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, 1997.
( ) 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 .
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: $17,916,000.
As of August 22, 1997, 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 $2,027,074 based on the average of the bid and
asked prices on that date of $2.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for 1997 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 - 1997
THE BETHLEHEM CORPORATION
PART I.........................................................................1
Item 1. Description of Business.....................................1
Item 2. Description of Property.....................................5
Item 3. Legal Proceedings...........................................6
Item 4. Submission of Matters to a Vote of Security Holders.........6
PART II........................................................................7
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters.........................................7
Item 6. Management's Discussion and Analysis or Plan of Operation...7
Item 7. Financial Statements.......................................12
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure........................12
PART III......................................................................13
Item 9. Directors, Executive Officers, Promotors
and Control Persons; Compliance
with Section 16(a) of the Exchange Act.....................13
Item 10. Executive Compensation.....................................13
Item 11. Security Ownership of Certain
Beneficial Owners and Management...........................13
Item 12. Certain Relationships and Related Transactions.............13
PART IV.......................................................................14
Item 13. Exhibits, List and Reports On Form 8-K.....................14
SIGNATURES....................................................................17
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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, markets and services a product line of capital equipment and
systems used to process materials for a variety of industrial applications. Its
proprietary products include the Porcupine Processor(R), the Thermal Disc(R)
Processor, the Bethlehem 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, fabrication and the
rebuilding and remanufacture of specialty process equipment. In addition, the
Company, through 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 for the
processing of advanced materials for customer orders. The furnaces process
specialty carbon, graphite and ceramic materials for semiconductors and
aerospace industries.
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, refineries, chemical, food, pharmaceutical and petrochemical firms.
Its products include the Porcupine Processor(R), the Thermal Disc(R) Processor,
the Bethlehem Tower Filter Press, drum dryers and flakers, tubular dryers and
calciners. 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 Bethlehem 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 and systems, 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 Thermal Process Equipment unit markets core heat transfer
equipment, which includes dryers, coolers, rotary calciners and
flakers. The Porcupine Processor(R), an indirectly heated dryer
developed by the Company, is the flagship of this unit's
products. Some of the markets for these products include the
chemical, plastics, food, pharmaceuticals, refineries, waste
treatment and mining industries.
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, contaminated soils and other waste
streams. 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
Bethlehem Tower Filter Press is the unit's principal product.
o The Specialty Heavy Machining and Fabrication Services unit
provides high quality fabrication machining and assembly services
to a wide variety of industries including power, chemical, petro
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chemical, ship building, steel and non-ferrous metal producers.
This Company has recently formed a joint venture with another
fabrication company to expand its services.
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 the
semiconductor and aerospace industries. 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.
In addition to selling furnaces, BAM owns and operates several
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.
STRATEGY
The Company's business strategy is to continue the technological
development and marketing of its core capital equipment products and
environmental systems. Additionally, the Company will focus on the expansion 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's strategy is also to continue to strengthen its position
in markets inside and outside the United States, to expand its world wide
manufacturing sourcing 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 and lithium ion batteries.
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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 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, 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 Company accounted for
35% of the Company's net sales for the year ended May 31, 1997 and 30% for the
year ended May 31, 1996.
The Company's active customers for capital equipment include Eastman
Chemical Company, Foster Wheeler, Olin Corp., Hampshire Chemical Company and
Aluminum Company of America. Sales to Universal Process Equipment, Inc. ("UPE"),
a significant shareholder of the Company accounted for approximately 1% of total
sales in fiscal 1997 and approximately 6% of total sales in fiscal 1996. The
Company's active customers for high temperature furnaces and tolling services
are Allied Signal, UCAR Carbon and Graphite Products, Inc. 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 headquarters in Easton, Pennsylvania for its capital equipment products and
services and in 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. 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 18% of total sales for the year ended May 31,
1997 and approximately 20% of total sales for the year ended May 31, 1996 and it
is anticipated that the percentage of sales for the year ending May 31, 1998
will be approximately 20%.
BACKLOG
As of August 22, 1997, the Company had a backlog of orders equaling
$9.5 million compared to $9.8 million for the same period last year. Orders
comprising current backlog are expected to be filled during the fiscal year
ending May 31, 1998.
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 May 31, 1997 for raw materials were, Bush Miller, G.O. Carlson, Inc.,
Thypin Steel, and, in connection with the high temperature furnace business,
Hajoca Corporation and Graybar Electric Co.
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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
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. 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.
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, Ipsen GMBH, AVS, Inc., Abar Ipsen, and
Harper International Corp. 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 22, 1997, the Company had 116 full-time employees,
including 16 employees of BAM. Of these, 77 are engaged in manufacturing and
technical services, 11 in marketing and sales and 12 in administrative
functions.
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The production employees at the Easton, Pennsylvania facility (54
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 expired on July 22, 1997. A one year
extension to the existing labor contract was ratified with the Association on
July 21, 1997. This contract will expire on July 31, 1998. 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
also received from the DOAPC additional permits necessary to expand its
operations to allow increased carbon processing, chlorine purification and the
operation of a second afterburner.
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.
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's current commitment for capital expenditures includes
approximately $300,000 for energy efficiency upgrades, as well as upgrades to
existing plant equipment. 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 22, 1997, 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 approximately $8,500. The Company
believes this facility is suitable and adequate for its
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present operations there. The Company is a guarantor of payment on this lease.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Matters submitted to a vote of security holders at Annual Meeting of
Shareholders held on April 10, 1997:
o The election of five directors each to serve for a term of one
year and until the next Annual Meeting of Shareholders and until
their successors are duly elected and qualify.
o Approval of the Company's 1997 Stock Option Plan.
o Ratification of the appointment of BDO Seidman, LLP as
independent auditors of the Company.
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PART II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, no par value, (the "Common Stock") is
traded under the symbol "BET." The following table sets forth the high and low
sales prices for the Common Stock, for the periods indicated, as reported by the
AMEX.
LOW ($) HIGH ($)
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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
1997 FISCAL YEAR
First Quarter 1.88 2.75
Second Quarter 1.94 3.00
Third Quarter 1.88 2.75
Fourth Quarter 1.88 2.38
As of August 22, 1997, there were approximately 914 holders of record
of the Company's Common Stock.
The Company did not declare any cash dividends on its Common Stock
during fiscal 1997 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, markets and services a
product line of capital equipment and systems 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 Thermal
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. The
market size serviced by the Company's fifth
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main business unit, the Rebuild/Remanufacture 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) THERMAL PROCESS 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 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 enjoys access 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
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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 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 continue to explore new opportunities and the possibility of
additional strategic partnerships with existing and new customers. The Company
will also seek to develop joint ventures with several of its customers and other
firms to develop new processes and broaden its manufacturing services. 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 1997 ("1997") COMPARED TO FISCAL YEAR
ENDED MAY 31, 1996 ("1996")
The Company's total revenues were $17,916,000 for 1997 compared to
$18,078,000 for 1996, a decrease of $162,000 or 1%. Revenues in 1997 in the
Thermal Process and Filtration Units, Environmental Systems and
Rebuild/Remanufacture Unit were higher than recorded in 1996. Revenues in 1997
in the Company's Specialty Heavy Machining and Fabrication Services Unit
decreased over the 1996 level. Revenues for Bethlehem Advanced Materials totaled
$1,297,000 in 1997 as compared to $539,000 reported in 1996. Bethlehem Advanced
Materials was acquired on November 28, 1995, thus, revenues reported in 1996
were for six months. The increased revenues were primarily attributable to
increased sales in Environmental Systems.
