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, 1999
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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 001-10287
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.)
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:
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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. [ X ]
The issuer's revenues for its most recent fiscal year were $16,254,000.
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 15, 1999 as reported on The Nasdaq SmallCap Market, was
approximately $5,716,981 (Assumes: (i) full conversion 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.)
The number of shares of the issuer's common equity outstanding as of
October 15, 1999 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 Convertible 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
<PAGE>
ended July 31, 1999, are incorporated into Parts I and II of this Form 10-KSB.
Portions of the registrant's Proxy Statement provided to shareholders in
conjunction with its 1999 Annual Meeting of Shareholders to be held on or about
January 6, 2000, are incorporated 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 1999 ANNUAL REPORT TO
SHAREHOLDERS.
Item 1. Description of Business; see 1999 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 1999 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.
<PAGE>
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, uncertainties and inaccurate
assumptions.
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 benefits 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.
<PAGE>
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,
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 new 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.
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Dependence Upon Management
The Company is substantially dependent upon its key managerial, technical,
and engineering personnel. The Company must also attract and retain highly
qualified engineering and technical 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.
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.
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.
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 manufacturing processes may also
<PAGE>
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 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, or developments concerning the Company's proprietary rights
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. 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.
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 has assessed
both the internal readiness of its computer systems and the compliance of its
<PAGE>
computer products and software sold to customers for handling the year 2000. At
the present time, the Company does not expect that its internal operations or
any of its current products will experience any material problems as a result of
the year 2000. There can be no assurance, however, that the vendors, suppliers,
or customers upon which the Company relies will 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 1999 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.
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 1999 ANNUAL REPORT TO
SHAREHOLDERS.
Item 5. Market for Common Equity and Related Stockholder Matters; see 1999
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
1999 Annual Report section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Item 7. Financial Statements; see attachment to 1999 Annual Report filed as
an Exhibit hereto.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
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
1999 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OR ABOUT JANUARY 6, 2000.
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".
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 1998 Form 10-KSB
(as amended to date) Exhibit 3.01
3.04* 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 1998 Form 10-KSB
Exhibit 10.01
10.02*# Employment Agreement for James Triplett 1997 Form 10-KSB,
Exhibit 10.2
<PAGE>
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
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+ 1999 Annual Report to Shareholders
21.01 List of Subsidiaries of the Registrant
23.01 Consent of Independent Public Accountants
27.01 Financial Data Schedule
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* 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 1999 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 1999.
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 November 3, 1999 /s/ DAVID K. LIFSCHULTZ
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David K. Lifschultz
Chief Executive Officer
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
confirming 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
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/s/ DAVID K LIFSCHULTZ Chairman and Chief November 3, 1999
- -------------------------- Executive Officer
David K. Lifschultz
<PAGE>
/s/ DENNIS R HUNTER Director, President November 4, 1999
- -------------------------- and Chief Financial
Dennis R. Hunter Officer
/s/ SIDNEY B. LIFSCHULTZ Director November 3, 1999
- --------------------------
Sidney B. Lifschultz
Director November __, 1999
- --------------------------
James E. Solomon
/s/ JOSEPH C. FATONY Director November 4, 1999
- --------------------------
Joseph C. Fatony
/s/ TIMOTHY O. PONT Controller November 4, 1999
- --------------------------
Timothy O. Pont
Exhibit 13.01
1999 Annual Report
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 it 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 LFF, 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
reorganization, 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. 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 instrumentation 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.
<PAGE>
Developments in Fiscal 1999
Total consolidated revenues for the Company rose from $15,651,000 in
fiscal 1998 to $16,254,000 in fiscal 1999, an increase of 4%. The Company's
consolidated net earnings of $1,033,000 in fiscal 1998 increased to $1,862,000
in fiscal 1999, and 80% increase. Included in the calculation of 1999 net
earnings is a recognition of a $1,286,000 deferred tax asset to be utilized in
future periods (offset against future tax liability), which is a $742,000
increase over the $544,000 deferred tax asset recognized in fiscal 1998.
Earnings before income tax increased from $1,137,000 in fiscal year 1998 to
$1,231,000 in fiscal year 1999, an 8% increase. An 11% growth in sales in
domestic markets was partially offset by a reduction in sales to export markets,
particularly the Far East where sales dropped to 67% of the sales realized in
1998 for that region. Management attributes the decline in export sales to a
generally weakened foreign economy following the "Asian" monetary crisis of
early 1998, a situation that will hopefully improve over the next several years.
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 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 calorimeters, a plastics testing device, and various custom instruments.
