UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)
For the fiscal year ended May 31, 1996.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
Commission File Number: 1-4676
The Bethlehem Corporation
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(Name of small business issuer in its charter)
Pennsylvania 24-0525900
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25th and Lennox Streets, Easton, Pennsylvania 18044-0348
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number including Area Code: (610) 258-7111.
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, no par value American Stock Exchange, Inc.
Securities registered under Section 12(g) of the Exchange Act: None.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes X . No .
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $18,078,000.
As of August 29, 1996, 1,938,520 shares of the registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was approximately $1,995,452 based on the average of the bid
(1,9375) and asked (2.00) prices on that date of $1.9688.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for 1996 Annual Meeting of Stockholders
incorporated by reference in Part III, Items 9, 10, 11 and 12.
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TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT - 1996
THE BETHLEHEM CORPORATION
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PART I .........................................................................................................1
Item 1. Description of Business........................................................................1
Item 2. Description of Property........................................................................6
Item 3. Legal Proceedings..............................................................................6
Item 4. Submission of Matters to a Vote of Security Holders............................................7
PART II .........................................................................................................8
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.........................8
Item 6. Management's Discussion and Analysis or Plan of Operation......................................8
Item 7. Financial Statements..........................................................................13
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure....................................................................................13
PART III ........................................................................................................14
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act.............................................................14
Item 10. Executive Compensation........................................................................14
Item 11. Security Ownership of Certain Beneficial Owners and Management................................14
Item 12. Certain Relationships and Related Transactions................................................14
PART IV ........................................................................................................15
Item 13. Exhibits, List and Reports On Form 8-K........................................................15
SIGNATURES.......................................................................................................18
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PART I
Item 1. DESCRIPTION OF BUSINESS.
GENERAL
The Bethlehem Corporation (the "Company") was founded in 1856 as a
foundry and machine shop and incorporated in 1888. The Company designs,
manufactures, sells and services a product line of capital equipment used to
process materials for a variety of industrial applications. Its proprietary
products include the Porcupine Processor(R), the Thermal Disc(R) Processor, the
Tower Filter Press, drum dryers and flakers, tubular dryers, and calciners. In
addition, the Company operates a production facility that fabricates, machines
and assembles equipment to customers' specifications. The Company has developed
expertise in the areas of thermal processing systems, environmental systems,
filtration, specialty machining, and fabrication and the rebuilding and
remanufacture of specialty process equipment. In addition, the Company, through
the Bethlehem Advanced Materials Corporation ("BAM"), a wholly-owned subsidiary
formed in September 1995 to acquire certain assets of the American Furnace
Division of Third Millennium Products, Inc., designs and manufactures
high-temperature furnaces for sale and for its own use and processes specialty
carbon, graphite and ceramic materials for semiconductors and aerospace
applications.
Capital Equipment, Machining and Fabrication
The Company's customers for its capital equipment, sales and machining
and fabrication services include the primary ferrous and non-ferrous metals
industries, cement and ship building companies, refineries, chemical, food,
pharmaceutical and petrochemical firms. Its products include the Porcupine
Processor(R), the Thermal Disc(R) Processor, the Tower Filter Press, filtration
equipment, drum dryers and flakers, tubular dryers, calciners, vapor recovery
systems and boilers. The Porcupine Processor(R) dries, heats or cools various
chemicals, solids, or slurries. It reduces operating and installation costs and
provides a free-flowing end product. The Company has recently introduced a new
product in filtration equipment--the Tower Filter Press. The Tower Filter Press
filters a wide range of slurries, operating automatically and uses a
programmable logic control system. The Company operates a production facility
that includes a full service laboratory equipped to test a broad range of
materials and processes for filtration and thermal processing applications. The
Company also has thermal processing and filtration pilot units available for use
at customer sites for test processing. In conjunction with sales of capital
equipment, the Company provides engineering and design services and conducts an
aftermarket business consisting primarily of remanufacture, repair,
refurbishment and equipment upgrade services and spare parts sales. The Company
markets its products through an international sales network covering markets in
North and South America, Asia and Europe.
The Company serves these markets through five main business units:
o The Heat Transfer Process Equipment unit markets core
technology equipment, which includes dryers, coolers, and
flakers, and which are fabricated to specific customer needs.
The Porcupine Processor(R), an indirectly heated dryer
developed by the Company, is an example of this unit's
products. Some of the markets for these products include the
chemical, plastics, food, pharmaceuticals, refineries, waste
treatment and mining industries. These industries use the
Company's equipment to recover valuable solvents from chemical
intermediates or final products.
o The Environmental Systems unit markets Thermal Desorption
Systems for sale and rental. These systems, which usually
include a Porcupine Processor(R), are used for treating both
hazardous and non-hazardous sludges and contaminated soil. The
market for these systems is currently driven by environmental
regulations and is expected to grow.
o The Filtration Process Equipment unit designs, manufactures
and markets coarse to fine filtration systems used in
solid/liquid separation. The target markets are fine and
specialty chemicals, mining, food, precious metal recovery and
pharmaceutical. The Tower Filter Press is an example of this
unit's products.
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o The Specialty Heavy Machining and Fabrication Services unit
provides high quality heavy equipment machining and
fabrication services to the U.S. Government, heavy industry,
including ferrous and nonferrous producers, the aggregates
industry and suppliers of specialty heavy equipment that serve
those industries.
o The Rebuild/Remanufacture Equipment unit upgrades used
equipment and remanufactures a broad range of process
equipment. This unit markets these products based on two
primary advantages: reduced capital expenditure and shorter
lead time on delivery to the pharmaceutical, chemical and
environmental remediation industries.
Bethlehem Advanced Materials Corporation (BAM)
BAM designs and manufactures specialty high-temperature furnaces that
are used for the processing and manufacturing of a wide variety of advanced
materials, such as carbon and graphite fiber, carbon graphite composites, carbon
and graphite structures, ceramic powders and ceramic composites. In addition,
BAM processes specialty carbon, graphite and ceramic materials for semiconductor
and aerospace, primarily for use in commercial aircraft braking systems
applications. BAM is also involved in commercial process and product development
of advanced materials.
BAM is engaged in three primary lines of business involving high
temperature furnaces and the processing of advanced specialty materials:
o Furnace Manufacturing--design/engineering, manufacturing and
installation of specialty high temperature furnace systems.
o Toll Processing--contract heat treating and thermal processing
of specialty materials.
o Commercial Product and Process Development--utilization of the
Company's own furnaces, technology and expertise to
commercialize new applications and products for its own use
and in conjunction with customers in order to enhance their
processes and applications.
BAM designs and manufactures custom high-temperature furnace systems
for customer sales and for its own use at the Company's Knoxville, Tennessee
facility. BAM's furnaces typically have custom design components, such as
continuous and batch loading systems, parallel plate heating systems and
advanced temperature control features. Management believes that, as such, BAM's
furnaces have the potential to provide added value to its customers, which may
result in higher product yield, more throughput due to more efficient heating
and cooling cycles and enhanced energy savings. A BAM furnace is designed in
accordance with an individual customer's materials processing requirements,
rather than according to fixed designs, and with a view to minimizing the need
for the customer to modify its process in order to match the furnace design.
In addition to selling furnaces to customers, BAM uses its furnaces to
provide toll firing services for its customers. Customers of BAM, whether a
furnace purchaser or on a tolling basis, are typically manufacturers of carbon
graphite structures, composites, powders and fibers, as well as manufacturers of
non-oxide ceramics, such as silicon carbide or silicon nitride or other advanced
ceramic structures.
Composite materials are suited to a diverse range of applications
based on their distinctive combination of physical and chemical properties.
Carbon fiber composites are attractive because of their specific properties,
including high strength, low weight, stiffness, resistance to corrosion,
resistance to fatigue, capacity to dissipate heat and electrical conductivity.
In order to process these carbon and carbon graphite products, a typical
customer will utilize a multi-step process to convert precursor materials such
as petroleum pitch, coal tar pitch, and acrylic materials, such as
polyacrylonitrile ("PAN"), into carbon fibers. All of these carbon precursors
require thermal processing in furnaces for oxidation, stabilization and
carbonization.
Overall, aerospace applications are the largest users of carbon fibers
and other advanced materials. However, the semiconductor industry, which uses
many materials requiring purified carbon, ceramic, and other advanced material
structures, also provides a potentially significant and high growth market for
these products. BAM
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currently serves specialty markets which include carbonization and
graphitization of carbon aircraft brakes, halogen purification of semiconductor
grade graphite materials as well as special ceramic coating systems for
semiconductor processing.
Carbonization of Aircraft Brakes. Carbon-carbon, which consists of
carbon fibers fused in a carbon matrix, is used in aircraft brakes because its
utility is enhanced by high heat and friction. Whereas other brake materials
such as metal soften under rising temperatures, carbon-carbon grows stronger.
Composites such as carbon-carbon combine the inertness of carbon and the
strength of carbon fiber and are replacing steel and metal linings as the
friction braking material of choice for large commercial aircraft. BAM has built
and currently operates for a customer a furnace for carbonization of
carbon-carbon brake materials for several aircraft programs.
Purification of Semiconductor Quality Graphite. The heart of the
semiconductor industry revolves around the production of the silicon wafer. The
wafers are "grown" from a melted pool of silicon that is held in a graphite
crucible. As minute impurities cause significant degradation of the silicon
quality, it is imperative that the graphite crucible have fewer than 10 parts
per million total impurity. The manner in which this is accomplished is to
subject the graphite crucible to a purge of halogen gas while heating to a
temperature near 2,000(degree)C. The Company's furnaces are utilized during this
purification step.
STRATEGY
The Company's business strategy is to continue the technological
development and marketing of its core capital equipment products and, at the
same time, to expand on the manufacture and marketing of specialty high
temperature furnace systems, toll processing services for the advanced materials
markets and the commercialization of new products and processes in advanced
materials by BAM.
The Company intends to strengthen its position in markets inside and
outside the United States to reduce the manufacturing costs of its products and
to pursue new sales opportunities as they develop, in new, rebuilt and used
equipment. In addition, the Company intends to identify and evaluate
opportunities to extend current market applications, identify new potential
applications and establish plans for developing such applications for high
temperature furnaces.
As part of its efforts to expand its current range of market
applications, the Company is engaged in exploring strategic partnerships with
specific customers to use Company technology and expertise in the areas of
semiconductor purification and the carbonization of PAN for use in aircraft
brakes.
CUSTOMERS; EXISTENCE OF SHORT-TERM CONTRACTS
The Company's principal customers for its capital equipment are
domestic and foreign manufacturers of chemicals, pharmaceuticals, foods,
plastics and petrochemicals and environmental remediation firms. The Company's
principal customers for its high temperature furnaces and related tolling
services are domestic and foreign manufacturers of carbon and graphite
structures, fiber powder and shapes, silicon carbide powder and shapes, silicon
nitride shapes and other advanced ceramic composite structures.
Currently, the major portion of the Company's sales are made under
short-term or one-time contracts for the Company's capital equipment or
high-temperature furnaces, which contracts are not subject to renewal. Although
this may afford the Company flexibility in responding to changing market
conditions, a market for the Company's products and services under such
contracts is not assured. As a result, one or more short-term or one-time
contracts may constitute a high percentage of the Company's total net sales for
any particular quarter or fiscal year. The inability of the Company to obtain
such contracts in the future could have a material adverse effect on the
Company's business.
The Company's largest customer Eastman Chemical accounted for 30% of
the Company's net sales for the year ended May 31, 1996.
The Company's active customers for capital equipment include Fortune
500 companies. Sales to Universal Process Equipment, Inc. ("UPE"), a significant
shareholder of the Company accounted for 17% of total sales in fiscal
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1995 and 5% of total sales in fiscal 1996. The Company's active customers for
high temperature furnaces and tolling services are Allied Signal, Mitsubishi
Chemical, UCAR Carbon, and Hughes Missile Systems. Purchases by any single
customer vary significantly from year to year according to such customer's
capital equipment needs. The composition of the Company's customers may also
vary from year to year.
SALES AND MARKETING
The Company markets its products to customers in North and South
America, Asia and Europe, primarily by a direct sales and support staff based at
its facilities in Easton, Pennsylvania for its capital equipment products and
services and Knoxville, Tennessee for its high temperature furnace products and
tolling services. The Company also relies on product sales representatives in
some regions of North America and in certain geographic areas outside the United
States, sales are made by independent representatives who are assisted and
supported by Company employees.
The margins received on sales by independent representatives exceed
those received on direct sales by Company personnel. The Company's commission
program with respect to such independent representatives varies depending on the
type of product sold and the volume of sales over the course of a year. The
percentage of sales generated from such independents equaled approximately 20%
of total sales for the fiscal year ended May 31, 1996.
BACKLOG
As of May 31, 1996, the Company had a backlog of orders equaling
$10,464,000. The Company had a backlog of $3,443,000 and $6,502,000 as of May
31, 1995 and 1994, respectively. Orders comprising current backlog are expected
to be filled during the fiscal year ending May 31, 1997.
RAW MATERIALS
The basic raw materials used in the Company's products are steel
plate, bars and castings and in addition, in the high temperature furnace
business, graphite, and copper. Raw materials are available from a number of
sources on comparable terms. The Company is not dependent on any supplier that
cannot be replaced in the normal course of business. Principal suppliers to the
Company at fiscal year end May 1996 were: Interstate Steel Supply Co., G.O.
