Exhibit 13.01
2000 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
calorimetry instrumentation and industrial temperature 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 temperature calibration
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.
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Except as otherwise noted, the discussion of Hart in the following paragraphs
includes the business of CSC.
Developments in Fiscal 2000
Total revenues for the Company rose from $16,254,000 in fiscal 1999 to
$19,334,000 in fiscal 2000, an increase of 19%. The Company's consolidated net
earnings of $1,862,000 in fiscal 1999 increased to $2,108,000 fiscal 2000, a 13%
increase. Included in the calculation of 2000 net earnings is a recognition of a
$1,249,000 deferred tax asset to be utilized in future periods (offset against
future tax liability), compared to a $1,286,000 deferred tax asset recognized
during fiscal 1999. .
Hart Scientific, Inc. and Subsidiary
Products and Markets. Hart's business strategy is to target narrow
market niches in temperature calibration equipment and high performance
calorimetry applications, build solution-oriented products 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, the biotechnology industry, and industrial manufacturing companies of
all types. The management of Hart believes that this strategy reduces risk and
results in higher margins, lower development costs, and greater growth potential
for Hart. Hart manufactures and markets temperature calibration services,
calibration seminars, constant temperature baths, microprocessor readout devices
(thermometers), primary standards, dry-wells and a variety of other temperature
calibration devices. Products manufactured and marketed by Hart's subsidiary CSC
include biological scanning calorimeters, heat conduction calorimeters, several
specialty calorimeters, parison calorimeters, a plastics testing device, and
various custom instruments. A calorimeter is a device that measures quantities
of heat energies.
During the last fiscal year, Hart was awarded a contract from NAVAIR, a
division of the United States Navy, for a custom temperature calibrator. The
contract is projected to total 150 units. To date, 50 have been shipped.
Management estimates that the three-year revenue from this contract will exceed
$1 million. Hart also recently introduced a new 1529 Thermometer, a precision
field thermometer targeted at the pharmaceutical and bio-medical industries.
Management currently projects first year sales of approximately $200,000.
Customer Service and Support. Most of Hart's products carry a standard
one-year warranty and factory service guarantee. Customer service is structured
around toll-free telephone support, in-factory service, and on-site repair when
necessary.
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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
year ended July 31, 2000, Hart spent approximately $$959,000 on
Company-sponsored research and development activities, compared to $786,000 in
fiscal 1999. 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 owns a manufacturing and office
facility in American Fork, Utah, while CSC leases a manufacturing and office
facility in Spanish Fork, 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 major difficulty in
obtaining components; however, various parts shortages have arisen in the past
and are expected from time to time in the future, so there can be no certainty
that parts shortages would not at some point have an adverse effect on the
Company. 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 calibration service departments and
research departments of universities, governmental agencies, and industrial
corporations. No customer accounted for more than 10 percent of total revenues
during fiscal 2000, 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 except for one connector
patent held by Hart. CSC licenses some patented product designs from the Johns
Hopkins University and acquired certain proprietary product designed from
Thermodynamics during 1999. Hart generally relies on trade secrets and
confidentiality agreements to protect the proprietary aspects of its
technologies.
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
uses traditional distribution channels such as sales representatives for its
products in Europe, Asia and other foreign markets. CSC utilizes an exclusive
distributor in Japan for some of its calorimeter products.
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Competition. Hart's temperature instrumentation products compete with
similar products from companies such as IsoTech, 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.
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 $522,000 in fiscal 2000.
Employees
As of September 30, 2000, Hart employed 76 full-time and nine 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 17 full-time
employees and three part time employees in its office/manufacturing facility in
Spanish Fork, 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
50,500 square foot building in American Fork, Utah. Beginning in 2000, Hart
purchased the building and associated land for approximately $2,341,000 and
spent an additional $317,000 on capital improvements. The building, which was
originally built in 1996 and expanded in 1999, is in good condition and is
currently adequate for Hart's needs.
CSC moved into a new 12,000 square foot office/manufacturing space in
Spanish Fork Utah in November 1999. CSC leases those premises under a ten year
lease at a monthly cost of $7,000 during the first year with 2% annual increases
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thereafter. The building is of new construction and currently adequate for CSC's
needs.