A calorimeter is a device that measures quantities of heat energies. Hart also
offers related software products, temperature calibration services and
calibration seminars.
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 expenditures as a percentage
of revenues have historically been relatively high at Hart. During the fiscal
<PAGE>
year ended July 31, 1999, Hart spent approximately $786,000 on Company-sponsored
research and development activities, compared to $1,077,000 in fiscal 1998. 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 manufacturing and office
facility in Provo, Utah. Currently, Hart manufactures 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 insurance 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 under insured 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 1999, 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.
Competition. Hart's temperature instrumentation products compete 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 the categories
offered by competitors and tend to compete less directly with such lower
performance products. CSC primarily competes with MicroCal and Thermometrics in
the calorimetry market.
<PAGE>
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. 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 $513,000 in fiscal 1999.
Employees
As of September 30, 1999, Hart employed 71 full-time and 5 part-time
employees, all of whom are employed in Hart's office/manufacturing facility in
American Fork, Utah. Also as of September 30, 1999, CSC employed 16 full-time
employees and two part time employees in 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. Hart is currently
expanding at its present location by adding approximately 22,000 square feet of
space, which the Company plans to occupy in 2000.
CSC is planning to move into a new 12,000 square foot
office/manufacturing space in Spanish Fork Utah in November 1999. CSC will lease
those premises under a ten year lease at a monthly cost of $7,000 during the
first year with 2% annual increases thereafter.
The Company and LFF are presently housed in offices totaling
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
<PAGE>
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 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.
Comparison of 1999 versus 1998
Net Sales
Total revenues for the Company increased 4% in fiscal 1999 to
$16,254,000 versus $15,651,000 in fiscal 1998. Hart revenues for fiscal 1999
were $15,899,000 versus $15,148,000 in fiscal 1998, a 5% 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.)
LFF had $513,000 in revenues during the 1999 fiscal year compared to
$502,000 in fiscal year 1998. 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.
<PAGE>
Exports made up 25% of total Company revenues in fiscal 1999 compared
to 30% in fiscal 1998 and 35% in fiscal 1997. Export shipments to the Far East
decreased significantly during the 1999 fiscal year. This continues the same
trend from last 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 44% in fiscal 1999 compared to 51%
in fiscal 1998. 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. Management
believes that gross margins decreased in fiscal 1999 primarily due to a product
shipment mix of lower margin products.
Operating Expenses
General and administrative (G&A) expenses at Hart were 21% of total
revenues in fiscal 1999 versus 24% during fiscal 1998. Actual spending decreased
by 10% or $406,000. G&A expenses at LFF were $497,000 in fiscal 1999 versus
$593,000 in fiscal 1998. With low unemployment in Utah, the company is
experiencing increased personnel costs, a trend the company expects to continue
in the near future. The Company hopes to off-set such increased costs through
increased efforts at improving personnel productivity.
Marketing expenses at Hart decreased from 9.5% of revenues in fiscal
1998 to 8.5% of revenues in fiscal 1999. Actual spending decreased by $90,000.
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 $786,000 in fiscal
1999 versus $1,077,000 in fiscal 1998. Hart continues to develop new products
and improve existing products. To remain competitive, R&D spending is likely to
increase in the future.
<PAGE>
Net Earnings
Net earnings for the Company were $1,862,000 in fiscal 1999 versus
$1,033,000 for fiscal 1998. Included in the calculation of 1999 net earnings is
a recognition of a $1,286,000 deferred tax asset to be utilized in future
periods (offset against future tax liability). In contrast, the Company's
calculation of net earnings in fiscal 1998 included the recognition of a
$544,000 deferred tax asset to be utilized in future periods.
Earnings of the Company before income tax for fiscal 1999 were
$1,231,000 versus $1,137,000 for fiscal 1998, an 8% increase. Hart had net
pretax income of $1,623,000 for the current fiscal year versus a net pretax
income of $1,490,000 for fiscal 1998, a 9% increase. Management believes that
general increases in revenue and cost controls accounted for the increase in
operating earnings.
A $631,000 tax benefit was realized by the Company in 1999, due in
part to a recognition of a $1,286,000 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 $5,949,000) should be recognized as a deferred
tax asset in accordance with Financial Accounting Standard (FAS) No. 109 in the
1999 fiscal year. This had the effect of increasing net earnings by
approximately $1,286,000 in 1999. If it were to be determined in the future
years that the Company's remaining unrecorded tax loss carryforward is more
likely than not to be utilized, similar recognition of such tax loss
carryforward would could have the result of increasing assets and net earnings
in such years.
