker to assess
performance and to make decisions about resource allocation.
Entities are required to report segment profit or loss, certain
specific revenue and expense items and segment assets based on
financial information used internally for evaluating performance and
allocating resources. This statement is effective for fiscal years
beginning after December 15, 1997 and requires restatement of prior
period financial statements presented for comparative purposes.
Management does not believe that the adoption of SFAS 130 and SFAS
131 will have a material effect on the Company's consolidated
financial statements.
NOTE B - CREDIT CONCENTRATION AND EXPORT SALES
1. Credit concentration
--------------------
The Company maintains cash balances at several financial institutions
located in the United States. Accounts at each institution are secured
by the Federal Deposit Insurance Corporation up to $100,000. Uninsured
balances aggregate to approximately $558,519 at July 31, 1998.
Financial instruments which potentially subject the Company to credit
risk concentration consist primarily of trade accounts receivable.
The Company sells to customers utilizing scientific and industrial
instrumentation and instrument calibration equipment located
throughout the world. The Company sells substantially to recurring
customers wherein the customer's ability to pay has previously been
evaluated. The Company generally does not require collateral. The
majority of its trade receivables are unsecured. Allowances are
maintained for potential credit losses, and such losses have been
within management's expectations. At July 31, 1998 and 1997, this
allowance was $15,000 and $13,000 respectively.
Page 61
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE B - CREDIT CONCENTRATION AND EXPORT SALES - CONTINUED
2. Export sales
------------
Export sales consist of the following:
1998 1997
----------- -----------
Europe $ 2,136,000 $ 1,565,000
Far East 1,682,000 2,040,000
Middle East 236,000 77,000
North America 282,000 287,000
South America 359,000 314,000
----------- -----------
$ 4,695,000 $ 4,283,000
=========== ===========
NOTE C - INVENTORIES
Inventories consist of the following:
1998 1997
----------- -----------
Raw materials $ 1,306,000 $ 1,003,000
Work in process 947,000 792,000
Finished goods 31,000 17,000
Demonstration units 102,000 76,000
----------- -----------
$ 2,386,000 $ 1,888,000
=========== ===========
Page 62
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE D - PROPERTY HELD FOR LEASE
Property held for lease consists of the following:
1998 1997
----------- -----------
Leasehold interest $ 7,500,000 $ 7,500,000
Less
Accumulated amortization 3,808,000 3,308,000
Valuation allowance to adjust to
undiscounted cash flows 1,626,000 1,626,000
----------- -----------
5,434,000 4,934,000
----------- -----------
$ 2,066,000 $ 2,566,000
=========== ===========
The Company leases a warehouse for nominal rent through September
2002. This leasehold interest is carried on the Company's balance
sheet at the undiscounted cash flows expected from the property
through subleases over the life of the related lease. The leasehold
interest and related improvements are being amortized over the life
of the related lease, which expires in September 2002. Noncancelable
subleases related to this property, presently in place, provide for
the Company to receive payments approximating $500,000 per year, sub-
ject to annual Consumer Price Index increases, through September 2002.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives consist of the
following:
Years 1998 1997
----- ---------- ----------
Furniture and fixtures 3-5 $ 960,000 $ 822,000
Machinery and equipment 5-10 562,000 489,000
Equipment held under capital lease 10 260,000 130,000
Leasehold improvements 5-8 284,000 271,000
--------- ---------
2,066,000 1,712,000
Less accumulated depreciation
and amortization 1,094,000 836,000
---------- ----------
$ 972,000 $ 876,000
========== ==========
Page 63
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE F - CREDIT ARRANGEMENTS
1. Notes payable to banks
----------------------
The notes payable to banks consist of a line of credit issued to Hart
with interest at prime plus 1.5 percent (10 percent at July 31, 1998).
The line, which is scheduled for renewal in December 1998, is collat-
eralized by Hart common stock, trade accounts receivable, inventories,
and equipment. Available borrowings under this line of credit are
limited to 85 percent of eligible trade accounts receivable and 30
percent of eligible inventories, not to exceed $650,000. As of July 31,
1998, $500,000 was available under the line.