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
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.
Net Sales
Total revenues for the Company increased 19% in fiscal 2000 to
$19,334,000 versus $16,254,000 in fiscal 1999. Hart revenues for fiscal 2000
were $18,809,000 versus $15,899,000 in fiscal 1999, an 18% 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.)
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LFF had $525,000 in revenues during the 2000 fiscal year compared to
$513,000 in fiscal year 1999. 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.
Exports made up 31% of total Company revenues in fiscal 2000 compared
to 25% in fiscal 1999, contributing significantly to this year's growth in
revenues. Hart sales to the Far East did show a strong recovery during the
fiscal year increasing from $1,124,000 in fiscal 1999 to $2,198,000 in fiscal
2000.
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 both domestically and in
export markets.
Gross Profit
Gross profit margins for Hart were 47% in fiscal 2000 compared to 44%
in fiscal 1999. 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 increased in fiscal 2000 primarily due to a product
shipment mix of higher margin products and efforts for reduced costs.
Operating Expenses
General and administrative (G&A) expenses at Hart were 19% of total
revenues in fiscal 2000 versus 21% during fiscal 1999. Actual spending increased
by 12% or $401,000. G&A expenses at LFF were $511,000 in fiscal 2000 versus
$497,000 in fiscal 1999. With very low unemployment in Utah, Hart 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 increased from 8.5% of revenues in fiscal
1999 to 10% of revenues in fiscal 2000. Actual spending increased by $551,000.
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 continue to increase in this market environment and management expects this
will be the case. Hart currently intends to focus a significant part of its
marketing efforts on improving its sales of higher cost/higher margin products
in export markets.
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Research and development expenditures at Hart were $959,000 in fiscal
2000 versus $786,000 in fiscal 1999. Hart continues to develop new products and
improve existing products. To remain competitive, R&D spending is also likely to
increase in the future.
Net Earnings
Net earnings for the Company were $2,108,000 in fiscal 2000 versus
$1,862,000 for fiscal 1999 an increase of 13%. Included in the calculation of
2000 net earnings is a $351,000 tax benefit realized by the Company in 2000, due
in part to a recognition of a $1,249,000 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 1999 included the recognition of a
$1,286,000 deferred tax asset. 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 the remaining portion of the Company's tax loss carryforward
(which, for tax reporting purposes, currently is $4,287,000) should be
recognized as a deferred tax asset in accordance with Financial Accounting
Standard (FAS) No. 109 in the 2000 fiscal year.
Earnings of the Company before income tax for fiscal 2000 were
$1,757,000 versus $1,231,000 for fiscal 1999, a 43% increase. Hart had net
pretax income of $2,199,000 for the current fiscal year versus a net pretax
income of $1,623,000 for fiscal 1999, a 35% increase. Management believes that
general increases in revenue, higher margin product mix and cost controls
accounted for the increase in operating earnings.
The LFF real estate sublease is carried on the balance sheet as an
asset equal in value to the cash expected to be generated by the sublease over
its 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 ($522,000 in fiscal 2000), they have no
positive impact upon the statement of earnings of the Company. LFF cash
expenses, such as salaries, are covered by the cash flow from the LFF sublease
and supplemental 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.
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 2000 were $1,065,000 and
$980,000 during fiscal 1999.
Hart carries a line of credit with Key Bank N.A. Hart had a maximum
borrowing capacity of $1,015,000 as of July 31, 2000. At that time,
approximately $865,000 of the credit line was available for use. Use of this
credit line varies with product shipments and other factors. Management believes
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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, 2000.
The Company's current ratio as of July 31, 2000 was 3.81 to 1, versus
3.50 to 1 as of July 31, 1999. The ratio of total debt to total assets at July
31, 2000 was .30, versus .20 on July 31, 1999. This ratio of total debt to
assets increased primarily due to the addition of a long-term mortgage to
finance the purchase of Hart's manufacturing facility in American Fork, Utah.