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 ($513,000 in fiscal 1999), 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 LFF cash expenses reduce the overall operating profit of the Company
because any LFF revenues from the subleases are offset, on an accounting basis,
by the amortization of the leasehold asset.
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. Management believes the increase in revenues in fiscal 1998
<PAGE>
was 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 compared to
$486,000 in fiscal year 1997. These revenues were generated primarily from its
New York subleases.
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. Other export markets showed mixed results during the year.
Gross Profit
Gross profit margins for Hart were 51% in fiscal 1998 compared to 49%
in fiscal 1997. Management 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.
Research and development expenditures at Hart were $1,077,000 in fiscal
1998 versus $866,000 in fiscal 1997. Hart continues to develop new products and
improve existing products.
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 included
recognition of a $544,000 deferred tax asset. In contrast, the Company's net
earnings in 1997 included a recognition of a deferred tax asset in the amount of
$780,000 and an extraordinary gain of $314,000 from extinguishment 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 1998 fiscal year versus a
net pretax income of $546,000 for fiscal 1997, a 173% increase. Management
<PAGE>
believes that general increases in revenue, increased shipments of higher priced
instruments with better margins, and a higher percentage of revenue produced in
direct sales markets with higher margins accounted for the increase in
operating earnings.
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 1999 were $980,000 and
$778,000 in fiscal 1998.
Hart carries a line of credit with Key Bank N.A.. Hart had a maximum
borrowing capacity of $650,000 as of July 31, 1999. At that time, approximately
$500,000 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, 1999.
The Company's current ratio as of July 31, 1999 was 3.50 to 1 versus
3.44 to 1 on July 31, 1998. The ratio of total debt to total assets at July 31,
1999 was .20 versus .20 on July 31, 1998.
As of July 31, 1999, the Company's working capital was $6,394,000
versus $5,035,000 on July 31, 1998.
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 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 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.
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 completed a review of its products and internal systems.
<PAGE>
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 inventory control, 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 that all replacement work to
make its internal information systems Year 2000 compliant will be completed by
the end of 1999.
At this time, management of Hart does not expect any significant
adverse effects from the Year 2000 problem with regard to its products. The
majority of its 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.
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. Hart has begun the process of contacting their
larger vendors to determine their Year 2000 compliance. 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 has formulated a simple contingency plan. In summary,
the plan includes a list of alternative suppliers the Company may be able to
order parts from in the event that current suppliers are unable to completely
fill Company demand for parts. In addition, Hart has also reviewed the
possibility of using manual systems as a supplement to its computerized internal
systems including its network and operating software programs. Hart has also
made a list of all of the facility systems that can be operated manually.
Although the Company has taken action to identify alternative
suppliers, in some cases there may not be sufficient alternative sources to
completely eliminate all adverse consequences of the Year 2000 problems, or
eliminate shortages of parts for certain products. The Company believes that the
largest risk comes from the possibility that other companies may order larger
quantities of certain materials and parts that they would normally purchase as a
<PAGE>
hedge against Year 2000 problems. This type of action could cause temporary
increases in demand for these materials and parts, thus creating unnecessary
shortages. There is no way to assess the possibility of this occurring. The
Company is monitoring parts availability.
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 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
contained 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 number of risks and uncertainties, including those
described in the Company's 1999 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
<PAGE>
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.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning directors
and executive officers of the Company:
<TABLE>
<CAPTION>
Began Service as an
Name Age Positions Held Officer or Director
- ---- --- -------------- -------------------
<S> <C> <C> <C>
David K. Lifschultz 53 Chairman and 1991
CEO of the Company
(also President and
Director of LFF)
Dennis R. Hunter 48 President, Director, and CFO 1988
of the Company (also CEO,
President, and Chairman of
CSC and Director of Hart)
Sidney B. Lifschultz 87 Director of the Company 1991
Joseph C. Fatony 52 Director of the Company 1998
James E. Solomon 49 Director of the Company and Hart 1995
James C. Triplett 49 Chairman and CEO of Hart 1988
J. Randall Owen 41 President and COO of Hart 1994
Michael Hirst 50 Vice President and 1988
Director of Hart
</TABLE>
For further information on these individuals, including biographies,
please refer to the Company's Proxy Statement.
