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, 2000.
( ) 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 . No X
-- --
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. /X/
State issuer's revenues for its most recent fiscal year: $11,661,000
As of September 12, 2000, 2,378,520 shares of the registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was approximately $715,331 based on the average of the bid and
asked prices on that date of $.625.
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TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-KSB - 2000
THE BETHLEHEM CORPORATION
PART I.........................................................................1
Item 1. Description of Business......................................2
Item 2. Description of Property......................................5
Item 3. Legal Proceedings............................................6
PART II........................................................................7
Item 4. Market for the Company's Common Equity and
Related Stockholder Matters................................7
Item 5. Management's Discussion and Analysis or
Plan of Operation..........................................7
Item 6. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.......................12
Item 7. Financial Statements........................................12
PART III......................................................................13
Item 8. Directors, Executive Officers, Promotors and Control
Persons; Compliance with Section 16(a) of the
Exchange Act..............................................13
Item 9. Executive Compensation......................................14
Item 10. Security Ownership of Certain Beneficial Owners
and Management............................................15
Item 11. Certain Relationships and Related Transactions...............16
Item 12. Exhibits, List and Reports on Form 8-K.......................18
SIGNATURES....................................................................19
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PART I
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Recent Developments
As of March 31, 2000, The Bethlehem Corporation, (the
"Company") no longer manufactured its products at its facilities in Easton, PA.
Orders for customers in North and South America are manufactured through
arrangements with subcontractors. Orders for Europe and Asia are manufactured
either in Germany or Poland where the Company has previously established
manufacturing and licensing relationships. For financial reporting purposes, the
Company considers its operations to be one segment. The Company plans to sell
all or some of its 29 acre site and manufacturing facilities in Easton, PA.
However, the Company will continue to direct its sales, marketing, engineering
and field services from its Easton, PA location.
On July 20, 2000 in conjunction with discontinuing
manufacturing of the Company's products in Easton, PA, an agreement was reached
with The Bethlehem Employees Association to provide closure to the existing
collective bargaining agreement and the Company terminated certain employees.
The charge related to this plan of action was not considered material.
On November 29, 2000, the Company closed on the sale of all of
the issued and outstanding shares of stock in its wholly owned subsidiary
Bethlehem Advanced Materials Corporation ("BAM") to a private company, Bergen
Cove Realty Inc. The purchase price was $3,923,000 which included the assumption
of BAM's existing term debt with Bank of America, N.A. ("BA") which was
$2,423,000 at November 29, 2000. In conjunction with the sale, the Company
received a fairness opinion from Seidman & Company, Inc. Investment Banking that
the transaction was fair to the Company and its Stockholders. The Company
expects to recognize a loss on the sale of BAM. In 2000, the Company recognized
an impairment charge of $1,600,000 in connection with a re-evaluation of the
carrying value of BAM intangible assets and property, plant and equipment.
The report of the Company's Independent Certified Public
Accountants contains an explanatory paragraph on the Company's ability to
continue as a going concern. The Company's continued existence is dependent upon
its ability to resolve its liquidity problems, principally by extending certain
bank financing arrangements, the sale of assets, business units, inventory and
real estate. While pursuing the sale of real estate and other assets and working
with PNC Bank, N.A. ("PNC") on additional agreements, the Company must continue
to operate on cash flow generated internally. The Company plans to improve its
working capital requirements by selling portions of its existing inventory and
other business units. In addition, the Company will continue to reduce expenses
as the sale of business units take place. Other than the recently completed sale
of BAM, the Company has no agreements, understandings or commitments with
respect to the sale of business units and there can be no assurance that any
such sales will take place. Working capital limitations continue to impinge on
day-to-day operations, thus contributing to additional operating losses. The
continued support and forbearance of its lenders will be required, although this
cannot be assured.
While the Company believes the proceeds from the sale of
certain assets and an extension on its borrowing facilities will be adequate to
fund its on-going obligations, there can be no assurance that the disposition of
assets and the Company's other strategies will occur in a timely manner in order
to fund its on-going obligations.
The Company received notice from the American Stock Exchange
("Exchange") Staff indicating that the Company no longer complies with the
Exchange's continued listing guidelines due to the non filing of its Form 10-KSB
("10-KSB") for the fiscal year ended May 31, 2000 and Form 10-QSB ("10-QSB") for
the quarterly period ended August 31, 2000 with the Securities and Exchange
Commission as set forth in Sections 132(c), 1002(d) (e) and 1101 of the Company
Guide. In view of this, the Exchange is unable to determine if the Company
satisfies the Exchange numerical guidelines for listing and that its securities
are, therefore subject to being delisted from the Exchange. The Company has
appealed this determination and a hearing is scheduled for January 23, 2001.
There can be no assurance the Company's request for continued listing will be
granted.
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Item 1. Description of Business.
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General
The Company was founded in 1856 as a foundry and machine
shop and incorporated in 1888. The Company provides thermal and filtration
process solutions, equipment, systems and technology 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. The Company has developed expertise in
the areas of thermal processing systems, filtration process systems and
environmental systems. The Company, through BAM, 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. In
addition, the Company, through Bethlehem Thermal, LLC ("Bethlehem Thermal")
provides metallized thermal coatings for a variety of industries using totally
automated thermal spray systems. Bethlehem Thermal also provides automated
systems technology and inspection services to provide long term solutions for
corrosion and erosion problems.
Thermal and Filtration Process Solutions, Equipment, Systems and Technology
The Company's customers include refineries, chemical, food,
pharmaceutical, petrochemical and environmental 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 has 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 thermal
and filtration process solutions, equipment systems and technology, 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 three 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 hazardous and
non-hazardous sludges, contaminated soils, drill
cuttings 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.
Bethlehem Advanced Materials Corporation (BAM)(See Recent Developments page 1)
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
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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 Toll Processing--contract heat treating and thermal
processing of specialty materials.
o Furnace Manufacturing--design/engineering,
manufacturing and installation of specialty high
temperature furnace systems.
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.
Bethlehem Thermal, LLC (Bethlehem Thermal)
Bethlehem Thermal provides metallizing thermal solutions for
a variety of industries using totally automated thermal spray systems. Bethlehem
Thermal's sprayed metal coatings are designed to combat corrosion and erosion in
severe environments, as found in the pulp & paper, chemical, petrochemical,
power and machine industries. Using both electric arc spray and high velocity
oxy fuel "HVOF" processes enables Bethlehem Thermal to provide coatings in a
wide variety of materials and alloys. Bethlehem Thermal's fully automated CNC
Thermal Spray Systems result in coatings extending equipment service life. As a
complement to Bethlehem Thermal's in-house capability, it provides on-site
coating services at its customers' plants and offers automated systems
technology and inspection services.
Customers; Existence of Short-Term Contracts
The Company's principal customers for thermal and filtration
process solutions, equipment, systems and technology are domestic and foreign
manufacturers of chemicals, pharmaceuticals, foods, plastics, petrochemicals and
environmental firms. BAM's principal customers for its tolling services and high
temperature furnaces are domestic and foreign manufacturers of carbon and
graphite structures, and other advanced ceramic composite structures. Bethlehem
Thermal's principal customers for its metallizing coatings are domestic and
foreign manufacturers of chemicals, petrochemicals, pulp and paper.
Currently, a major portion of the Company's sales for its
thermal and filtration process equipment and environmental systems, and
metallizing coating solutions, are made under short term or one time contracts,
which contracts are not subject to renewal. Although such contracts may afford
the Company flexibility in responding to changing market conditions, a market
for the Company's products and services 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 active customers for thermal and filtration
process solutions, equipment, systems and technology include Oiltools
International Group, Mexicana De Cobre, S.A. DE C.V., Daesang Corporation,
EtiHolding, Inc. and Celotex Corporation. Sales to Universal Process Equipment,
Inc. ("UPE"), a significant shareholder of the Company accounted for less than
1% of total sales in both the years 2000 and 1999. UPE filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code in October 2000. The
Company's active customers for high temperature furnaces and tolling services
are Honeywell International Inc., Hitco, Inc. and BP Amoco. Purchases by any
single customer vary significantly from year to year according to such
customer's capital
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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 thermal and filtration
process solutions, equipment and technologies products, metallizing coating
solutions and services, and in Knoxville, Tennessee for its high temperature
furnace products and tolling services. In June 1999, the Company entered into an
agreement with Oiltools International Group ("Oiltools"), whereby Oiltools will
serve as the exclusive representative of the Company's thermal desorption
systems for the treatment of oil and gas drilling wastes in all areas of the
world except for North and South America.
Backlog
As of November 28, 2000, the Company had a backlog of orders
equaling $16.8 million ($15.4 million of this amount related to BAM orders)
compared to $22.5 million for the same period last year. Orders comprising
current backlog are expected to be filled during the fiscal years ending May 31,
2001 to May 31, 2004.
Raw Materials
The basic raw materials used in the Company's products are
pipe and forgings, steel plate, bars and castings and in addition, in the high
temperature furnace business, graphite and copper. For metallized thermal
coatings, the basic raw materials are alloy wire and powders. 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, 2000 were Motion
Industries and G. J. Oliver, Inc. and in connection with the high temperature
furnace business, Air Products and Chemicals, Inc., Fiber Materials, Inc. and
UCAR Carbon Company, Inc.
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 one patent which is material to its
business. The Company received this patent for the new generation of its tower
filter product line in August of 2000. 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. 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 and 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.
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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.
Dependence on Significant Customers
For the year ended May 31, 2000, the Company's two largest
customers individually accounted for 15% and 33% of the Company's sales. The
customers are Oiltools and Honeywell International Inc., respectively.
Employees
As of November 28, 2000, the Company had 55 full-time
employees, including 22 employees of BAM. Of these, 37 are engaged in
manufacturing and technical services, 6 in marketing and sales and 12 in
administrative functions.
Environmental Impact and Regulation
The operations at BAM's Knoxville, Tennessee plant utilize
fume destruction 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 Department of Air Quality Management (the "KCDAQM").
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
KCDAQM additional permits necessary to expand its operations to allow increased
carbon processing, and the operation of two additional afterburners.
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, financial condition or cash flows.
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.
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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 Northampton County, Pennsylvania. On May 2,
2000 the Company submitted plans to the Zoning Board of Palmer Township seeking
permission to subdivide its real estate. On October 10, 2000, the Company
received conditional approval from the Palmer Township Planning Commission to
proceed with the Subdivision Plan. That approval was unanimously ratified by the
Palmer Township Board of Supervisors on October 23, 2000. The Company expects to
submit final plans and permits that address all of the township's conditions in
time for final plan approval by the end of February 2001. See "Management's
Discussion and Analysis or Plan of Operation -- Liquidity and Capital
Resources."
As of November 30, 2000, the Company's Easton facilities
were subject to a first and second mortgage loan. See "Management's Discussion
and Analysis or Plan of Operation -- Liquidity and Capital Resources."