On March 27, 2000, Hart purchased its manufacturing facility in
American Fork Utah for $2,341,000. A mortgage of $2,300,000 was provided by Key
Bank, N.A. The mortgage is a variable rate mortgage based on the prime rate,
with payments amortized over 20 years, and is due in 10 years. Hart entered into
an interest rate hedge agreement with an affiliate of Key Bank that, in effect,
fixes the interest rate on the mortgage at approximately 9.6%
As of July 31, 2000, the Company's working capital was $7,550,000,
versus $6,394,000 as of July 31, 1999.
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.
Summarized Quarterly Data (unaudited)
Following is a summary of the quarterly results of operations for the
years ended July 31, 2000 and 1999:
<TABLE>
<CAPTION>
$ in thousands, except per share amounts First Second Third Fourth Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Net sales $ 3,871 $ 4,620 $ 5,356 $ 5,487 $ 19,334
Earnings before income taxes 244 332 755 426 1,757
Income tax (expense) benefit * (29) (28) (17) 425 351
Net earnings 215 304 738 851 2,108
Net earnings per common share - basic 0.19 0.27 0.66 0.80 1.92
Net earnings per common share - diluted 0.17 0.25 0.57 0.73 1.72
1999
Net sales $ 3,626 $ 3,920 $ 4,068 $ 4,640 $ 16,254
Earnings before income taxes 319 365 315 232 1,231
Income tax (expense) benefit ** (32) (30) (12) 705 631
Net earnings 287 335 303 937 1,862
Net earnings per common share - basic 0.26 0.30 0.32 0.82 1.70
Net earnings per common share - diluted 0.24 0.28 0.27 0.77 1.56
</TABLE>
* In the fourth quarter of 2000, the Company recorded a benefit resulting
from the removal of the valuation allowance associated with deferred tax
assets held by the Company.
** In the fourth quarter of 1999, the Company recorded a benefit resulting
from the removal of a portion of the valuation allowance associated with
deferred tax assets held by the Company.
Due to the small size of the Company, quarterly revenues, expenses and
profits are subject to wide variations and do not necessarily indicate future
performance. Inventory adjustments, marketing expense timing, payroll timing and
other items, which may or may not be amortized, can cause significant
fluctuations in the quarterly financial results.
Year 2000
The coming of year 2000 produced no significant computer-related events
for the company. Only one low volume thermometer product showed a printing error
in the date header due to Y2K software issues. The problem was easily corrected
with a software patch, and no other significant problems of any type were
encountered. All of the company's vendors and suppliers performed well with the
exception of one minor part shortage, which was managed without creating
shipping delays. The total cost for Y2K contingent liability was less than the
$20,000 forecasted.
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
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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
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
Due to factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Past financial performance should not be considered a reliable indicator
of future performance and investors should not use historical trends to
anticipate results or trends in future periods.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning directors
and executive officers of the Company:
<TABLE>
<CAPTION>
Began Service as an
Name Age Positions Held Officer or Director
---- --- -------------- -------------------
<S> <C> <C> <C>
David K. Lifschultz 54 Chairman and 1991
CEO of the Company
(also President and
Director of LFF)
Dennis R. Hunter 49 President, Director, and CFO 1988
of the Company (also CEO,
President, and Chairman of
CSC and Director of Hart)
Sidney B. Lifschultz 88 Director of the Company 1991
Joseph C. Fatony 53 Director of the Company 1998
James E. Solomon 50 Director of the Company and Hart 1995
James C. Triplett 50 Chairman and CEO of Hart 1988
J. Randall Owen 42 President and COO of Hart 1994
Michael Hirst 51 Vice President and 1988
Director of Hart
</TABLE>
For further information on these individuals, including biographies,
please refer to the Company's Proxy Statement.
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq SmallCap
Market since 1991. It trades under the symbol LIFF. The prices below are for the
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high and low closing sales prices of the Company's Common Stock, and are drawn
from Nasdaq reports rounded to the nearest cent. The closing price as of October
27 was $16.125.
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999
Price Range High Low High Low
----------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $ 9.563 $ 5.75 $ 6.50 $ 3.125
2nd Quarter $12.25 $ 7.25 $ 6.88 $ 3.125
3rd Quarter $13.00 $ 9.00 $ 5.44 $ 4.375
4th Quarter $14.75 $ 9.00 $ 6.25 $ 5.625
</TABLE>
As of October 5, 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 2 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, 2000 and 1999 and for each of the two years ended
July 31, 2000 and 1999 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.