Carlson, Inc., Shenango Industries, Inc., UPE, Bush Miller, Thypin Steel, and,
in connection with the high temperature furnace business, UCAR, Hajoca, and
Graybar Electric.
DEVELOPMENT OF LITHIUM-ION RECHARGEABLE BATTERIES
BAM executed a License Agreement on December 20, 1995 (the "License
Agreement") with Sandia Corporation ("Sandia"), a multi-program laboratory
operated by a subsidiary of Lockheed Martin Corp. for the U.S. Department of
Energy. With main facilities in Albuquerque, New Mexico and Livermore,
California, Sandia has major research and development responsibilities in
national defense, energy, environmental technologies and economic
competitiveness. Under the License Agreement, the Company has acquired a limited
exclusive license to make, use and sell a formula developed by Sandia for carbon
powder impregnated with lithium ions to be used to make anodes for use in
lithium ion rechargeable batteries. Under the License Agreement, BAM has
exclusive rights in two fields: computers and camcorders. If the process proves
commercially feasible, consumer electronics, aerospace and defense applications
could all potentially use the technology to create longer lasting, less
expensive, safer, lighter batteries, particularly for use in power-hungry
applications such as laptop computers, cellular telephones, camcorders and
cordless power tools. The Company is currently endeavoring to produce along with
Sandia scientists the first scale-up of the product to commercial quantities.
Sandia developed the product at its facilities and has been able to produce only
laboratory quantities to date. There can be no assurance that this process will
prove commercially feasible or that the Company will derive any revenue from the
License Agreement. In the event that the process described herein does prove to
be commercially feasible, the License Agreement provides for certain royalty fee
payments to be made to Sandia.
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PATENTS AND TRADEMARKS
The Company depends upon its proprietary technology and expertise. The
Company relies principally upon trade secret and copyright law to protect its
proprietary technology and owns no patents which are material to its business.
The Company regularly enters into confidentiality agreements with its employees,
consultants, customers and potential customers and limits access to and
distribution of its trade secrets and other proprietary information. There can
be no assurance that these measures will be adequate to prevent misappropriation
of its technology or that the Company's competitors have not and will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
COMPETITION
The Company's products are sold in highly competitive worldwide
markets. A number of companies compete directly with the Company in the
chemical, pharmaceutical, food, plastic and petrochemical processing markets and
the Company competes with various other furnace manufacturers and toll
processors. Numerous competitors of varying sizes compete with the Company in
one or more of its product lines and its Specialty Heavy Machining and
Fabrication Services unit. A number of the Company's competitors are divisions
or subsidiaries of larger companies with significantly greater financial,
marketing, managerial and other resources than those of the Company. The Company
believes that the principal competitive factors affecting its core proprietary
equipment business are price, performance, delivery, breadth of product line,
product availability, experience and customer support. The Company believes that
the principal areas of competition for its high temperature furnace sales
segment are price, quality, delivery, skill and experience in developing
specialized equipment aimed at a customer's specific materials requirement. The
Company believes that the principal areas of competition for its toll processing
operations are the ability to reliably meet the customer's quality specification
and program requirements, including volume and price considerations.
The Company's direct competitors that manufacture high temperature
furnaces include Consarc, Seco/Warwick, Chugai Ro, Ipsen GMBH, AVS, Inc., FCT,
Fujidempa, Abar Ipsen, Harper International Corp., and Textron. The Company's
competitors in providing toll processing services include Zoltek Companies, Inc.
There can be no assurance that developments by existing or future
competitors will not render the Company's products or technologies
noncompetitive or that the Company will be able to keep pace with new
technological developments. In addition, the Company's customers could decide to
vertically integrate their operations and perform for themselves some or all of
the functions performed by the Company.
EMPLOYEES
As of August 11, 1996, the Company had 147 full-time employees,
including 22 employees of BAM. Of these, 121 are engaged in manufacturing and
technical services, 10 in marketing and sales and 16 in administrative
functions.
The production employees at the Easton, Pennsylvania facility (77
persons) are represented by their own bargaining unit called The Bethlehem
Corporation Employees Association. A three-year labor contract was ratified with
this Association on July 23, 1994 and expires on July 22, 1997. The employees at
the Knoxville, Tennessee facility are not represented by any collective
bargaining organization. The Company believes that its relations with its
employees are good.
ENVIRONMENTAL IMPACT AND REGULATION
The operations at the Company's Knoxville, Tennessee plant utilize
fume destruction and scrubbing of various exhaust streams, designed to comply
with applicable laws and regulations. The plant produces air emissions that are
regulated and permitted by Knox County, Tennessee, Department of Air Pollution
Control (the "DOAPC"). Management believes that the plant is currently in
compliance with its permit and the conditions set forth therein. The Company has
applied to the DOAPC for additional permits necessary to expand its operations
to allow increased carbon processing, chlorine purification and the operation of
a second afterburner. These permits are currently pending with the DOAPC.
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The Company believes that compliance by its operations with applicable
environmental regulations will not have a material effect upon the Company's
future capital expenditure requirements, results of operations or competitive
position. There can be no assurance, however, as to the effect of future changes
in federal, state and county environmental laws or regulations on the Company's
results of operations or financial condition.
The Company unilaterally "opted in" to a group settlement in U.S. VS.
CHARLES CHRIN, ET AL. ("Charles Chrin"). The proposed consent decree in this
matter is undergoing final draft revisions and will be submitted for court
approval after a hearing. The Company paid in a total of $55,000 toward the
group settlement in exchange for a covenant not to sue by the United States
pursuant to Section 107(a) of the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, or Section 7003 of the Resource
Conservation and Recovery Act of 1976. Apart from Charles Chrin, the Company has
not received, or is aware of any threatened submission of, any "potentially
responsible party" or similar notices under federal, state or local law with
respect to environmental damages.
GOVERNMENT REGULATION
The Company is not aware of a need for government approval of any
principal products. Existing governmental regulations do not have a significant
effect on the business of the Company. In addition, government regulations that
are probable of enactment are not anticipated to have any material effect.
Item 2. DESCRIPTION OF PROPERTY.
The Company operates from two properties, one in Easton, Pennsylvania
and one in Knoxville, Tennessee.
The Company owns a complex on 29 acres consisting of four major heavy
manufacturing buildings, a laboratory, a two-story office building,
miscellaneous storage and service buildings and a one-story office building
located near the City of Easton in Palmer Township, Northampton County,
Pennsylvania. The facility is a totally integrated production facility,
conducting engineering, fabrication, forming, machining, assembly, heat
treating, finishing and testing. The machine and assembly floor area is 100,000
square feet and is serviced by a 70 ton lifting capacity crane. Complete
shipping facilities are available by truck with easy access to major interstate
systems. The Company is currently in the process of completing plans for
renovation. Once that renovation is complete, management believes that its
Easton facilities will be in satisfactory condition and adequate for its present
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
As of August 30, 1996, the Company's Easton facilities were subject to
a first mortgage loan, a second lien created as a result of a legal settlement,
and a third lien securing a line of credit and term loan facility.
BAM leases a 33,600 square foot manufacturing and office building in
Knoxville, Tennessee for capital equipment manufacturing, toll processing and
related administrative services and marketing. The facility is equipped with
several furnace systems with capabilities of firing in excess of 3000(degree)C.
It is located in an industrial park with excellent access to major interstate
highways and a modern airport. The lease expires September 30, 2000, unless two
options, each for an additional three-year term, are exercised by BAM. The
Knoxville lease has a monthly base rent of $8,317.46. The Company believes this
facility is suitable and adequate for its present operations there. The Company
is a guarantor of payment on this lease.
Item 3. LEGAL PROCEEDINGS.
Commencing in 1990 and continuing through 1996, Federal Boiler Company
("FBC"), a wholly-owned, inactive subsidiary of the Company, formed in 1986, was
named as one of numerous defendants in cases brought in State Court in
Philadelphia County, Pennsylvania. FBC was named as a defendant in fifty-three
lawsuits in which it was sued for asbestos related reasons stemming from boilers
manufactured in the 1940's and 1950's by a previous company known as Federal
Boiler. The Company successfully obtained summary judgments in thirty-seven of
the fifty-three cases, and legal counsel is filing summary judgment motions for
the remaining cases.
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The Company's legal counsel believes the courts will grant FBC
summary judgments on these cases on the following grounds:
1. FBC is not the Federal Boiler Company who manufactured the
products in question and therefore does not have any successor
liability.
2. The lawsuits were wrongfully asserted against FBC as FBC did
not manufacture the boilers in question.
3. FBC did not use asbestos in the manufacture of its products.
4. None of the plaintiffs were exposed to FBC's products or, if
they were exposed to an FBC product, the FBC's product legally
could not have caused their injuries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Security Holders during the
fourth quarter of fiscal year 1996.
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PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, no par value, (the "Common Stock") is
traded under the symbol "BET." The following table sets forth the high and low
sales prices for the Common Stock, for the periods indicated, as reported by the
AMEX.
LOW ($) HIGH ($)
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1995 FISCAL YEAR
First Quarter .75 1.50
Second Quarter .81 1.44
Third Quarter .75 5.63
Fourth Quarter 2.00 3.44
1996 FISCAL YEAR
First Quarter 1.88 3.73
Second Quarter 2.50 3.94
Third Quarter 2.00 3.00
Fourth Quarter 1.75 3.31
As of September 6, 1996, there were approximately 936 holders of
record of the Company's Common Stock.
The Company did not declare any cash dividends on its Common Stock
during fiscal 1995 or fiscal 1996. A $1.5 million five year first mortgage loan
from Sterling Commercial Capital, Inc., First Wall Street SBIC, L.P., and
Interequity Capital Partners, L.P. (collectively, "Sterling") imposes certain
limitations on the Company with respect to the payment of cash dividends. In
addition, a three year $5 million maximum line of credit and term loan facility
from the CIT Group/Credit Finance, Inc. ("CIT"), contains certain restrictions
on the payment of cash dividends. The Company does not anticipate that it will
pay cash dividends in the foreseeable future. The payment of dividends by the
Company will depend upon its earnings and financial condition and such other
factors as the Board of Directors may consider relevant. The Company currently
plans to retain any earnings to provide for the development and growth of the
Company.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
COMPANY OVERVIEW
The Company was founded in 1856 as a foundry and machine shop and
incorporated in 1888. The Company designs, manufactures, sells and services a
product line of capital equipment used to process materials for a variety of
industrial applications. Its proprietary products include the Porcupine
Processor(R), the Thermal Disc(R) Processor, the Tower Filter Press, drum dryers
and flakers, tubular dryers, and calciners. In addition, the Company operates a
production facility that fabricates, machines and assembles equipment to
customers' specifications. The Company has developed expertise in the areas of
thermal processing systems, environmental systems, filtration, specialty
machining and fabrication and the rebuilding and remanufacture of specialty
process equipment. In addition, the Company, through BAM, designs and
manufactures high-temperature furnaces for sale and for its own use and
processes specialty carbon, graphite and ceramic materials for semiconductors
and aerospace applications.
Four of the Company's five main business units, namely the Heat
Transfer Process Equipment Unit, the Environmental Systems Unit, the Filtration
Process Equipment Unit and the Specialty Heavy Machining and Fabrication
Services Unit each serve several billion dollar worldwide markets. The Company
expects the future size of each of these markets to remain in the billions of
dollars. However, the Company's ability to sell its products is limited by its
marketing and manufacturing ability. To the extent that the Company's marketing
and manufacturing capabilities increase, the Company's ability to exploit
opportunities in these markets should improve.
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The market size serviced by the Company's fifth main business unit, the
Rebuild/Remanufactures Equipment Unit, is considerably more limited. The Company
expects the future size of this market to vary in relation to factors
influencing cost of capital such as interest rates, export/import duties,
manufacturing capacity and utilization.
The Company would characterize the markets for each of its business
units as follows:
(1) HEAT TRANSFER AND FILTRATION UNITS
o Markets are relatively concentrated in mature
industries such as chemicals, plastics, foods,
pharmaceuticals, refineries, waste treatment and
mining and minerals.
o Technology barrier is medium.
o Competition is worldwide, except that there are
certain prohibitions against foreign companies in
Japan.
(2) ENVIRONMENTAL SYSTEMS UNIT
o Markets are concentrated.
o Technology barrier is low.
o Competition is domestic in North America and Western
Europe.
(3) SPECIALTY HEAVY MACHINING AND FABRICATION SERVICES UNIT
o Market is highly concentrated.
o Technology barrier is low.
o Competition is domestic and often regional.
(4) REBUILD/REMANUFACTURE UNIT
o Market is diffuse.
o Technology Barrier is low.
o Competition is domestic.
The Company's customer concentration has historically been limited to
segments such as military, chemical process, power generating or ferrous and
nonferrous producers. More recently, the Company has sought to broaden its
customer base to include customers in such markets as environmental and mining
and precious metals. The Company has also added new products such as high
temperature furnaces through BAM which services newer growth markets such as the
semiconductor industry. To the degree the Company is able to add to and
diversify its products and the markets it serves, the Company will insulate
itself from potential volatility due to declines in any particular market served
by the Company's products.