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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,
2003, but provisions for the lease provide for one additional three year rental
term. The Knoxville lease has a monthly base rent of approximately $10,000. In
March 1999, the Company purchased a tract of land of approximately 1.08 acres
adjacent to the facility. In May of 2000, BAM renewed its lease for 1,530 square
feet of office space and approximately 2,470 square feet of warehouse space. The
lease is for one year and has a monthly base rate of $2,450. See "Management's
Discussion and Analysis or Plan of Operation - Recent Developments."
Item 3. Legal Proceedings
-----------------
The Company is party to litigation claims and assessments
that arise in the normal course of operations. Management does not believe that
the ultimate disposition of such matters will have a material adverse effect on
the Company's financial position, results of operations or liquidity.
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PART II
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Item 4. Market for the Company's Common Equity and Related
---------------------------------------------------
Stockholder Matters.
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The Company's Common Stock, no par value, (the "Common
Stock") is traded under the symbol "BET" on the American Stock Exchange
("AMEX"). The following table sets forth the high and low sales prices for the
Common Stock, for the periods indicated, as reported by the AMEX.
Low ($) High ($)
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1999 Fiscal Year
First Quarter 1.63 2.75
Second Quarter 1.19 2.00
Third Quarter 1.25 3.50
Fourth Quarter 1.63 3.00
2000 Fiscal Year
First Quarter 1.56 2.38
Second Quarter 0.63 1.81
Third Quarter 0.63 1.31
Fourth Quarter 0.81 1.88
As of August 31, 2000, there were approximately 796 holders
of record of the Company's Common Stock.
The Company did not declare any cash dividends on its Common
Stock during Fiscal 2000 or Fiscal 1999. The Company's financing agreement with
PNC Bank, N.A., imposes certain limitations with respect to payment of cash
dividends (See "Management's Discussion and Analysis or Plan of
Operation--Liquidity and Capital Resources").
Item 5. Management's Discussion and Analysis or Plan of Operation.
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Recent Developments
As of March 31, 2000, the Company no longer manufactured its
products at its facilities in Easton, PA. Orders for customers in North and
South America are manufactured through arrangements with subcontractors. Orders
for Europe and Asia are manufactured either in Germany or Poland where the
Company has previously established manufacturing and licensing relationships.
For financial reporting purposes, the Company considers its operations to be one
segment. The Company plans to sell all or some of its 29 acre site and
manufacturing facilities in Easton, PA. However, the Company will continue to
direct its sales, marketing, engineering and field services from its Easton, PA
location.
On July 20, 2000, in conjunction with discontinuing
manufacturing of the Company's products in Easton, PA, an agreement was reached
with The Bethlehem Employees Association to provide closure to the existing
collective bargaining agreement and the Company terminated certain employees.
The charge related to this plan of action was not considered material. In
accordance with this agreement, the Company agreed to pay the balance of 1999
vacation and 2000 vacation earned and accrued through March 31, 2000 by August
11, 2000. On December 11, 2000, this obligation was paid in full.
On November 29, 2000, the Company closed on the sale of all of
the issued and outstanding shares of Bethlehem Advanced Materials Corporation
("BAM"), a wholly-owned subsidiary to a private company, Bergen Cove Realty Inc.
The purchase price was $3,923,000 which includes the assumption of BAM's
existing term debt with Bank of America, N.A. ("BA") which was $2,423,000 at
November 29, 2000. In conjunction with the sale, the Company received a fairness
opinion from Seidman & Company, Inc. Investment Banking that the transaction was
fair to the Company and its Stockholders. The Company expects to recognize a
loss on the sale of BAM. In
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2000, the Company recognized an impairment charge of $1,600,000 in connection
with a re-evaluation of the carrying value of BAM intangible assets and
property, plant and equipment.
The report of the Company's Independent Certified Public
Accountants contains an explanatory paragraph on the Company's ability to
continue as a going concern. The Company has not complied with certain bank
covenants in effect at May 31, 2000. The Company received a temporary extension
on its borrowing facilities from PNC on July 31, 2000 to November 30, 2000 and
is currently working on additional agreements with PNC. Due to non-compliance
with such covenants, such amounts have been classified as current liabilities in
the accompanying financial statements. The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern.
Management's plans with respect to this matter are addressed in the following
paragraphs. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company's continued existence is dependent upon its
ability to resolve its liquidity problems, principally by extending certain bank
financing arrangements, the sale of assets, business units, inventory and real
estate. While pursuing the sale of real estate and other assets and working with
PNC on additional agreements, the Company must continue to operate on cash flow
generated internally. The Company plans to improve its working capital
requirements by selling portions of its existing inventory and other business
units. In addition, the Company will continue to reduce expenses as the sale of
business units take place. Other than the recently completed sale of BAM, the
Company has no agreements, understandings or commitments with respect to the
sale of business units and there can be no assurance that any such sales will
take place. Working capital limitations continue to impinge on day-to-day
operations, thus contributing to additional operating losses. The continued
support and forbearance of its lenders will be required, although this cannot be
assured.
While the Company believes the proceeds from the sale of
certain assets and an extension on its borrowing facilities will be adequate to
fund its on-going obligations, there can be no assurance that the disposition of
assets and the Company's other strategies will occur in a timely manner in order
to fund its on-going obligations.
The Company received notice from the American Stock Exchange
("Exchange") Staff indicating that the Company no longer complies with the
Exchange's continued listing guidelines due to the non filing of its Form 10-KSB
("10-KSB") for the fiscal year ended May 31, 2000 and Form 10-QSB ("10-QSB") for
the quarterly period ended August 31, 2000 with the Securities and Exchange
Commission as set forth in Sections 132(c), 1002(d) (e) and 1101 of the Company
Guide. In view of this, the Exchange is unable to determine if the Company
satisfies the Exchange numerical guidelines for listing and that its securities
are, therefore subject to being delisted from the Exchange. The Company has
appealed this determination and a hearing is scheduled for January 23, 2001.
There can be no assurance the Company's request for continued listing will be
granted.
Company Overview
The Company was founded in 1856 as a foundry and machine
shop and incorporated in 1888. The Company provides thermal and filtration
process solutions, equipment, systems and technology 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. 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 industries. In addition, the Company, through Bethlehem Thermal,
provides metallizing coating solutions for a variety of industries using totally
automated thermal spray systems.
All three of the Company's business units 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 Company would characterize the markets for each of its
business units as follows:
(1) Thermal Process and Filtration Units
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. Markets are relatively concentrated in
mature industries such chemicals,
plastics, foods, pharmaceuticals,
refineries, waste treatment and mining
and minerals.
. Technology barrier is medium.
. Competition is worldwide.
(2) Environmental Systems Unit
--------------------------
. Markets are concentrated.
. Technology barrier is medium.
. Competition is worldwide.
The Company's customer concentration has historically been
limited to markets 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.
Results of Operations
Fiscal Year Ended May 31, 2000 ("2000") Compared to Fiscal Year Ended May 31,
1999 ("1999")
The Company's total sales were $11,661,000 for 2000,
compared to sales of $13,710,000 for 1999, a decrease of $2,049,000 or 15%.
Gross profit was $2,045,000 or 18% of sales for 2000 compared to gross profit of
$4,539,000 or 33% of sales for 1999. Decreased sales in the Company's Thermal
Products Unit was the primary factor for the lower sales. Both sales activity
and sales in the Company's core Thermal Products Unit decreased in the fourth
quarter of 2000 due to a worldwide decline of the purchasing of capital goods in
the chemical industry and other process industries that the Company serves. The
decreased gross profit for the year 2000 was due to two main factors. The
Company increased its inventory reserve in 2000 by the amount of $845,000. In
addition, manufacturing absorption decreased due to lower sales volume, thus
increasing cost of goods sold.
The Company's two largest customers individually accounted
for 15% and 33% of the Company's sales for 2000. The Company's export sales
equaled $4,362,000 for 2000 compared to $5,674,000 for 1999. All sales were
denominated in US Dollars, therefore, currency fluctuations did not affect the
transactions.
Operating expenses for 2000 were $5,693,000 or 49% of sales,
compared to $3,655,000 or 27% of sales for 2000. The long-lived asset impairment
was recorded in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be disposed of" ("SFAS 121"). As a result of debt covenant
violations, the need to generate working capital and the subsequent sale of BAM,
the Company re-evaluated the carrying values of BAM intangible and fixed assets.
Based upon the ultimate sales price of BAM (considered to be fair value),
management determined there was an impairment and recognized a non cash charge
of $1,600,000 in 2000, comprised of write offs of $244,000 and $1,356,000 for
intangible and fixed assets, respectively. The increase in administrative
expenses was due primarily to increased legal expense and bad debt expense.
During the fourth quarter of 2000, a customer cancelled a contract which
resulted in bad debt expense of $238,000. In years 2000 and 1999, the Company
recognized approximately $116,000 of compensation expense for the issuance of
stock options in late 1998 to James L. Leuthe (a Director) and Salvatore J.
Zizza (then the Chairman of the Board). The balance of the options' fair values
of approximately $119,000 will be expensed in the year ending May 31, 2001.
Operating loss equaled $3,648,000 for 2000 or 31% of sales compared to operating
income of $884,000 or 7% of sales for 1999.
Other expense totaled $563,000 for 2000 compared to $495,000
for 1999. Interest expense was $993,000 in 2000 compared to $693,000 for 1999
due to increased debt levels during the year and interest rates. The Company
recognized approximately $325,000 in financing charges for the existing
amortization and modification of certain option grants to UPE compared to
$100,000 in 1999. The Company recognized a gain of $789,000 in the third quarter
of 2000 for the sale of machinery and equipment. In 1999, the Company recognized
a gain on the sale of machinery and equipment assets in the amount of $170,000.
-9-
<PAGE>
The Company's provision for income taxes totaled $435,000
for 2000 compared to a benefit of $20,000 for 1999. The 2000 expense was
comprised of a valuation allowance established on deferred tax assets of
$375,000 and a $60,000 net state tax provision. In the fourth quarter of 2000
management, based on an assessment of its prospective business plan and
strategies, results of operations and other various criterion, concluded that
realization of such deferred tax assets could not be considered more likely than
not. Net loss for 2000 was $4,646,000 compared to net income of $409,000 for
1999.
Liquidity and Capital Resources (Also See Recent Developments - page 7)
During 2000, $992,000 of cash was provided by operating
activities compared to $1,740,000 of cash used in operating activities in 1999.
The Company's accounts receivable decreased $846,000 and costs and estimated
profits in excess of billings decreased $1,211,000. The decrease was due to
decreased billings and decreased percentage of completion contract projects at
May 31, 2000 compared to May 31, 1999.