The Company's largest customer in the Thermal Process Unit accounted
for 35% of the Company's revenues in 1997 and 30% in 1996. The Company was
awarded a contract from this customer in the second quarter of fiscal 1996 in
the amount of approximately $10,500,000. The balance outstanding on this order
will be shipped during the first and second quarters of fiscal 1998. The
Company's future revenues will not be materially impacted by the completion of
this contract. The Company's backlog at August 22, 1997 was $9,500,000 compared
to $9,800,000 for the same period last year.
Export sales for 1997 equaled approximately $7,165,000 compared to
approximately $953,000 for 1996. In 1997, export sales grew to thirteen foreign
countries from six foreign countries in 1996. This growth in export sales is in
accordance with the Company's sales and marketing strategy implemented in 1996
to expand the Company's presence in foreign markets. All sales were in US
Dollars, therefore currency fluctuations did not affect the transactions.
Gross profit was $5,062,000 or 28% of revenues for 1997 compared to
gross profit of $4,867,000 or 27% of revenues for 1996. The increased gross
profit margins were due to the increase in revenues recorded in the Company's
Thermal Process and Filtration Equipment Units as well as the Company's
Environmental Systems Unit. These units produced slightly higher gross margins
than historically experienced in these product lines. With respect to the
Company's Rebuild Unit, the Company, over the last eighteen months, has begun to
purchase and sell used process equipment as an adjunct to its new equipment and
rebuild capabilities. Several of the orders received by the Company in 1997 for
the purchase of used equipment also called for the utilization of the
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Company's rebuild and remanufacturing capabilities. The gross profit margins
recorded in this business unit were higher than gross profit margins recognized
by the Company in prior periods in other business units. The Company continues
to focus on decreasing manufacturing overhead expenses as well as increasing
production efficiency.
Selling, general and administrative expenses for 1997 were $3,849,000
or 21% of revenues compared to $3,845,000 or 21% of revenues for 1996.
Other expenses equaled $600,000 for 1997 compared to $583,000 for
1996. Interest expense increased $91,000 from $576,000 in 1996 to $667,000 in
1997. Interest expense to UPE (a related party) increased from $18,000 in 1996
to $59,000 in 1997 due to increased advances from UPE in the amount of $630,000.
Interest expense to CIT increased in 1997 for additional used and new equipment
borrowings. Additionally, the Company wrote off approximately $103,000 of Stock
Rights Offering costs previously capitalized in 1996 and 1997. In May of 1997,
the Board of Directors of the Company withdrew the Stock Rights Offering
initiated in May of 1996. In May 1997, the Company negotiated a final payment
for previously accrued liabilities with a third party service provider. As a
result of such negotiations, the Company recognized a gain of $98,000 in 1997.
The Company also recognized a gain of $49,000 in January of 1997 for the
settlement of an insurance claim for property damage that occurred at its
Knoxville, Tennessee facility in April of 1996. Income before income taxes
equaled $613,000 for 1997 compared to $439,000 for 1996.
The Company's benefit for income taxes equaled $100,000 for 1997
compared to a provision for income taxes for 1996 of $36,000. As a result of the
Company's historical trend of losses and uncertainties concerning the Company's
ability to obtain new contracts, at May 31, 1996 a valuation allowance was
provided against net deferred tax assets. Based on 1997 results and estimated
1998 earnings, which include earnings on existing contracts, management
considers realization of the unreserved deferred tax asset more likely than not.
Additional reductions to the valuation allowance will be recorded when in the
opinion of management, the Company's ability to generate taxable income is
considered more likely than not. Net income for 1997 was $ 713,000 compared to
$403,000 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital equaled $55,000 at May 31, 1997 compared to $177,000
at May 31, 1996. During 1997, $97,000 of cash was provided by operating
activities compared to $1,889,000 of cash used in operating activities for 1996.
Net income and depreciation and amortization expenses were $1,257,000
for 1997 as compared to $789,000 for 1996. Accounts receivable and inventory
increased by approximately $635,000 in 1997, while accounts payable decreased
$1,335,000. The increase in accounts receivable (including amounts with related
parties) is due to the reclassification of funds advanced by UPE classified as
accounts receivable to a note in 1997. The decrease in accounts payable is
attributable to payments made to suppliers and third party providers. Currently,
the Company is delinquent with respect to certain trade payables. In some
instances, the Company has negotiated new payment terms. Billings in excess of
costs and estimated earnings increased by $1,079,000 due to advance billings on
major contracts.
Cash provided by financing activities equaled $287,000 in 1997
compared to $2,416,000 in 1996. 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
22, 1997, the amount outstanding under the loan was $1,433,000. The
loan agreement contains a number of covenants which among other things
will require the Company to maintain specified levels of
-10-
<PAGE>
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
22, 1997 was $467,000 on the term loan and $1,230,000 on the secured
credit line. As of August 22, 1997, the interest rate on both the term
loan and the secured credit line was 11.50%. 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.
From time to time in the ordinary course of business, Universal
Process Equipment ("UPE") advances funds to the Company to enable the Company to
meet certain temporary cash requirements. These advances are repaid from
operations. An advance of $250,000 was made to the Company in August 1996 by
UPE. In addition, another advance of $250,000 was made to the Company by UPE in
October 1996. As of August 22, 1997, these two advances remain outstanding. The
interest rate on the advances is prime plus 1%.
On February 28, 1997, the Company purchased a complete two stage
environmental thermal process system in Alberta, Canada. In order to effect the
acquisition of the equipment, the Company borrowed $225,000 from UPE at an
interest rate of prime rate (Chase Bank, New York) plus 2.5%. This loan will be
repaid from the proceeds of the sale of the specific equipment purchased. The
Company also secured a loan with the Royal Bank of Canada in the amount of
$320,000 to assist with the buy-out of these assets at the borrowing rate of
Canadian prime rate plus 1.5% per annum. The loan is to be paid in full by March
1, 1999. The loan is paid down as each piece of equipment is sold.
Capital expenditures were $367,000 during 1997 as compared to $659,000
in 1996. In 1997, capital expenditures included renovations to its facility as
well as the purchase, refurbishment and installation of plant assets. The
Company's current commitment for capital expenditures includes approximately
$300,000 for energy efficiency upgrades, as well as upgrades to existing plant
equipment.
The Company believes that cash generated from existing business, new
orders and sales of used equipment, will be sufficient to meet operating
requirements through the year ending May 31, 1998. The Company is presently
working with its current lender, The CIT Group/Credit Finance, to increase its
credit facility so the Company can expand working capital as well as make
available additional capital for inventory acquisition.
-11-
<PAGE>
EFFECTS OF INFLATION
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.
NET OPERATING LOSS CARRY FORWARD
At May 31, 1997 the Company had approximately $4.5 million of unused
federal net operating losses and $119,000 of unused federal investment and
research tax credit carry forwards, as well as $1.9 million of unused state net
operating losses.