In addition, Calorimetry has an available line of credit of $125,000
with a bank. The line, which is scheduled for renewal in December
1998, is collateralized by accounts receivable and equipment. Amounts
outstanding incur interest at prime plus 1.5 percent (10 percent at
July 31, 1998). No amounts were outstanding on the line at July 31,
1998 or 1997.
2. Note payable to shareholder
---------------------------
Note payable to shareholder represents an unsecured demand note with
interest at approximately 7.5 percent.
NOTE G - LONG-TERM OBLIGATIONS
1. Capital Leases
--------------
The Company has capital lease obligations with a corporation. The
balances at July 31, 1998 and 1997, total $142,000 and $123,000
respectively and bear interest at approximately nine percent per
year. Payments of approximately $3,000 and $1,000 are due monthly
and the obligations are due in full in February of 2002 and June of
2003 respectively. The obligations are collateralized by the leased
equipment.
The Company has accumulated amortization relating to the capital
leases (Note E) of $35,000 and $15,000 as of December 31, 1998 and
1997, respectively. Amortization expense on capital leases
approximated $20,000 and $15,000.
Page 64
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
The following is a schedule of the capital lease obligation at July 31,
1998:
Year ending July 31,
--------------------
1999 $ 44,000
2000 44,000
2001 44,000
2002 33,000
2003 11,000
Thereafter -
-----------
Total minimum leases payments 176,000
Less amount representing interest 34,000
-----------
Present value of net minimum
lease payments 142,000
Less current maturities 32,000
-----------
Long-term obligation $ 110,000
===========
2. Debt
----
The Company has a 7.29 percent note payable to a finance company,
collateralized by a vehicle which is payable in monthly installments
of $200 including interest and due October 2002.
Aggregate maturities of long-term debt are as follows:
Year ending July 31,
--------------------
1999 $ 2,000
2000 2,000
2001 2,000
2002 2,000
2003 1,000
Thereafter -
-----------
$ 9,000
===========
Page 65
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE H - OPERATING LEASES
The Company leases laboratory and office space under operating leases
expiring in various years through 2005. The lease payments increase
throughout the term of leases at three percent annually.
Minimum future rental payments under noncancelable operating leases
having remaining terms in excess of one year are as follows:
Year ending July 31,
--------------------
1999 $ 214,000
2000 161,000
2001 166,000
2002 170,000
2003 176,000
Thereafter 447,000
-----------
$ 1,334,000
===========
Rent expense totaled $220,000 and $196,000 for the years ended
July 31, 1998 and 1997, respectively.
The Company has a right of first refusal to purchase this real estate
at approximate market value.
NOTE I - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1998 1997
------------ -----------
Payroll, payroll taxes and benefits $ 403,000 $ 351,000
Bonuses 535,000 405,000
Warranties 159,000 132,000
Other 221,000 269,000
------------ -----------
$ 1,318,000 $ 1,157,000
============ ===========
Page 66
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE J - INCOME TAXES
Components of income tax expense (benefit) consist of the following:
1998 1997
------------ -----------
Current
Federal $ 495,000 $ 308,000
State 83,000 34,000
Less benefit of net operating
loss carryforward net of
alternate minimum tax (470,000) (298,000)
------------ ------------
108,000 44,000
Deferred ------------ ------------
Federal (3,500) (675,000)
State (500) (105,000)
------------ ------------
(4,000) (780,000)
------------ ------------
Total taxes before extraordinary item 104,000 (736,000)
Allocated to extraordinary item
Federal - (6,000)
State - (1,000)
------------ ------------
$ 104,000 $ (743,000)
============ ============
The provision for income taxes differs from the statutory Federal
income tax rate due to the following:
1998 1997
------------- ------------
Income taxes computed at federal
statutory rate of 34% $ 387,000 $ 189,000
State taxes, net of federal benefit 83,000 19,000
Net operating loss carryforward
utilized (380,000) (174,000)
Deferred tax assets not previously
recorded - (780,000)
Non-deductible expenses 11,000 10,000
Other 3,000 -
------------ ------------
Page 67
<PAGE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE J - INCOME TAXES - CONTINUED
Total income taxes (benefit) 104,000 (736,000)
Income taxes allocated to
extraordinary item - (7,000)
------------ ------------
$ 104,000 $ (743,000)