Cash used in investing activities totaled $368,000 and
$3,421,000 in 2000 and 1999, respectively. Capital expenditures totaled
$1,571,000 in 2000 compared to $3,468,000 in Fiscal 1999. The Company had been
building and upgrading the high temperature furnaces needed to support the long
term contract secured by Bethlehem Advanced Materials ("BAM"). During the third
quarter of 2000, the Company sold certain machinery and equipment for cash of
$1,203,000.
Cash used in financing activities was $725,000 for 2000
compared to cash flow provided by financing activities of $5,233,000 in 1999. On
May 19, 2000, the Company entered into a $600,000 loan agreement with Fundex
Capital Corporation ("Fundex") secured by a second mortgage on real estate and
personal property. Proceeds from the loan were used to repay the Harrisburg
Authority obligation in the amount of $445,000 with the balance used for general
corporate purposes. Terms of the Fundex agreement provide for twelve monthly
interest payments of $7,000 each commencing and due and payable on July 1, 2000
up to and including June 1, 2001. Thereafter, principal and interest at the rate
of 14% per annum shall be paid in one hundred eight constant monthly
installments of approximately $10,000 commencing and due and payable on the
first day of July, 2001 and on the first day of each month thereafter up to and
including June 1, 2010. During 2000, the Company recorded interest expense of
$3,000 related to this loan agreement.
On May 19, 2000, the Company entered into a $1,500,000
committed line of credit note with Exim Bank ("Exim") through PNC Bank N.A.
("PNC"). The purpose of the facility is to provide working capital for export
contracts. Borrowing's under this agreement accrue interest at PNC's prime rate
of interest. At May 31, 2000, the rate of interest was 9.5%. During 2000, the
Company recorded $1,000 in interest expense. Borrowing's under the facility are
secured in defined accounts receivable and inventory. The balance outstanding at
May 31, 2000 was $194,000 and at November 30, 2000 was $1,081,000.
On June 3, 1998, the Company entered into a financing
agreement with PNC Bank, N.A. ("PNC") which provided for a term loan of $800,000
and a revolving credit facility of $3,200,000. During the third quarter of
fiscal 2000, the Company prepaid the term loan in the amount of $536,000 from
proceeds raised in the sale of the machinery and equipment assets. On July 31,
2000, PNC temporarily extended the line until November 30, 2000. The Company is
in default on various covenants with PNC. The Company is presently working with
PNC on further agreements. The amount outstanding at May 31, 2000 and November
30, 2000 was approximately $3,193,000. On December 1, 2000, the Company paid PNC
$900,000 from the proceeds from the sale of BAM. Interest expense related to
this agreement totaled $333,000 in 2000 and $321,000 in 1999. UPE agreed to
provide a guarantee for this credit facility. This guarantee consists of an
equipment repurchase agreement wherein UPE is required to either liquidate or
otherwise purchase for its own account the Company's eligible inventory upon the
occurrence of a payment default. In addition, UPE agreed to subordinate $800,000
of indebtedness due from the Company to PNC. As discussed under
Business--Customers; Existence of Short-Term Contracts, UPE filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code in October 2000.
In September 1998, the Company entered into a $250,000 non
revolving and committed equipment line of credit with PNC. The purpose of the
facility is to provide funding for acquisition of equipment from time to time,
in aggregate amounts not exceeding the sum of $250,000. The maximum amount of
each advance made
-10-
<PAGE>
under the facility shall be equal to the lesser of; (1) the then current
unadvanced portion of the facility or, (2) ninety percent (90%) of the price
paid by the Company to acquire the equipment. The rate bears interest of a
maximum rate of 9.40% and a minimum rate of 9.15%. Borrowings under the facility
are secured by a lien on all of the collateral advanced. Borrowings under this
facility are fully amortized with fixed equal payments of $5,000 not to exceed a
term of 60 months. The amount outstanding as of May 31, 2000 and November 30,
2000 was $131,000 and $136,000, respectively.
On January 21, 1999, the Company entered into a loan
agreement with Bank of America for a $3 million line of credit and term loan,
secured by a first lien on the Company's inventory, accounts receivable,
machinery and equipment and other assets. The proceeds of this credit facility
were used to finance the capital expenditures at the BAM facility to support the
contract received during the third quarter of 1999. On July 31, 1999, the credit
line was converted to a seven-year term loan requiring $36,000 principal
payments plus interest at a prime plus one half of one percent. The loan
agreement contains certain covenants, which among other criteria will require
the Company to maintain a specified level of net worth. The Company is in
violation of certain covenants with Bank of America. Effective November 29,
2000, all outstanding loans to the Bank of America were assumed by the new
owners of BAM in accordance with the sale and purchase agreement. As of May 31,
2000 and November 28, 2000 the amounts outstanding under the facility are
$2,654,000 and $2,423,000 respectively.
Backlog of $16,807,000 ($15,378,000 of this amount related
to BAM orders) at November 28, 2000, compares to backlog of $19,804,432 for the
same period last year.
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 Losses and Tax Credits Carry Forward
At May 31, 2000 the Company has approximately $6.7 million
of unused federal net operating loss carryforwards and $.3 million of federal
alternative minimum tax ("AMT") and investment and research tax credit
carryforwards. If the net operating loss carryforwards remain unused, they will
expire during the years 2004 through 2011. If the investment and research tax
credit carryforwards remain unused, they will expire during the years 2001
through 2002.
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.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 133, "Accounting for
Derivative Instruments and hedging Activities" ("SFAS 133"), which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The Company is currently reviewing the effects of SFAS 133. This
standard will be adopted by the Company no later than the first quarter of its
year ending May 31, 2002.
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101,
-11-
<PAGE>
Revenue Recognition ("SAB 101") which broadly addresses how companies report
revenues in their financial statements. The Company is in the process of
evaluating the accounting requirements of SAB 101 and does not expect that this
standard will have a material effect, if any, on its financial statements.
In May 19, 2000, the Financial Accounting Standards Board
released Interpretation 44, "Accounting for Certain Transactions involving Stock
Compensation", which addresses - in question and answer form - certain practice
issues related to APB 25, Accounting for Stock Issued to Employees. The Company
is currently in the process of evaluating the accounting requirements of
Interpretation 44 and does not expect that this standard will have a material
effect, if any, on its financial statements.
Item 6. Changes In and Disagreements With Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure
------------------------
None
Item 7. Financial Statements.
--------------------
Provided following the signature page.
-12-
<PAGE>
PART III
--------
Item 8. Directors, Executive Officers, Promoters and Control
-----------------------------------------------------------
Persons; compliance with Section 16(a) of the Exchange Act.
-----------------------------------------------------------
The directors are elected at the Annual Meeting of the
Stockholders of the Company and each director elected holds office until his
successor is elected and qualified. The Board currently consists of seven
members. The stockholders vote at the Annual Meeting for the election of
directors. There are no family relationships among any directors or executive
officers of the Company, except that directors Jan P. Gale and Ronald H. Gale
are brothers. The names of the directors, together with certain information
regarding them, are as follows:
Year First Became a
Name Age Principal Occupation Director
--------------------- ----- ------------------------ --------------------
Alan H. Silverstein 51 Chairman of the Board of 1994
Directors since December
1999; President and Chief
Executive Officer of the
Company since December
1995; President and Chief
Operating Officer of the
Company from February
1994 to November 1995;
from July 1992 to
February 1994, President
of Universal Industrial
Gas, Inc., a rebuilder of
industrial gas plants
James L. Leuthe 58 President, Midland Farms, 1976
Inc., since August 1998;
Chairman of the Board of
First Lehigh Corporation,
a bank holding company,
from 1982 to 1998; from
1977 until 1995 held
various positions with
the Company, including
most recently President
and Chief Executive
Officer
Jan P. Gale 46 Executive Vice President 1991
of UPE since 1978, an
international supplier of
complete process plants
and equipment and
manufacturer of new
equipment in the United
States and Europe. UPE
filed for bankruptcy
under Chapter 11 of the
United States Bankruptcy
Code in October 2000.
Ronald H. Gale 49 President and Chief Executive 1990
Officer of UPE since 1978
Harold Bogatz 62 Vice President and General 1995
Counsel of UPE since 1987;
Secretary of the Company
since 1996
James F. Lomma 54 President, J.F. Lomma 1998
Inc. since 1975, a
trucking, rigging and
export packaging firm
located in South Kearney,
N.J. Mr. Lomma also
serves as the Chairman of
the Special Carrier &
Rigging Association
B. Ord Houston 87 Secretary of the Company 1976
from June 1983 to
December 1995, otherwise
retired for at least the
last five years; held
various positions with
the Company from 1966
until 1984, most recently
as Executive Vice
President
Antoinette L. Martin 42 Vice President and Chief -
Financial Officer since
September 1994,
Controller from 1992 to
1994, Accounting Manager
from 1984 to 1989
Robert P. Allwein 49 Vice President of -
Technology and
Development since 1996,
held various positions in
sales and technologies
since 1980.
-13-
<PAGE>
Item 9. Executive Compensation
----------------------
The following table summarizes compensation information for
the Company's President whose compensation exceeded $100,000 for the Fiscal Year
ended May 31, 2000. No other executive officer of the Company has compensation
in excess of $100,000 for the Fiscal year ended May 31, 2000. The table presents
information with respect to compensation paid or accrued by the Company for
services rendered during the Fiscal Years ended May 31, 1998, 1999 and 2000.
<TABLE>
<CAPTION>
Summary Compensation Table
Fiscal Year Compensation Long Term Compensation
------------------------ ----------------------
Name and Principal
Position Stock
Other Annual Option All Other
Year Salary Bonus Compensation (1) Awards Compensation (2)
----------------------- ------ ------- -------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Alan H. Silverstein 2000 $165,000 $102,316 $ 6,154 -- $ 15,004
President and Chief 1999 154,789 88,243 6,154 100,000 12,134
Executive Officer 1998 140,441 83,570 7,295 50,000 11,865
</TABLE>
(1) Represents lease and insurance payments by the Company with
respect to use of an automobile
(2) Represents life insurance premiums paid by the Company.
Option Grants in Last Fiscal Year
There were no options granted during the Fiscal Year Ended May
31, 2000.
Aggregated Fiscal Year-End Options
The following table sets forth certain information regarding
unexercised stock options held by the Named Executive Officer as of May 31,
2000. No stock options were exercised by any Named Executive Officer during the
2000 Fiscal Year.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Value of Unexercised
Unexercised Options in-the-Money Options
at May 31, 2000 at May 31, 2000 ($)(1)
------------------------- ----------------------
Exercisable/
------------
Name Exercisable/Unexercisable Unexercisable
---- ------------------------- -------------
Alan H. Silverstein 400,000/0 0/0
(1) On May 31, 2000 the last reported sale price of the Common
Stock, as reported by the American Stock Exchange, was $0.8125
per share.
-14-
<PAGE>
Compensation of Directors
Directors are not compensated in general for their services as
a director but are entitled to reimbursement of expenses incurred in connection
with their attendance at meetings. In the past the Company has granted options
to certain directors.