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LIFSCHULTZ INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
JULY 31, 2000 AND 1999
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants 1
Consolidated financial statements
Balance sheets 3
Statements of earnings 4
Statements of shareholders' equity 5
Statements of cash flows 6
Notes to consolidated financial statements 8
<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, 2000 and 1999,
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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
GRANT THORNTON LLP
Provo, Utah
September 22, 2000
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 31,
ASSETS
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 888,000 $ 1,175,000
Marketable securities 1,143,000 993,000
Trade accounts receivable, net 3,213,000 3,059,000
Related party receivable 89,000 51,000
Deferred income taxes 168,000 323,000
Inventories 4,558,000 3,190,000
Other current assets 182,000 159,000
------------ ------------
Total current assets 10,241,000 8,950,000
PROPERTY HELD FOR LEASE, NET 1,076,000 1,598,000
PROPERTY AND EQUIPMENT, net 3,442,000 1,181,000
LAND 560,000 170,000
OTHER ASSETS, NET 483,000 -
DEFERRED INCOME TAXES 1,815,000 1,222,000
------------ ------------
$ 17,617,000 $ 13,121,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Current liabilities
Note payable to bank $ 150,000 $ 150,000
Accounts payable 431,000 688,000
Income taxes payable 38,000 149,000
Accrued liabilities 1,969,000 1,528,000
Current maturities of capital lease obligations 55,000 39,000
Current maturities of long-term obligations 48,000 2,000
------------ ------------
Total current liabilities 2,691,000 2,556,000
long-term obligationS, less current maturities 2,245,000 5,000
capital lease obligations, less current maturities 105,000 92,000
Commitments - -
Shareholders' equity
Convertible preferred stock, par value $0.01;
authorized 100,000 shares
Series A; issued and outstanding 5,200 shares
in 2000 and 1999 - -
Series E; issued and outstanding 552 shares
in 2000 and 1999 - -
Common stock, par value $0.001; authorized 1,650,000 shares;
issued 1,121,655 shares in 2000 and 1,117,519 shares in 1999 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)
Retained earnings (accumulated deficit) 1,672,000 (436,000)
------------ ------------
Total shareholders' equity 12,576,000 10,468,000
------------ ------------
$ 17,617,000 $ 13,121,000
============ ============
</TABLE>
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended July 31,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 19,334,000 $ 16,254,000
Costs and expenses
Cost of products sold 9,951,000 8,828,000
Selling, general and administrative 6,540,000 5,370,000
Research and development 959,000 786,000
Interest 127,000 39,000
------------ ------------
17,577,000 15,023,000
------------ ------------
Earnings before income taxes 1,757,000 1,231,000
Income tax benefit 351,000 631,000
------------ ------------
NET EARNINGS $ 2,108,000 $ 1,862,000
============ ============
Net earnings per common share - basic $ 1.92 $ 1.70
============ ============
Net earnings per common share - diluted $ 1.72 $ 1.56
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
Additional Retained
Common Preferred Stock paid-in Treasury earnings
Stock Series A Series E capital stock (deficit) Total
----------- ---------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 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
Net earnings - - - - - 2,108,000 2,108,000
---------- ------- ------- ------------ ---------- ------------ ------------
Balance at July 31, 2000 $ 1,000 $ - $ - $ 11,060,000 $ (157,000) $ 1,672,000 $ 12,576,000
========== ======= ======= ============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 2,108,000 $ 1,862,000
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 376,000 309,000
Amortization of leasehold interest 522,000 468,000
Provision for bad debts 26,000 12,000
Provision for inventory reserves (20,000) -
Deferred income taxes (438,000) (761,000)
(Gain) loss on sale of property and equipment 7,000 (2,000)
Changes in assets and liabilities
Trade accounts receivable (180,000) (603,000)
Related party receivable (38,000) 28,000
Inventories (1,348,000) (804,000)
Other current assets (23,000) (23,000)
Accounts payable (257,000) 169,000
Accrued liabilities 441,000 210,000
Income taxes payable (111,000) 115,000
------------ ------------
Total adjustments (1,043,000) (882,000)
------------ ------------