Historically, the sale of the Company's products has primarily been
limited to North America and Europe. The Company has sought to increase its
international sales because it believes demand and opportunity for its products
are increasing in direct proportion to the development of process industries
such as chemical, food and pharmaceutical in countries outside of the North
American and Western European markets. The Company's ability to compete in
certain countries, particularly Japan, is restricted by trade laws in such
countries. Further, the Company's ability to sell its products internationally
is limited by its marketing and manufacturing ability. The Company estimates
that approximately $750,000 for new inventory and $150,000 for additional sales
and marketing expenditures is required to support international market expansion
and sales growth. The Company enjoys access
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<PAGE>
to customers through the worldwide customer base of UPE, and occasionally
utilizes UPE's network of company owned offices and personnel around the world.
The only cost incurred for the utilization of UPE's offices and personnel is the
payment of a commission on actual sales originated. The Company believes this
relationship will help the Company increase its sales. The Company does not
believe, however, that the termination of this relationship, which is not
anticipated, would have a significant material adverse effect on the Company's
results of operations.
The Company's capital equipment products and technologies were
developed throughout the 20th century. Historically, the Company's products life
cycles have been relatively long term. There can be no assurance, however, that
such products will continue to be viable in the future. The Company has over the
past eighteen months introduced a new product, the Tower Filter Press, and
acquired a new product line, high temperature furnaces through BAM. The Company
continues to evaluate other products and companies that have the potential to
complement the Company's existing products and business. More recently, the
Company has begun to purchase and sell used process and environmental equipment
as an adjunct to its new equipment capabilities and its rebuild capabilities.
The Company has been able to enter this market in the last year through
financing obtained from CIT. The Company has also utilized UPE's expertise to
advise it on certain purchases and UPE and the Company have jointly purchased
certain pieces of equipment. The Company believes this venture could improve its
financial condition and results of operations. The Company believes this
business activity complements its other activities and permits it to serve
customers who either cannot afford the cost or lead time for new equipment.
In the future, the Company intends to continue to enhance existing
products and explore new opportunities and the possibility of strategic
partnerships with existing and new customers. The Company will also seek to
develop joint ventures with several of its customers to develop new processes.
There can be no assurance, however, that the Company will be able to
successfully implement any of these strategies or that, if implemented, these
strategies will improve the Company's financial position or results of
operations.
RESULTS OF OPERATIONS
Fiscal Year Ended May, 31 1996 Compared to Fiscal Year Ended May 31, 1995
Revenues of $18,078,000 for the fiscal year ended May 31, 1996
represent an increase of 24% over the fiscal year ended May 31, 1995 level of
$14,541,000. The principal reason for the increase in revenues was an increase
in sales due to expansion in the chemical process industry. Several major
contracts in the Company's proprietary equipment line, part of the Heat Transfer
Process Unit and in the Specialty Heavy Machining and Fabrication Services Unit
were awarded during this period.
The Company's largest customer in the Heat Transfer Process Unit
accounted for 30% of the Company's net sales in fiscal 1996. Other major
contracts awarded were with Fortune 500 companies.
Export sales for the fiscal year ended May 31, 1996 equaled $953,000
(5% of revenue) compared to $4,687,000 (32% of revenue) for the year ended May
31, 1995. In fiscal 1996 export sales were to six countries including Israel,
Indonesia, Japan, Finland, United Kingdom and Canada. The largest total for a
single country was $236,000 for Israel. In fiscal 1995 export sales were to
Indonesia, Canada, Korea and Netherlands with the bulk of such sales coming from
single sales of $2,030,500 and $1,780,920 in Canada and Indonesia, respectively.
Also, current backlog which is composed of orders received in fiscal 1996
includes approximately $4,000,000 in sales to the Netherlands and Indonesia. All
sales were in U.S, dollars, therefore, currency fluctuations did not affect the
transactions.
Gross profit equaled $4,867,000 (27% of revenues) for the fiscal year
ended May 31, 1996 compared to a gross profit of $2,581,000 (18% of revenues)
for the fiscal year ended May 31, 1995. The increased gross profit was primarily
attributable to increased sales in the Company's proprietary product lines which
produced higher profit margins than had been historically experienced in these
lines. These higher margins were a result of the implementation of a timely
method of reviewing and revising all major quotations, cost estimates and work
in process.
-10-
<PAGE>
Backlog as of May 31, 1996 was $10,464,000 compared to backlog at May
31, 1995 of $3,443,000. New orders received by the Company were $25,099,000 for
fiscal 1996 compared to new orders of $11,519,000 for fiscal 1995, including new
orders from related parties of $994,000 and $2,015,000 respectively.
The Company reported operating income of $1,038,000 for the fiscal
year ended May 31, 1996 as compared to operating income of $224,000 for the
fiscal year ended May 31, 1995. Selling and Administrative expenses increased
for the year ended May 31, 1996 to $3,829,000 (21% of net revenues) as compared
to $2,357,000 (16% of net revenues) for the fiscal year ended May 31, 1995. The
implementation of the Company's sales and marketing programs called for an
increased sales force as well as increased advertising, travel and marketing
expenditures to expand entry into potential foreign markets and support product
sales. The increase in administrative expense was due to increased salary
expense for both management and support staff combined with increases in
financing costs, legal and professional fees. Included in administrative expense
are certain non recurring expenses of approximately $300,000 associated with the
asset acquisition made by BAM and other miscellaneous administrative expenses.
Approximately $250,000 of prior year's pension obligation expense is also
classified as administrative expense. The Company recorded the additional bad
debt reserve because one of its customers sought protection under the Canadian
Bankruptcy and Insolvency Act. The Company has a security interest in the
equipment and expects to recover the difference between the accounts receivable
balance and the cost of the equipment. In addition, the Company has submitted a
proposal on behalf of itself and several other companies to restructure the
Canadian entity pursuant to a Plan of Management under the Canadian Business
Corporation Act. If the proposal is accepted, the Company may convert all or a
portion of its receivable into equity in the Canadian entity.
Other expenses equaled $536,000 for the year ended May 31, 1996
compared to $118,000 for the year ended May 31, 1995. The increase in other
expenses was primarily the result of increased interest expenses incurred on a
restructured real estate mortgage loan and the secured term loan and line of
credit obtained in July, 1995. Net income for the year ended May 31, 1996
equaled $465,000 as compared to net income of $105,000 for the year ended May
31, 1995. During the year ended May 31, 1996, the management of the Company
concluded that certain legal fees totalling $125,000 capitalized during the year
ended May 31, 1995 would have been more appropriately accounted for had they
been expensed. Accordingly, the financial statements for the year ended May 31,
1995 have been restated to recognize these legal fees totalling $125,000 as an
expense.
The Company has begun to purchase and sell used process equipment as
an adjunct to its new equipment and rebuild capabilities. The Company has been
able to enter this market in the last year through the additional sources of
financing obtained from CIT. The Company has utilized UPE's expertise in this
area to advise it on certain purchases and has purchased certain pieces of
equipment jointly with UPE. The Company believes this venture could positively
impact revenues, profits and cash flow because used equipment sales generally do
not require significant labor costs. As a result, the Company can recover its
investment in the equipment more quickly.
In summary, the Company's results of operations have improved due to
the following factors:
- Increased domestic sales and marketing efforts;
- Expansion of the senior management team;
- Increased production efficiency; and
- Joint marketing efforts with UPE, the Company's major
shareholder.
Liquidity and Capital Resources
Net cash used for operating activities was $1,889,000 for fiscal 1996
compared to net cash provided by operating activities for fiscal 1995 of
$784,000.
During the fiscal year ended May 31, 1996, the Company's accounts
receivable, inventory and accounts payable increased. The increased accounts
receivable in fiscal 1996 was due to increased sales volume. The increased
inventory in fiscal 1995 was due to increased sales volume which resulted in
increased production in the Company's new equipment product lines and the
Company's ability to purchase equipment through additional financing obtained
from CIT. Inventory consists of finished goods, raw materials and work in
process. Finished goods inventory consists of new and used processing equipment
that the Company is marketing and is in the business
-11-
<PAGE>
of selling as an adjunct to its new equipment and rebuild capabilities. This
equipment is valued at the lower of cost or market value. It is anticipated that
approximately 42% of the Company's finished goods inventory will not sell within
one year. That portion of the inventory is classified as a non current asset.
Historically, this type of equipment has maintained market value. However, no
estimate can be made of the possible loss should the Company be unable to sell
this inventory. The Company believes that the related reserves were adequate at
May 31, 1996.
The significant increase in accounts payable is due to the increased
sales volume which required major material purchases. In addition, accounts
payable at May 31, 1996 include those of BAM which was formed in September 1995
and acquired the assets of the American Furnace Division of Third Millennium
Products in November 1995. Currently the Company is delinquent with respect to
certain accounts payable. In some instances the Company has negotiated new
payment terms. If the Company's working capital position does not improve, the
Company's delinquencies with its accounts payable could adversely effect the
Company's future ability to structure favorable terms in the purchase of
materials and services.
Cash provided by financing activities equalled $2,629,000 for the
fiscal year ended May 31, 1996 compared to cash used for financing activities
for the fiscal year ended May 31, 1995 in the amount of $613,000. On July 14,
1995, the Company prepaid its note payable to G.E. Capital and paid relevant
closing costs with proceeds from advances against a $6.5 million total credit
facility available from a group of lenders as follows:
(1) A $1.5 million five year first mortgage loan from Sterling. The
loan is collateralized by a first mortgage lien on real estate owned
by the Company and a second lien on all other Company owned assets.
The loan bears interest at 14.25% per annum. The outstanding principal
and interest is payable in 59 consecutive equal monthly payments
calculated to fully amortize over a 15 year period with a final
payment of all then outstanding principal and interest. As of August
30, 1996, the amount outstanding under the loan was $1,469,035. The
loan agreement contains a number of covenants which among other things
will require the Company to maintain specified levels of net worth and
working capital and will impose certain limitations on the Company
with respect to (I) the incurrence of additional indebtedness; (II)
the incurrence of additional liens; (III) the payment of cash
dividends and (IV) mergers and investments. UPE agreed to provide a
limited guarantee for up to $350,000 of the mortgage payable and
subordinate all of its outstanding receivables or other extensions of
credit due from the Company to the mortgage. The Company granted
warrants to the three-party lending group to purchase up to 40,000
shares of the Company's Common Stock. The purpose of this loan was to
pay off the existing mortgage loan.
(2) A three-year $5 million maximum line of credit and term loan
facility from CIT, secured by a third lien position (behind the three
party lending group referenced above and the Harrisburg Authority) on
Company owned real estate and a first lien on substantially all other
owned assets of the Company. This credit facility includes: (a) an
$800,000 term loan requiring $13,333 monthly principal payments plus
interest at prime rate (Chemical Bank, New York) plus 3% and (b)
advances against a percentage of eligible inventory not to exceed
$4,000,000 in the aggregate. Initial proceeds of this credit facility
were used to fund working capital. The amount outstanding as of August
30, 1996 was $627,000 on the term loan and $1,702,000 on the secured
credit line. As of August 30, 1996, the interest rate on both the term
loan and the secured credit line was 11.25%. Additional advances will
be for the purpose of acquiring eligible inventory. The loan agreement
contains certain restrictions among other things on the making of
investments, loans and capital expenditures, on borrowings, on the
sale of assets and on the payment of dividends. The loan agreement
contains customary events of default including material
misrepresentations, payment defaults and default in the performance of
other covenants. An additional condition of the loan agreement is that
UPE will purchase all of the Company's used resale inventory in the
event of default. The term of the agreement is for three years and
automatically renewable for successive terms of two years thereafter
unless terminated by either party at the end of the initial or any
renewal term. Notwithstanding the foregoing, the agreement shall
terminate automatically upon termination or non-renewal of CIT's
financing agreements with UPE. The Company granted warrants to CIT to
purchase 50,000 shares of the Company's Common Stock.
By securing this funding, the Company expanded working capital, made
available additional capital for inventory acquisition and increased liquidity.
-12-
<PAGE>
Capital expenditures were $659,000 during fiscal 1996 versus $133,000
in fiscal 1995. The increase in capital expenditures was due primarily to the
acquisition and construction of high temperature furnaces for toll processing
and renovations to existing manufacturing and office buildings. The Company's
current commitment for capital expenditures is less than $50,000. If the Company
receives sufficient net proceeds in a proposed distribution of transferable
subscription rights to its shareholders to purchase additional shares of Common
Stock (the "Rights Offering"), the Company intends to continue to renovate its
one-story office building and laboratory and upgrade roofs on several of its
manufacturing facilities. See "Business -- Properties." The Company also intends
to purchase laboratory equipment and a management information system/network.
Additional capital expenditures will be dependent upon whether the Company
engages in significant expansion opportunities.
The Company believes that cash generated from existing business, new
orders and sales of used equipment, together with the net proceeds of the Rights
Offering, will be sufficient to meet operating requirements through the fiscal
year ending May 31, 1997. In the event that the Company's operations were to
expand significantly or the Company were to desire to make further acquisitions,
further external sources of financing would be required. While the Company
believes that such financing would be available to it, there can be no assurance
in this regard.