Employment Agreements
Alan H. Silverstein, President and Chief Executive Officer, is
employed by the Company pursuant to an agreement (the "Employment Agreement")
dated February 1, 1994. The Employment Agreement provides for a five year term,
with automatic renewal for successive terms of two years, subject to a mutual
right, exercisable within 120 days prior to the expiration of any term, not to
renew the Employment Agreement. The salary paid to Mr. Silverstein for the first
year under the Employment Agreement was $110,000, increasing to $165,000 in the
fifth year. The Employment Agreement was renewed for an additional two years on
February 1, 1999. The salary paid to Mr. Silverstein under the Employment
Agreement is $165,000.
Item 10. Security Ownership of Certain Beneficial Owners
-----------------------------------------------
and Management
--------------
The following table sets forth, as of December 4, 2000,
information regarding ownership of the outstanding Common Stock of the Company
by (i) all persons who are known to the Company to be the beneficial owner of
more than 5% of the Common Stock; (ii) each director and Named Executive Officer
(as such term is hereinafter defined); and (iii) all directors and executive
officers of the Company as a group:
<TABLE>
<CAPTION>
Percentage of
Name and Address of Beneficial Owner* Shares Owned Beneficially (1) Outstanding Shares
-------------------------------------------- ------------------------------ -------------------
<S> <C> <C>
Universal Process Equipment, Inc. 2,706,600(2)(3) 62.2%
PO Box 338
Roosevelt, NJ 08555
Ronald H. Gale 2,779,100(4)(5) 63.8%
Jan P. Gale 2,777,100(4)(5) 61.2%
James L. Leuthe 339,124(4)(6) 13.5%
Alan H. Silverstein 400,000(7) 14.4%
Salvatore J. Zizza 188,000(8) 7.3%
B. Ord Houston 6,365(4) (9)
Harold Bogatz 10,000(10) (9)
James F. Lomma - (9)
Antoinette L. Martin 35,000 (11) (9)
Robert P. Allwein 15,000(12) (9)
All directors and executive officers as a 3,579,921 (13) 76%
group (9 persons)
</TABLE>
* Unless otherwise noted the address of the Beneficial Owner is
c/o the Company, 25th & Lennox Streets, Easton, Pennsylvania
18044.
-15-
<PAGE>
(1) All persons identified as holding options are deemed to be
beneficial owners of shares of Common Stock subject to such
options by reason of their right to acquire such shares
within 60 days after December 4, 2000.
(2) Includes 1,975,000 shares subject to options. See "Certain
Relationships and Transactions."
(3) Does not include shares owned by Ronald H. Gale and Jan P.
Gale.
(4) Includes 500 shares subject to options.
(5) Includes 2,706,600 shares beneficially owned by UPE, of
which the individual is an officer, director and principal
stockholder.
(6) Of this total, 52,281 shares are owned by Nikki, Inc., a
corporation of which Mr. Leuthe is an officer and director
and the sole stockholder, 161,343 shares are owned by Mr.
Leuthe and 125,500 shares are subject to options. This total
does not include 640 shares owned by Mr. Leuthe's adult
children as to which he disclaims beneficial ownership.
(7) Consists of 400,000 shares subject to options.
(8) Consists of 188,000 shares subject to options.
(9) Less than 1.0%.
(10) Consists of 10,000 shares subject to options.
(11) Consists of 35,000 shares subject to options.
(12) Consists of 15,000 shares subject to options.
(13) Includes 2,750,000 shares subject to options
Item 11. Certain Relationships and Transactions
--------------------------------------
Ronald H. Gale and Jan P. Gale are Directors and
Stockholders of the Company and are officers, directors and principal
stockholders of UPE, a principal stockholder of the Company. UPE filed for
bankruptcy under Chapter 11 of the United States Bankruptcy Code in October
2000. UPE and/or Ronald H. Gale and/or Jan P. Gale are also majority
stockholders or otherwise affiliated with other companies that engage in
transactions with the Company. UPE and related entities have purchased process
equipment manufactured by the Company and have utilized the Company's
remanufacturing services. The approximate total revenues derived from sales to
UPE and related parties was approximately $41,000 for the Fiscal year ended May
31, 2000 ("Fiscal 2000") and $40,000 for the Fiscal year ended May 31, 1999
("Fiscal 1999").
On March 26, 1996, the Board of Directors of the Company,
subject to the approval of the Company's stockholders, granted an option to UPE
to purchase 350,000 shares of the Common Stock at an exercise price of $1.8125
per share. Such option was issued in consideration for debt guarantees by UPE
for various borrowings by the Company. This transaction was approved by the
Company's Stockholders at the Annual Meeting of the Stockholders held on April
23, 1998. A financing charge of $43,000 related to these options was recognized
in both Fiscal 2000 and Fiscal 1999. The value ascribed to these options was
approximately $424,000, and the balance of $42,000 at May 31, 2000 will be
amortized over the terms of the outstanding guarantees.
On August 21, 1998, the Board of Directors of the Company
authorized the issuance to UPE of 175,000 shares of Common Stock at an exercise
price of $1.63, which represented the fair market value of the stock at the date
of the grant. Such option was issued in consideration for guarantees by UPE of
borrowings by the Company from PNC Bank National Association. The fair value
ascribed to the options was $172,000. During Fiscal 2000
-16-
<PAGE>
and 1999, the Company recorded approximately $57,000 in financing charges. The
balance of $58,000 will be amortized over the next year.
From time to time in the ordinary course of business, UPE
advances funds to the Company to enable the Company to meet certain temporary
cash requirements. The interest on the advances is prime rate (Chase Bank, New
York) plus 1%. In August 1996, UPE advanced $250,000 to the Company. UPE
advanced an additional $250,000 to the Company in October 1996. As of November
30, 2000, $787,000 of these advances remains outstanding.
In November 1993, the Company and the Harrisburg Authority
settled a lawsuit for $1,300,000 based upon negotiations between the Company,
UPE and the Harrisburg Authority. Under the terms of the settlement agreement,
UPE agreed to serve as a guarantor and surety for the obligation. In addition,
UPE agreed to pay up to $650,000 from the proceeds of the sale of certain of its
machinery and equipment inventory and certain equipment co-owned by the Company
and UPE. Pursuant to the settlement agreement and for services rendered at that
time, the Company granted stock options to UPE. These options provide that at
UPE's discretion, the Company will issue additional shares of common stock to
UPE in exchange for payments, if any, made by UPE on behalf of the Company to
Harrisburg under the settlement agreement instead of reimbursing UPE in cash.
UPE 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 UPE, the Company will not be obligated to
issue more than 1,450,000 shares to UPE for such payments. The ratio of exchange
shall be as follows: three (3) shares issued for each dollar in payment made by
UPE, up to a total of 450,000 shares in exchange for a total of $150,000 in
payments, and after such total of 450,000 shares has been reached, two (2)
shares issued for each additional $1.50 in payment made by UPE up to a total of
1,000,000 additional shares in exchange for a total of $750,000 in additional
payments. On May 19, 2000 the Company paid this obligation in full for cash of
$445,000.
In November 1999, the Company extended the contractual life
of 1,450,000 options that were issued to UPE in 1993 for a debt guarantee. The
options expire in May 2001 and no other modifications were made to the original
grant. The Company recognized a non cash charge of $225,000 for the effects of
the change in the options' fair values arising from the modification.
-17-
<PAGE>
Item 12. 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(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).
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(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(u) Agreement dated July 31, 1998 between the Company
and The Bethlehem Corporation Employees
Association (incorporated by reference to Exhibit
10() to the Form SB-2).
10(v) Mortgage agreement dated December 12, 1997 by the
Company to Ocwen Federal Bank. (Incorporated by
reference to Exhibit 10(v) to the Company's 1998
Form 10-KSB).
10(w) Amended and Restated Loan agreement dated January
21, 1999 between the Company and PNC Bank, N.A.
(incorporated by reference to Exhibit 10(w) to the
Company's 1999 Form 10-KSB).
10(x) Second Amended and Restated loan agreement dated
July 31, 1999 between the Company and PNC Bank,
N.A. (incorporated by reference to Exhibit 10(x)
to the Company's 2000 Form 10-KSB).
10(y) Amended and Restated Committed Line of Credit Note
dated July 31, 1999 between the Company and PNC
Bank, N.A. (incorporated by reference to Exhibit
10(y) to the Company's 2000 Form 10-KSB).
10(z) Loan agreement dated January 21, 1999 between the
Company and Bank of America. (incorporated by
reference to Exhibit 10(z) to the Company's 2000
Form 10-KSB).
10(aa) Amended loan agreement dated July 31, 1999 between
the Company and Bank of America. (incorporated by
reference to Exhibit 10(aa) to the Company's 2000
Form 10-KSB).
10(bb) Agreement dated July 20, 2000 between The Company
and the Bethlehem Corporation Employees
Association.
10(cc) Loan agreement dated May 19, 2000 between the
Company and Fundex Capital Corporation.
10(dd) Loan agreement dated May 19, 2000 between the
Company and Exim Bank through PNC Bank.
10(ee) Purchase agreement dated November 29, 2000 between
the Company and Bergen Cove Realty Inc. for
Bethlehem Advanced Materials Corporation.