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
Provided following the signature page.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On March 6, 1997, the Board of Directors of the Company terminated the
engagement of Sobel and Company, LLC Certified Public Accountants ("Sobel") as
the independent auditors of the Company and appointed BDO Seidman, LLP as the
independent auditors of the Company for the fiscal year ending May 31, 1997.
Sobel's report on the financial statements of the Registrant for the fiscal year
ended May 31, 1996 did not contain any adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principles. There were no disagreements with Sobel during the Registrant's
fiscal year ended May 31, 1996 or the subsequent interim period on any matter of
accounting principles or practices, financial statement disclosures or auditing
scope or procedure, which disagreements, if not resolved to Sobel's
satisfaction, would have caused the Registrant to make reference to the subject
matter of the disagreement(s) in connection with its report.
-12-
<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 1997 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 1997 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 1997 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 1997 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.
-13-
<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
-14-
<PAGE>
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)1.5 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)
-15-
<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)
10(t) Agreement, dated July 21, 1997, between the Company and The
Bethlehem Corporation Employees Association.
(b) REPORTS ON FORM 8-K
A form 8-K was filed on March 11, 1997 and a form 8-KA was filed on
March 25, 1997 to report a change in the Company's Independent Accountant on
March 6, 1997. On that date, the Board of Directors of the Company terminated
the engagement of Sobel and Company LLC Certified Public Accountants as the
independent auditors of the Company and appointed BDO Seidman LLP as the
independent auditors of the Company for the fiscal year ending May 31, 1997.
-16-
<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: August 27, 1997 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 August 27, 1997
- ----------------------------------------- Chief Executive Officer
Alan H. Silverstein (Principal Executive Officer)
/S/ ANTOINETTE L. MARTIN Chief Financial Officer (Principal August 27, 1997
- ---------------------------------------- Financial Officer and Principal
Antoinette L. Martin Accounting Officer)
/S/ SALVATORE J. ZIZZA Chairman of the Board August 27, 1997
- ----------------------------------------
Salvatore J. Zizza
/S/ RONALD H. GALE Director August 27, 1997
- ----------------------------------------
Ronald H. Gale
/S/ JAN P. GALE Director August 27, 1997
- ----------------------------------------
Jan P. Gale
/S/ Director
- ----------------------------------------
James L. Leuthe
/S/ HAROLD BOGATZ Director August 27, 1997
- ----------------------------------------
Harold Bogatz
/S/ Director
- ----------------------------------------
B. Ord Houston
/S/ Director
- ----------------------------------------
O. Karl Dieckman
</TABLE>
-17-
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1997 AND 1996
INCLUDING REPORTS OF
INDEPENDENT CERTIFIED PUBLIC ACCOUTANTS
================================================================================
F-1
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONTENTS
Page
Reports of Independent Certified Public Accountants..................F-3 - F-4
Consolidated Financial Statements:
Balance Sheet
May 31, 1997...................................................F-5 - F-6
Statements of Income
for the Years Ended May 31, 1997 and 1996 (as restated)........F-7
Statements of Stockholders' Equity (Deficit)
for the Years Ended May 31, 1997 and 1996 (as restated)........F-8
Statements of Cash Flows
for the Years Ended May 31, 1997 and 1996 (as restated)........F-9
Notes to Financial Statements....................................F-10 - F-30
================================================================================
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
The Bethlehem Corporation
Easton, Pennsylvania
We have audited the accompanying consolidated balance sheet of The Bethlehem
Corporation and subsidiaries as of May 31, 1997 and the related consolidated
statements of income, stockholders' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Bethlehem
Corporation and subsidiaries as of May 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Woodbridge, New Jersey
August 22, 1997
================================================================================
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
The Bethlehem Corporation
We have audited the accompanying consolidated statement of income, stockholders'
equity (deficiency), and cash flows of The Bethlehem Corporation and
Subsidiaries for the year ended May 31, 1996. 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 results of operations and
cash flows of The Bethlehem Corporation and Subsidiaries for the year ended May
31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 17 to the financial statements, the Company determined that
reimbursements from a related party for bad debt losses were incorrectly
recorded as a reduction of general and administrative expenses and should have
been accounted for as a contribution to the Company's additional paid in
capital. Accordingly, the financial statements for the year ended May 31, 1996
have been restated to reflect the correction of this error.
SOBEL & CO., LLC
Certified Public Accountants
Livingston, New Jersey
September 4, 1996 (except for Note
17 which is dated August 15, 1997)
================================================================================
F-4
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1997 (amounts in thousands, except share data)
================================================================================
ASSETS
CURRENT ASSETS:
Cash $ 36
Accounts receivable (net of allowance for doubtful
accounts of $108) 2,667
Accounts receivable - related parties 2,061
Costs and estimated earnings in excess of billings
on long-term contracts 1,305
Inventories 2,729
Prepaid expenses and other current assets 94
Deferred tax asset 100
--------
Total Current Assets 8,992
--------
PROPERTY, PLANT AND EQUIPMENT, at cost 10,134
Less: accumulated depreciation and amortization (7,397)
--------
Property, Plant and Equipment, Net 2,737
--------
OTHER ASSETS:
Intangibles (net of $58 of accumulated amortization) 340
Inventories, non current 2,300
Intangible pension and deferred compensation plan assets 204
Other 246
--------
Total Other Assets 3,090
--------
$ 14,819
========
================================================================================
F-5
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
MAY 31, 1997 (amounts in thousands, except share data)
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 632
Accounts payable 2,776
Accounts payable - related parties 2,297
Accrued liabilities 700
Billings in excess of costs and estimated earnings
on long-term contracts 1,389
Commissions payable 213
Note payable - related party 930
--------
Total Current Liabilities 8,937
--------
OTHER LIABILITIES:
Accounts payable - long-term 1,410
Long-term debt, net of current maturities 3,951
Deferred compensation and other pension liabilities 1,132
--------
Total Long-Term Liabilities 6,493
--------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
STOCKHOLDERS' EQUITY (DEFICIT):
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
Additional paid-in capital 4,995
Accumulated deficit as restated (See Note 17) (6,575)
--------
(611)
Less - treasury stock, at cost, 12 shares --
--------
Total Stockholders' Equity (Deficit) (611)
--------
$ 14,819
========
================================================================================
See notes to consolidated financial statements. F-6
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
================================================================================
Year Ended May 31,
1997 1996
as Restated
(See Note 17)
-------- --------
NET SALES $ 17,916 $ 18,078
COST OF GOODS SOLD 12,854 13,211
-------- --------
GROSS PROFIT 5,062 4,867
-------- --------
OPERATING EXPENSES:
Selling 1,131 1,270
General and administrative 2,718 2,575
-------- --------
3,849 3,845
-------- --------
Operating income 1,213 1,022
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (667) (576)
Write off of Stock Rights Offering costs (103) --
Gain on settlement of accrued liabilities 98 --
Interest income 5 9
Other 67 (16)
-------- --------
(600) (583)
-------- --------
Income before income taxes 613 439
BENEFIT (PROVISION) FOR INCOME TAXES 100 (36)
-------- --------
NET INCOME $ 713 $ 403
======== ========
EARNINGS PER SHARE DATA:
Primary $ .21 $ .13
======== ========
Fully diluted $ .21 $ .12
======== ========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING
Primary 3,377 3,220
======== ========
Fully diluted 3,377 3,260
======== ========
================================================================================
See notes to consolidated financial statements. F-7
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(amounts in thousands, except share data)