============ ============
The tax effects of temporary differences which give rise to deferred
tax assets and liabilities are as follows:
1998 1997
Current deferred tax assets ----------- -----------
Deferred compensation $ 119,000 $ 131,000
Allowance for doubtful accounts 2,000 5,000
Accrued expenses 92,000 62,000
Contributions carryforward 38,000 18,000
Uniform inventory capitalization (17,000) 24,000
Other - (2,000)
----------- -----------
Net current tax assets $ 234,000 $ 238,000
=========== ===========
Long-term deferred tax assets
Net operating loss carryforwards $2,867,000 $3,410,000
Excess book depreciation and
amortization 16,000 31,000
Alternative minimum tax credit
carryforward 153,000 131,000
Less valuation allowance (2,486,000) (3,030,000)
----------- -----------
Net long-term current
tax assets $ 550,000 $ 542,000
=========== ===========
During 1998 and 1997, management evaluated the prospects for future
profitable operations of the Company. Because the Company has gener-
ated operating profits for the last several years and current budget
forecasts show profits will continue into the future, management
concluded it is more likely than not that a portion of the deferred
tax asset will be realized in the future. The valuation allowance on
deferred taxes was decreased $780,000 during 1997, to adjust for this
change in judgment on the realizability of the deferred tax asset. No
further adjustments to the valuation allowance relating to the reali-
Page 68
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<PAGE>
zation issue were deemed necessary during 1998. Also, the remaining
change in the valuation allowance during 1998 and 1997 is due to
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE J - INCOME TAXES - CONTINUED
utilization of a portion of the net operating loss and the net change
in the other deferred tax assets and liabilities.
At July 31, 1998, the Company has net operating loss carryforwards
for tax reporting purposes of approximately $7,686,000 which expire
from 2004 through the year 2007.
NOTE K - CAPITAL STOCK
1. Convertible preferred stock
---------------------------
The Series A preferred stock is convertible at the option of the holder
into 0.2 shares of common stock, has voting rights equal to one vote
for each share of common stock as if converted, participates in all
dividends declared by the Board of Directors, as if converted, and has
a liquidation preference over all other series of preferred and common
stock of $0.01 per share of Series A preferred stock. At July 31, 1998,
5,200 shares of series A preferred stock were issued and outstanding.
The Series B preferred stock is convertible at the option of the holder
into 0.28 shares of common stock. The Series B preferred stock has
voting rights equal to one vote for each share of common stock, as if
converted, as to the election of the Company's directors. For all
other matters the Series B preferred stock votes as a class. The
Series B preferred stock participates in all dividends declared by the
Board of Directors, as if converted. The Series B preferred stock has
liquidation preferences over the Company's Series E preferred stock and
common stock of $0.01 per share of Series B preferred stock. During
1997, all outstanding shares (776,614 shares) of Series B preferred
stock were converted into approximately 217,000 shares of common stock.
At July 31, 1998, all series B preferred stock was canceled.
The Series E preferred stock is convertible at the option of the holder
into 0.2 shares of common stock. The Series E preferred stock has
voting rights equal to one vote for each share of common stock, as if
converted, and participates in all dividends declared by the Board of
Directors, as if converted. The Series E preferred stock has liquida-
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<PAGE>
tion rights after the Series A, B, C, and D preferred stock but before
common stock. The liquidation preference is $10.87 per share of
Series E preferred stock. During 1997, 99,647 shares of Series E
preferred stock were converted to approximately 20,000 shares of
common stock. At July 31, 1998, 21,231 shares of Series E preferred
stock were issued and outstanding.
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE K - CAPITAL STOCK - CONTINUED
2. Cumulative nonvoting preferred shares
-------------------------------------
In February of 1998, the series C 10% cumulative non-voting preferred
stock and series D 8% cumulative non-voting preferred stock were
canceled by amendment to the articles of incorporation of the
Company.