27 Financial Data Schedule Year ended May 31, 2000.
-18-
<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: December 28, 2000 By: /s/ Alan H. Silverstein
--------------------------------------------
Alan H. Silverstein, Chairman of the Board
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 Chairman of the Board and December 28, 2000
------------------------------------------ Chief Executive Officer
Alan H. Silverstein (Principal Executive Officer)
/s/ Antoinette L. Martin Chief Financial Officer (Principal December 28, 2000
------------------------------------------ Financial Officer)
Antoinette L. Martin
/s/ Ronald H. Gale Director December 28, 2000
------------------------------------------
Ronald H. Gale
/s/ Jan P. Gale Director December 28, 2000
------------------------------------------
Jan P. Gale
/s/ James L. Leuthe Director December 28, 2000
------------------------------------------
James L. Leuthe
/s/ Harold Bogatz Director December 28, 2000
------------------------------------------
Harold Bogatz
/s/ B. Ord Houston Director December 28, 2000
------------------------------------------
B. Ord Houston
/s/ James F. Lomma Director December 28, 2000
------------------------------------------
James F. Lomma
</TABLE>
-19-
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FOR THE YEARS ENDED MAY 31, 2000 AND 1999
-----------------------------------------
INCLUDING REPORT OF
-------------------
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
----------------------------------------
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
------------------------------------------
CONTENTS
--------
Page
----
Report of Independent Certified Public Accountants.................. F-3
Consolidated Financial Statements:
Balance Sheet
May 31, 2000.................................................. F-4 - F-5
Statements of Operations
for the Years Ended May 31, 2000 and 1999 .................... F-6
Statements of Stockholders' Equity (Deficit)
for the Years Ended May 31, 2000 and 1999 .................... F-7
Statements of Cash Flows
for the Years Ended May 31, 2000 and 1999 .................... F-8
Notes to Consolidated Financial Statements...................... F-9
================================================================================
See notes to the consolidated financial statements 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 as of May 31, 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
May 31, 2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 financial position of The Bethlehem
Corporation as of May 31, 2000, and the results of its operations and its cash
flows for the years ended May 31, 2000 and 1999 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements for the year ended May 31, 2000, the Company has suffered a
significant operating loss and has both a working capital deficiency and a net
capital deficiency. In addition, the Company has not complied with certain
covenants with bank agreements. The Company and the banks are working on
additional agreements. If the banks demand payment on these obligations
(totaling $5,847,000 at May 31, 2000), the Company may be unable to pay off such
amounts. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Woodbridge, New Jersey
November 3, 2000 (November 29, 2000 As to Note 18)
================================================================================
See notes to the consolidated financial statements F-3
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 2000 (amounts in thousands, except share and per share data)
================================================================================
ASSETS
CURRENT ASSETS:
Cash $ 12
Accounts receivable (net of allowance for doubtful 1,495
accounts of $21)
Due from - related party 77
Costs and estimated profit in excess of billings 407
Inventories 3,490
Prepaid expenses and other current assets 119
-------
Total Current Assets 5,600
-------
PROPERTY, PLANT AND EQUIPMENT, at cost less 5,042
accumulated depreciation and amortization
OTHER ASSETS:
Inventories, non current 1,952
Intangible pension and deferred compensation plan assets 85
Deferred financing costs 270
Other 96
-------
Total Other Assets 2,403
-------
Total Assets $13,045
=======
================================================================================
See notes to the consolidated financial statements F-4
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
MAY 31, 2000 (amounts in thousands, except share and per share data)
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 3,939
Accrued liabilities 648
Billings in excess of costs and estimated profit 595
Taxes payable 5
Current maturities of long-term debt and capital leases 6,153
Note payable - related party 787
--------
Total Current Liabilities 12,127
--------
LONG TERM LIABILITIES:
Long-term debt and capital leases, net of current maturities 2,597
Deferred compensation and other pension liabilities 515
--------
Total Long-Term Liabilities 3,112
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - authorized, 5,000,000 shares
without par value, none issued or outstanding --
Common stock - authorized, 20,000,000 shares
without par value, stated value of $.50 per share;
2,378,532 shares issued and 2,378,520 shares outstanding 1,189
Additional paid-in capital 6,898
Accumulated deficit (10,281)
--------
(2,194)
Less - treasury stock, at cost, 12 shares --
--------
Total Stockholders' Equity (Deficiency) (2,194)
--------
Total Liabilities and Stockholders' Equity (Deficiency) $ 13,045
========
================================================================================
See notes to the consolidated financial statements F-5
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(amounts in thousands, except per share data)
================================================================================
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------
2000 1999
<S> <C> <C>
NET SALES $ 11,661 $ 13,710
COST OF GOODS SOLD 9,616 9,171
--------------------
GROSS PROFIT 2,045 4,539
--------------------
OPERATING EXPENSES:
Selling 1,061 1,250
General and administrative 2,916 2,289
Long-lived asset impairment 1,600 --
Non-employee stock option expense 116 116
--------------------
5,693 3,655
--------------------
Operating income (loss) (3,648) 884
--------------------
OTHER INCOME (EXPENSE):
Interest expense (993) (693)
Financing charge - issuance and amortization of stock options (325) (100)
Gain on sale of fixed assets 789 170
Other income (expense) (34) 128
--------------------
(563) (495)
--------------------
Income (loss) before income taxes (4,211) 389
INCOME TAX (EXPENSE) BENEFIT (435) 20
--------------------
NET INCOME (LOSS) $ (4,646) $ 409
====================
EARNINGS (LOSS) PER SHARE DATA:
Basic $ (1.95) $ .18
====================
Diluted $ (1.95) $ .12
====================
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 2,379 2,295
====================
Diluted 2,379 3,304
====================
</TABLE>
================================================================================
See notes to the consolidated financial statements F-6
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(amounts in thousands, except share data)
================================================================================
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated Treasury Shares
Shares Amount Capital Deficit Share Amount Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1998 2,288,532 $ 1,144 $ 6,123 $ (6,044) 12 -- $ 1,223
Issuance of Common Stock
in Exchange for Inventory 90,000 45 146 -- -- -- 191
Value of Stock Option
Grants to Non-Employees -- -- 288 -- -- -- 288
Net Income for the Year
Ended May 31, 1999 -- -- -- 409 -- -- 409
-------------------------------------------------------------------------------------------
Balance at May 31, 1999 2,378,532 1,189 6,557 (5,635) 12 -- 2,111
Value of Stock Option
Grants to Non-Employees -- -- 341 -- -- -- 341
Net Loss for the Year -- -- -- (4,646) -- -- (4,646)
Ended May 31, 2000
-------------------------------------------------------------------------------------------
2,378,532 $ 1,189 $ 6,898 ($ 10,281) 12 -- $ (2,194)
===========================================================================================
</TABLE>
================================================================================
See notes to the consolidated financial statements F-7
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
================================================================================
<TABLE>
<CAPTION>
Year Ended May 31,
2000 1999
-------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Net Income (Loss) $(4,646) $ 409
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 710 567
Gain on sale of fixed assets (789) (169)
Inventory provisions 845 126
Deferred tax expense (benefit) 375 (75)
Long-lived asset impairment 1,600 --
Non cash compensation and interest expense 441 216
Changes in operating assets and liabilities:
Accounts receivable 846 (855)
Due from - related party (77) --
Costs and estimated profit in excess of billings 1,211 (785)
Inventories (257) (780)
Prepaid expenses and other current assets (7) 114
Other assets (98) (260)
Accounts payable 423 (25)
Accounts payable (net) - related party (24) (289)
Accrued liabilities 59 (5)
Billings in excess of costs and estimated profit 356 79
Deferred compensation and other pension liabilities 24 (8)
-------------------
Net Cash Provided By (Used In) Operating Activities 992 (1,740)
-------------------
INVESTING ACTIVITIES:
Purchase and construction of property, plant and equipment (1,571) (3,468)
Proceeds from sales of fixed assets 1,203 47
-------------------
Net Cash Used In Investing Activities (368) (3,421)
-------------------
FINANCING ACTIVITIES:
Net proceeds from line of credit 370 6,007
Proceeds from long-term debt 600 1,049
Repayments on long-term debt and capital leases (1,695) (1,828)
Repayment of note payable - related party -- 5
-------------------
Net Cash (Used In) Provided By Financing Activities (725) 5,233
-------------------
NET (DECREASE) INCREASE IN CASH (101) 72
CASH
BEGINNING OF PERIOD 113 41
-------------------
CASH
END OF PERIOD $ 12 $ 113
===================
</TABLE>
================================================================================
See notes to the consolidated financial statements F-8
<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 provides thermal and filtration process
solutions, equipment, systems and technology for a variety of industrial
applications. 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 (See Note 18). In addition, Bethlehem Thermal, LLC, a
wholly owned subsidiary, formed in March 1999, provides metallized thermal
coating using automated thermal spray systems. The Company does not segregate or
manage its operations by business segments.
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, 2000 ("2000") and for the year ended May 31, 1999
("1999").
Going Concern:
The Company's consolidated financial statements are presented on the going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has suffered a
significant operating loss for the year ended May 31, 2000, which has resulted
in both a working capital deficiency and a net capital deficiency at May 31,
2000. In addition, the Company has not complied with certain financial covenants
with its two bank agreements. The Company and the banks are working on
additional agreements. If the banks demand payment on these obligations
(approximately $5,847 at May 31, 2000), the Company may be unable to generate
sufficient cash in a timely fashion and pay off such amounts. In addition, the
Company has incurred a net loss of $4,646 for the year ended May 31, 2000 and
also has a working capital deficiency of $6,527 and has a stockholder deficiency
of $2,194 at May 31, 2000. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern.
The Company's continued existence is dependent upon its ability to resolve these
liquidity matters, principally by obtaining alternative or replacement debt
financing, proceeds from the sale of BAM (see Note 18) equity capital or
proceeds from the sale of assets. While pursuing additional debt and equity
funding, the Company must continue to operate on limited cash flow generated
through operations and the continued support and forbearance of the banks will
be required, although this is not assured.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
Principles of Consolidation:
The consolidated financial statements include the accounts of The Bethlehem
Corporation and its wholly owned subsidiaries (collectively the "Company"). All
intercompany transactions and balances have been eliminated in consolidation.
================================================================================
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: (Continued)
--------------------------------------------------------------------------------
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 in relation 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. 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.
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. At May 31, 2000, the Company reported an inventory provision of $845,
related to materials and goods that were identified as obsolete or slow moving.
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. There were no such impairments recognized in 1999. In connection with the
Company's debt covenant violations, the need to generate working capital and the
subsequent sale of BAM, the Company determined that certain long-lived assets
were impaired in 2000. As a result, intangible assets and property, plant and
equipment with carrying values of $244 and $1,356, respectively, were written
off.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. The cost of self-constructed
assets includes 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.
On March 31, 2000, the Company sold certain machinery and equipment, and as a
result no longer manufactures product at its facility in Easton, Pennsylvania
(see Note 5).
Depreciation and amortization expense is recognized over the assets' estimated
useful lives on a straight-line basis.
================================================================================
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)
--------------------------------------------------------------------------------
The useful lives of the principal 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
Intangibles:
The excess of the purchase price of BAM over tangible net assets has been
allocated to intangible assets acquired on the basis of ascribed fair values. In
1999 and through May of 2000 the intangible assets were 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
Amortization was $32 and $30 for the years ended May 31, 2000 and 1999,
respectively.
Deferred Financing Costs:
Direct costs incurred in obtaining financing have been capitalized and are being
amortized over the term of the related debt. The amortization of deferred
financing costs was $89 and $78 for 2000 and 1999, respectively, and is included
in "Interest Expense" in the accompanying Statements of Operation. The Company
also amortizes the value ascribed to stock options, issued in connection with
debt guarantees provided by a related party, over the terms of the underlying
guarantees (see Notes 7, 10 and 12).
Income Taxes:
The Company utilizes the liability method of accounting for income taxes, which
requires the recognition of deferred tax assets and liabilities for 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.
Valuation allowances are established against deferred tax assets when
realization cannot be considered more likely than not.