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional Treasury Shares
--------------------- Paid-In Accumulated ---------------
Shares Amount Capital Deficit as Shares Amount Total
Restated
(See Note 17)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995 1,888,532 $ 944 $ 4,595 $ (7,691) 12 -- $ (2,152)
Net Income for the Year Ended
May 31, 1996 (as Restated) -- -- -- 403 -- -- 403
Issuance of Common Stock 50,000 25 129 -- -- -- 154
Receipt of Used Equipment
Inventory from Related Party -- -- 209 -- -- -- 209
Funding of Cost Sharing
Arrangement by Related Party -- -- 62 -- -- -- 62
------------------------------------------------------------------------------------
Balance at May 31, 1996 1,938,532 969 4,995 (7,288) 12 -- (1,324)
Net Income for the Year Ended
May 31, 1997 -- -- -- 713 -- -- 713
------------------------------------------------------------------------------------
Balance at May 31, 1997 1,938,532 $ 969 $ 4,995 $ (6,575) 12 $-- $ (611)
===================================================================================
</TABLE>
================================================================================
See notes to consolidated financial statements. F-8
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(amounts in thousands)
================================================================================
<TABLE>
<CAPTION>
Year Ended May 31,
1997 1996
as Restated
(See Note 17)
---------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Net income $ 713 $ 403
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 544 386
Write off of stock rights offering costs 103 --
Accrued loss on contracts and obsolete inventory write-offs 105 130
Deferred taxes (100) --
Gain on settlement of accrued liabilities (98) --
Changes in operating assets and liabilities:
Accounts receivable (16) (1,119)
Accounts receivable - related parties (366) (729)
Inventories (253) (3,509)
Prepaid expenses and other current assets 30 34
Costs and estimated earnings in excess of billings (35) (531)
Other assets (130) (69)
Accounts payable (1,438) 2,856
Accounts payable - related parties 103 813
Accrued liabilities (74) (643)
Billings in excess of costs and estimated earnings 1,079 (38)
Advances on contracts (238) 98
Commissions payable 36 (63)
Deferred compensation and other pension liabilities 132 92
---------------------------
Net Cash Provided by (Used in)Operating Activities 97 (1,889)
---------------------------
INVESTING ACTIVITIES:
Purchase and construction of property, plant and equipment (367) (659)
---------------------------
Net Cash Used in Investing Activities (367) (659)
---------------------------
FINANCING ACTIVITIES:
Net (repayments) borrowings on line of credit (344) 1,760
Proceeds from issuance of long-term debt 312 860
Payments on long-term debt (311) (301)
Proceeds from notes payable - related party 630 310
Financing Costs -0- (213)
---------------------------
Net Cash Provided by Financing Activities 287 2,416
---------------------------
NET INCREASE (DECREASE) IN CASH 17 (132)
CASH
BEGINNING OF PERIOD 19 151
---------------------------
CASH
END OF PERIOD $ 36 $ 19
===========================
</TABLE>
================================================================================
See notes to consolidated financial statements. F-9
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
Nature of Business:
The Bethlehem Corporation 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 and fabricates, machines and also assembles equipment to
customers' specifications. In addition, the Company, through Bethlehem Advanced
Materials Corporation ("BAM"), a wholly-owned subsidiary formed in September
1995, 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 as of and for
the year ended May 31, 1997 ("1997") and for the year ended May 31, 1996
("1996").
Principles of Consolidation:
The consolidated financial statements include the accounts of The Bethlehem
Corporation and its wholly-owned subsidiaries (collectively, the "Company"). All
inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition:
Sales and profit 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.
Sales and profit on all other contracts are recognized on the completed contract
method of accounting. Under this method, sales and profits are recognized when a
contract is substantially complete. Generally, a contract is deemed to be
substantially complete when the product is shipped to a customer or when it is
ready for shipment to a customer and the product has been accepted by the
customer.
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 profits and costs, 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 material and
labor costs, job performance and conditions, contract penalty provisions,
claims, change orders, and settlements are accounted for as changes in estimates
in the current period.
Revenues from sales of new or used equipment are recorded when the product is
shipped.
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. The Company periodically performs a review of
inventories to evaluate whether such goods are obsolete or off standard. When
identified, provisions to reduce inventories to net realizable value are
recorded.
================================================================================
F-10
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING 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 maintenance charges are expensed as incurred.
Depreciation and amortization expense is recognized over the assets' estimated
useful lives on a straight-line basis.
The useful lives of the principle classes of assets are as follows:
Buildings and improvements 10 to 40 years
Machinery and equipment 3 to 20 years
Equipment under capital leases 3 to 5 years
Long-Lived Assets:
Long-lived assets, such as property, plant and equipment, and intangible assets
are evaluated for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of these assets. If and
when any such impairment exists, the related assets will be written down to fair
value. This policy is in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of," which the Company has adopted
effective for 1997. No write-downs have been necessary through May 31, 1997 as a
result of the adoption of SFAS No. 121.
Intangibles:
The excess of the purchase price over tangible net assets acquired by BAM has
been allocated to intangible assets acquired on the basis of ascribed fair
values. The intangible assets are being amortized on a straight-line basis over
their estimated useful lives as follows:
Designs, blue prints and plans 20 Years
Technology 20 Years
Customer list 10 Years
Covenants not to compete 5 Years
Fixed price contract 1 Year
Amortization was $48 and $10 for the years ended May 31, 1997 and 1996,
respectively.
Deferred Financing Costs:
Direct costs incurred in obtaining financing have been capitalized and are being
amortized over the term of the related debt using the interest method. The
amortization of the deferred financing costs was $74 and $46 for 1997 and 1996,
respectively and is included in "Interest Expense" in the accompanying
Statements of Income.
Income Taxes:
The Company utilizes the liability method of accounting for income taxes, which
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 net operating losses and tax credit carryforwards and the
establishment of a valuation allowance to reflect whether realization of
deferred tax assets is considered more likely than not.
================================================================================
F-11
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
- --------------------------------------------------------------------------------
Earnings per Share:
Earnings per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of the dilutive effect, if any, of unissued
shares under options and warrants, computed using the treasury stock method
(using the average stock prices for primary basis and the higher of average or
period-end stock prices for fully diluted basis).
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. The more
significant estimates used by management in preparing the financial statements
include the following: measurement of costs and profitability on long-term
contracts; valuation of inventory (current and non-current); useful lives
assigned to fixed and tangible assets; and valuation allowances established
against deferred tax assets and accounts receivable. Actual results could differ
from those estimates.
Stock-Based Compensation:
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" but applies Accounting Principle Board
Opinion No. 25 in accounting and measuring compensation expense related to
employee stock option plans. Accordingly, there was no compensation expense
related to the issuance of stock options for 1997 and 1996. (see Note 11 for
pro-forma disclosure required by SFAS No. 123)
Fair Value of Financial Instruments:
The carrying amounts reported in the consolidated balance sheet for cash,
accounts receivable, accounts payable, accrued liabilities and related party
balances approximate fair value because of the immediate or short-term maturity
of these financial instruments. Based on an assessment of the terms, conditions
and rates of the Company's various debt agreements, management estimates that
the fair values of long term and short term debt instruments approximate
carrying values.