Net cash provided by
operating activities 1,065,000 980,000
------------ ------------
Cash flows from investing activities
Purchase of land (390,000) -
Purchase of property and equipment (2,552,000) (569,000)
Proceeds from sale of property and equipment 19,000 3,000
Purchase of marketable securities (1,346,000) (982,000)
Proceeds from maturities of marketable securities 1,196,000 794,000
Purchase of other assets (522,000) -
------------ ------------
Net cash used in
investing activities (3,595,000) (754,000)
------------ ------------
</TABLE>
(Continued)
6
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended July 31,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from financing activities
Net change in note payable to bank - (4,000)
Proceeds from issuance of long term obligations 2,300,000 -
Principal payments on long-term obligations (14,000) (2,000)
Principal payments on note payable to shareholder - (3,000)
Principal payments on capital lease obligations (43,000) (31,000)
------------ ------------
Net cash provided by (used in)
financing activities 2,243,000 (40,000)
------------ ------------
Net increase (decrease) in cash
and cash equivalents (287,000) 186,000
Cash and cash equivalents at beginning of year 1,175,000 989,000
------------ ------------
Cash and cash equivalents at end of year $ 888,000 $ 1,175,000
============ ============
Supplemental disclosures of cash flow information
-------------------------------------------------
Cash paid during the year for
Interest $ 127,000 $ 39,000
Income taxes 148,000 106,000
Noncash investing and financing activities
------------------------------------------
During 2000 and 1999, the Company entered into capital leases for $72,000 and
$19,000 of equipment, respectively.
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
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), Calorimetry Sciences Corporation (Calorimetry), which is a
wholly-owned subsidiary of Hart, and Energetic Genomics Corporation
(EGC), which is a 50 percent owned subsidiary of Calorimetry. EGC is also
50 percent owned by the officers of Calorimetry. 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
-----------------
The Company's business activities include the following:
a) 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.
b) Calorimetry is engaged in the design, manufacturing and marketing of
scientific instruments for use in laboratories and industry.
c) Fast Freight is currently a non-operating freight-hauling company.
d) EGC is in the process of organization.
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 2000 and 1999.
5. Inventories
-----------
Inventories are valued at the lower of cost or market using the first-in,
first-out method.
8
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
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 are 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 and
warehouse 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. Other assets
------------
Other assets consist of a patent, purchased equipment designs, and other
identifiable intangible assets. They are being amortized over a period of
ten to fifteen years, using the straight-line method.
9. Research and development
------------------------
Research and development costs have been charged to expense as incurred.
10. 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.
11. 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. Potentially dilutive common shares included in
the diluted earnings per share calculation include stock options granted
and convertible preferred stock.
12. 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.
9
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
13. Use of estimates
----------------
In preparing the Company's financial statements in conformity with
accounting principles generally accepted in the United States, 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.
14. 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
approximate their fair values due to their short-term nature.
15. 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.
16. Certain reclassifications
-------------------------
Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 presentation. These reclassifications had no
effect on total assets or net earnings.
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 $600,000 at July 31, 2000.
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, 2000 and 1999, this allowance was $47,000 and $21,000
respectively.