Earnings (Loss) per Share:
Basic earnings (loss) per share are calculated based on the weighted-average
number of common shares outstanding. Diluted earnings per share are calculated
based on the weighted-average number of common shares outstanding, plus dilutive
potential common shares. Dilutive potential common shares, principally stock
options, are computed under the treasury stock method. For 2000 such shares were
anti dilutive. The Company has reserved 2,978,000 of common shares for various
stock option plans and awards. Issuance of such common shares will dilute basic
earnings per share in the future.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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. Actual
amounts could differ from the estimates made. Management periodically evaluates
estimates used in the preparation of the financial statements for continued
reasonabliness. Appropriate adjustments, if any, to the estimates used are made
prospectively based upon such periodic evaluation. The more significant
estimates used by management in
================================================================================
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)
--------------------------------------------------------------------------------
preparing the financial statements include the following: measurement of costs
and profitability on long-term contracts; valuation of inventory (current and
non-current); impairment losses; useful lives assigned to fixed and tangible
assets; accrued liabilities; and valuation allowances established against
deferred tax assets and accounts receivable.
Stock-Based Compensation:
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") 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
employee stock options for 2000 and 1999 (See Note 10 for pro-forma disclosure
required by SFAS 123). With respect to stock option grants to non-employees and
grant modifications, the Company recognizes a charge to operations for the
ascribed value of such options over the underlying vesting periods or the
expected terms of debt guarantees.
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.
Effect of Recently Issued Accounting Standard:
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which must be adopted for fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires the
recognition of all derivatives as either assets or liabilities in the Company's
balance sheet and measurement of those instruments at fair value. To date, the
Company has not entered into any derivative or hedging activities, and, as such
does not expect that the adoption of SFAS No. 133, as amended, will have a
material effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulleting No. 101, Revenue Recognition ("SAB 101") which broadly addresses how
companies report revenues in their financial statements. The Company is in the
process of evaluating the accounting requirements of SAB 101 and subsequently
issued guidance, and does not expect that this standard will have a material
effect, if any, on its financial statements.
In May 19, 2000, the Financial Accounting Standards Board released
Interpretation 44, "Accounting for Certain Transactions involving Stock
Compensation", which addresses - in question and answer form - certain practice
issues related to APB 25, Accounting for Stock Issued to Employees. The Company
is currently in the process of evaluating the accounting requirements of
Interpretation 44 and does not expect that this standard will have a material
effect, if any, on its financial statements.
--------------------------------------------------------------------------------
NOTE 2 - ACCOUNTS RECEIVABLE:
--------------------------------------------------------------------------------
Accounts receivable are comprised of the following at May 31, 2000:
Billed (net of allowance for doubtful accounts of $21) $1,427
Retention on contracts 68
-------
$1,495
<PAGE>
================================================================================
F-12
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 2 - ACCOUNTS RECEIVABLE: (Continued)
--------------------------------------------------------------------------------
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 year ending May 31, 2001.
The Company recognized bad debt expense of $261 and $68 in 2000 and 1999,
respectively, and charged off uncollectible accounts receivable of $286 and $171
in 2000 and 1999, respectively.
--------------------------------------------------------------------------------
NOTE 3 - LONG TERM CONTRACTS:
--------------------------------------------------------------------------------
At May 31, 2000, 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 $ 1,056
Estimated profit 168
-------
1,224
Less: billings to date (1,412)
-------
$ (188)
=======
These amounts are included in the accompanying
consolidated balance sheet under
the following captions:
Costs and estimated profit in excess of
billings on long-term contracts $ 407
Billings in excess of costs and estimated
profit on long term contracts (595)
-------
$ (188)
=======
--------------------------------------------------------------------------------
NOTE 4 - INVENTORIES:
--------------------------------------------------------------------------------
The components of inventories are comprised of the following at May 31, 2000:
Raw materials and components $ 497
Work in process 2,080
Finished goods 3,866
Less: reserve for obsolete inventory (1,001)
---------
5,442
Less: Non-Current Inventory (1,952)
---------
$3,490
=========
================================================================================
F-13
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 4 - INVENTORIES: (Continued)
--------------------------------------------------------------------------------
At May 31, 2000, the Company's 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 assessment, 36% 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 recognized provisions for specific raw material and finished goods
inventory in the amount of $845 and $126 in 2000 and 1999, respectively. 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 (See Note 7):
--------------------------------------------------------------------------------
At May 31, 2000, property, plant and equipment consists of the following:
Land $ 448
Buildings and improvements 1,695
Machinery and equipment 4,764
Equipment under capital leases 118
Construction in progress 1,441
-------
8,466
Less: accumulated depreciation and amortization (3,424)
-------
Property, plant and equipment, net of accumulated depreciation $5,042
=======
Depreciation and amortization expense on property, plant and equipment was $487
and $348 in 2000 and 1999, respectively, which included $22 and $30 of expense
related to equipment subject to capital leases.
Included in "Other Income (Expense)" in the 2000 Statement of Operations are
gains from the sale of machinery and equipment assets totaling $789.
The long-lived asset impairment was recorded in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets" to be disposed of (SFAS
121). As a result of debt covenant violations, the need to generate working
capital and the subsequent sale of BAM, the Company re-evaluated the carrying
values of BAM intangible and fixed assets. Based upon the ultimate sales price
of BAM (considered to be fair value), management determined there was an
impairment and recognized a non cash charge of $1,600 in 2000, comprised of
write offs of $244 and $1,356 for intangible and fixed assets, respectively.
================================================================================
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, 2000, accrued liabilities consist of the following:
Salaries and benefits $258
Current portion of deferred compensation 78
Purchases 189
Other 123
-------
$648
=======
--------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
--------------------------------------------------------------------------------
At May 31, 2000, long-term debt and capital lease obligations consists of the
following:
Note payable - Ocwen Federal Bank $1,926
Line of Credit - PNC Bank, N.A. 3,193
Note Payable - Exim Bank/PNC Bank N.A. 194
Note Payable - PNC Bank, N.A. 163
Note Payable - Bank of America 2,654
Fundex Capital Corporation 600
Capital lease obligations 20
---------
8,750
Less: current maturities (6,153)
---------
Total $2,597
=========
Universal Process Equipment ("UPE"), a corporation which is a stockholder of the
Company, is a party to certain financing transactions that the Company enters
into (see Notes 10 and 12).
Note Payable - Ocwen Federal Bank
In December 1997, the Company entered into a $2,000 mortgage loan agreement with
Ocwen Federal Bank ("Ocwen"). Proceeds from the loan were used to repay existing
indebtedness of approximately $1,481 with the balance used for general corporate
purposes. Terms of the loan agreement provide for minimum monthly principal and
interest payments of approximately $21 with all unpaid principal and interest
due by January 2003 and interest accruing at the rate of 11.25% per annum. The
Company is subject to prepayment penalties (ranging from .50% to 3% of the
outstanding balance) if the balance is repaid prior to December 2001. The
Company has granted Ocwen a first lien and security interest on all land and
related improvements owned by the Company at its Pennsylvania facility. During
2000 and 1999, the Company recorded $219 and $222 in interest expense,
respectively, related to this loan agreement.
PNC Bank, N.A. - Credit Facility
In June 1998, the Company entered into a financing agreement with PNC Bank, N.A.
("PNC") which provided for a term loan of $800 and a revolving credit facility
of $3,200. During the third quarter of fiscal 2000, the Company prepaid the term
loan in the amount of $536 from proceeds raised in the sale of the machinery and
equipment. The Company is in default on various conventants with PNC. On July
31, 2000, PNC temporarily extended the line to November 30, 2000. As discussed
in Note 1, the Company and PNC are currently working on additional agreements.
Interest expense related to this agreement totaled $333 in 2000 and $321 in
1999. UPE was required to provide certain guarantees on the Company's behalf. In
August 1998, the Company granted UPE 115,000 stock options for providing these
guarantees.
================================================================================
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)
--------------------------------------------------------------------------------
PNC Bank, N.A. - Non Revolving and Committed Equipment Line of Credit
In September 1998, the Company entered into a $250 non-revolving and committed
equipment line of credit with PNC. The purpose of the facility is to provide
funding for acquisition of equipment from time to time, in aggregate amounts not
exceeding the sum of $250. The maximum amount of each advance made under the
facility shall be an amount equal to the lesser of the then current unadvanced
portion of the facility or an amount equal to ninety percent (90%) of the price
paid by the Company to acquire the equipment. The rate bears interest at a
maximum rate of 9.40% and a minimum rate of 9.15%. The Company recorded $19 in
interest expense in 2000 and $16 in 1999. Borrowings under the facility are
secured by a lien on all of the collateral advanced. Borrowings under this
facility are fully amortized with fixed equal payments of $5 not to exceed a
term of 60 months. The balance outstanding at May 31, 2000 is $163.
Bank of America - Note Payable
On January 21, 1999, the Company entered into a loan agreement with Bank of
America for a $3,000 line of credit and term loan, secured by a first lien on
BAM's inventory, accounts receivable, machinery and equipment and other assets.
The proceeds of this credit facility were used to finance capital expenditures
at the BAM facility. The balance outstanding at May 31, 2000 is $2,654. On July
31, 1999, the credit line outstanding of $3,000 was converted to a seven-year
term loan requiring $36 monthly principal payments plus interest at prime plus
one half of one percent. The loan agreement contains certain covenants, which
among other criteria, require the Company and BAM to maintain a specified level
of net worth. Effective November 29, 2000, all outstanding loans to the Bank of
America were assumed by the new owners of BAM in accordance with the sale and
purchase of BAM. During the year ended May 31, 2000 and May 31, 1999, the
Company recorded $259 and $48 respectively, in interest expense related to this
loan agreement.
Harrisburg Authority - Note Payable
On May 19, 2000, the Company paid off the Harrisburg Authority obligation (a
multi-year settlement) for cash of $445.
Note Payable - Fundex
On May 19, 2000, the Company entered into a $600 loan agreement with Fundex
Capital Corporation ("Fundex") secured by a second lien on the Company's real
estate. Proceeds from the loan were used to repay the Harrisburg Authority in
the amount of $445 and the balance was used for general corporate purposes.
Terms of the agreement provide for twelve monthly interest payments of $7 each
commencing and due and payable on July 1, 2000 up to and including June 1, 2001.
Thereafter principal and interest at the rate of 14% per annum shall be paid in
one hundred eight constant monthly installments of approximately $10 commencing
and due and payable on the first day of July, 2001 and on the first day of each
month thereafter up to and including June 1, 2010. The Company is subject to no
prepayment penalties if the note is paid at any time during the first twelve
months, the sum of 3% of the amount being repaid, (if repaid during the
thirteenth to sixtieth month) and no prepayment penalty from then on. During
2000, the Company recorded interest expense of $3 related to this loan
agreement.
Exim Bank - Committed Line of Credit Note
On May 19, 2000, the Company entered into a $1,500 committed line of credit note
with Exim Bank ("Exim") through PNC Bank N.A. ("PNC"). The purpose of the
facility is to provide working capital for export contracts. Borrowing's under
this agreement accrue interest at PNC's prime rate of interest. At May 31, 2000,
the rate of interest was 9.5%. During 2000, the Company recorded $1 in interest
expense. Borrowings under the facility are secured by accounts receivable and
inventory. The balance outstanding at May 31, 2000 is $194.