Management believes that any inflationary increase arising from the
Company's raw material costs and certain overhead expenses have generally been
reflected in pricing to its customers.
RECENT DEVELOPMENTS
As of June 1, 1996 the Company began a three year profit sharing
arrangement with UPE. This arrangement was agreed upon as consideration for
UPE's role in identifying, introducing, screening and negotiating the
acquisition of the assets of the American Furnace Division of Third Millennium
Products Inc., by BAM and their role in originating, negotiating, developing and
assisting in the marketing of the Tower Filter Press product line. Under this
arrangement which expires in May 1999, UPE is entitled to receive 25% of the net
pre-tax profits of BAM and the Tower Filter Press product line.
NET OPERATING LOSS CARRYFORWARD
At May 31, 1996 the Company had approximately $4.7 million of unused
federal net operating losses and $119,000 of unused federal investment and
research tax credit carryforwards. The Company has determined that the Rights
Offering will not effect a change of control of the Company, which would result
in material limitations on the use of such carryforwards to offset future
taxable income.
FORWARD LOOKING STATEMENTS
This Form 10-KSB contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended which are intended to be
covered by the safe harbors created thereby. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-
KSB will prove to be accurate. Factors that could cause actual results to differ
from the results discussed in the forward-looking statements include, but not
limited to, the Company's proprietary rights, environmental considerations and
its ability to obtain contracts in the future. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Item 7. FINANCIAL STATEMENTS.
The response to this item is submitted as a separate section to this
Form 10-KSB
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The response to this Item is incorporated by reference to the
Company's Proxy Statement for its 1996 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.
Item 10. EXECUTIVE COMPENSATION.
The response to this Item is incorporated by reference to the
Company's Proxy Statement for its 1996 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this Item is incorporated by reference to the
Company's Proxy Statement for its 1996 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this Item is incorporated by reference to the
Company's Proxy Statement for its 1996 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.
-14-
<PAGE>
PART IV
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following exhibits are being filed or are incorporated by
reference in this Form 10-KSB Report:
3(i) Amended And Restated Articles of Incorporation approved at
the December 12, 1995 Annual Meeting of the Company
(incorporated by reference to Exhibit 3(i) to the Company's
Registration Statement on Form SB-2 filed May 15, 1996 (the
"Form SB-2"))
3(ii) Amended and Restated Bylaws approved at the December 12,
1995 Annual Meeting of the Company (incorporated by
reference to Exhibit 3(ii) to the Company's 10-QSB for the
quarterly period ended November 30, 1995 (the "November 1995
10-QSB"))
10(a) The Company's 1989 Equity Incentive Plan. Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1992.
10(b) Description of the Company's deferred compensation
arrangements with certain employees, including its officers.
Incorporated by reference to the Company's Amendment No. 1
to Report on Form 10-Q for the quarter ended September 30,
1993.
10(c) The Company's Equity Incentive Plan for Directors.
Incorporated by reference to the Company's Report on Form
10-K for the fiscal year ended December 31, 1991.
10(d) Stock Purchase Agreement dated as of July 27, 1990 among the
Company, James L. Leuthe, Universal Process Equipment, Inc.,
Ronald Gale and Jan Gale. Incorporated by reference to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(e) Registration Rights Agreement dated as of July 27, 1990
among the Company, Universal Process Equipment, Inc., Ronald
Gale and Jan Gale. Incorporated by reference to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(f) Form of Agreement dated March 31, 1993 by and between the
Company and Universal Process Equipment, Inc. Incorporated
by reference to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1992.
10(g) Conformed copy of Settlement Agreement, including the
following exhibits thereto. Incorporated by reference to the
Company's Amendment No. 1 Report on Form 10-Q for the
quarter ended September 30, 1993.
10(g)1.1 Exhibit A: UPE Agreement. Incorporated by reference to the
Company's Amendment No. 1 Report on Form 10-Q for the
quarter ended September 30, 1993.
10(g)1.2 Exhibit B: Security Promissory Note, dated November 22,
1993, by The Bethlehem Corporation to The Harrisburg Sewage
Authority. Incorporated by reference to the Company's
Amendment No. 1 Report on Form 10-Q for the quarter ended
September 30, 1993.
10(g)1.3 Exhibit C: Guaranty and Suretyship Agreement, dated as of
november 22, 1993, by Universal Process Equipment, Inc. to
The Harrisburg Sewage Authority. Incorporated by reference
to the Company's Amendment No. 1 Report on Form 10-Q for the
quarter ended September 30, 1993.
10(g)1.4 Exhibit D: Equipment Security Agreement (Schedule 1
Equipment), dated as of November 22, 1993, by and between
Universal Process Equipment, Inc. and The Harrisburg Sewage
Authority.
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<PAGE>
Incorporated by reference to the Company's Amendment No. 1
Report on Form 10-Q for the quarter ended September 30,
1993.
10(g)1.5 Exhibit E: Equipment Security Agreement (Schedule 2
Equipment), dated as of November 22, 1993, by and between
Universal Process Equipment, Inc. and The Harrisburg Sewage
Authority. Incorporated by reference to the Company's
Amendment No. 1 Report on Form 10-Q for the quarter ended
September 30, 1993.
10(g)1.6 Exhibit F: Collateral Assignment of Judgement, dated as of
November 22, 1993, by and between Universal Process
Equipment, Inc. and The Harrisburg Sewage Authority.
Incorporated by reference to the Company's Amendment No. 1
Report on Form 10-Q for the quarter ended September 30,
1993.
10(g)1.7 Exhibit G: Consent to Entry of Judgement. Incorporated by
reference to the Company's Amendment No. 1 Report on Form
10-Q for the quarter ended September 30, 1993.
10(g)2 Conformed copy of UPE Agreement. Incorporated by reference
to the Company's Amendment No. 1 Report on Form 10-Q for the
quarter ended September 30, 1993.
10(h) Loan and Security Agreement dated July 14, 1995 by the
Company to The CIT Group/Credit Finance, Inc. Incorporated
by reference to the Company's Report on Form 10-K-SB for the
fiscal year ended May 31, 1995.
10(i) Term Promissory Note dated July 14, 1995 by the Company to
The CIT Group/Credit Finance, Inc. Incorporated by reference
to the Company's Report on Form 10-K-SB for the fiscal year
ended May 31, 1995.
10(j) Open-End Mortgage and Security Agreement dated July 14, 1995
by the Company to The CIT Group/Credit Finance, Inc.
Incorporated by reference to the Company's Report on Form
10-K- SB for the fiscal year ended May 31, 1995.
10(k) Inventory Purchase Agreement dated July 14, 1995 by
Universal Process Equipment, Inc. to The CIT Group/Credit
Finance, Inc. Incorporated by reference to the Company's
Report on Form 10-K-SB for the fiscal year ended May 31,
1995.
10(l) Mortgage Note dated July 13, 1995 by the Company to Sterling
Commercial Capital Inc., First Wall Street SBIC, L.P. and
Interequity Capital Partners, L.P. Incorporated by reference
to the Company's Report on Form 10-K-SB for the fiscal year
ended May 31, 1995.
10(m) Loan Agreement dated July 13, 1995 by the Company to
Sterling Commercial Capital Inc., First Wall Street SBIC,
L.P. and Interequity Capital Partners, L.P. Incorporated by
reference to the Company's Report on Form 10-K-SB for the
fiscal year ended May 31, 1995.
10(n) Security Agreement dated July 13, 1995 by the Company to
Sterling Commercial Capital Inc., First Wall Street SBIC,
L.P. and Interequity Capital Partners, L.P. Incorporated by
reference to the Company's Report on Form 10-K-SB for the
fiscal year ended May 31, 1995.
10(o) Limited Corporate Guaranty dated July __, 1995 by Universal
Process Equipment, Inc. to Sterling Commercial Capital Inc.,
First Wall Street SBIC, L.P. and Interequity Capital
Partners, L.P. Incorporated by reference to the Company's
Report on Form 10-K-SB for the fiscal year ended May 31,
1995.
10(p) 1994 Stock Option Plan of the Company as amended
(incorporated by reference to Exhibit 10(a) to the Company's
November 1995 10-QSB)
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<PAGE>
10(q) Equity Incentive Plan for Directors of the Company as
amended (incorporated by reference to Exhibit 10(b) to the
Company's November 1995 10-QSB)
10(r) Agreement, dated July 23, 1994, between the Company and The
Bethlehem Corporation Employees Association (incorporated by
reference to Exhibit 10(c) to the Form SB-2)
10(s) Net Commercial Lease Contract, dated January 30, 1996, by
and between Knoxville Industrial Group, Ltd., Bethlehem
Advanced Materials Corporation, The Stanfield York Company
and the Company (incorporated by reference to Exhibit 10(d)
to the Form SB-2)
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of period
covered by this report.
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE BETHLEHEM CORPORATION
Dated: September 11, 1996 By: /S/ ALAN H. SILVERSTEIN
-----------------------
Alan H. Silverstein, President, Director
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/S/ ALAN H. SILVERSTEIN President, Director and September 11, 1996
- ----------------------------------- Chief Executive Officer
Alan H. Silverstein (Principal Executive Officer)
/S/ ANTOINETTE L. MARTIN Chief Financial Officer (Principal September 11, 1996
- ----------------------------------- Financial Officer and Principal
Antoinette L. Martin Accounting Officer)
/S/ SALVATORE J. ZIZZA Chairman of the Board September 11, 1996
- -----------------------------------
Salvatore J. Zizza
- ----------------------------------- Director September 11, 1996
Ronald H. Gale
/S/ JAN P. GALE Director September , 1996
- -----------------------------------
Jan P. Gale
/S/ JAMES L. LEUTHE Director September 11, 1996
- -----------------------------------
James L. Leuthe
/S/ HAROLD BOGATZ Director September 11, 1996
- -----------------------------------
Harold Bogatz
/S/ B. ORD HOUSTON Director September 11, 1996
- -----------------------------------
B. Ord Houston
- ----------------------------------- Director September , 1996
O. Karl Dieckman
</TABLE>
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<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1996 AND 1995
INCLUDING REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-1
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
Independent Auditors' Report...................................... F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet
May 31, 1996................................................F-4 - F-5
Statements of Income
for the Years Ended May 31, 1996 and 1995................... F-6
Statements of Stockholders' Equity (Deficiency)
for the Years Ended May 31, 1996 and 1995................... F-7
Statements of Cash Flows
for the Years Ended May 31, 1996 and 1995................... F-8
Notes to Financial Statements.................................F-9 - F-28
================================================================================
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
The Bethlehem Corporation
We have audited the accompanying consolidated balance sheet of The Bethlehem
Corporation and Subsidiaries as of May 31, 1996, and the consolidated statements
of income, stockholders' equity (deficiency), and cash flows for the years ended
May 31, 1996 and 1995. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Bethlehem Corporation and Subsidiaries as of May 31, 1996, and the consolidated
results of their operations and their cash flows for the years ended May 31,
1996 and 1995, in conformity with generally accepted accounting principles.
As discussed in Note 24 to the financial statements, an overstatement of
intangibles as of and for the year ended May 31, 1995, was determined by
management of the consolidated company during the year ended May 31, 1996.
Accordingly, the financial statements for the year ended May 31, 1995 have been
restated to reflect the correction of this overstatement.