10
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE B - CREDIT CONCENTRATION AND EXPORT SALES - CONTINUED
2. Export sales
------------
Export sales consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Europe $ 2,336,000 $ 2,161,000
Far East 2,198,000 1,124,000
Middle East 122,000 161,000
North America 707,000 369,000
South America 564,000 283,000
----------- -----------
$ 5,927,000 $ 4,098,000
=========== ===========
</TABLE>
NOTE C - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Raw materials $ 2,559,000 $ 2,115,000
Work in process 537,000 788,000
Finished goods 1,253,000 175,000
Demonstration units 269,000 192,000
Inventory reserves (60,000) (80,000)
------------ ------------
$ 4,558,000 $ 3,190,000
============ ============
</TABLE>
NOTE D - PROPERTY HELD FOR LEASE
Property held for lease consists of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Leasehold interest $ 7,500,000 $ 7,500,000
Less
Accumulated amortization 4,798,000 4,276,000
Valuation allowance to adjust to
undiscounted cash flows 1,626,000 1,626,000
----------- -----------
6,424,000 5,902,000
----------- -----------
$ 1,076,000 $ 1,598,000
=========== ===========
</TABLE>
11
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE D - PROPERTY HELD FOR LEASE - CONTINUED
The Company leases a trucking terminal and 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
Property and equipment and estimated useful lives consist of the
following:
<TABLE>
<CAPTION>
Years 2000 1999
--------- ---------- -----------
<S> <C> <C> <C>
Furniture and fixtures 3-5 $ 1,525,000 $ 1,202,000
Machinery and equipment 5-10 752,000 773,000
Equipment held under capital leases 10 323,000 249,000
Building 30 2,095,000 -
Leasehold improvements 5-8 405,000 351,000
----------- -----------
5,100,000 2,575,000
Less accumulated depreciation
and amortization 1,658,000 1,394,000
----------- -----------
$ 3,442,000 $ 1,181,000
========== ===========
</TABLE>
NOTE F - OTHER ASSETS
Other assets consist of various identifiable intangible assets.
Accumulated amortization was $39,000 at July 31, 2000.
NOTE G - NOTE PAYABLE TO BANK
The note payable to bank consists of a line of credit issued to Hart with
interest at prime plus 1 percent (10.5 percent at July 31, 2000). The
line, which is scheduled for renewal in December 2000, is collateralized
by trade accounts receivable and inventories. Available borrowings under
this line of credit are limited to the aggregate of 80 percent of
eligible trade accounts receivable and 50 percent of eligible
inventories, not to exceed $650,000. As of July 31, 2000, $500,000 was
available under the line.
Calorimetry also has a line of credit with a bank with interest at prime
plus 1.25 percent (10.75 percent at July 31, 2000). The line is
collateralized by trade accounts receivable and inventories. As of July
31, 2000, there were no borrowings under the line with $365,000
available.
12
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE H - LONG-TERM OBLIGATIONS
1. Capital Leases
--------------
The Company has capital lease obligations with leasing companies. The
balances at July 31, 2000 and 1999, total $160,000 and $131,000,
respectively, and bear interest from approximately 5.45 to 9.24 percent.
Payments of approximately $5,600 are due monthly and the obligations are
due in full between February of 2002 and December of 2004. The
obligations are collateralized by the leased equipment.
The Company has accumulated amortization relating to the equipment under
capital leases of $91,000 and $59,000 as of July 31, 2000 and 1999,
respectively. Amortization expense on capital leases approximated $32,000
and $24,000 for 2000 and 1999, 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, 2000:
Year ending July 31,
2001 $ 67,000
2002 57,000
2003 34,000
2004 21,000
2005 8,000
Thereafter -
---------
Total minimum lease payments 187,000
Less amount representing interest 27,000
---------
Present value of net minimum lease payments 160,000
Less current maturities 55,000
---------
Capital lease obligations, less current maturities $ 105,000
=========
2. Debt
----
The Company has a note payable to a financial institution at prime rate
(9.5 percent at July 31, 2000) collateralized by commercial property, and
is payable in monthly installments of $21,990 including interest with the
remaining balance due April 2010.
In connection with the note, the Company has entered into an interest
rate swap agreement with the financial institution for the term of the
loan. The agreement in effect causes the variable interest rate on the
loan to become a fixed rate loan payable at 9.0 percent interest. The
potential risk involved with the swap agreement is if the Company pays
off the loan prior to the due date, the difference between the set rate
of 9.0 percent and the prime rate at the date of payoff would require
either a payment to or from the financial institution for the computed
difference.
13
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE H - LONG-TERM OBLIGATIONS - CONTINUED
The Company also 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 with the final payment due October 2002.
Aggregate maturities of long-term debt are as follows:
Year ending July 31,
--------------------
2001 $ 48,000
2002 52,000
2003 57,000
2004 61,000
2005 67,000
Thereafter 2,008,000
------------
2,293,000
Less current maturities 48,000
------------
Long term obligations, less current maturities $ 2,245,000
============
NOTE I - OPERATING LEASES
The Company leases laboratory and office space under an operating lease
expiring in 2009. The lease payments on the building increase throughout
the term of the lease at two percent annually. The Company also leases
office equipment under operating leases expiring in 2003.