Reclassifications:
Certain prior period amounts have been reclassified to conform with the 1997
presentation.
Effect of Prospective Accounting Change:
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share". This statement is effective for the Company's 1998
financial statements and establishes criteria for the calculation and
presentation of "Basic" and "Diluted" earnings per share.
================================================================================
F-12
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 2 - ACCOUNTS RECEIVABLE:
- --------------------------------------------------------------------------------
Accounts receivable are comprised of the following at May 31, 1997:
Billed (net of allowance
for doubtful accounts of $108 ) $ 2,327
Retention on contracts 340
-------
$ 2,667
========
The Company generally invoices customers in accordance with pre-established
milestones, the Company's agreement with the respective customer, or when the
job or equipment is shipped.
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 1996, a customer that owed the Company $575 sought protection under the
Canadian Bankruptcy & Insolvency Act. At May 31, 1996 the Company had provided
an allowance for its estimated loss on this secured receivable. In 1997, upon
receipt of the equipment, the estimate was adjusted and, accordingly, an
additional loss of $50 was recognized. In connection with the settlement of
this transaction, a related party agreed to fund one-half of the total loss. The
amount reimbursed ($63) has been recorded as an increase to the Company's paid
in capital during 1996 (see Note 17).
================================================================================
NOTE 3 - LONG TERM CONTRACTS:
================================================================================
At May 31, 1997, costs, estimated profit, and billings on uncompleted long-term
contracts accounted for by the percentage of completion method are summarized as
follows:
Costs incurred on long term contracts $ 8,827
Estimated profit 6,244
--------
15,071
Less billings to date (15,155)
--------
$ (84)
========
These amounts are included in the accompanying balance sheet under the following
captions:
Costs and estimated earnings in
excess of billings on long-term
contracts $ 1,305
Billings in excess of costs and
estimated earnings on
long term contracts (1,389)
-------
$ (84)
=======
================================================================================
F-13
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 4 - INVENTORIES:
- --------------------------------------------------------------------------------
The components of inventories are comprised of the following at May 31, 1997:
Raw materials and components $ 261
Work in process 1,375
Finished goods 3,624
Less: reserve for obsolete inventory (231)
-------
5,029
Less: non-current inventory (2,300)
-------
$ 2,729
=======
At May 31, 1997, the Company's finished goods inventories consist of new and
used processing equipment for resale. The processing equipment is specialized
and is sold to a limited customer base. Based upon management's experience, 46%
of net inventory will not be sold within one year and has been classified as a
non-current asset. The Company is actively marketing these items and believes no
loss will be incurred upon the ultimate sale of this inventory.
The Company provided for the write-down of specific raw material and finished
goods inventory to net realizable value in the amount of $40 for 1996. In 1997,
the Company increased its reserve for inventory in the amount of $105. While
management believes the Company is carrying inventories at net realizable value,
it is reasonably possible that additional losses may be required should the
Company be unable to sell the inventories or if market conditions change in the
future.
Work in process consists principally 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.
================================================================================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
================================================================================
At May 31, 1997, property, plant and equipment consists of the following:
Land $ 348
Buildings and improvements 1,372
Machinery and equipment 8,255
Equipment under capital leases 7
Construction in progress 152
--------
10,134
Less accumulated depreciation and amortization (7,397)
Property, plant and equipment,
net of accumulated depreciation --------
$ 2,737
========
Depreciation and amortization expense on property, plant and equipment was $422
and $334 in 1997 and 1996, respectively. In connection with the construction of
certain assets, the Company capitalized $23 of interest costs in 1997.
================================================================================
F-14
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 6 - ACCRUED LIABILITIES:
- --------------------------------------------------------------------------------
At May 31, 1997, accrued liabilities consist of the following:
Salaries and wages $391
Current portion of deferred compensation 101
Postretirement obligation (health insurance) 24
Other 184
----
$700
====
In May 1997, the Company negotiated a final payment for previously accrued
liabilities with a third party service provider. As a result of such
negotiations, the Company recognized a gain of $98, which is reflected in "Other
Income (Expense)" in the accompanying 1997 Statement of Operations.
================================================================================
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
================================================================================
At May 31, 1997, long-term debt and capital lease obligations consist of the
following:
Note payable - Sterling Commercial Capital $ 1,443
Note payable - Harrisburg Authority 794
Line of credit - CIT 1,416
Term Loan payable - CIT 507
Note payable - Royal Bank of Canada 283
Capital lease obligations 86
Other notes payable 54
-------
4,583
Less: current maturities (632)
-------
Total $ 3,951
=======
Universal Process Equipment ("U.P.E."), a corporation which is a stockholder of
the Company, is a party to certain financing transactions that the Company
enters into (see Note 13).
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
including interest at 14.25% commencing September 1, 1995 with a final principal
balloon payment of $1,290 due August 1, 2000. Interest expense on this debt
totaled $208 and $188 in 1997 and 1996, respectively.
================================================================================
F-15
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (Continued)
- --------------------------------------------------------------------------------
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. The Mortgage 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. All debts owed by the Company to the directors and executive
officers are subordinated to the repayment of the loan. In connection with the
Mortgage, U.P.E. agreed to:
1) Provide a limited guarantee for up to $350 of the Mortgage.
2) Subordinate all of its outstanding receivables or other extensions of
the credit due from the Company to the Mortgage.
In July 1995, the Company granted warrants to the three-party lending group to
purchase up to 40 thousand 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 - Harrisburg Authority:
On July 12, 1985, the Harrisburg Authority filed suit against the Company. The
complaint alleged liability on grounds that certain Porcupine dryers
manufactured and furnished by the Company failed to satisfy design
specifications. In June 1993, a judgement was entered against the Company in the
amount of $2,127.
In November 1993, as part of a settlement agreement between the Company and the
Harrisburg Authority for this lawsuit, the Company executed a $1,200 note
payable to the Harrisburg Authority. The Harrisburg Authority has a second lien
on the Company's owned real estate. Interest expense on this debt totaled $24
and $30 in 1997 and 1996, respectively. The note's remaining principal payment
provisions at May 31, 1997 are as follows:
1) Payable in equal monthly installments of $7, including interest
discounted at 10.5% due the first day of each month through November
1, 1999.
2) The remaining balance of $603 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.
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 referenced in 1 and 2 above
are due and payable to the Harrisburg Authority.
Note Payable - CIT Group/Credit Finance, Inc.
In July 1995, the Company signed a three year $5 million maximum credit facility
including an $800 term loan from CIT Group/Credit Finance, Inc. secured by a
third lien position (behind the Mortgage and the Harrisburg Authority Judgement)
on Company owned real estate and a first lien on substantially all other owned
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) A $507 term loan (original balance of $800) requiring $13.3 monthly
principal plus interest at prime plus 3% from August 1, 1995 through
July 1, 1998.
================================================================================
F-16
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (Continued)
- --------------------------------------------------------------------------------
2) A line of credit against a percentage of eligible inventory not to
exceed $4,000 in the aggregate. The line of credit is payable interest
only at prime plus 3% until the line of credit is due in full in July
1998. At May 31, 1997, $1,416 is outstanding under the line, which
represents the maximum credit available to the Company at that date.