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq SmallCap
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 nearest cent. The prices shown for periods
prior to 1998 are adjusted to reflect the Company's reverse stock split in
January 1998.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1999
Price Range High Low High Low
----------- ---- --- ----- ---
<S> <C> <C> <C> <C>
1st Quarter $ 6.25 $ 3.125 $ 6.50 $ 3.125
2nd Quarter $ 6.25 $ 3.125 $ 6.88 $ 3.125
3rd Quarter $10.00 $ 4.375 $ 5.44 $ 4.375
4th Quarter $ 8.75 $ 5.625 $ 6.25 $ 5.625
</TABLE>
As of September 10, 1999 there were approximately 329 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, 1999 and 1998 and for each of the two years ended
July 31, 1999 and 1998 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.
<PAGE>
LIFSCHULTZ INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
JULY 31, 1999 AND 1998
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants FS-1
Consolidated financial statements
Balance sheets FS-2
Statements of earnings FS-3
Statements of shareholders' equity FS-4
Statements of cash flows FS-5
Notes to consolidated financial statements FS-7
</TABLE>
<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, 1999 and 1998,
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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lifschultz
Industries, Inc. and Subsidiaries as of July 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/S/GRANT THORNTON LLP
Provo, Utah
October 1, 1999
FS-1
<PAGE>
<TABLE>
<CAPTION>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 31,
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,175,000 $ 989,000
Marketable securities 993,000 805,000
Trade accounts receivable, net 3,059,000 2,468,000
Related party receivable 51,000 79,000
Deferred income taxes 323,000 234,000
Inventories 3,190,000 2,386,000
Other current assets 159,000 136,000
------------ ------------
Total current assets 8,950,000 7,097,000
1,598,000 2,066,000
PROPERTY HELD FOR LEASE, NET
PROPERTY AND EQUIPMENT, NET 1,181,000 972,000
LAND 170,000 100,000
DEFERRED INCOME TAXES 1,222,000 550,000
------------ ------------
$ 13,121,000 $ 10,785,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
FS-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable to bank $ 150,000 $ 154,000
Accounts payable 688,000 519,000
Income taxes payable 149,000 34,000
Accrued liabilities 1,528,000 1,318,000
Note payable to shareholder - 3,000
Current maturities of capital lease obligations 39,000 32,000
Current maturities of long-term obligation 2,000 2,000
------------- -------------
Total current liabilities 2,556,000 2,062,000
LONG-TERM OBLIGATION, less current maturities 5,000 7,000
CAPITAL LEASE OBLIGATIONS, less current maturities 92,000 110,000
COMMITMENTS - -
SHAREHOLDERS' EQUITY
Convertible preferred stock, par value $0.01;
authorized 100,000 shares
Series A; issued and outstanding 5,200 shares
in 1999and 1998. - -
Series E; issued and outstanding 21,231 shares
in 1999 and 1998 - -
Common stock, par value $0.001; authorized 1,650,000 shares;
issued 1,117,519 shares in 1999 and 1998 1,000 1,000
Additional paid-in capital 11,060,000 11,060,000
Treasury stock, at cost (22,560 common shares) (157,000) (157,000)
Accumulated deficit (436,000) (2,298,000)
------------- -------------
Total shareholders' equity 10,468,000 8,606,000
------------- -------------
$ 13,121,000 $ 10,785,000
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended July 31,
1999 1998
------------- -------------
<S> <C> <C>
Net sales $ 16,254,000 $ 15,651,000
Costs and expenses
Cost of products sold 8,828,000 7,416,000
Selling, general and administrative 5,370,000 5,967,000
Research and development 786,000 1,077,000
Interest 39,000 54,000
------------- -------------
15,023,000 14,514,000
------------- -------------
Earnings before income taxes 1,231,000 1,137,000
Income tax expense (benefit) (631,000) 104,000
------------- -------------
NET EARNINGS $ 1,862,000 $ 1,033,000
============= =============
Net earnings per common share - basic $ 1.70 $ 0.95
============= =============
Net earnings per common share - diluted $ 1.56 $ 0.88
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
FS-3
<PAGE>
<TABLE>
<CAPTION>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended July 31, 1999 and 1998
Common
Preferred Stock Additional Stock
Common ---------------------------- Paid-in Subscriptions Treasury Accumulated
Stock Series A Series B Series E Capital Receivable Stock Deficit Total
-------- --------- -------- --------- ------------ ------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1997 $ 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 July 31, 1998 1,000 - - - 11,060,000 - (157,000) (2,298,000) 8,606,000
Net earnings - - - - - - - 1,862,000 1,862,000
-------- --------- -------- -------- ------------ ------------- ---------- ------------ -----------
Balance at July 31, 1999 $ 1,000 $ - $ - $ - $ 11,060,000 $ - $(157,000) $ (436,000) $10,468,000
======== ========= ======== ======== ============ ============= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
FS-4
<PAGE>
<TABLE>
<CAPTION>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31,
1999 1998
------------ ------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 1,862,000 $ 1,033,000
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 309,000 262,000
Amortization of leasehold interest 468,000 500,000
Provision for bad debts 12,000 (15,000)
Compensation to officers - 15,000