Minimum future rental payments under noncancelable operating leases
having remaining terms in excess of one year as of July 31, 2000 are as
follows:
Year ending July 31,
--------------------
2001 $ 87,000
2002 88,000
2003 90,000
2004 91,000
2005 93,000
Thereafter 390,000
-----------
$ 839,000
===========
Building and equipment rent expense totaled $199,000 and $220,000 for the
years ended July 31, 2000 and 1999, respectively.
14
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE J - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Payroll, payroll taxes and benefits $ 507,000 $ 471,000
Bonuses 1,076,000 615,000
Warranties 75,000 147,000
All other 311,000 295,000
----------- -----------
$ 1,969,000 $ 1,528,000
=========== ===========
</TABLE>
NOTE K - INCOME TAXES
Components of income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Current
Federal $ 20,000 $ 29,000
State 67,000 101,000
------------- ------------
87,000 130,000
------------- ------------
Deferred
Federal (383,000) (659,000)
State (55,000) (102,000)
------------- ------------
(438,000) (761,000)
------------ ------------
Total taxes (benefit) $ (351,000) $ (631,000)
============= ============
</TABLE>
The provision for income taxes differs from the statutory Federal income
tax rate due to the following:
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Income taxes computed at federal statutory rate of 34% $ 598,000 $ 418,000
State taxes, net of federal benefit 118,000 91,000
Realization of net operating loss carryforward
and change in valuation allowance (1,249,000) (1,286,000)
Non-deductible expenses 170,000 146,000
Other 12,000 -
------------ -------------
Total income taxes (benefit) $ (351,000) $ (631,000)
============= ============
</TABLE>
15
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE K - INCOME TAXES - CONTINUED
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Current deferred tax assets (liabilities)
Deferred compensation $ 106,000 $ 128,000
Allowance for doubtful accounts 18,000 9,000
Inventory reserves 22,000 30,000
Accrued expenses 53,000 88,000
Contributions carryforward - 43,000
Uniform inventory capitalization (33,000) 27,000
Other 2,000 (2,000)
------------ ------------
Net current tax assets $ 168,000 $ 323,000
============ ============
Long-term deferred tax assets (liabilities)
Net operating loss carryforwards $ 1,599,000 $ 2,219,000
Excess book depreciation and amortization - 20,000
Alternative minimum tax credit carryforward 216,000 183,000
Valuation allowance - (1,200,000)
------------ ------------
Net long-term tax assets $ 1,815,000 $ 1,222,000
============ ============
</TABLE>
At July 31, 2000, the Company has net operating loss carryforwards for
tax reporting purposes of approximately $4,287,000 which expire from 2004
through the year 2007.
During 2000, 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 the deferred tax asset relating to net operating loss carryforwards
will be realized in the future. The valuation allowance on deferred taxes
was decreased $1,200,000 during 2000, to adjust for this evaluation
regarding the realizability of the deferred tax asset and other deferred
tax assets and liabilities.
16
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE L - CAPITAL STOCK
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, 2000, a
total of 5,200 shares of Series A preferred stock were issued and
outstanding.
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 preferred stock but before common stock. The liquidation
preference is $10.87 per share of Series E preferred stock. At July 31,
2000, a total of 552 shares of Series E preferred stock were issued and
outstanding.
NOTE M - 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, 2000,
the Company had granted stock options to various officers, directors,
employees and other non-employees of the Company covering the aggregate
number of 167,000 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 vest
ratably at a rate of one option for every nine common shares issued as a
result of a) the exercise of employee stock options outstanding at the
date of the agreement (approximately 23,000 such options are outstanding
at July 31, 2000 and 1999) and b) the conversion of Series A preferred
stock (5,200 shares are convertible into 1,040 common shares at July 31,
2000). Once exercisable, these options will have a price of $0.05 per
share. At July 31, 2000, 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 1,000 shares were granted to an employee in exchange for
services during 2000. These options are immediately exercisable with an
exercise price of $7.25, and expire in 2010.