3) Advances against other eligible collateral not to exceed the unused
balance of the line of credit. Interest expense (net of amounts
capitalized) on this debt totaled $322 and $234 in 1997 and 1996,
respectively.
The Company granted warrants in July 1995 to the CIT Group/Credit Finance, Inc.
to purchase 50 thousand 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 - Royal Bank of Canada:
On February 1997, the Company also secured a loan with the Royal Bank of Canada
in the amount of $320 for the purchase of a complete two stage environmental
thermal process system; interest is based on the bank's prime rate plus 1.5% per
annum. The loan is to be paid in full by March 1, 1999. Interest expense on this
debt was $3 in 1997.
Debt Maturities:
At May 31, 1997, long-term debt maturities for the next five fiscal years are as
follows:
Year Ended May 31,
------------------
1998 $ 601
1999 1,891
2000 700
2001 1,305
2002 -
Capital Lease Obligations:
Certain leased equipment 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, 1997.
Year Ending May 31,
- ------------------------------
1998 $ 33
1999 30
2000 26
2001 9
2002 -
==============
Minimum lease payments 98
Less: imputed interest (12)
==============
Present value of minimum
lease payments $ 86
==============
================================================================================
F-17
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES:
- --------------------------------------------------------------------------------
The components of the benefit (provision) for income taxes are as follows:
December 31, 1997 1996
------------------------------------------------------------
Current:
Federal $ - $ -
State - (36)
------------------------------------------------------------
- (36)
------------------------------------------------------------
Deferred:
Federal (10) 166
State (3) 66
------------------------------------------------------------
(13) 232
------------------------------------------------------------
Net change in valuation
allowance 113 (232)
------------------------------------------------------------
Benefit (provision) for
income taxes $ 100 $ (36)
============================================================
The following table presents the principal reasons for the difference between
the actual income tax benefit (provision) and the tax provision computed by
applying the U.S. Federal statutory income tax rate to income before income
taxes.
December 31, 1997 1996
------------------------------------------------------------
U.S. Federal Income tax
provision at statutory rates $ (205) $(149)
State income taxes, net of
Federal benefit (40) (36)
Utilization of net operating
loss carryforwards 245 149
Changes in deferred tax assets,
net 100 -
------------------------------------------------------------
Benefit (provision) for income
tax $ 100 $ (36)
=============================================================
================================================================================
F-18
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES: (Continued)
- --------------------------------------------------------------------------------
The components of the Company's deferred tax assets and liability are as
follows:
May 31,
1997 1996
---------------------------
Deferred Tax Assets:
Receivables $ 44 $ 76
Inventory 116 31
Net operating loss
carryforwards 1,606 1,670
Tax credits 119 138
Lawsuit settlement 219 221
Deferred compensation
and retirement benefit 443 386
Other 20 81
---------------------------
Total Gross Deferred
Tax Asset 2,567 2,603
Valuation allowance (2,220) (2,333)
---------------------------
Total Deferred Tax
Assets 347 270
Deferred Tax Liability:
Property, plant and
equipment (247) (270)
---------------------------
Net Deferred Tax Asset $ 100 $ -
===========================
================================================================================
F-19
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES: (Continued)
- --------------------------------------------------------------------------------
As a result of the Company's historical trend of losses and uncertainties
concerning the Company's ability to obtain new contracts, at May 31, 1996 a
valuation allowance was provided against net deferred tax assets. Based on 1997
results and estimated 1998 earnings, which include earnings on certain
contracts, management considers realization of the unreserved deferred tax asset
($100 at May 31, 1997) more likely than not. Additional reductions to the
valuation allowance will be recorded when, in the opinion of management, the
Company's ability to generate taxable income is considered more likely than not.
At May 31, 1997, the Company has approximately $4.5 million of unused federal
net operating loss carryforwards and 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 have or will expire during the years
1997 through 2002. In addition, at May 31, 1997, the Company has unused state
net operating loss carryforwards of approximately $1.9 million that expire in
1998 and beyond.
- --------------------------------------------------------------------------------
NOTE 9 - DEFERRED COMPENSATION AND RETIREMENT PLANS:
- --------------------------------------------------------------------------------
The Company has an unfunded nonqualified deferred compensation plan for certain
employees which provide for ten to fifteen 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 plan
provides 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 through operating cash flow. A
description of the plan follows:
The Retirement Income Security Plan ("RISP") is an unfunded
noncontributory plan and covers eligible plan participants and, for
purposes of determining net pension expense and plan liabilities,
includes one participant from a predecessor plan. 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 qualified 401(k) plan.
The Company maintains two noncontributory defined benefit retirement plans
("Pension 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
remaining transition obligations are being amortized over a six year term for
one plan and a twelve year term for the other plan. The Company funds the plans,
at a minimum, based upon the statutory amounts required under ERISA.
The following tables set forth the components of net periodic pension expense
and the funded status and amounts recognized in the Company's consolidated May
31, 1997 balance sheet for deferred compensation and defined benefit plans. Plan
assets are stated at fair value and are comprised primarily of common stock and
corporate bonds.
================================================================================
F-20
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 9 - DEFERRED COMPENSATION AND RETIREMENT PLANS: (Continued)
- --------------------------------------------------------------------------------
Net Periodic Pension Expense:
RISP PENSION
PLANS
1997 1996 1997 1996
Service cost $ -- $ -- $ -- $ --
Interest cost on projected benefit
obligation 46 55 208 223
Actual return on plan assets -- -- (553) (502)
Amortization of transition
obligation 33 33 55 55
Prior service cost and gain
amortization (9) (9) -- --
Net amortization and deferral -- -- 347 341
---------------------------------
$ 70 $ 79 $ 57 $117
=================================
Actuarial present value of RISP PENSION
benefit obligations at PLANS
May 31, 1997:
Vested benefit obligation $ -- $ 1,778
======= =======
Accumulated benefit
obligation $ 561 $ 2,651
======= =======
Projected benefit obligation $ 561 $ 2,651
Plan assets at fair value -- 2,775
------- -------
Deficit (excess) of plan assets
over projected benefit
obligation 561 (124)
Unrecognized net gain and
prior service cost 149 950
Unamortized net obligation
at adoption (219) (350)
------- -------
Accrued pension expense $ 491 $ 476
======= =======
The expected long-term return on plan assets and the weighted average discount
rate assumed in determining the actuarial present value of the projected benefit
obligation for all plans was 8% in 1997 and 1996.
401(k) Plan:
During 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, 1997 the Company's liability to the plan approximated $6. The Company's
expense related to the plan was $91 and $64 for 1997 and 1996, respectively.