Deferred income taxes (761,000) (4,000)
(Gain) loss on sale of property and equipment (2,000) 3,000
Changes in assets and liabilities
Trade accounts receivable (603,000) (615,000)
Related party receivable 28,000 (49,000)
Inventories (804,000) (498,000)
Other current assets (23,000) 6,000
Accounts payable 169,000 46,000
Accrued liabilities 210,000 161,000
Income taxes payable 115,000 (67,000)
------------ ------------
Total adjustments (882,000) (255,000)
------------ ------------
Net cash provided by
operating activities 980,000 778,000
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (569,000) (412,000)
Proceeds from sale of property and equipment 3,000 6,000
Purchase of marketable securities (982,000) (786,000)
Proceeds from maturities of marketable securities 794,000 557,000
------------ ------------
Net cash used in
investing activities (754,000) (635,000)
------------ ------------
</TABLE>
(continued)
FS-5
<PAGE>
<TABLE>
<CAPTION>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended July 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from financing activities
Net change in note payable to bank (4,000) 1,000
Proceeds from issuance of long term debt - 10,000
Principal payments on long-term obligations (2,000) (48,000)
Principal payments on note payable to shareholder (3,000) -
Principal payments on capital lease obligations (31,000) (28,000)
Net proceeds from issuance of common stock - 10,000
------------ ------------
Net cash used in
financing activities (40,000) (55,000)
------------ ------------
Net increase in cash
and cash equivalents 186,000 88,000
Cash and cash equivalents at beginning of year 989,000 901,000
------------ ------------
Cash and cash equivalents at end of year $ 1,175,000 $ 989,000
============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 39,000 $ 54,000
Income taxes 106,000 42,000
</TABLE>
Noncash investing and financing activities
During 1999 and 1998, the Company entered into capital leases for $19,000 and
$46,000 of equipment, respectively.
During 1998, common stock subscriptions receivable totaling $15,000 were
relieved in exchange for compensation to officers.
Also during 1998, the tax effect of exercising stock options was an $8,000
increase to additional paid-in-capital.
The accompanying notes are an integral part of these statements.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
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
transactions 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 and
losses reported in equity. There were no significant net unrealized
holding gains or losses during 1999 and 1998.
5. Inventories
-----------
Inventories are valued at the lower of cost or market using the first-in,
first-out method.
FS-7
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Property and equipment
----------------------
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to operations as incurred, whereas major
replacements and improvements are capitalized and subsequently
depreciated or amortized. For financial reporting purposes, depreciation
and amortization is provided on a straight-line basis over the lesser of
the estimated useful lives of the assets or the life of the respective
lease, if applicable. 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.
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.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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, marketable
securities, trade receivables, notes payable and trade payables
approximates their fair values due to their short-term nature.
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 reclassifications have been made to the 1998 financial statements
to conform with the 1999 presentation. These reclassifications had no
effect on total assets or net income.
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 $544,000 at July 31, 1999.
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, 1999 and 1998, this allowance was $22,000 and $15,000
respectively.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE B - CREDIT CONCENTRATION AND EXPORT SALES - CONTINUED
2. Export sales
------------
<TABLE>
<CAPTION>
Export sales consist of the following:
1999 1998
----------- -----------
<S> <C> <C>
Europe $ 2,161,000 $ 2,136,000
Far East 1,124,000 1,682,000
Middle East 161,000 236,000
North America 369,000 282,000
South America 283,000 359,000
----------- -----------
$ 4,098,000 $ 4,695,000
=========== ===========
</TABLE>
NOTE C - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
1999 1998
------------ -----------
<S> <C> <C>
Raw materials $ 2,115,000 $ 1,306,000
Work in process 788,000 947,000
Finished goods 175,000 31,000
Demonstration units 192,000 102,000
Less inventory reserves (80,000) -
------------ -----------
$ 3,190,000 $ 2,386,000
============ ===========
</TABLE>
NOTE D - PROPERTY HELD FOR LEASE
<TABLE>
<CAPTION>
Property held for lease consists of the following:
1999 1998
----------- -----------
<S> <C> <C>
Leasehold interest $ 7,500,000 $ 7,500,000
Less
Accumulated amortization 4,276,000 3,808,000
Valuation allowance to adjust to
undiscounted cash flows 1,626,000 1,626,000
----------- -----------
5,902,000 5,434,000
----------- -----------
$ 1,598,000 $ 2,066,000
=========== ===========
</TABLE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE D - PROPERTY HELD FOR LEASE - CONTINUED
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, subject to annual Consumer Price Index
increases, through September 2002.