17
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE M - 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>
2000 1999
----------- -----------
<S> <C> <C>
Net earnings
As reported $ 2,108,000 $ 1,862,000
Pro forma 2,101,000 1,849,000
Net earnings per common share - basic
As reported $ 1.92 $ 1.70
Pro forma 1.91 1.69
Net earnings per common share - diluted
As reported $ 1.72 $ 1.56
Pro forma 1.72 1.55
</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
2000: expected volatility of 222 percent; risk-free interest rate of 6.50
percent; and expected life of 10 years. The weighted-average fair value
of options granted was $7.25 in 2000.
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.
18
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE M - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
Information with respect to the Company's stock options at July 31, 2000
is as follows:
<TABLE>
<CAPTION>
Weighted
Number average
of exercise
options Exercise price price
------- -------------- --------
<S> <C> <C> <C>
Outstanding at August 1,
1998 166,000 $0.050 to 4.625 $ 2.69
Granted - - -
Exercised - - -
Canceled/expired - - -
------- -------
Outstanding at July 31, 1999 166,000 $0.050 to 4.625 2.69
Granted 1,000 7.250 7.25
Exercised - - -
Canceled/expired - - -
------- -------
Outstanding at July 31, 2000 167,000 $0.050 to 7.250 $ 2.72
======= =======
Exercisable at July 31, 2000 162,000 $0.050 to 7.250 $ 2.88
======= =======
</TABLE>
Additional information about stock options outstanding and exercisable at
July 31, 2000 follows:
Options outstanding
-------------------
<TABLE>
<CAPTION>
Weighted-
average
remaining
Number Weighted-average contractual
Exercise price outstanding exercise price life (years)
-------------- ----------- -------------- ------------
<S> <C> <C> <C>
$ 0.050 4,000 $ 0.050 7.1
1.565 71,000 1.565 0.7 to 7.1
3.215 51,000 3.215 4.3 to 12.5
4.625 40,000 4.625 12.8
7.250 1,000 7.250 9.6
-------
167,000
=======
</TABLE>
19
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE M - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED
Options exercisable
-------------------
<TABLE>
<CAPTION>
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
4.625 40,000 4.625
7.250 1,000 7.250
-------
162,000
=======
</TABLE>
3. Put option
----------
Pursuant to an employment agreement, 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 of 5,260 shares or options per year
for three years. The agreement expires in August of 2003.
NOTE N - 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 two individuals,
provide for annual salaries of $225,000 and $231,000 (plus a five percent
annual increase). The two remaining contracts have annual salaries of
$82,000 and $285,000 (plus a five percent annual increase), terms of 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 nine or more years
and some have been employed more than thirteen years. One individual has
a put option under the agreement (Note M). 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.
The Company made a sale/acquisition agreement with a certain officer
during fiscal 2000. The agreement provides that if Hart or Calorimetry
are sold or acquired for an amount exceeding $25 million within three
years of the agreement date, the officer is to be paid 10 percent of the
acquisition value exceeding $25 million.
No provision for severance payments under any of these employment
contracts has been made as of July 31, 2000.
20
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE O - 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 6.6 percent of compensation which equates
to 50 percent of actual employee contributions. The Company's matching
contributions vest at a rate of 20 percent per year. The Company
contributed approximately $144,000 and $135,000 to the plan during the
fiscal years ended July 31, 2000 and 1999, respectively.
NOTE P - RELATED PARTY TRANSACTIONS
During 2000 and 1999, the Company purchased $130,000 and $114,000
respectively, of inventory from an entity owned by the spouse of an
officer of the Company.
NOTE Q - EARNINGS PER COMMON SHARE
The following shows the shares used in computing earnings per common
share including potentially dilutive common shares:
<TABLE>
<CAPTION>
For the Year Ended July 31, 2000
----------------------------------------------------------
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 $ 2,108,000 1,097,716 $ 1.92
================ =================
Effect of dilutive securities
Stock options 123,613
Convertible preferred stock 1,150
---------
Net earnings per common share - diluted
Net earnings available to common shareholders $ 2,108,000 1,222,480 $ 1.72
=============== ========= ===============
</TABLE>
21
<PAGE>
Lifschultz Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000 and 1999
NOTE Q - EARNINGS PER COMMON SHARE - CONTINUED
<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>
22