3. Reverse stock split
-------------------
The Company's common stock was split one-for-fifty in a reverse stock
split. All stock and stock option data and net earnings per common
share amounts in the consolidated financial statements have been
restated to give effect to the reverse stock split.
The Company amended their articles of incorporation to reflect
1,650,000 common shares authorized due to the reverse stock split.
The Company also retained the par value for common stock at $0.001
per share.
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION
1. Stock options
-------------
The Company's board of directors has the authority to grant stock
options to employees, officers and non-employees. The stock options
are considered non-qualified for income tax purposes. As of July 31,
1998, the Company had granted stock options to various officers,
directors, employees and other non-employees of the Company covering
the aggregate number of 170,000 shares of the Company's common stock
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<PAGE>
(112,000 shares at July 31, 1997). Except as explained below,
options vest immediately upon grant.
Options issued in connection with the Company's leasehold interest
(Note D) vest ratably at a rate of one option for every nine common
shares issued as a result of a) the exercise of employee stock options
outstanding at the date of the agreement (approximately 23,000 such
options are outstanding at July 31, 1998 and 6,040 options were
exercised during fiscal 1998) and b) the conversion of Series A pre-
ferred stock (5,200 shares are convertible into 1,040 common shares at
July 31, 1998). These options are exercisable at the then existing
par value of the common stock ($.05 - adjusted for the reverse stock
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
split). At July 31, 1998, such options to purchase 671 shares were
exercisable. Vesting of the options is complete upon exercisability
and Company notification to option-holders of such exercisability.
Options covering 40,000 shares were granted to an officer during 1998
and are exercisable when the market value of the Company's common
stock has a closing price at or above $12 per share. These options
expire in 2013.
3. Fair market value of options granted
------------------------------------
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). Therefore, the Company accounts for stock based compensa-
tion under Accounting Principles Board Opinion No. 25, under which no
significant compensation cost has been recognized. Had the compensa-
tion cost for the stock based compensation been determined based upon
the fair value of the options at the grant date consistent with the
methodology prescribed by FAS 123, the Company's net earnings and
Page 71
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<PAGE>
earnings per share would have been reduced to the following pro forma
amounts:
1998 1997
Pro forma earnings before ---------- ----------
extraordinary item As reported $1,033,000 $ 978,000
Pro forma 924,000 972,000
Pro forma net earnings As reported 1,033,000 1,292,000
Pro forma 924,000 1,286,000
Net earnings per common share - basic
Earnings before extraordinary item $ 0.95 $ 0.95
Pro forma 0.85 0.94
Extraordinary item - 0.30
Pro forma - 0.30
Net earnings per common share -
assuming dilution
Earnings before extraordinary item $ 0.88 $ 0.82
Pro forma 0.79 0.82
Extraordinary item - 0.26
Pro forma - 0.26
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
These pro forma amounts may not be representative of future
disclosures because they do not take into effect pro forma compen-
sation expense related to grants made before fiscal 1997. The fair
value of these options was estimated at the date of grant using the
Black-Scholes American option-pricing model with the following
weighted average assumptions for 1998 and 1997: expected volatility
of 172 percent; risk-free interest rate of 5.83 percent; and expected
life of 14.7 years. The weighted average fair value of options
granted was $3.97 and $3.10 in 1998 and 1997, respectively.
Option pricing models require the input of highly sensitive assump-
tions, including the expected stock price volatility. Also, the
Company's stock options have characteristics significantly different
from those of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimate. Management
believes the best input assumptions available were used to value the
options and that the resulting option values are reasonable.
Page 72
<PAGE>
<PAGE>
Information with respect to the Company's stock options at July 31,
1998:
Weighted avg.