NOTE E - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment and estimated useful lives consist of the
following:
Years 1999 1998
--------- ---------- -----------
<S> <C> <C> <C>
Furniture and fixtures 3-5 $ 1,202,000 $ 960,000
Machinery and equipment 5-10 773,000 562,000
Equipment held under capital lease 10 249,000 260,000
Leasehold improvements 5-8 351,000 284,000
----------- -----------
2,575,000 2,066,000
Less accumulated depreciation
and amortization 1,394,000 1,094,000
---------- -----------
$ 1,181,000 $ 972,000
========== ===========
</TABLE>
NOTE F - NOTE PAYABLE TO BANK
The note payable to bank consists of a line of credit issued to Hart with
interest at prime plus 1.5 percent (8 percent at July 31, 1999). The
line, which is scheduled for renewal in December 1999, is collateralized
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, 1999,
$500,000 was available under the line.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE G - LONG-TERM OBLIGATIONS
1. Capital Leases
--------------
The Company has capital lease obligations with a corporation. The
balances at July 31, 1999 and 1998, total $131,000 and $142,000,
respectively, and bear interest at approximately nine percent per year.
Payments of approximately $4,000 are due monthly and the obligations are
due in full between February of 2002 and June of 2003. The obligations
are collateralized by the leased equipment.
The Company has accumulated amortization relating to the capital leases
(Note E) of $59,000 and $35,000 as of July 31, 1999 and 1998,
respectively. Amortization expense on capital leases approximated $24,000
and $20,000 for 1999 and 1998, respectively.
The following is a schedule by year of future minimum lease payments of
the capital lease obligations together with the present value of the net
lease payments at July 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
Year ending July 31,
2000 $ 49,000
2001 49,000
2002 35,000
2003 15,000
2004 2,000
Thereafter -
---------
Total minimum leases payments 150,000
Less amount representing interest 19,000
---------
Present value of net minimum lease payments 131,000
Less current maturities 39,000
---------
Capital lease obligations $ 92,000
=========
</TABLE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
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.
<TABLE>
<CAPTION>
Aggregate maturities of long-term debt are as follows:
<S> <C>
Year ending July 31,
2000 $ 2,000
2001 2,000
2002 2,000
2003 1,000
Thereafter -
---------
$ 7,000
=========
</TABLE>
NOTE H - OPERATING LEASES
The Company leases laboratory and office space under operating leases
expiring in various years through 2009. 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 as of July 31, 1999 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending July 31,
2000 $ 231,000
2001 251,000
2002 258,000
2003 265,000
2004 272,000
Thereafter 741,000
----------
$ 2,018,000
==========
</TABLE>
Rent expense totaled $220,000 for the years ended July 31, 1999 and 1998.
The Company has a right of first refusal to purchase certain of this real
estate at approximate market value.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE I - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consist of the following:
1999 1998
----------- -----------
<S> <C> <C>
Payroll, payroll taxes and benefits $ 471,000 $ 403,000
Bonuses 615,000 535,000
Warranties 147,000 159,000
Other 295,000 221,000
----------- -----------
$ 1,528,000 $ 1,318,000
=========== ===========
</TABLE>
NOTE J - INCOME TAXES
<TABLE>
<CAPTION>
Components of income tax expense (benefit) consist of the following:
1999 1998
------------- ------------
<S> <C> <C>
Current
Federal $ 29,000 $ 25,000
State 101,000 83,000
------------- ------------
130,000 108,000
------------- ------------
Deferred
Federal (659,000) (3,500)
State (102,000) (500)
------------- ------------
(761,000) (4,000)
------------- ------------
Total taxes (benefit) $ (631,000) $ 104,000
============= ============
</TABLE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE J - INCOME TAXES - CONTINUED
<TABLE>
<CAPTION>
The provision for income taxes differs from the statutory Federal income
tax rate due to the following:
1999 1998
----------- -----------
<S> <C> <C>
Income taxes computed at federal statutory rate of 34% $ 418,000 $ 387,000
State taxes, net of federal benefit 91,000 83,000
Realization of net operating loss carryforward
and change in valuation allowance (1,286,000) (530,000)
Non-deductible expenses 146,000 161,000
Other - 3,000
----------- ------------
Total income taxes (benefit) $ (631,000) $ 104,000
=========== ===========
</TABLE>
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current deferred tax assets
Deferred compensation $ 128,000 $ 119,000
Allowance for doubtful accounts 9,000 2,000
Inventory reserves 30,000 -
Accrued expenses 88,000 92,000
Contributions carryforward 43,000 38,000
Uniform inventory capitalization 27,000 (17,000)
Other (2,000) -
------------ ------------
Net current tax assets $ 323,000 $ 234,000
============ ============
Long-term deferred tax assets
Net operating loss carryforwards $ 2,219,000 $ 2,867,000
Excess book depreciation and amortization 20,000 16,000
Alternative minimum tax credit carryforward 183,000 153,000
Less valuation allowance (1,200,000) (2,486,000)
------------ ------------
Net long-term tax assets $ 1,222,000 $ 550,000
============ ============
</TABLE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE J - INCOME TAXES - CONTINUED
At July 31, 1999, the Company has net operating loss carryforwards for
tax reporting purposes of approximately $5,949,000 which expire from 2004
through the year 2007.