================================================================================
F-21
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 10 - POSTRETIREMENT BENEFIT PLANS:
- --------------------------------------------------------------------------------
The Company provides certain employees with 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 accrues 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 and prior service cost over a 15-year period. The
following table presents the Company's postretirement medical benefit expense:
Year Ended May 31,
1997 1996
Service cost $ 5 $ 6
Interest cost 68 91
Amortization
of transition
obligation 58 58
Amortization of
prior service
costs (26) (--)
Expected
contributions
from retirees (48) (131)
----- -----
$ 57 $ 24
===== =====
Discount rate 7% 7%
--------------
Medical trend rate 13.5% 13.5%
==============
The Company's accumulated postretirement medical benefit obligation at May 31,
1997 is as follows:
Active plan participants $ 112
Retirees 855
------
967
Plan assets -0-
Accumulated postretirement benefit
obligation in excess of plan assets 967
Unrecognized transition obligation
and net gain (910)
------
Accrued medical postretirement liability $ 57
======
The effect of raising health care cost trend rates 1% for each future year would
increase the accumulated benefit obligation by approximately $92 and increase
the aggregate service and interest cost components of net periodic
postretirement health care benefit costs by approximately $7.
================================================================================
F-22
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 10 - POSTRETIREMENT BENEFIT PLANS: (Continued)
- --------------------------------------------------------------------------------
Life Insurance:
Term life insurance in the face amount of $3 is provided to salaried retirees.
Term life insurance in the face amount of $10 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 to $3 is provided to retired
hourly employees. The related expense for both 1997 and 1996 totaled $2. The
actuarially determined liability was $13 at May 31, 1997.
- --------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' EQUITY:
- --------------------------------------------------------------------------------
Rights Offering Costs:
The Company had capitalized professional fees incurred in connection with a
contemplated Stock Rights Offering. In May of 1997, the Company decided not to
pursue the Stock Rights Offering and, accordingly, a non operating loss
provision of $103 was recorded to reflect this impairment.
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. There were no options granted under this plan in 1997 and
1996.
Plan 2:
During 1991, the Equity Incentive Plan ("EIP") 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 EIP 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
EIP. The exercise price of each option granted under the EIP 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 EIP is not limited
in duration. There were no options granted under this plan in 1997 and 1996.
Plan 3:
During 1995, the stockholders approved the 1994 Stock Option Plan (the "1994
Plan"). The 1994 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 1994 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 1994 Plan is 250,000 shares. There were 290,000 options
granted under this plan in 1996.
================================================================================
F-23
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' EQUITY: (Continued)
- --------------------------------------------------------------------------------
The 1994 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 the 1994
Plan vest ratably over a three year period, however, if there is a change in
control, the options become fully vested. The 1994 Plan provides for Directors
of the Company, elected after December 1, 1994 to receive 10,000 options if they
do not receive options under the EIP. 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. The options are nontransferable and
the 1994 Plan expires December 23, 2004.
Plan 4:
During 1997, the stockholders approved the 1997 Stock Option Plan ("1997 Plan").
The 1997 Plan provides for the granting of non-qualified and incentive stock
options. The 1997 Plan currently authorizes the issuance of a maximum of 200,000
shares of common stock. The maximum number of shares that may be subject to
options granted under the 1997 Plan to any individual in any calendar year may
not exceed 50,000. No options have been issued under this plan in 1997.
Other Options:
During 1996, the Board of Directors approved the issuance of 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 U.P.E. These options are subject to stockholders' approval. The
options were granted at $1.825 per share (the fair market value at the date of
the grant) and will be valued based upon the market price of the Company's
common stock at the date the stockholders approve the grant. If and when the
stockholders' approval is obtained, the Company will recognize an expense
related to the issuance of these options.
Disclosure On Options:
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for the 1994 Stock Option Plan and the
Other Options. Under APB Opinion 25, because the exercise price of the Company's
stock options issued to employees equals the market price of the underlying
stock on the date of grant, no compensation is recognized.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company to
provide pro-forma information regarding net income and earnings per share as if
compensation cost for the Company had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. The Company estimates the
fair value of each stock option at the grant date by using the Black-Scholes
option-price model with the following weighted average assumptions used for
grants in 1997 and 1996, no dividend yield; expected volatility of 35%;
risk-free interest rates of 5.73% and expected lives of 10 years for the
options.
Under the accounting provisions of SFAS No. 123, the Company's net income,
primary earnings per share and fully diluted earnings per share would have been
reduced to the pro-forma amounts indicated below.
1997 1996
Net Income:
As reported $ 713 $ 403
Pro-forma $ 645 $ 383
Primary earnings per share:
As reported $ .21 $ .13
Pro-forma $ .19 $ .12
Fully diluted earnings per share:
As reported $ .21 $ .12
Pro-forma $ .19 $ .12
The pro forma effect on net income and earnings per share for 1997 and 1996 may
not be representative of the pro forma effect in future years because it
includes compensation cost on a straight-line basis over the vesting periods of
the grants and does not take into consideration the pro forma compensation costs
for grants made prior to 1996.
================================================================================
F-24
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' EQUITY: (Continued)
- --------------------------------------------------------------------------------
A summary of the status of the Company's outstanding options as of May 31, 1997
and 1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
May 31, 1997 May 31, 1996
Weighted Average Weighted Average
Exercise Price Exercise Price
Shares Shares
<S> <C> <C> <C> <C>
Outstanding-beginning of year 2,065,000 $0.98 1,792,500 $0.84
Granted - 290,000 $1.90
Exercised - -
Forfeited (70,000) $3.15 (17,500) $2.50
----------------- ------------------
Outstanding-end of year 1,995,000 $0.90 2,065,000 $0.98
================= ==================
Options exercisable -year-end 429,174 465,000
================= ==================
Weighted-average fair value
of options granted
during the year - $1.03
================= ==================
</TABLE>
The options issued in 1996 expire between 2000 and 2006 and are exercisable as
to 60% of the optioned shares after the first year, 77% after the second year,
92% after the third year, and 100% after the fourth year.
The following table summarizes information about stock options outstanding at
May 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted- Weighted-
Range of Average Average
Exercise Number Outstanding Weighted-Average Exercise Number Exercisable Exercise
Prices at May 31, 1997 Remaining Contractual Price at May 31, 1997 Price
Life
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.33 to 0.94 1,700,000 3.1 years $0.67 250,000 $0.94
$1.87 to 2.88 240,000 6.8 $2.10 124,174 $2.05
$2.50 25,000 2.5 $2.50 25,000 $2.50
$3.15 30,000 1.8 $3.15 30,000 $3.15
--------- -------
$0.33 to 3.15 1,995,000 3.5 $0.90 429,174 $1.51
========= =======
</TABLE>
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
- --------------------------------------------------------------------------------
Legal Matters
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 1980. The matter was recently settled in the
amount of $20. The Company accrued this amount at May 31, 1997.
================================================================================
F-25
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES: (Continued)
- --------------------------------------------------------------------------------
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, 1997.
Operating Lease Commitments
The Company leases a manufacturing facility in Knoxville, Tennessee which is
accounted for as an operating lease. The lease is due to expire on September 30,
2000 with two consecutive three year renewal options. 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. Rent expense under all operating lease arrangements was $151 and
$81 in 1997 and 1996, respectively. At May 31, 1997, the future minimum lease
payments on these operating leases are as follows:
Year Ended May 31,
1998 $ 135
1999 127
2000 119
2001 38
2002 -
Employment Agreement
The Company entered into an employment contract with an officer resulting in
future commitments for payments as follows:
Year Ended May 31,
1998 $ 141
1999 156
------
$ 297
=======
- --------------------------------------------------------------------------------
NOTE 13 - 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
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 Eastern Europe. The Company earned no royalties in
1997 and 1996.