SOBEL & CO., LLC
Certified Public Accountants
Livingston, New Jersey
September 4, 1996
================================================================================
F-3
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,976
Accounts receivable (Net of allowance for doubtful
accounts of $124,950) 2,650,819
Accounts receivable - related parties 1,695,050
Costs and accumulated gross profit in excess of billings
on long-term contracts 1,269,655
Inventories 3,089,407
Prepaid expenses and other current assets 121,647
-----------------
Total Current Assets 8,845,554
-----------------
PROPERTY, PLANT AND EQUIPMENT, at cost 9,319,480
Less accumulated depreciation and amortization (6,977,215)
-----------------
Property, Plant and Equipment, Net 2,342,265
-----------------
OTHER ASSETS:
Goodwill (net of $9,935 of accumulated amortization) 387,459
Deferred financing costs 195,809
Inventories, net of current 2,203,142
Intangible pension and deferred compensation plan assets 172,953
Other 151,523
-----------------
Total Other Assets 3,110,886
-----------------
$14,298,705
=================
================================================================================
See notes to consolidated financial statements. F-4
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
MAY 31, 1996
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 307,389
Accounts payable 4,361,421
Accounts payable - related parties 2,194,500
Accrued liabilities 635,385
Contract billings in excess of costs and accumulated gros
profit on long-term contracts 310,506
Advances on short term contracts 238,377
Commissions payable 176,961
Payroll and state income taxes payable 134,576
Note payable - related party 310,000
--------------
Total Current Liabilities 8,669,115
--------------
OTHER LIABILITIES:
Accounts payable - long-term 1,360,225
Long-term debt, net of current maturities 4,593,764
Deferred compensation and other pension liabilities 999,786
--------------
Total Long-Term Liabilities 6,953,775
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - authorized, 5,000,000 shares
without par value, none issued or outstanding -
Common stock - authorized, 20,000,000 shares
without par value, stated value of $.50 per share;
1,938,532 shares issued; 1,938,520 shares outstanding 969,266
Additional paid-in capital 4,932,176
Accumulated deficit (7,225,617)
--------------
(1,324,175)
Less - treasury stock, at cost, 12 shares 10
--------------
Total Stockholders' Equity (Deficiency) (1,324,185)
--------------
$14,298,705
==============
================================================================================
See notes to consolidated financial statements. F-5
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1996 1995
------------ ------------
<S> <C> <C>
NET SALES $ 18,077,726 $ 14,540,591
COST OF GOODS SOLD 13,211,211 11,959,486
------------ ------------
GROSS PROFIT 5,111,988 2,581,105
------------ ------------
SELLING AND ADMINISTRATIVE EXPENSES:
Selling 1,270,253 677,055
Administrative 2,558,470 1,679,818
------------ ------------
3,828,723 2,356,873
------------ ------------
Income from Operations Before Other
Income (Expenses) and Income Taxes 1,037,792 224,232
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (530,470) (253,940)
Gains on sales of equipment -- 72,092
Royalty income - related party -- 35,500
Other (15,671) 19,709
Interest income 9,780 8,166
------------ ------------
(536,361) (118,473)
------------ ------------
Income before provision for income taxes 501,431 105,759
PROVISION FOR INCOME TAXES 36,000 1,105
------------ ------------
NET INCOME $ 465,431 $ 104,654
============ ============
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ .14 $ .04
============ ============
Assuming full dilution $ .14 $ .03
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING
Primary 3,219,517 2,946,423
============ ============
Fully diluted 3,259,686 3,026,762
============ ============
</TABLE>
================================================================================
See notes to consolidated financial statements. F-6
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------- PAID-IN ACCUMULATED -------------------------
SHARES AMOUNT CAPITAL EQUITY (DEFICIT) SHARES AMOUNT TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994 1,888,532 $ 944,266 $ 4,594,628 $(7,795,702) 12 $ (10) $(2,256,818)
Net Income for the Year Ended
May 31, 1995 -- -- -- 104,654 -- -- 104,654
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 1995 1,888,532 944,266 4,594,628 (7,691,048) 12 (10) (2,152,164)
Net Income for the Year Ended
May 31, 1996 -- -- -- 465,431 -- -- 465,431
Issuance of Common Stock 50,000 25,000 129,000 -- -- -- 154,000
Receipt of Used Equipment
Inventory from Related Party -- -- 208,548 -- -- -- 208,548
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 1996 1,938,532 $ 969,266 $ 4,932,176 $(7,225,617) 12 $ (10) $(1,324,185)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
================================================================================
See notes to consolidated financial statements. F-7
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1996 1995
------------------------- ---------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 465,431 $104,654
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 385,953 287,768
Gains on sales of equipment - (72,092)
Accrued loss on contracts and obsolete inventory write-offs 67,451 88,459
(Increase) decrease in assets:
Accounts receivable (1,181,640) (640,256)
Accounts receivable - related parties (666,193) (767,652)
Inventories (3,508,649) (426,033)
Prepaid expenses and other current assets 34,064 (40,622)
Costs and accumulated gross profit in excess of billings (530,935) -
Other assets (68,471) 30,590
Increase (decrease) in liabilities:
Accounts payable 2,855,972 1,301,330
Accounts payable - related parties 812,597 1,102,321
Accrued liabilities (58,757) (54,784)
Billings in excess of costs and accumulated gross profit (37,971) (772,743)
Advances on contracts 98,377 -
Commissions payable (63,237) (16,790)
Payroll and state income taxes payable (584,589) 603,080
Deferred compensation and pension liabilities 91,509 57,009
------------------------- ---------------------
Net Cash Provided by (Used for)Operating Activities (1,889,088) 784,239
------------------------- ---------------------
INVESTING ACTIVITIES:
Purchase and construction of property, plant and equipment (659,260) (133,385)
Proceeds from the sales of equipment - 77,792
Increase in deferred financing costs (212,895) (25,000)
------------------------- ---------------------
Net Cash Used for Investing Activities (872,155) (80,593)
------------------------- ---------------------
FINANCING ACTIVITIES:
Borrowings on line of credit 13,646,842 -
Repayments on line of credit (11,886,383) -
Proceeds from issuance of long-term debt 860,268 -
Principal payments on long-term debt (301,367) (612,912)
Proceeds from notes payable - related party 310,000 -
------------------------- ---------------------
Net Cash Provided by(Used for) Financing Activities 2,629,360 (612,912)
------------------------- ---------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (131,883) 90,734
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 150,859 60,125
------------------------- ---------------------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 18,976 $150,859
========================= =====================
</TABLE>
================================================================================
See notes to consolidated financial statements. F-8
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS:
The Company was founded in 1856 as a foundry and machine shop and incorporated
in 1888. The Company designs, manufactures, sells and services a product line of
capital equipment used to process materials for a variety of industrial
applications. Its proprietary products include the Porcupine Processor(R), the
Thermal Disc(R) Processor, the Tower Filter Press, drum dryers and flakers,
tubular dryers, and calciners. In addition, the Company operates a production
facility that fabricates, machines and assembles equipment to customers'
specifications. The Company has developed expertise in the areas of thermal
processing systems, environmental systems, filtration, specialty machining and
fabrication and the rebuilding and remanufacture of specialty process equipment.
In addition, the Company, through Bethlehem Advanced Materials Corporation
("BAM"), a wholly-owned subsidiary, designs and manufactures high-temperature
furnaces for sale and for its own use and processes specialty carbon, graphite
and ceramic materials for semiconductors and aerospace applications.
The following is a summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of The Bethlehem
Corporation and its wholly-owned subsidiaries (the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION:
Profits on long-term contracts are recognized on the percentage-of-completion
method of accounting. Under this method, sales and profits are recorded
throughout the contract term based upon the percentage of costs incurred to date
to total estimated costs of the contract. Profit on short-term contracts are
recognized on the completed contract method. Profits on short-term contracts are
recorded when a contract is substantially complete. Generally, a contract is
deemed to be substantially complete when it is shipped to a customer or when it
is ready for shipment to a customer. Progress billings applicable to their
contracts have been recorded as advances on contracts on the accompanying
balance sheet.
Losses on long-term and short-term construction contracts are recorded at the
time the losses are determined to be probable and can be reasonably estimated.
Changes in job performance, job conditions, and estimated profitability may
result in revisions to costs and income, which are recognized in the period in
which the revisions are determined. For long term contracts the accumulated
gross profit, changes in estimated job profitability resulting from job
performance, job conditions, contract penalty provisions, claims, change orders,
and settlements, are accounted for as changes in estimates in the current
period.
The asset, "Costs and accumulated gross profit in excess of billings,"
represents revenues recognized in excess of amounts billed on long term
contracts. The liability "Contract billings in excess of costs and accumulated
gross profit" represents billings in excess of revenues recognized on long term
contracts.
Revenues from sales of new or used equipment is recorded when the product is
shipped.
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company utilizes the allowance method for determining bad debts based upon
management's evaluation of outstanding receivables. Where a bad debt is secured
by a collateral interest in equipment sold to the customer, the allowance is
equal to the difference between the amount due from the customer and the cost or
net realizable value of the collateral, which ever is less.
INVENTORIES:
Inventories are stated at the lower of cost (principally first-in, first-out) or
market. Inventoried costs relating to any contracts accounted for under the
completed contract method are stated at the actual production cost, including
factory overhead incurred to date. Inventoried costs are reduced to the lower of
cost or market by charging costs in excess of estimated net realizable value to
cost of goods sold.
================================================================================
F-9
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT POLICIES: (Continued)
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. The cost of self-constructed
assets include material, direct labor and overhead expenses. Betterments and
extraordinary repairs that extend the useful life or functionality of an asset
are capitalized, other repairs and maintenane charges are expensed as incurred.
Depreciation and amortization are provided in amounts sufficient to amortize the
cost of depreciable assets over their estiamted useful lives on a straight-line
basis.
The estimated useful lives of the principal classes of assets are as follows:
The estimated useful lives of the principal classes of assets are as follows:
Buildings 10 to 40 years
Machinery and
equipment 3 to 20 years
Equipment of capital leases 3 to 5 years
GOODWILL:
The excess of the purchase price over net assets acquired by BAM have been
recorded as goodwill. Goodwill is being amortized on a straight line basis over
a period of twenty years. Amortization was $9,935 and $ 0 for the years ended
May 31, 1996 and 1995, respectively.
DEFERRED FINANCING COSTS:
Costs incurred with the origination of financing have been capitalized and are
being amortized over the term of the related debt. Loan origination costs, which
amount to $237,895 include discount fees, legal fees and brokerage fees. Any
remaining balance in Deferred Financing Costs related to a specific debt is
written off in the period such debt is refinanced or becomes due. Amortization
expenses on the deferred financing costs equalled $46,086 for the year ended May
31, 1996.
RIGHTS OFFERING COSTS:
Professional fees incurred in connection with a Stock Rights Offering being
undertaken by the Company have been capitalized and will be offset against the
proceeds obtained from the offering. If in a period it is determined the Rights
Offering will not be successful, the Company will write-off the capitalized
costs against income in such period.
EARNINGS (LOSS) PER COMMON SHARE:
The computation of earnings or loss per share in each period is computed by
dividing earnings (loss) by the weighted average number of common shares
outstanding during each period. When dilutive, stock options and warrants are
included as common share equivalents using the treasury stock method. For
primary earnings per share, the Company is using the average market price for
its common stock. For fully diluted earnings per share, the Company is using the
average market price for the year ended May 31, 1996. For the year ended May 31,
1995, the company used the market price at May 31, 1995 because the price was
higher than the average.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INCOME TAXES:
The Company utilizes the asset and liability method of accounting for income
taxes pursuant to SFAS No. 109. SFAS No. 109 requires the recognition of
deferred tax assets and liabilities for both the expected future tax impact of
differences between the financial statement and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from tax loss
and tax credit carryforwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
Temporary differences primarily result from different book and tax methods of
accounting for contracts, depreciation, and tax deductibility differences
related to accrued bad debts, vacation, payroll, deferred compensation and legal
settlements.
================================================================================
F-10
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
- --------------------------------------------------------------------------------
CASH EQUIVALENTS:
The Company considers investments with original maturities of three months or
less to be cash equivalents.
ENVIRONMENTAL COSTS:
The Company is subject to certain environmental laws and regulations.
Environmental costs that relate to past or present operations are charged to
operations in the year identified.
PROSPECTIVE ACCOUNTING CHANGES:
In 1995, the FASB issued SFAS 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", which requires the Company
to evaluate the recoverability of long-lived assets, if facts and circumstances
indicate possible impairment. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
assets carrying amount to determine if a write-down to market value or
discounted cash flow is required.
In 1995, the FASB issued SFAS 123 "Accounting for Stock-Based Compensation",
which describes a method of accounting for stock compensation plans that is
based on the fair value of employee stock options and similar equity
instruments. The method is in contrast to that described in APB 25, which is
based on the intrinsic value of equity instruments. The Company is permitted to
continue using the method of accounting described in APB 25, but is required to
disclose proforma net income and earnings per share, determined as if the fair
value method of FASB 123 had been used to measure compensation cost.
Both of these pronouncements become effective for the Company's financial
statements for fiscal year ending May 31, 1997. The Company believes that the
future adoption of these pronouncements will not have a significant impact on
results of operations or financial position.
RECLASSIFICATION:
Certain items for the year ended May 31, 1995 have been reclassified to conform
with the 1996 presentation.
- --------------------------------------------------------------------------------
NOTE 2 - ACCOUNTS RECEIVABLE:
- --------------------------------------------------------------------------------
Accounts receivable are comprised of the following at May 31, 1996:
Billed (net of allowance
for doubtful accounts of $124,951) 2,118,318
Unbilled receivables 469,171
Retention on contracts 63,330
----------
$2,650,819
==========
The three most common contract billing methods are as follows:
1. Actual progress billings based on pre-established milestones,
2. Actual billings based on the Company's agreement with the respective
customer,
3. Billing when the job or equipment is shipped.
Unbilled receivables represent revenues earned on contracts accounted for on the
completed contract method not billed by the Company at May 31, 1996.
The accounts receivable retention balances are pursuant to the retention
provisions in long-term contracts and are due and payable to the Company upon
contract completion and/or customer acceptance of merchandise. All of the
retentions are expected to be collected within the next fiscal year.
In May 1996, a customer that owes the Company $575,000 sought protection under
the Canadian Bankruptcy & Insolvency Act. The Company has a security interest in
the equipment it sold to the customer related to this accounts receivable. In
addition, UPE, a related party and the supplier of certain equipment to the
Company sold to this customer, has agreed to a chargeback equal to one half of
the actual loss on this bad debt. The Company has included in its allowance for
doubtful accounts one half of the difference between the accounts receivable
balance and the cost of the equipment expected to be recovered. It is possible
that the actual loss on this receivable may exceed the amounts received by the
Company.