================================================================================
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)
--------------------------------------------------------------------------------
Debt Maturities:
Long-term debt maturities for the next five fiscal years and thereafter
(reflecting the effects of various covenant defaults) are as follows:
Year Ending May 31,
-------------------------
2001 $ 6,153
2002 145
2003 1,924
2004 47
2005 54
2006 and thereafter 427
--------------
$8,750
==============
Capital Lease Obligations:
Certain leased equipment has been capitalized for financial statement purposes.
The following summarizes, by year, future minimum lease payments and the present
value of the minimum lease payments as of May 31, 2000:
Year Ending May 31,
2001 $ 14
2002 4
2003 4
Minimum lease payments 22
Less: imputed interest (2)
---------------
Present value of minimum
lease payments 20
Less: current portion (14)
---------------
Long term portion $ 6
===============
--------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES:
--------------------------------------------------------------------------------
The components of the benefit (provision) for income taxes are as follows:
2000 1999
-------------------------------------------------------------
Current:
Federal $ - $ (153)
State (60) (55)
Recognition of net operating losses - 153
-------------------------------------------------------------
(60) (55)
-------------------------------------------------------------
Deferred:
Federal (319) 64
State (56) 11
-------------------------------------------------------------
(375) 75
-------------------------------------------------------------
Income tax benefit (provision) $(435) $ 20
=============================================================
================================================================================
F-17
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES: (Continued)
--------------------------------------------------------------------------------
The following table presents the principal reasons for the difference between
the actual income tax benefit and the tax provision computed by applying the
U.S. Federal statutory income tax rate to income before income taxes.
2000 1999
---- ----
U.S. Federal income tax $ 1,432 $ (132)
provision at statutory rates
State income taxes, net of
Federal benefit (77) (29)
Utilization of net operating loss
carryforwards -- 153
Change in valuation allowance (1,740) 75
Other, net (50) (47)
------------------
Income tax (benefit) provision $ (435) $ 20
==================
At May 31, 2000, the components of the Company's deferred tax assets and
liability are as follows:
Deferred Tax Assets:
Receivables $ 9
Inventory 454
Net operating loss carryforwards 1,796
AMT and tax credits 119
Deferred compensation and retirement benefit 237
Stock option compensation 355
Property, plant and equipment 282
Long-lived asset impairment 640
Other 20
-------
Gross Deferred Tax Assets 3,912
Valuation allowance (3,912)
-------
Net Deferred Tax Assets $ --
=======
Based on the assessment of all available evidence, including 2000 operating
results, uncertainties on its financing arrangements with banks, and the status
of the Company's business and the Company's potential inability to generate
taxable income in future periods, management has established a valuation
allowance on the total deferred tax assets. Reductions in the valuation
allowance will be recorded when, in the opinion of management, the Company's
ability to generate taxable income in the future is considered more likely than
not.
At May 31, 2000, the Company has approximately $6.7 million of unused federal
net operating loss carryforwards and $.3 million of federal alternative minimum
tax ("AMT") and investment and research tax credit carryforwards. If the net
operating loss carryforwards remain unused, they will expire during the years
2004 through 2011. If the investment and research tax credit carryforwards
remain unused, they will expire during the years 2001 through 2002.
================================================================================
F-18
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 9 - DEFERRED COMPENSATION, PENSION AND OTHER
POSTRETIREMENT PLANS:
--------------------------------------------------------------------------------
PLAN DESCRIPTIONS
Deferred Compensation Plan:
The Company has an unfunded nonqualified deferred compensation plan for certain
employees which provides 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 plan's 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 funded a portion of the active employees
accrued benefit obligation to a qualified 401(k) plan.
During 1999, the Company settled a retirement plan obligation at an individual's
request through the issuance of 90,000 shares of common stock. The number of the
shares was based on the fair market value of the common stock at the settlement
date and approximated the present value of the retirement obligation.
Pension Plans
The Company maintains two noncontributory defined benefit retirement plans
(collectively, "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.
Other Postretirement 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 to
July 31, 2001. 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.
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 effect of raising health care cost trend rates 1% for each future year would
increase the accumulated benefit obligation by approximately $85 and increase
the aggregate service and interest cost components of net periodic
postretirement health care benefit costs by approximately $7.
================================================================================
F-19
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 9 - DEFERRED COMPENSATION, PENSION AND OTHER
POSTRETIREMENT PLANS: (Continued)
--------------------------------------------------------------------------------
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 following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans described above:
Change in benefit obligations
Pension Other
Plans RISP Benefits
----- ---- --------
Benefit obligation at May 31, 1999 $(3,279) $ (337) $(1,170)
Service Cost -- -- (6)
Interest Cost (255) (24) (86)
Plan participants' contributions -- 10 90
Actuarial Gain -- -- --
Benefits paid 276 78 --
-----------------------------
Benefit obligation at May 31, 2000 $(3,258) $ (273) $(1,172)
=============================
Change in plan assets
Fair value of plan assets at May 31, 1999 $ 3,426 $ 6 $ --
Actual return on plan assets 489 1 --
Contributions 78 --
Benefits paid (276) (78) --
-----------------------------
Fair value of plan assets at May 31, 2000 $ 3,639 $ 7 $ --
=============================
Plan assets are stated at fair value and are comprised primarily of common stock
and corporate bonds
Funded Status
Unrecognized actuarial (gain) loss $ 743 $ (111) $ --
Unrecognized prior service cost (3) (57) (307)
-----------------------------
Net amount recognized $ 740 $ (168) $ (307)
=============================
Amounts recognized in the May 31, 2000
consolidated balance sheet consist of:
Accrued benefit liability $ (177) $ (266) $ (150)
Intangible asset -- 85 --
-----------------------------
Net amount recognized at May 31, 2000 $ (177) $ (181) $ (150)
=============================
At May 31, 2000, plans with accumulated benefits in excess of plan assets have
accumulated benefit obligations and projected benefit obligations of $2,624 and
plan assets of $2,358.
================================================================================
F-20
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 9 - DEFERRED COMPENSATION, PENSION AND
POSTRETIREMENT PLANS: (Continued)
--------------------------------------------------------------------------------
Weighted-average assumptions as of May 31, 2000
Pension Other
Plans RISP Benefits
----- ---- --------
Discount Rate 8.5% 8% 8%
Expected return on plan assets 8.5% 8% N/A
For measurement purposes, a 13.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2000. The rate was assumed to
decrease gradually to 6% for 2009 and remain at that level thereafter.
For the year ended May 31, 2000
-------------------------------
Pension Other
Plans RISP Benefits
----- ---- --------
Service cost $-- $-- $ 6
Interest cost 255 24 86
Expected return on plan assets (262) (1) --
Amortization of prior service costs 5 (10) (26)
Recognized net actuarial loss 13 26 64
Expected contributions from retirees -- -- --
----- ----- -----
Net periodic benefit cost $ 11 $ 39 $ 130
===== ===== =====
For the year ended May 31, 1999
-------------------------------
Pension Other
Plans RISP Benefits
----- ---- --------
Service cost $-- $-- $ 6
Interest cost 208 33 83
Expected return on plan assets (245) (1) --
Amortization of prior service costs 7 (10) (26)
Recognized net actuarial loss (18) 32 59
Net amortization and deferral
Expected contributions from retirees -- -- (87)
----- ----- -----
Net periodic (benefit) cost $ (48) $ 54 $ 35
===== ===== =====
================================================================================
F-21
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 9 - DEFERRED COMPENSATION, PENSION AND
POSTRETIREMENT PLANS: (Continued)
--------------------------------------------------------------------------------
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 employee's contribution to a maximum contribution of
6% of an employee's contribution. At May 31, 2000, the Company's liability to
the plan approximated $30. The Company's expense related to the plan was $29 and
$21 for 2000 and 1999, respectively.
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY:
--------------------------------------------------------------------------------
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. In 1990, the Company's
Board of Directors granted 25,000 options to officers and key employees with an
exercise price of $2.50 per share. There were no options granted under this plan
in 2000 and 1999. The plan expired in 2000.
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 2000 and 1999.
Plan 3:
During 1995, the stockholders approved the 1994 Stock Option Plan ("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 nine employees.
The maximum number of shares that may be granted to one person pursuant to the
1994 Plan is 250,000 shares. There were no options granted under this plan in
2000 and 1999.
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.
================================================================================
F-22
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------
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 calendar year may not exceed 50,000.
Options totaling -0- and 117,500 shares have been issued under this plan in
fiscal 2000 and 1999, respectively.
Other Options:
In April 1998, the Company's stockholders approved the issuance of an additional
653,000 stock options outside of any existing plan to the Company's Chairman, a
Director of the Company and UPE. The options were granted with an exercise price
of $1.825 per share (the fair market value at the date the grants were approved
by the Board of Directors). Since the recipients of the options are considered
non-employees, the Company recognizes a cost for the related services. With
respect to the options granted to the Company's Chairman and Director, the
values ascribed to these options ($367) will be recognized as services are
rendered over the three year vesting period. The charge for 2000 and 1999
totaled $116 each year. With respect to the values ascribed to the options
granted to UPE ($424), the Company has and will recognize a charge over the
expected terms of the various guarantees provided by UPE. The financing charges
totaled $268 for 2000 and $43 for 1999.
In connection with the PNC credit facility and UPE's guarantee of such
indebtedness, the Company's Board of Directors approved the issuance of an
additional 175,000 stock options at an exercise price of $1.63 which represented
the fair market value of the stock at the date of the grant in August of 1998.
The value ascribed to such options ($172) will be amortized over the estimated
three-year term of the guarantee. The financing charges totaled $57 both in 2000
and 1999.
The Company estimated the fair values of such stock options granted in 1999,
using the Black - Scholes option price model with the following assumptions at
the initial grant date, no dividend yield; expected volatility of 46.5% (1999)
risk free interest rates of 5.4% (1999) and expected lives of ten years. Such
fair values also encompassed the excess of the fair market values of the stock,
as adjusted for liquidity and dilution factors, less the exercise price of the
options issued to the Company's Chairman, Director and UPE in April 1998. The
options vest over a three year period. There were no stock options granted in
2000.
In November 1999, the Company extended the contractual life of 1,450,000 options
that were issued to UPE in 1993 for a debt guarantee. The options expire in May
2001 and no other modifications were made to the original grant. The Company
recognized a non cash charge of $225 (over the remaining term of the debt) for
the effects of the change in the options' fair values arising from the
modification.
Disclosure On Options:
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for its options issued to employees.
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. The Company did not issue any options
to employees in fiscal 2000.
SFAS 123 requires the Company to provide pro-forma information regarding net
income and earnings per share as if compensation cost for the Company's
employees had been determined in accordance with the fair value based method
prescribed in SFAS 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 employee grants, no dividend
yield; expected volatility of 46.5% risk-free interest rates of 5.32% (1999) and
6.42% (1998) and expected lives of 10 years for the options.