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.
The amounts paid to and earned by U.P.E. were $378 and $94 in 1997 and 1996,
respectively.
From time to time, U.P.E. advances funds to the Company for working capital
purposes. At May 31, 1997, advances outstanding totaled $685. Related interest
expense on such advances totaled $53 in 1997 and $18 in 1996. The interest rate
on the advances is prime rate plus 1%.
================================================================================
F-26
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS: (Continued)
- --------------------------------------------------------------------------------
On February 28, 1997, the Company purchased a two stage environmental thermal
process system for $545. In order to effect the acquisition of the equipment,
the Company borrowed $225 from U.P.E. at an interest rate of prime plus 2.5%.
Interest expense accrued in fiscal 1997 totaled $6. This loan will be repaid
from the proceeds of the sale of the equipment purchased. The Company also
secured a loan with the Royal Bank of Canada in the amount of $320 to assist
with the purchase of these assets at the borrowing rate of Canadian prime rate
plus 1.5% per annum.
The related party accounts receivable and accounts payable are derived from the
normal course of business activities and are included in the accompanying
balance sheet as follows:
May 31, 1997
--------------- ---------------
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) $ 1,936 $ 2,126
b. Universal Envirogenics, Inc.
(U.E.I.) (80% owned by
U.P.E.) - 1
c. Universal Industrial
Refrigeration, Inc. (U.I.R.)
(80% owned by Ronald &
Jan Gale) 10 99
d. R. Simon Dryers, Ltd.
(Directors are Ronald &
Jan Gale) 115 25
Employees, Directors and
Other Affiliates - 46
-------------------------------
$ 2,061 $ 2,297
===============================
Since the amounts arise in the ordinary course of business, management expects
to collect and pay the amounts within one year (see Note 17).
Related party sales were as follows:
Year Ended May 31,
1997 1996
----------------------------
U.P.E. $ 54 $ 977
U.E.I. 22 132
----------------------------
$ 76 $1,109
============================
The Company purchases equipment and services from U.P.E. and its affiliates.
These purchases total approximately 7% and 8% of the total cost of goods sold
for 1997 and 1996, respectively.
================================================================================
F-27
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS: (Continued)
- --------------------------------------------------------------------------------
In November 1993, the Company and Harrisburg Authority settled a lawsuit for
$1,300 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 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.
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 dollar in payment made by U.P.E., up to a total
of 450,000 shares in exchange for a total of $150 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 in additional payments. As of August 22,
1997, no options have been exercised by U.P.E. under this plan.
In July 1995, U.P.E. exchanged used equipment inventories to the Company for one
dollar of consideration. The Company recorded the transaction as a contribution
to paid in capital in an amount equal to U.P.E.'s cost ($209), which is less
than the inventories' net realizable value.
In addition, the Board of Directors approved the issuance of 350,000 stock
options to U.P.E. in March, 1996 for consideration of U.P.E.'s guarantees on the
CIT debt. These options are subject to stockholders' approval. 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 March 1996, the Board of Directors authorized the Company to issue 350,000
shares of common stock to U.P.E. in exchange for used equipment inventory. These
shares are subject to stockholders' approval. As of August 22, 1997, 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. Expenses relating to this
agreement were $43 in 1997.
- --------------------------------------------------------------------------------
NOTE 14 - 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, 1997, the Company's accounts receivable (excluding
related parties) include a concentration of three customer balances which
represent 25% of the accounts receivable outstanding.
================================================================================
F-28
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 15 - MAJOR CUSTOMERS AND EXPORT SALES:
- --------------------------------------------------------------------------------
For 1997 and 1996, one customer accounted for 35% and 30%, respectively of the
Company's sales.
For the years ended May 31, 1997 and 1996, export sales were as follows:
Year Ended May 31,
Customer 1997 1996
- -------------------------------------------------------------------------------
Netherlands $ 2,723 $ -
Brazil 1,149 -
Taiwan 1,566 -
Indonesia 620 211
Mexico 534 -
Japan 352 204
Chile 138 -
Estonia 38 -
Israel 33 236
Canada 6 35
Poland 3 -
Switzerland 2 -
United Kingdom 1 71
Finland - 196
-----------------------------------------------
$ 7,165 $ 953
===============================================
- --------------------------------------------------------------------------------
NOTE 16 - SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended May 31,
1997 1996
-----------------------------------
<S> <C> <C>
A. Cash paid for interest $ 591 $ 593
===================================
B. Cash paid for income taxes -- $ 104
===================================
C. Non Cash Investing and Financing Activities:
1. Purchase of accounts receivable, machinery and
equipment and intangibles from the American Furnace
Division of the Third Millennium Corporation
via issuance of common stock and assumption
of accounts payable -- $ 447
===================================
2. Equipment capitalized with corresponding
increase to long-term debt and capital leases -- $ 102
===================================
3. Balance of G.E. Capital Financing paid directly
by Sterling Commercial Capital, Inc. -- $1,440
===================================
4. Receipt of used equipment inventory form U.P.E with a
corresponding increase in additional paid in capital -- $ 209
===================================
5. Funding of cost sharing arrangement by related party
increasing additional paid in capital -- $ 62
===================================
</TABLE>
================================================================================
F-29
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================
- --------------------------------------------------------------------------------
NOTE 17 - RESTATEMENT:
- --------------------------------------------------------------------------------
During the year ended May 31, 1997, the Company determined that reimbursements
from U.P.E. for bad debt losses (previously accounted for as a reduction of
general and administrative expense) should be accounted for as a contribution to
the Company's additional paid in capital. Accordingly, the 1996 statement of
income has been restated from previously published amounts to recognize this
expense of $63 (or $ .01 per share).
- --------------------------------------------------------------------------------
NOTE 18 - ACQUISITION:
- --------------------------------------------------------------------------------
On November 28, 1995, the Company acquired certain assets of the American
Furnace Division of Third Millennium Products, Inc. pursuant to the terms of an
Asset Purchase Agreement. The acquisition is being accounted for utilizing the
purchase method of accounting and, accordingly, results of operations are
reflected in the accompanying 1996 statement of income from November 28, 1995.
The purchase price of $447, 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
Machinery and equipment 20
Designs, blue prints and plans 179
Technology.... 99
Customer List. 42
Management team and
covenant not to compete 68
Fixed Price Contract 10
----
$447
====
================================================================================
F-30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed financial statements for the year ended May 31, 1997 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1997
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 4,836
<ALLOWANCES> 108
<INVENTORY> 2,729
<CURRENT-ASSETS> 8,992
<PP&E> 10,134
<DEPRECIATION> 7,397
<TOTAL-ASSETS> 14,819
<CURRENT-LIABILITIES> 8,937
<BONDS> 0
<COMMON> 969
0
0
<OTHER-SE> (1,580)
<TOTAL-LIABILITY-AND-EQUITY> 14,819
<SALES> 17,916
<TOTAL-REVENUES> 17,916
<CGS> 12,854
<TOTAL-COSTS> 3,849
<OTHER-EXPENSES> (600)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 613
<INCOME-TAX> (100)
<INCOME-CONTINUING> 713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 713
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