================================================================================
F-11
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 3 - LONG-TERM CONTRACTS:
- --------------------------------------------------------------------------------
At May 31, 1996, costs, estimated earnings, and billings on uncompleted
long-term contracts accounted for on the percentage of completion method are
summarized as follows:
Costs incurred on long term contracts $4,966,732
Estimated earnings 3,175,235
--------------------
8,141,967
Less billings to date (7,182,818)
--------------------
$ 959,149
====================
These amounts are included in the accompanying balance sheet under the following
captions:
Contract costs in excess of billings
and accumulated gross profit on
long term contracts $1,269,655
Billings in excess of costs and
accumulated gross profit on
long term contracts (310,506)
--------------------
$ 959,149
====================
- --------------------------------------------------------------------------------
NOTE 4 - INVENTORIES:
- --------------------------------------------------------------------------------
The components of inventories are comprised of the following at May 31, 1996:
Finished goods $3,531,673
Raw materials and components 169,197
Work in process 1,591,679
----------
5,292,549
Less amount classified as a
long-term asset 2,203,142
----------
$3,089,407
==========
At May 31, 1996, the Company's finished goods inventories consist of new and
used processing equipment for resale. The processing equipment is specialized
with a limited customer base. Based upon management's experience, 40% of the
finished goods inventory will not sell within one year. As a result, the company
has classified as a non-current asset that portion of the inventory that is not
expected to sell within one year. The Company is in the process of attempting to
sell these items and management believes no loss will be incurred upon the
disposition or sale of the finished goods inventories.
The Company provides for the write-down of specific raw material and finished
goods inventory to net realizable value. Such write-downs approximated $39,800
and $88,000 for the years ended May 31, 1996 and 1995, respectively. In
addition, for the year ended May 31, 1996 the company has established a reserve
for inventory writedowns of approximatley $64,500. While management believes the
Company is carrying inventories at net realizable value, no estimate can be made
of a range of possible loss should the Company be unable to sell the
inventories.
Work in process consists of costs (including materials, direct labor and
overhead) incurred on equipment in the process of being manufactured for resale
or incurred on short term contracts that are in process and accounted for on the
completed contract method.
================================================================================
F-12
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
- --------------------------------------------------------------------------------
At May 31, 1996, property, plant and equipment consist of the following:
Land $ 348,250
Buildings 1,306,827
Machinery and equipment 7,281,151
Equipment under capital lease 108,093
Construction in progress 275,159
----------
9,319,480
Less accumulated depreciation and amortization 6,977,215
---------
Property, plant and equipment, net of accumulated depreciation
$2,342,265
==========
Depreciation and amortization expense on property, plant and equipment is as
follows:
YEAR ENDED MAY 31,
1996 1995
-------------- ---------------
Depreciation of buildings, machinery
and equipment $319,614 $282,965
Amortization of equipment
under capital leases 14,318 4,803
-------------- ---------------
$333,932 $287,768
============== ===============
- --------------------------------------------------------------------------------
NOTE 6 - ACCRUED LIABILITIES:
- --------------------------------------------------------------------------------
At May 31, 1996, accrued liabilities consist of the following:
Salaries and wages $322,769
Current portion of deferred compensation 102,588
Postretirement obligation (health insurance) 24,110
Other 185,918
--------
$635,385
========
================================================================================
F-13
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 7 - LEASE COMMITMENTS:
- --------------------------------------------------------------------------------
The Company leases a manufacturing facility in Knoxville, Tennessee which is
treated as an operating lease. The lease is due to expire on September 30, 2000
with two consecutive three year renewal options. Under the terms of the lease,
the Company's annual rent is $99,810, payable in monthly installments, with 3%
annual increases.
In addition to the base annual rent, the Company is responsible for the payment
of property taxes and other operating expenses.
The Company also leases certain equipment and automobiles which have been
classified as operating leases for financial statement purposes.
The following table represents expenses under these operating leases for the
respective periods:
YEAR ENDED MAY 31,
1996 1995
------------------------ ------------------------
Lease Expense $80,810 $ 11,154
======================== ========================
At May 31, 1996, the future minimum lease payments on these operating leases are
as follows:
YEAR ENDED MAY 31,
------------------
1997 $146,914
1998 121,579
1999 113,760
2000 116,996
2001 37,402
--------
$536,651
========
- --------------------------------------------------------------------------------
NOTE 8 - LONG-TERM DEBT:
- --------------------------------------------------------------------------------
At May 31, 1996, long-term debt consists of the following:
Line of credit - CIT $1,760,459
Note payable - Sterling Commercial Capital 1,477,192
Note payable - Harrisburg Authority 857,180
Note payable - CIT 666,667
Capital lease obligations 99,848
Note payable - Former corporate legal counsel 24,357
Note payable - Other 15,450
----------
4,901,153
Less current maturities (307,389)
----------
$4,593,764
==========
================================================================================
F-14
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 8 - LONG-TERM DEBT: (Continued)
- --------------------------------------------------------------------------------
NOTE PAYABLE - G.E. CAPITAL:
On July 16, 1995, the Company prepaid its note payable from G. E. Capital The
Company did not incur any prepayment penalties in connection with this payoff.
NOTE PAYABLE - STERLING COMMERCIAL CAPITAL, INC., FIRST WALL STREET SBIC, L.P.,
AND INTEREQUITY CAPITAL PARTNERS, L.P.:
In July 1995, the Company signed a $1.5 million, five year, first mortgage loan
(the Mortgage) with Sterling Commercial Capital, Inc., First Wall Street SBIC,
L.P., and InterEquity Capital Partners, L.P. The mortgage is payable in equal
monthly installments of $20,229 including interest at 14.25% commencing
September 1, 1995 with a final principal balloon payment of $1,290,317 due
August 1, 2000.
The loan is collateralized by a first mortgage lien on real estate owned by the
Company and substantially all other Company owned assets, subject only to a
first lien on the assets (excluding real estate) in favor of CIT Group/Credit
Finance, Inc. All debts owed by the Company to the directors and executive
officers are subordinated to the repayment of the loan. U.P.E. Inc. agreed to:
1) Provide a limited guarantee for up to $350,000 of the mortgage
payable.
2) Subordinate all of its outstanding receivables or other extensions
of the credit due from the Company to the mortgage.
The Company granted warrants to the three-party lending group to purchase up to
40,000 shares of the Company's stock at $1.87 per share, the fair market value
of the stock on the date the warrants were granted.
NOTE PAYABLE - CIT GROUP/CREDIT FINANCE, INC. In July 1995 the Company signed a
five year $5 million maximum credit facility including an $800,000 term loan
from CIT Group/Credit Finance, Inc. secured by a third lien position (behind the
three party lending group referenced above and the Harrisburg Sewerage Authority
Judgment) on Company owned real estate and a first lien on substantially all
other wned assets of the Company. In addition, U.P.E. has agreed to purchase
certain of the Company's used equipment inventory in the event the Company
defaults on the loan or certain other specified events occur. The credit
facility is for three years and is automatically renewed for an additional two
years so long as it is not terminated by either party. The credit facility
includes:
1) An $800,000 term loan requiring $13,333 monthly principal plus
interest at prime plus 3% from August 1, 1995 through July 1, 2000.
2) A line of credit against a percentage of eligible inventory not to
exceed $4,000,000 in the aggregate. The line of credit is payable
interest only at prime plus 3% until the line of credit is due in
full. At May 31, 1996 $1,760,459 is outstanding under the line.
3) Advances against other eligible collateral not to exceed the unused
balance of the line of credit.
The Company granted warrants to the CIT Group/Credit Finance, Inc. to purchase
50,000 (2.65%) shares of the Company's stock at $1.87 per share, the fair market
value of the stock on the date the warrants were granted.
NOTE PAYABLE - FORMER CORPORATE LEGAL COUNSEL:
The Company's former legal counsel agreed during 1993 to settle obligations owed
to them by the Company for a down payment of $6,518 and a $175,000 non-interest
bearing note from the Company. The Company discounted this obligation using its
incremental borrowing rate of 10.5%. The remaining obligation on the note is
payable in monthly installments of $5,000, which includes principal and
interest, through October 15, 1996.
================================================================================
F-15
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 8 - LONG-TERM DEBT: (Continued)
- --------------------------------------------------------------------------------
NOTE PAYABLE - HARRISBURG AUTHORITY:
In November 1995, as part of a settlement agreement between the Company and The
Harrisburg Authority, the Company executed a $1,200,000 note payable to the
Harrisburg Authority. The Harrisburg Authority has a second lien on the
Company's owned real estate. The note's remaining principal payment provisions
at May 31, 1996 are as follows:
1) Payable in equal monthly installments of $7,258, including interest
discounted at 10.5% due the first day of each month through November
1, 1999.
2) The balance of $603,000 will be paid from 50% of the proceeds from
the sale of certain machinery or equipment included in U.P.E.'s
inventory and certain equipment co-owned by U.P.E. and the Company.
U.P.E. is a related party of the Company and agreed to serve as
guarantor and surety for the Company on this obligation. (See Note
17)
3) The settlement agreement requires principal balances referenced in 1
and 2 above which are unpaid on March 1, 1998 to accrue 3% simple
interest compounded annually through February 28, 1999. Principal
balances unpaid on March 1, 1999 through November 1, 1999 accrue 6%
simple interest compounded annually. On November 1, 1999, all unpaid
balances of principal and accrued interest are due and payable to
the Harrisburg Authority.
At May 31, 1996 long-term debt maturities are as follows:
YEAR ENDED MAY 31,
------------------
1997 $ 305,877
1998 298,266
1999 312,820
2000 883,394
2001 1,340,337
-----------
$ 3,140,694
===========
CAPITAL LEASE OBLIGATIONS:
The Company acquired certain equipment under the provisions of leases that have
been capitalized for financial statement purposes. The following is a schedule
by years of future minimum lease payments together with the present value of the
net minimum lease payments as of May 31, 1996.
YEAR ENDING MAY 31,
- ----------------------------------------------------------
1997 $ 33,710
1998 33,098
1999 30,039
2000 23,663
2001 8,363
---------
Minimum lease payments 128,873
Less amount representing interest 29,025
=========
Present value of minimum
lease payment $ 99,848
=========
================================================================================
F-16
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES:
- --------------------------------------------------------------------------------
The components of the Company's deferred tax assets and liabilities are as
follows:
MAY 31,
1996 1995
------------------- ------------------
Deferred Tax Assets:
Bad debt reserve $ 66,000 $ 51,000
Inventory basis difference 27,000 6,000
Net operating loss
carryforwards 1,440,000 1,285,000
Tax credits 119,000 121,000
Lawsuit settlement 191,000 240,000
Deferred compensation
and retirement benefit 333,000 242,000
Other 70,000 66,000
------------------- ------------------
Total Gross Deferred
Tax Asset 2,246,000 2,011,000
Valuation allowance (2,014,000) (1,782,000)
------------------- ------------------
Total Deferred Tax Asset 232,000 229,000
Deferred Tax Liability:
Property, plant and
equipment (232,000) (229,000)
=================== ==================
Net Deferred Tax Asset
(Liability) $ - $ -
=================== ==================
The assumed rates used were as follows:
1996 1995
------------------- ------------------
Federal 25% 15%
State 10% 10%
The Company has recorded a valuation allowance for the amount by which deferred
tax assets exceed deferred tax liabilities and, as a result, the Company has not
recorded any liability or asset for deferred taxes as of May 31, 1996 and 1995.
The valuation allowance on the deferred assets increased by $232,000 during the
year ended May 31, 1996.
For the year ended May 31, 1996, the Company utilized net operating loss
carryforwards totalling $702,000 and $500,000 for federal and state income
taxes, respectively.
For the year ended May 31, 1995 the Company had a loss for income tax purposes
of approximately $160,000. The tax expense for the year ended May 31, 1995
related to minimum taxes for the Company and its' subsidiaries.
At May 31, 1996, the Company has approximately $4.7 million of unused federal
net operating losses and $119,000 of unused federal investment and research tax
credit carryforwards. If the net operating loss carryforwards remain unused,
they will expire during the years 2004 through 2010. If the investment and
research tax credit carryforwards remain unused, they will expire during the
years ended May 31, 1997 through 2002. In addition, at May 31, 1996, the Company
has unused state net operating loss carryforwards of approximately $2.7 million
that expire in May 1997 and 1998.
The provision for domestic income taxes is as follows:
-----------------------------------------
YEAR YEAR
ENDED ENDED
MAY 31,1996 MAY 31, 1995
------------------- ---------------------
Current:
State $36,000 $1,105
------------------- ---------------------
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate as follows:
YEAR ENDED MAY 31,
1996 1995
-------------------- -------------------
Statutory federal income
tax rate 25% 15%
Change in deferred asset
valuation reserve (25%) (15%)
-------------------- -------------------
Effective income tax rate 0% 0%
==================== ===================
================================================================================
F-17
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 10 - DEFERRED COMPENSATION PLANS:
- --------------------------------------------------------------------------------
The Company has two unfunded nonqualified deferred compensation plans for
certain employees which provide for 10-15 year payouts of annual retirement
benefits equal to 20% of the pre-retirement salary of employees. The benefits
become fully vested upon the employees' retirement from the Company. The plans
provide for benefits to be paid to beneficiaries of retirees who have passed
away and had unpaid vested benefits at the time of their death. The Company
funds the plans' annual benefit payments with proceeds from life insurance
contracts and operating cash.