================================================================================
F-23
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------
Under the accounting provisions of SFAS 123, the Company's net income, primary
earnings per share and fully diluted earnings per share per Fiscal 1999 would
have been reduced
2000 1999
-------- ----------
Net Income (loss):
As reported $(4,646) $409
Pro-forma $(4,724) $331
Basic earnings (loss) per share:
As reported $ (1.95) $ .18
Pro-forma $ (1.99) $ .14
Diluted earnings (loss) per share:
As reported $ (1.95) $ .12
Pro-forma $ (1.99) $ .10
The pro forma effect on net income and earnings per share for 1999 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.
A summary of the status of the Company's outstanding options and warrants as of
May 31, 2000 and 1999 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
May 31, 2000 May 31, 1999
-------------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 2,978,000 $1.20 2,685,500 $1.12
Granted -- 292,500 1.68
Exercised -- -- --
Forfeited (112,500) 1.21 -- --
-------------- -------------
Outstanding-end of year 2,865,500 2,978,000
============== =============
Options exercisable -year-end 2,863,833 1,286,076
============== =============
Weighted-average fair value of
options granted during the year $ -- $1.08
============== =============
</TABLE>
Options issued to employees in 1999 expire in 2006 and 2007, respectively, and
are exercisable immediately. At May 31, 2000, the Company has 52,500 shares of
common stock available for grant under various option plans.
================================================================================
F-24
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------
The following table summarizes information about stock options and warrants
outstanding at May 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------- -----------------------------------------------
Range of Weighted-Average Weighted- Weighted-
Exercise Number Outstanding Remaining Contractual Average Number Exercisable at Average
Prices at May 31, 2000 Life Exercise Price May 31, 2000 Exercise Price
--------------------------------------------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.33 to 0.94 1,700,000 .5 $.67 1,700,000 $.67
$1.78 100,000 8.5 $1.78 100,000 $1.78
$1.63 187,500 8.2 $1.63 187,500 $1.63
$1.81 653,000 8 $1.81 653,000 $1.81
$1.87 to 2.88 205,000 4 $1.99 203,333 $1.99
$2.50 20,000 3 $2.50 20,000 $2.50
------------------- -----------------------
$0.33 to 2.88 2,865,500 2,863,833
=================== =======================
</TABLE>
Warrants:
In July 1995, the Company granted warrants to a financial institution to
purchase 50,000 shares of the Company's common stock at $1.87 per share, the
fair market value of the stock on the date the warrants were granted. The
warrants expired in August of 2000.
--------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
--------------------------------------------------------------------------------
Legal Matters
The Company is party to litigation claims and assessments that arise in the
normal course of operations. Management does not believe that the ultimate
disposition of such matters will have a material adverse effect on the Company's
financial position, results of operations or liquidity.
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,
2003 with one 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. BAM also leases 1,530 square feet of office space. The
lease is for one year and has a monthly base rate of $2. This lease has the
option to renew for an additional period of one year at $2 per month. The
Company also leases certain equipment and automobiles. Rent expense under all
operating lease arrangements was approximately $168 in 2000 and $130 in 1999,
respectively. At May 31, 2000, the future minimum lease payments on these
operating leases are as follows:
Year Ended May 31,
--------------------
2001 $183
2002 159
2003 143
-----------------------
$485
=======================
================================================================================
F-25
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 12 - 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
("UPE"), a corporation, which is a stockholder of the Company. UPE 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 UPE 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
2000 and 1999.
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:
<TABLE>
<CAPTION>
May 31, 2000
---------------------------------------
Accounts
Receivable Accounts Payable
(Related Parties) (Related Parties)
---------------------------------------
<S> <C> <C>
UPE (Owned by Ronald & Jan $250 $237
Gale through Universal Baling &
Processing, Inc. UPE's parent)
Universal Industrial Gases, Inc. 4 3
(U.I.G.) (100% owned by UPE)
Universal Industrial Refrigeration, Inc. 11 119
(U.I.R.) (80% owned by UPE)
Universal Glastell Equipment 46 -
(U.G.E.) (50% owned by Gale Glass)
R. Simon Dryers, Ltd. (Directors are 133 -
Ronald & Jan Gale)
Ayton Equipment - 8
---------------------------------------
$444 $367
=======================================
</TABLE>
Since the right of offset exists between the Company, UPE and related parties, a
net amount receivable to related parties is presented in the accompanying May
31, 2000 balance sheet.
Related party sales were as follows:
Year Ended May 31,
2000 1999
--------------------------
UPE $41 $12
U.I.G. - 28
--------------------------
$41 $40
==========================
Rental income from related parties totaled $55 in both 2000 and 1999.
The Company purchases equipment and services from UPE and its affiliates. These
purchases total approximately 2% and 11% of the total cost of goods sold for
2000 and 1999, respectively.
================================================================================
F-26
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 12 - RELATED PARTY TRANSACTIONS: (Continued)
--------------------------------------------------------------------------------
In November 1993, the Company and Harrisburg Authority settled a lawsuit for
$1,300 based upon negotiations between the Company, UPE and the Harrisburg
Authority. Under the terms of the settlement agreement, UPE agreed to serve as a
guarantor and surety for the obligation. In addition, UPE 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 UPE. Pursuant to the
settlement agreement and for services rendered at that time, the Company granted
stock options to UPE. These options provide that at UPE's discretion, the
Company will issue additional shares of common stock to UPE in exchange for
payments, if any, made by UPE on behalf of the Company to Harrisburg under the
settlement agreement instead of reimbursing UPE in cash. UPE 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 UPE, the Company will not be obligated to
issue more than 1,450,000 shares to UPE for such payments. The ratio of exchange
shall be as follows: three (3) shares issued for each dollar in payment made by
UPE, 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 UPE up to a total of
1,000,000 additional shares in exchange for a total of $750 in additional
payments.
As discussed in Note 10, in March 1996 and August 1998, the Board of Directors
approved the issuance of an aggregate 525,000 stock options to UPE in exchange
for consideration for guarantees provided on the Company's various debt
obligations. The ascribed fair values to these options approximated $596. Such
costs were allocated to current and future periods based on existing and prior
guarantees. Of this amount, $100 was expensed as a financing charge in both the
2000 and 1999 statements of income, and $100 remains capitalized at May 31,
2000.
As discussed in Note 10, the Company recognized a non-cash charge of $225 in
2000 for the effects of the changes in fair value related to the modification of
an option grant.
From time to time in the ordinary course of business, UPE advances funds to the
Company to enable the Company to meet certain temporary cash requirements. The
interest on the advances is prime rate (Chase Bank, New York) plus 1%. In August
1996, UPE advanced $250,000 to the Company. UPE advanced an additional $250,000
to the Company in October 1996. As of May 31, 2000, $787,000 of these advances
remains outstanding.
UPE filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code
in October 2000.
--------------------------------------------------------------------------------
NOTE 13 - CONCENTRATION OF CREDIT RISKS:
--------------------------------------------------------------------------------
Trade accounts receivable:
The Company designs, manufactures, sells and services a product line of capital
equipment used to process materials to a variety of domestic and international
customers. The Company's accounts receivable (excluding related parties) include
a concentration of two customer balances which represent 18% and 35% of the
accounts receivable balance at May 31, 2000 Accounts receivable are primarily
composed of unsecured balances. The Company does not require collateral as a
condition of sale.
================================================================================
F-27
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 14 - MAJOR CUSTOMERS AND EXPORT SALES:
--------------------------------------------------------------------------------
In 2000, two customers individually represented 15% and 33% of consolidated
sales. In 1999, two customers individually represented 12% and 20% of
consolidated sales.
For 2000 and 1999, export sales were as follows:
Year Ended May 31,
Customer 2000 1999
-----------------------------------------------------
Australia $536 $ 142
Belgium 4 1,681
Brazil 229 388
Canada 54 37
Hong Kong 119 420
Korea 590 687
Mexico 105 711
Netherlands 32 27
Scotland - 63
Singapore 1,548 1,110
South Africa 44 63
Spain - 264
Turkey 407 -
United Kingdom 687 46
All Others 7 35
--------------------------------
$4,362 $5,674
================================
--------------------------------------------------------------------------------
NOTE 15 - SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES:
--------------------------------------------------------------------------------
Year Ended May 31,
2000 1999
Cash paid for interest $ 952 $ 662
=====================
Cash paid for income taxes $ 71 $ 51
=====================
Noncash investing and financing activities:
During 2000, the Company transferred property, plant and equipment with a
carrying value of $190 to inventory.
In 1999, the Company acquired $24 of fixed assets subject to capital lease
obligations.
During 1999, the Company settled a retirement obligation through the issuance of
90,000 shares of common stock.
================================================================================
F-28
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 16 - EARNINGS PER SHARE:
--------------------------------------------------------------------------------
Basic and Diluted earnings per share for 2000 and 1999 have been computed as
follows:
<TABLE>
<CAPTION>
2000
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Loss Per Share $(4,646) 2,379 $(1.95)
Effect of dilutive securities
Warrants and options - - -
Diluted Loss Per Share $(4,646) 2,379 $(1.95)
1999
Net Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 409 2,295 $ .18
Effect of dilutive securities
Warrants and options - 1,009 -
Diluted Earnings Per Share $ 409 3,304 $ .12
</TABLE>
Options and warrants to purchase approximately 2,900,000 shares of common stock
were outstanding during the year ended May 31, 2000 but were not included in the
computation of diluted loss per share because their effect would be anti
dilutive.
Options to purchase 122,500 shares of common stock, (exercisable at between
$2.00 and $3.15 per share) in 1999, were outstanding but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common stock underlying
the options.
--------------------------------------------------------------------------------
NOTE 17 - FOURTH QUARTER ADJUSTMENTS:
--------------------------------------------------------------------------------
During the fourth quarter of 2000, the Company recorded adjustments of: (a) $225
related to a modification of an existing option grant (see Note 10); (b) as a
result of a completed sales and business plan forecast, an inventory provision
of $763 related to obsolete and slow moving inventory; (c) bad debt expense of
$238; (d) a reduction in gross profit of $255 for a customer cancellation of a
project and (e) a tax expense of $375 related to a valuation allowance
established against deferred tax assets and (f) a long-lived asset impairment
charge of $1,600 related to the sale of BAM.
--------------------------------------------------------------------------------
NOTE 18 - SUBSEQUENT EVENT:
--------------------------------------------------------------------------------
On November 29, 2000, the Company closed on the sale of BAM. The Company was
sold to a private company, Bergen Cove Realty Inc. Under the terms of the
agreement, the Company sold the issued and outstanding shares of the common
stock of BAM. The selling price was $3,923,000 which included the assumption of
BAM's existing term debt on November 29, 2000 of $2,423,000. BAM's total sales
for fiscal 2000 were $3,891,000 with a net operating loss of $1,263,000.
================================================================================
F-29