During 1999, management evaluated the prospects for future profitable
operations of the Company. Because the Company has generated operating
profits for the last several years and current budget forecasts project
profits continuing into the future, generally accepted accounting
principles require the deferred tax asset related to the net operating
loss carryforwards to be reflected on the balance sheet (net of its
respective valuation allowance) since it appears more likely than not
that a major portion of the deferred tax asset relating to net operating
loss carryforwards will be realized in the future. The valuation
allowance on deferred taxes was decreased $1,286,000 during 1999, to
adjust for this evaluation regarding the realizability of the deferred
tax asset and other deferred tax assets and liabilities.
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, 1999,
5,200 shares of series A preferred stock were issued and outstanding.
In February of 1998, all series B preferred stock was cancelled by
amendment to the articles of incorporation of the Company.
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 liquidation 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.
At July 31, 1999, a total of 21,231 shares of series E preferred stock
were issued and outstanding.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE K - CAPITAL STOCK - CONTINUED
2. Cumulative nonvoting preferred shares
-------------------------------------
In February of 1998, the series C ten percent cumulative non-voting
preferred stock and series D eight percent cumulative non-voting
preferred stock were canceled by amendment to the articles of
incorporation of the Company.
3. Reverse stock split
-------------------
During 1998, the Company's common stock was split one-for-fifty in a
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 $0.001
per share. All amounts relating to common stock in these financial
statements have been adjusted for the split.
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION
1. Stock options
-------------
The Company's board of directors has the authority to grant stock options
to employees, officers and non-employees. The stock options are
considered non-qualified for income tax purposes. As of July 31, 1999,
the Company had granted stock options to various officers, directors,
employees and other non-employees of the Company covering the aggregate
number of 170,000 shares of the Company's common stock. Except as
explained below, options vest immediately upon grant.
Options issued in connection with the Company's leasehold interest (Note
D) vest ratably at a rate of one option for every nine common shares
(pre-reverse stock split) issued as a result of a) the exercise of
employee stock options outstanding at the date of the agreement
(approximately 23,000 such options are outstanding at July 31, 1999 and
1998) and b) the conversion of Series A preferred stock (5,200 shares are
convertible into 1,040 common shares at July 31, 1999). These options are
exercisable at the then existing par value of the common stock ($.05). At
July 31, 1999, 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
with an exercise price of $4.625 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.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
2. 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 compensation
under Accounting Principles Board Opinion No. 25, under which no
significant compensation cost has been recognized. Had the compensation
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 earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
Net earnings
As reported $ 1,862,000 $ 1,033,000
Pro forma 1,849,000 924,000
Net earnings per common share - basic
As reported $ 1.70 $ 0.95
Pro forma 1.69 0.85
Net earnings per common share - diluted
As reported $ 1.56 $ 0.88
Pro forma 1.55 0.79
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before fiscal 1997. The fair value of options was
estimated at the date of grant using the Black-Scholes American
option-pricing model with the following weighted-average assumptions for
1998: 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 in 1998.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
2. Fair market value of options granted- continued
----------------------------------------------
Option pricing models require the input of highly sensitive assumptions,
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.