PLAN 1:
The "Professional Executive Incentive Plan" is accounted for in accordance with
Accounting Principles Board (APB) Statement No. 12. At May 31, 1996, the Company
has an accrued liability of $88,419 relating to its unfunded obligation. Net
periodic income related to this deferred compensation plan, primarily due to
change in estimates was as follows:
YEAR ENDED MAY 31,
1996 1995
------------------------ -----------------------
$(22,898) $(4,259)
======================== =======================
The unfunded obligations were discounted using the following discount rates:
YEAR ENDED MAY 31,
1996 1995
------------------------ -----------------------
8% 7%
======================== =======================
PLAN 2:
The "Retirement Income Security Plan" is a noncontributory plan and covers
eligible plan participants not covered by Plan 1. During the year ended May 31,
1995, the Company notified all active employees covered by this plan that they
will no longer be eligible for the plan. Instead, the Company has agreed to fund
a portion of the active employees accrued benefit obligation to a 401(k) plan.
Net periodic expense for the "Retirement Income Security Plan" in accordance
with FAS No. 87 is as follows:
1996 1995
------------------ -----------------
Service cost $ - $ 7,126
Interest expense 54,983 70,832
Transition obligation
amortization 33,378 33,378
Prior service cost and
amortization of gain (9,521) (9,490)
------------------ -----------------
$ 78,840 $ 101,846
================== =================
Weighted average
discount rate 8% 8%
================== =================
The following table sets forth the funded status and amounts recognized for the
"Retirement Income Security Plan" in the Company's consolidated balance sheet at
May 31, 1996.
Actuarial present value of benefit obligations:
Accumulated benefit obligation $657,948
========
Projected benefit obligations $657,948
Plan assets at estimated fair value -
--------
Excess of projected benefit obligation over plan assets 657,948
Unrecognized gain 149,338
Unamortized net obligation at adoption which is being
amortized over 15 years (386,624)
--------
Accrued pension expense $420,662
========
================================================================================
F-18
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 11 - PENSION AND RETIREMENT PLANS:
- --------------------------------------------------------------------------------
The Company maintains two noncontributory defined benefit retirement plans,
covering substantially all hourly employees subject to a collective bargaining
agreement. The plans require benefits to be paid to eligible employees at
retirement based primarily on years of service and a fixed compensation formula.
For the plan year beginning January 1, 1995, the plan was amended to no longer
require the Company to accrue future service benefits. The transition
obligations are being amortized over a twelve year term for one plan and a
thirty year term for the other plan. The Company funds the plan, at a minimum,
based upon the statutory amounts required under ERISA.
Net periodic pension expense includes the following components:
YEAR ENDED MAY 31,
1996 1995
--------- ---------
Service cost $ -- $ 17,543
Interest cost on projected benefit obligation 222,918 216,629
Actual return on plan assets (502,310) (240,995)
Amortization of transition obligation 54,901 54,901
Net amortization and deferral 341,675 75,372
--------- ---------
$ 117,184 $ 123,450
========= =========
Weighted average discount rate assumed
in determining the actuarial present value
of the projected benefit obligation 8% 8%
========= =========
Expected long-term return on plan assets 8% 8%
========= =========
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated balance sheet for its defined benefit plans. Plan
assets are stated at fair value and are comprised primarily of common stock and
corporate bonds.
MAY 31, 1996
-------------
Actuarial present value of benefit obligations:
Vested benefit obligation $2,852,955
=============
Accumulated benefit obligation $2,852,955
=============
Projected benefit obligations $2,852,955
Plan assets at estimated fair value 2,497,745
-------------
Excess of projected benefit obligation over plan assets 355,210
Unrecognized net gain and prior service cost 463,965
Unamortized net obligation at adoption (399,633)
-------------
Accrued pension expense $ 419,542
=============
401(K) PLAN:
During the year ended May 31, 1995, the Company adopted a 401(k) plan for all
eligible employees. Employees can contribute at their discretion up to 15% of
compensation. The Company matches 25% of the employees contribution to a maximum
contribution of 1 1/2% of compensation. The plan is funded at the end of the
calendar year. At May 31, 1996 approximately $20,000 of employer contributions
were due to the plan. The 401K expense was $64,407 for the year ended May 31,
1996.
================================================================================
F-19
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 12 - POSTRETIREMENT BENEFIT PLANS:
- --------------------------------------------------------------------------------
The Company provides certain employees postretirement health care and life
insurance benefits. Postretirement health care and life insurance benefits are
provided to salaried employees who retired prior to August 1, 1992. The Company
provides postretirement health care benefits upon retirement to eligible hourly
employees in accordance with the Company's collective bargaining agreement.
Postretirement life insurance benefits are also available to eligible hourly
employees. Employees are eligible for postretirement benefits upon reaching
certain ages or completing certain years of service. The Company does not fund
its future obligations for postretirement benefits in advance.
MEDICAL BENEFITS: The Company utilizes Financial Accounting Standard No. 106
(SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions". SFAS No. 106 requires the accrual of the expected future cost of
providing these benefits during the years the employees render the necessary
service. The Company elected to recognize the transition obligation associated
with unfunded health insurance benefits over a 20-year period. The following
table presents the Company's postretirement medical benefit expense:
YEAR ENDED MAY 31,
1996 1995
-----------------------------
Service cost $ 6,158 $ 5,702
Interest cost 90,712 83,993
Amortization
of transition
obligation 58,295 58,295
Expected
contributions
from retirees (131,055) (97,248)
-----------------------------
$ 24,110 $ 50,742
=============================
Discount rate 7% 7%
=============================
Medical trend rate 13.5% 13.5%
======= ======
The Company's accumulated postretirement medical benefit obligation at May 31,
1996 is as follows:
Active plan participants $ 135,111
Retirees 1,160,777
------------
1,295,888
Plan assets -
------------
Accumulated postretirement benefit
obligation in excess of plan assets $1,295,888
Unrecognized transition obligation
and net gain 1,271,778
------------
Accrued medical postretirement liability $ 24,110
============
The effect of raising health care cost trend rates 1% for each future year would
increase the accumulated benfit obligation by appoximately $130,000 and increase
the aggregate service and interest cost components of net periodic post
retirement health care benefit costs by approximately $16,000.
LIFE INSURANCE: Term life insurance in the face amount of $3,000 is provided to
salaried retirees. Term life insurance in the face amount of $10,000 is provided
to salaried executive retirees. Salaried employees and executives who retired
subsequent to August 1992 are not eligible for these postretirement life
insurance benefits. Term life insurance in face amounts ranging from $1,250 to
$2,500 is provided to retired hourly employees.
The Company's actuary calculated the net present value of unfunded
postretirement life insurance obligations to be provided in the future to
approximately 130 active and retired employees at May 31, 1996. The following
table presents accumulated postretirement life insurance benefit obligations at
May 31, 1996:
Active hourly employees $ 8,514
Inactive hourly & salaried
employees 110,128
---------
$ 118,642
---------
Accumulated postretirement
benefit obligation in excess
of plan assets $ 118,642
Unrecognized transition obligation 105,877
---------
Accrued life insurance post-
retirement liability $ 12,765
=========
Net periodic postretirement life insurance expense for premiums paid for hourly
and salaried retirees is as follows.
YEAR ENDED MAY 31,
1996 1995
-------------------------- -----------------------
$2,241 $2,284
========================== =======================
================================================================================
F-20
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS:
- --------------------------------------------------------------------------------
PLAN 1:
On June 2, 1989, the Board of Directors of the Company adopted The Bethlehem
Corporation "1989 Equity Incentive Plan" which was approved by the stockholders
on May 11, 1990. The plan provides that the Board of Directors may grant
incentive or nonqualified common stock options to officers, directors,
consultants and employees of the Company for the purchase of up to 150,000
shares of the Company's common stock. Incentive stock options may be granted
only to employees pursuant to the plan and Board established performance
criteria. Options expire one month after employees terminate employment but in
no case later than ten years after the date of grant.
The Company's Board of Directors granted options to officers and key employees
with an exercise price of $2.50 per share. The following table summarizes
certain key points of the plan at:
MAY 31, MAY 31,
1996 1995
------------------ -----------------
a) Options outstanding 25,000 42,500
b) Options available for
granting 125,000 107,500
c) Persons holding options 4 7
PLAN 2:
During 1991, the "Equity Incentive Plan" for Directors was approved and provides
that each of the Company's directors receive nonqualified stock options to
purchase 10,000 shares of common stock of the Company.
The Company's common shares subject to options under the "Equity Incentive Plan"
(the Plan) may not exceed 130,000 shares in the aggregate and 10,000 shares for
any one director. The Plan provided the following: (i) each director of the
Company on March 21, 1991 receive common stock options for 10,000 shares, and
(ii) each director elected after March 21, 1991 be granted common stock options
for 10,000 shares under the Plan. The exercise price of each option granted
under the Plan shall be the greater of $3.15 per share or 100% of the fair
market value of a share of the Company's common stock on the date the option is
granted. The Plan is not limited in duration. The following table summarizes
certain key points of the plan at:
MAY 31, MAY 31,
1996 1995
----------------- -----------------
a) Options outstanding 100,000 100,000
b) Options available for
granting 30,000 30,000
c) Directors holding options 10 10
================================================================================
F-21
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS: (Continued)
- --------------------------------------------------------------------------------
PLAN 3:
During 1995, the stockholders approved the "1994 Stock Option Plan". The Plan
provides for the granting of non-qualified and incentive stock options and stock
appreciation rights equal to the greater of 400,000 shares or 8% of common stock
issued and outstanding, to certain officers, non-employee directors and key
employees of the Company and its subsidiaries. The Board of Directors may at its
discretion determine the key employees eligible to participate in the plan. The
Board has granted options to twenty-one employees. The maximum number of shares
that may be granted to one person pursuant to the Plan is 250,000 shares. The
1994 Stock Option Plan provides that options are to be granted at an exercise
price of at least fair market value at the date of the grant. Options covered by
Plan 4, vest ratably over a three year period, however, if there is a change in
control, the options become fully vested. The Plan provides for directors of the
Company, elected after December 1, 1994 to receive 10,000 options if they do not
receive options under Plan 2. Also, continuing directors of the Company are
entitled to options to acquire 500 shares annually. Also, the aggregate fair
market value (determined as of the date an option is granted) of the shares with
respect to which incentive stock options are exercisable by any single employee
during any calendar year cannot exceed $100,000. The options are nontransferable
and the Plan expires December 23, 2004. The following table summarizes certain
key points of the plan:
MAY 31,
1996 1995
----------------- -----------------
a) Options outstanding 400,000 250,000
b) Options available for
granting - 150,000
c) Persons holding
options 21 1
OTHER OPTIONS:
During 1996, the Board of Directors appoved and issued an additional 683,000 of
stock options outside of any existing plan to the Company's Chairman, a former
Company Chairman, a Director of the Company, a former Director of the Company
and a consultant for the Company and U.P.E. All of the options were granted at
an exercise price equal to the fair market value at the date of the grant. The
following is a summary of the options issued:
NUMBER OF OPTIONS OPTION EXERCISE PRICE
----------------- ---------------------
303,000 $1.8125
30,000 $2.1875
350,000 $1.8125
================================================================================
F-22
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
- --------------------------------------------------------------------------------
A. In response to a lawsuit initiated by the Company against Denver Equipment
Company, Inc. and its successor Svedala Industries, Inc. ("Denver"),
Denver filed a counter claim against the company in July 1995. The
Counterclaim alleged that the Company initiated and has continued the
litigation against Denver for the purpose of suppressing lawful
competition which has resulted in expenses incurred by Denver of not less
than $20,000 and asks the Court for an award in favor of Denver in an
amount not less than $20,000. This matter, along with the Company's
lawsuit, was settled in full in November 1995.
B. The Company has a wholly owned subsidiary which is currently inactive that
is named Federal Boiler Company (FBC). FBC was named as a defendant in
fifty-one lawsuits in which it was sued for asbestos related reasons
stemming from FBC's sales of the boilers it manufactured for use in
industry and government. The Company successfully obtained summary
judgments in thirty-seven of the fifty-one cases, and legal counsel is
filing summary judgment motions for the remaining cases.
The Company believes the courts will grant FBC summary judgments on these
cases on the following grounds:
1. The lawsuits were wrongfully asserted against FBC as FBC did not
manufacture the boilers in question.
2. FBC did not use asbestos in the manufacture of its products.
3. None of the plaintiffs were exposed to FBC's products or, if they
were exposed to an FBC product, then FBC's product legally could not
have caused their injuries.
The Company believes that even if summary judgments are not granted in
favor of the Company, the Company does not appear to be exposed to a risk
of significant damage awards. Accordingly, no provision has been made for
any loss from these lawsuits in the accompanying financial statements.
C. The Company is a party to a proposed settlement in United States v.
Charles Chrin et. al. The matter involved an action to obtain site cleanup
and reimbursement of costs at the Industrial Lane Landfill Superfund site.
The Company elected to join the proposed settlement in order to eliminate
the possibility of any future potential liability connected with this
site. The settlement is under review by the court. While the Company does
not believe that it is responsible for any of the problems or costs
associated with the cleanup, it has disposed of waste at the site. The
Company accrued $55,000 at May 31, 1995 , which was subsequently paid to a
settlement fund during fiscal 1996. The Company is uncertain of its
ultimate liability, if any, relating to this case.