Stock Exercise Exercise
options price price
--------- ---------------- ------------
Outstanding at
August 1, 1996 $116,000 $0.050 to 14.050 $1.900
Granted 2,000 3.150 3.150
Exercised (2,000) 1.550 1.550
Canceled/expired (4,000) 1.565 to 14.050 7.050
--------- ------
Outstanding at
July 31, 1997 112,000 0.050 to 3.150 1.760
Granted 71,000 3.215 to 4.625 3.970
Exercised (6,000) 1.565 1.565
Canceled/expired (7,000) 1.565 1.565
--------- ------
Outstanding at
July 31, 1998 170,000 $0.050 to 4.625 $2.690
========= ================ ============
Exercisable at
July 31, 1998 121,000 $0.050 to 3.215 $2.200
========= ================ ============
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
Additional information about stock options outstanding and
exercisable at July 31, 1998:
Options outstanding
-------------------
Number Weighted avg. Years Remaining
Exercise price Outstanding exercise price contractual life
-------------- ----------- -------------- ----------------
$0.050 8,000 $0.050 9.1
1.565 71,000 1.565 4.6 to 9.1
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<PAGE>
3.215 51,000 3.125 6.4 to 14.6
4.625 40,000 4.625 14.8
--------
170,000
========
Options exercisable
-------------------
Number Weighted avg.
Exercise price exercisable exercise price
-------------- ----------- --------------
$0.050 1,000 $0.050
1.565 69,000 1.565
3.215 51,000 3.125
-------
121,000
=======
4. Put option
----------
Pursuant to an employee agreement (Note N), an officer of the Company
has a put option which may be exercised during a three year period
following termination or expiration of the agreement. Under the
option, the officer may require Calorimetry to repurchase up to 15,780
shares of Company stock and stock options owned by the officer at
prices from $5.94 per share to $7.50 per share at a maximum rate of
5,260 shares or options per year for three years. The agreement expires
in August of 2003.
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE M - COMMON STOCK SUBSCRIPTIONS RECEIVABLE
The common stock subscriptions receivable from related parties consist
of notes receivable from three officers and directors to be repaid with
interest at 11.5 percent. During 1998, the Company provided compensa-
tion to these officers and directors totaling the full amount of the
subscriptions and the accrued interest.
NOTE N - COMMITMENTS
The Company has employment and severance agreements with certain
officers and managers of the Company, some of which were updated sub-
Page 74
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<PAGE>
sequent to year end. Salaries covered by these agreements range from
$82,000 to $285,000 annually. Contracts, with three individuals, pro-
vice for annual salaries of $90,000, $231,000 (plus a five percent for
annual increase) and $226,000 and are for terms of two to five
years providing for severance, which could be as much as 50 percent of
the remaining base compensation (or one year's salary whichever is
greater) if the individual is terminated without cause. The other two
contracts with annual salaries of $82,000 and $285,000 (plus a five
cent annual increase) have longer terms of six to ten years and
severance, which could be as much as 50 percent of the remaining base
salary (or one year's salary whichever is greater) if the individual
is terminated without cause. All the officers and managers covered
by contracts have been with the Company for seven or more years and
some have been employed more than eleven years. One individual has a
put option under the agreement (Note L). Additionally, provisions
exist in the contracts to provide for immediate payment of remaining
compensation plus additional amounts totaling $300,000 if a successor
of the Company fails to honor the respective contracts. No provision
for any severance payments under these employment contracts has been
made as of July 31, 1998.
NOTE O - EXTRAORDINARY ITEM
During 1997, Fast Freight was relieved of $321,000 in past due accrued
liabilities as a result of the statute of limitations expiring on the
respective outstanding balances. This resulted in a $314,000 gain,
after income taxes of $7,000, which is recorded in the accompanying
financial statements as an extraordinary gain.
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE P - EMPLOYEE BENEFIT PLAN
The Company has established an employee savings plan under Section
401(k) of the Internal Revenue Code. This plan covers employees who
are at least 21 years of age and work at least 1,000 hours per year.
The Company matches at its discretion up to 50 percent of employee
contributions up to six percent of the employee's salary. The
Company's matching contributions vest at a rate of 20 percent per year.
The Company contributed approximately $121,000 and $103,000 to the
plan during the fiscal years ended July 31, 1998 and 1997, respectively.