Information with respect to the Company's stock options at July 31, 1999:
<TABLE>
<CAPTION>
Weighted-average
Stock options Exercise price Exercise price
------------- -------------- ----------------
<S> <C> <C> <C>
Outstanding at August 1,
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 0.50 to 4.625 2.690
Granted - - -
Exercised - - -
Canceled/expired - - -
----------
Outstanding at July 31,
1999 170,000 0.50 to 4.625 2.690
==========
Exercisable at July 31,
1999 121,000 $ 0.50 to 4.625 $2.690
==========
</TABLE>
Additional information about stock options outstanding and exercisable at
July 31, 1999:
<TABLE>
<CAPTION>
Options outstanding
-------------------
Weighted average
Number Weighted-average remaining-contractual
Exercise price outstanding Exercise price life (years)
-------------- ----------- ---------------- ---------------------
<S> <C> <C> <C>
$ 0.050 8,000 $ 0.050 8.1
1.565 71,000 1.565 3.6 to 8.1
3.215 51,000 3.215 5.3 to 13.6
4.625 40,000 4.625 13.8
-------
170,000
=======
</TABLE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE L - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
<TABLE>
<CAPTION>
Options exercisable
-------------------
Number Weighted-average
Exercise price exercisable exercise price
-------------- ----------- ----------------
<S> <C> <C>
$ 0.050 1,000 $ 0.050
1.565 69,000 1.565
3.215 51,000 3.215
-------
121,000
=======
</TABLE>
3. Put option
----------
Pursuant to an employee agreement (Note M), 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.
NOTE M - COMMITMENTS
The Company has employment and severance agreements with certain officers
and managers of the Company. Salaries covered by these agreements range
from $82,000 to $285,000 annually. Contracts, with three individuals,
provide for annual salaries of $225,000 (plus a five percent annual
increase), $231,000 (plus a five percent 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 percent 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 eight or more years
and some have been employed more than twelve 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, 1999.
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE N - 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. The
Company's matching contributions vest at a rate of 20 percent per year.
The Company contributed approximately $135,000 and $121,000 to the plan
during the fiscal years ended July 31, 1999 and 1998, respectively.
NOTE O - RELATED PARTY TRANSACTIONS
During 1999 and 1998, the Company purchased $114,000 and $103,000
respectively, of inventory from an entity owned by the spouse of an
officer of the Company.
NOTE P - EARNINGS PER COMMON SHARE
The following shows the shares used in computing earnings per common
share including dilutive potential common stock:
<TABLE>
<CAPTION>
For the Year Ended July 31, 1999
----------------------------------------------------------
Weighted-average
Net Earnings shares Per-share
(numerator) (denominator) amount
---------------- ------------------- -----------------
<S> <C> <C> <C>
Net earnings per common share - basic
Net earnings available to common shareholders $ 1,862,000 1,094,959 $ 1.70
================ =================
Effect of dilutive securities
Stock options 93,639
Convertible preferred stock 5,286
----------
Net earnings per common share - diluted
Net earnings available to common shareholders $ 1,862,000 1,193,884 $ 1.56
================ ========= =================
</TABLE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and 1998
NOTE P - EARNINGS PER COMMON SHARE - CONTINUED
<TABLE>
<CAPTION>
For the Year Ended July 31, 1998
----------------------------------------------------------
Weighted-average
Net Earnings shares Per-share
(numerator) (denominator) amount
---------------- ------------------- -----------------
<S> <C> <C> <C>
Net earnings per common share - basic
Net earnings available to 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 - diluted
Net earnings available to common shareholders $ 1,033,000 1,179,012 $ 0.88
================ ========= =================
</TABLE>
<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.)
Exhibit 23.01
CONSENT
We have issued our report dated October 1, 1999, accompanying the consolidated
financial statements included in the Annual Report of Lifschultz Industries,
Inc. on Form 10-KSB for the year ended July 31, 1999. 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
October 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> $6,175,000
<SECURITIES> $993,000
<RECEIVABLES> $3,081,000
<ALLOWANCES> $22,000
<INVENTORY> $3,190,000
<CURRENT-ASSETS> $8,950,000
<PP&E> $8,449,000
<DEPRECIATION> $5,670,000
<TOTAL-ASSETS> $13,121,000
<CURRENT-LIABILITIES> $2,556,000
<BONDS> 0
0
0
<COMMON> $1,000
<OTHER-SE> $10,467,000
<TOTAL-LIABILITY-AND-EQUITY> $13,121,000
<SALES> $16,254,000
<TOTAL-REVENUES> $16,254,000
<CGS> $8,828,000
<TOTAL-COSTS> $15,023,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $39,000
<INCOME-PRETAX> $1,231,000
<INCOME-TAX> ($631,000)
<INCOME-CONTINUING> $1,862,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $1,862,000
<EPS-BASIC> 1.70
<EPS-DILUTED> 1.56
</TABLE>