D. In May 1996, a complaint was filed alleging that the plaintiff sustained
injuries in the course of providing maintenance on a piece of equipment
manufactured by the Company in 1979-80. The suit seeks damages in an
unspecified amount.
While the Company is still investigating this matter, it appears that the
equipment was relocated by the plaintiff's employer from a plant in
Virginia to a facility in Reading, PA. Moreover, it appears that the
equipment had been substantially modified, by others, prior to plaintiff's
injury and that those modifications may have defeated the safety features
designed and installed by the Company prior to shipment of the equipment.
The Company is also investigating insurance coverages that were in place
for the appropriate periods involved.
The Company intends to vigorously defend this matter and can not determine
the likelihood of success by the plantiff or even if successful, the
amount of damage, if any, that would be awarded.
E. At May 31, 1996, the Company is not aware of any other material pending or
threatened litigation or other environmental claims which have not been
remedied, disclosed or accrued at May 31, 1996.
================================================================================
F-23
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS:
- --------------------------------------------------------------------------------
Ronald Gale and Jan Gale are directors and stockholders of the Company and
are officers, directors and principal stockholders of Universal Process
Equipment (U.P.E.), a corporation which is a stockholder of the Company.
U.P.E. and or Ronald and Jan Gale are also majority stockholders or
otherwise affiliated with other companies that engage in transactions with
the Company.
On September 9, 1992, the Company and U.P.E. entered into an agreement for
the foreign production of the Company's dryer equipment. This agreement
provides for payment to the Company of fees for design drawings and a
license fee for sales of equipment manufactured in the Eastern Block
countries of Europe. The Company earned a $35,500 royalty for the year
ended May 31, 1995 related to sales of products covered by the agreement.
On November 28, 1995, the Company and U.P.E. entered into a sales and
marketing agreement whereby U.P.E. will market certain used equipment
owned by the Company. As consideration for its services, U.P.E. will
receive from the Company 50% of the net selling price (defined as the
sales price less the cost of the equipment) plus 1/2 of the sales
commission paid by U.P.E. to its sales people. The agreement provides that
U.P.E. will pay the Company any interest it will be required to pay on the
original acquisition of the inventory from its supplier.
During May 1996, the Company received a $310,000 advance from U.P.E. This
advance had no formal terms and was repaid in June and August 1996.
The related party receivables and payables are derived in the normal
course of business activities and are included in the accompanying balance
sheet as follows:
MAY 31, 1996
----------------------------
ACCOUNTS ACCOUNTS
RECEIVABLE PAYABLE
(RELATED (RELATED
PARTIES) PARTIES)
----------------------------
a. U.P.E. (Owned by Ronald
& Jan Gale through
Universal Baling &
Processing, Inc.
U.P.E'.s parent) $1,439,643 $1,748,568
b. Universal Envirogenics, Inc.
(U.E.I.) (80% owned by
U.P.E.) 145,724 24,000
c. Universal Industrial
Refrigeration, Inc. (U.I.R.)
(80% owned by Ronald &
Jan Gale) - 105,181
d. R. Simon Dryers, Ltd.
(Directors are Ronald &
Jan Gale) 109,343 231,321
e. Employees, Directors and
Other Affiliates 340 85,430
----------------------------
$1,695,050 $2,194,500
============================
================================================================================
F-24
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS: (Continued)
- --------------------------------------------------------------------------------
Since the amounts are in the ordinary course of business, management expects to
collect and repay the amounts within one year.
The approximate total revenues derived from related party sales were as follows:
YEAR ENDED MAY 31,
1996 1995
------------------- ------------------
U.P.E. $ 977,000 $2,450,000
U.E.I. 132,000 -
------------------- ------------------
$1,109,000 $2,450,000
=================== ==================
The Company purchases equipment and services from U.P.E. and its affiliates.
These purchases total approximately 8% and 10% of the total cost of goods sold
for the year ended May 31, 1996 and 1995, respectively.
In November 1993, the Company and Harrisburg Authority settled a lawsuit for
$1,300,000 based upon negotiations between the Company, U.P.E. and the
Harrisburg Authority. Under the terms of the settlement agreement, U.P.E. agreed
to serve as a guarantor and surety for the obligation. In addition, U.P.E.
agreed to pay up to $650,000 from the proceeds of the sale of certain of its
machinery and equipment inventory and certain equipment co-owned by the Company
and U.P.E. During the year ended May 31, 1995, proceeds from sales under this
agreement of $47,000 were used to reduce the payable to Harrisburg. The $47,000
is included in Accounts Payable-related parties. Pursuant to the settlement
agreement, the Company granted stock options to U.P.E. These options provide
that at U.P.E.'s discretion, the Company will issue additional shares of common
stock to U.P.E. in exchange for payments made by U.P.E. on behalf of the Company
to Harrisburg under the settlement agreement instead of reimbursing U.P.E. in
cash. U.P.E. may make payments (without prior approval of the Company) on the
outstanding amounts due to Harrisburg and thereby be entitled to exercise its
options or accept reimbursement for payments it advanced on behalf of the
Company. Provided however, for any such payment made by U.P.E., the Company will
not be obligated to issue more than 1,450,000 shares to U.P.E. for such
payments. The ratio of exchange shall be as follows: three (3) shares issued for
each $1.00 in payment made by U.P.E., up to a total of 450,000 shares in
exchange for a total of $150,000 in payments, and after such total of 450,000
shares has been reached, two (2) shares issued for each additional $1.50 in
payment made by U.P.E. up to a total of 1,000,000 additional shares in exchange
for a total of $750,000 in additional payments. As of May 31, 1996, no options
have been exercised by U.P.E. under this plan.
In addition, the Board of Directors approved and issued 350,000 stock options to
U.P.E. in March, 1996 for consideration of U.P.E.'s guarantees on the CIT debt.
As of May 31, 1996 none of these options have been excercised by U.P.E. The
options were granted at an exercise price of $1.825, the fair market value of
the stock on the date of the grant.
In July 1995, U.P.E exchanged used equipment inventory to the Company for $1 of
consideration. The Company recorded the transaction as contribution to paid in
capital in an amount equal to U.P.E.'s cost ($208,548), which is less than the
inventories net realizable value.
In March 1996, the Board authorized the Company to issue 300,000 shares of
common stock in exchange for used equipment inventory. As of September 4, 1996,
the inventory has not been exchanged and the stock has not been issued.
In connection with U.P.E.'s assistance in the acquisition of the assets of the
American Furnace Division and the introduction of the Tower Filter Press line,
the Company entered into a three year profit sharing arrangement with U.P.E.
expiring May 1999. Under this arrangement U.P.E. is entitled to receive 25% of
net pre-tax profits from these business units.
- --------------------------------------------------------------------------------
NOTE 16 - CONCENTRATION OF CREDIT RISK:
- --------------------------------------------------------------------------------
TRADE ACCOUNTS RECEIVABLE:
The Company designs, manufacturers sells and services a product line of capital
equipment used to process materials for a variety of industrial applications
primarily in the United States. In addition, the Company operates a production
facility that fabricates machines and assembles equipment to customers
specifications. In connection with these activities, the Company grants credit
to its customers. At May 31, 1996, the Company's accounts receivable (excluding
related parties) include a concentration of two customer balances which
represent 31% of the accounts receivable outstanding (excluding related
parties).
================================================================================
F-25
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 17 - EMPLOYMENT CONTRACTS:
- --------------------------------------------------------------------------------
The Company entered into employment contracts with several members of its
management team resulting in future purchase commitments for services as
follows:
YEAR ENDED MAY 31,
1997 330,000
1998 141,000
1999 156,000
----------
$627,000
----------
- --------------------------------------------------------------------------------
NOTE 18 - MAJOR CUSTOMERS AND EXPORT SALES:
- --------------------------------------------------------------------------------
For the years ended May 31, 1996 and 1995, customers with 10% or more of the
Company's sales are as follows:
YEAR ENDED MAY 31,
CUSTOMER 1996 1995
- ------------------------------------------------------------
A 30% -
B - 13%
C - 10%
D - 12%
E - 12%
For the years ended May 31, 1996 and 1995, export sales were as follows:
YEAR ENDED MAY 31,
CUSTOMER 1996 1995
- ------------------------------------------------------------
Israel $235,988 $ -
Indonesia 210,792 1,780,920
Japan 204,099 -
Finland 195,560 -
United Kingdom 70,562 -
Canada 35,874 2,030,500
Korea - 839,120
Netherlands - 36,888
--------------------------------------
$952,875 $4,687,428
======================================
- --------------------------------------------------------------------------------
NOTE 19 - FUTURE OPERATIONS:
- --------------------------------------------------------------------------------
As reflected in the accompanying financial statements, liabilities exceed assets
by approximately $1,324,185 at May 31, 1996. Furthermore, the Company continues
to rely on extended terms from vendors in order to meet its cash flow
shortfalls.
In May, 1996 the Company filed a Registration Statement with the SEC to initiate
a Rights Offering to existing stockholders in order to raise additional capital.
There can be no assurance that such offering will become effective, or even if
it becomes effective, it will raise sufficient capital. U.P.E. has informed the
Company of its intent to exercise its Rights under the offering (approximately
267,000 shares). The Company is also continuing to seek outside sources of
financing when cost effective and appropriate. In addition, the Company has had
net income for the past two consecutive fiscal years and management's 1997
forecast indicates continued positive trends for sales, earnings and cash flows.
================================================================================
F-26
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 20 - CASH FLOW STATEMENT DISCLOSURES:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1996 1995
---------- ----------
<S> <C> <C>
A. Cash paid for interest $ 593,155 $ 256,285
========== ==========
B. Cash paid for income taxes $ 103,904 $ --
========== ==========
C. Non Cash Investing and Financing Activities:
1. Purchase of accounts receivable, machinery and
equipment and goodwill from the American Furnace
Division of the Third Millenium Corporation
via issuance of common stock and assumption
of accounts payable $ 446,683 $ --
========== ==========
2. Equipment capitalized with corresponding
increase to long-term debt and capital leases $ 101,589 $ 33,009
========== ==========
3. Balance of G.E. Capital Financing paid directly
by Sterling Commercial Capital, Inc. $1,439,732 $ --
========== ==========
4. Receipt of used equipment inventory form U.P.E with a
corresponding increase in additional paid in capital $ 208,548 $ --
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
NOTE 21 - RESTATEMENT:
- --------------------------------------------------------------------------------
During the year ended May 31, 1996, the management of the consolidated company
determined that certain legal fees totalling $125,000 capitalized during the
year ended May 31, 1995 should have been expensed. Accordingly, the financial
statements for the year ended May 31, 1995 have been restated to recognize these
legal fees totalling $125,000 as an expense. As a result net income for the year
ended May 31, 1995 has been restated from $229,694 to $104,654 (a reduction of
$.04 per share).
- --------------------------------------------------------------------------------
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
CASH AND CASH EQUIVALENTS:
The carrying amount approximates fair value because of the short-term maturities
of these instruments.
LONG-TERM DEBT:
The fair value of the consolidated companys long-term debt (including current
installments) is estimated based on current rates available to the company for
similar debt of the same remaining maturities.
The estimated fair values of the corporation's financial instruments are as
follows:
MAY 31, 1996
CARRYING AMOUNT FAIR VALUE
--------------- --------------
Financial Assets:
Cash $ 18,976 $ 18,976
Financial Liabilities:
Long-term debt (including current portion) 4,901,153 4,901,153
================================================================================
F-27
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
- --------------------------------------------------------------------------------
NOTE 23 - BUSINESS COMBINATION:
- --------------------------------------------------------------------------------
On November 28, 1995, the Company acquired certain assets of the American
Furnace Division of Third Millenium Products, Inc. pursuant to the terms of an
Asset Purchase Agreement. The business combination is being accounted for
utilizing the purchase method of accounting. Results of operations are included
in the accompanying statement of income as of November 28, 1995.
Pursuant to the agreement, the Company purchased certain accounts receivables,
customer contracts, machinery and equipment and goodwill (including customer
lists and a covenant not to compete.) The purchase price of $446,683, was
comprised of 50,000 shares of the Company's common stock valued at approximately
$3.08 per share on the date of closing and the assumption of certain
liabilities. The allocation of the purchase price to the acquired assets are as
follows:
Accounts receivable $ 29,289
Machinery and equipment 20,000
Goodwill 397,394
---------
$446,683
=========
================================================================================
F-28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed financial statements for the year ended May 31, 1996 and is qualified
in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 4,396
<ALLOWANCES> 125
<INVENTORY> 3,089
<CURRENT-ASSETS> 8,846
<PP&E> 9,319
<DEPRECIATION> 6,977
<TOTAL-ASSETS> 14,299
<CURRENT-LIABILITIES> 8,669
<BONDS> 0
0
0
<COMMON> 969
<OTHER-SE> (1,324)
<TOTAL-LIABILITY-AND-EQUITY> 14,299
<SALES> 18,078
<TOTAL-REVENUES> 18,078
<CGS> 13,211
<TOTAL-COSTS> 3,829
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 531
<INCOME-PRETAX> 501
<INCOME-TAX> 36
<INCOME-CONTINUING> 465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465
<EPS-PRIMARY> .014
<EPS-DILUTED> .014
</TABLE>