Page 75
<PAGE>
<PAGE>
NOTE Q - RELATED PARTY TRANSACTIONS
During 1998 and 1997, the Company purchased $103,000 and $88,000
respectively, of inventory from an entity owned by the spouse of an
officer of the Company.
NOTE R - EARNINGS PER COMMON SHARE
During 1997, the Financial Accounting Standards Board issued State-
ment of Financial Accounting Standard No. 128, "Earnings Per Share".
This statement changed the method in which earnings per share are
determined. The new standard requires the computation of basic
earnings per share and earnings per share assuming dilution. Adop-
tion of this statement has been applied retroactively and the 1997
earnings per share amounts have been recomputed applying the standard
and has not had a material impact on earnings per share. The
following shows the shares used in computing earnings per common
share including dilutive potential common stock:
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED STATEMENTS
July 31, 1998 and 1997
NOTE R - EARNINGS PER COMMON SHARE - CONTINUED
For the Year Ended July 31, 1998
------------------------------------
Net Weighted
Earnings avg. shares Per-share
(numerator) (denominator) amount
----------- ------------- ----------
Net earnings per common share-basic
Net earnings available
common shareholders $1,033,000 1,090,932 $ 0.95
========== =========
Effect of dilutive securities
Stock options - 82,794 -
Convertible preferred stock - 5,286 -
----------
Net earnings per common share--
assuming dilution
Net earnings available to
common shareholders $1,033,000 1,179,012 $ 0.88
========== ========= =========
Page 76
<PAGE>
<PAGE>
For the Year Ended July 31, 1997
------------------------------------
Net earnings per common share-basic
Net earnings before
extraordinary item $ 978,000 1,030,975 $ 0.95
========== ========= =========
Net earnings available to
common shareholders $1,292,000 1,030,975 $ 1.25
========== ========= =========
Effect of dilutive securities
Stock options - 155,102 -
Convertible preferred stock - 5,286 -
---------
Net earnings per common share-
assuming dilution
Net earnings before
extraordinary item $ 978,000 1,191,363 $ 0.82
Net earnings available to ========== ========= =========
common shareholders $1,292,000 1,191,363 $ 1.08
========== ========= =========
Page 77
<PAGE>
Exhibit 21.01
LIST OF SUBSIDIARIES OF REGISTRANT
LIFSCHULTZ INDUSTRIES, INC.
1. Lifschultz Fast Freight, Inc. a Delaware corporation
(a wholly owned subsidiary of registrant)
2. Hart Scientific, Inc., a Utah corporation (a wholly owned
subsidiary of registrant)
3. Calorimetry Sciences Corporation, a Utah corporation
(a wholly owned subsidiary of Hart Scientific, Inc.)
Page 78
<PAGE>
CONSENT
We have issued our report dated September 25, 1998, accompanying the
consolidated financial statements included in the Annual Report of
Lifschultz Industries, Inc. on Form 10-KSB for the year ended July 31,
1998. We hereby consent to the incorporation by reference of said
report in the Registration Statement of Lifschultz Industries, Inc. on
Form S-8 (File No. 333-05487, effective June 26, 1996.)
GRANT THORNTON LLP
Provo, Utah
September 25, 1998
Page 79
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> $989,000
<SECURITIES> $805,000
<RECEIVABLES> $2,468,000
<ALLOWANCES> 0
<INVENTORY> $2,386,000
<CURRENT-ASSETS> $7,097,000
<PP&E> $7,940,000
<DEPRECIATION> $4,902,000
<TOTAL-ASSETS> $10,785,000
<CURRENT-LIABILITIES> $2,062,000
<BONDS> 0
0
0
<COMMON> $1,000
<OTHER-SE> $8,605,000
<TOTAL-LIABILITY-AND-EQUITY> $10,785,000
<SALES> $15,651,000
<TOTAL-REVENUES> $15,651,000
<CGS> $7,416,000
<TOTAL-COSTS> $14,514,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $54,000
<INCOME-PRETAX> $1,137,000
<INCOME-TAX> $104,000
<INCOME-CONTINUING> $1,033,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $1,033,000
<EPS-PRIMARY> $0.95
<EPS-DILUTED> $0.88
</TABLE>
