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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-5005
SELAS CORPORATION OF AMERICA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1069060
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
DRESHER, PENNSYLVANIA 19025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(215) 646-6600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
(X) YES ( ) NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON SHARES, $1.00 PAR VALUE 5,119,214 (exclusive of 515,754
CLASS treasury shares)
OUTSTANDING AT AUGUST 8, 2002
SELAS CORPORATION OF AMERICA
I N D E X
Page
Number
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2002 (Unaudited) and December 31, 2001 3, 4
Consolidated Statements of Operations for
the Three Months Ended June 30, 2002 and 2001 (Unaudited) 5
Consolidated Statements of Operations for
the Six Months Ended June 30, 2002 and 2001 (Unaudited) 6
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2002 and 2001 (Unaudited) 7
Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 2002 (Unaudited) 8
Notes to Consolidated Financial Statements 9-19
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 20-23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SELAS CORPORATION OF AMERICA
Consolidated Balance Sheets
Assets
June 30, December 31,
2002 2001
(Unaudited) (Audited)
Current assets
Cash, including cash equivalents of
$410,000 in 2002 and $391,000 in 2001 $ 1,981,238 $ 3,636,673
Accounts receivable (including unbilled
receivables of $3,507,000 in 2002
and $1,857,000 in 2001, less allowance
for doubtful accounts of $547,000 in
2002 and $456,000 in 2001) 22,559,170 17,376,784
Inventories 13,318,206 13,810,209
Deferred income taxes 1,718,875 1,521,809
Other current assets 1,177,484 1,033,689
Assets of discontinued operations 21,765,174 --
Total current assets 62,520,147 37,379,164
Property, plant and equipment
Land 554,943 554,943
Buildings 7,175,875 7,143,408
Machinery and equipment 33,677,466 32,502,680
41,408,284 40,201,031
Less: Accumulated depreciation 27,024,287 25,621,190
Net property, plant and equipment 14,383,997 14,579,841
Assets of discontinued operations -- 16,773,442
Excess of cost over net assets of acquired
subsidiaries, less accumulated amortiza-
tion of $4,510,000 in 2002 and
$4,562,000 in 2001 15,731,801 15,631,502
Deferred income taxes 210,933 350,014
Other assets including patents, less
amortization 1,571,969 1,523,320
$94,418,847 $86,237,283
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
June 30, December 31,
2002 2001
Current liabilities (Unaudited) (Audited)
Notes payable $11,715,044 $ 9,422,202
Current maturities of long-term debt 1,475,568 1,496,033
Accounts payable 13,409,313 10,232,880
Federal, state and foreign income taxes 580,863 461,393
Customers' advance payments on contracts 2,241,653 2,809,988
Guarantee obligations and estimated costs
of service 1,166,796 878,952
Other accrued liabilities 4,988,684 5,100,021
Liabilities of discontinued operations 13,610,537 --
Total current liabilities 49,188,458 30,401,469
Long-term debt 2,639,954 3,214,934
Other postretirement benefit obligations 3,827,439 3,878,948
Liabilities of discontinued operations -- 10,137,315
Contingencies and commitments
Shareholders' equity
Common shares, $1 par; 10,000,000 shares
authorized; 5,634,968 shares issued 5,634,968 5,634,968
Additional paid-in capital 12,012,541 12,012,541
Retained earnings 23,390,565 23,297,747
Accumulated other comprehensive loss (1,010,000) (1,075,561)
Less: 515,754 common shares held
in treasury, at cost (1,265,078) (1,265,078)
Total shareholders' equity 38,762,996 38,604,617
$94,418,847 $86,237,283
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30, June 30,
2002 2001
Sales, net $22,775,493 $24,918,031
Operating costs and expenses
Cost of sales 18,083,978 19,364,158
Selling, general and administrative
expenses 4,211,139 4,228,177
Operating income 480,376 1,325,696
Interest (expense) (117,256) (138,745)
Interest income 7,902 13,578
Other income (expense), net 159,469 (73,748)
Income from continuing operations
before income taxes 530,491 1,126,781
Income taxes 125,161 402,858
Income from continuing operations 405,330 723,923
Loss from discontinued operations, net of
income taxes benefit (174,114) (589,121)
Net income $ 231,216 $ 134,802
Earnings (loss) per share
Basic
Continuing operations $0.08 $0.14
Discontinued operations (0.03) (0.11)
$0.05 $0.03
Diluted
Continuing operations $0.08 $0.14
Discontinued operations (0.03) (0.11)
$0.05 $0.03
Average shares outstanding
Basic 5,119,000 5,119,000
Diluted 5,135,000 5,143,000
Comprehensive income $ 324,227 $ 66,922
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Statements of Operations
(Unaudited)
Six Months Ended
June 30, June 30,
2002 2001
Sales, net $ 43,505,452 $48,488,740
Operating costs and expenses
Cost of sales 34,491,263 37,348,352
Selling, general and administrative
expenses 8,211,426 8,721,695
Operating income 802,763 2,418,693
Interest (expense) (199,894) (293,132)
Interest income 23,183 22,552
Other income (expense), net 253,780 59,427
Income before income taxes 879,832 2,207,540
Income taxes 196,734 854,074
Income from continuing operations 683,098 1,353,466
Loss from discontinued operations, net of
income taxes benefit (590,280) (920,192)
Net income $ 92,818 $ 433,274
Earnings (loss) per share
Basic
Continuing operations $0.13 $0.26
Discontinued operations (0.12) (0.17)
$0.01 $0.09
Diluted
Continuing operations $0.13 $0.26
Discontinued operations (0.12) (0.17)
$0.01 $0.09
Average shares outstanding
Basic 5,119,000 5,119,000
Diluted 5,123,000 5,129,000
Comprehensive income $ 158,379 $ 279,990
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30, June 30,
2001 2002
Cash flows from operating activities:
Net income $ 92,818 $ 433,274
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Depreciation and amortization 1,601,731 2,055,943
(Gain) loss on sale of property and
equipment (3,322) 5,522
Deferred taxes (1,448) (514,280)
Changes in operating assets and
liabilities:
(Increase)in accounts receivable (4,297,386) (1,983,037)
(Increase) decrease in inventories 669,307 (1,279,074)
(Increase) in other assets (100,338) (52,225)
Increase (decrease) in accounts
payable 907,571 (140,802)
Increase (decrease) in accrued expenses 835,633 (631,601)
Increase (decrease) in customer advances (985,449) 1,360,054
Increase (decrease) in other
liabilities (60,963) 423,898
Net cash (used) by
operating activities (1,341,846) (322,328)
Net cash provided (used) by
discontinued operations 76,515 (1,460,996)
Cash flows from investing activities:
Purchases of property, plant and equipment (1,171,402) (1,097,285)
Proceeds from sale of property, plant
and equipment 12,311 --
Acquisition of subsidiary companies, net of
cash acquired -- (68,143)
Net cash (used) by investing
activities (1,159,091) (1,165,428)
Cash flows from financing activities:
Proceeds from short-term bank borrowings 1,683,901 3,090,998
Proceeds from long-term bank borrowings -- 2,353,494
Proceeds from borrowings to acquire
subsidiary company 136,173 672,136
Repayments of short-term bank borrowings (376,034) (1,964,133)
Repayments of long-term debt (809,120) (1,329,301)
Payment of dividends -- (460,858)
Net cash provided by
financing activities 634,920 2,362,336
Effect of exchange rate changes on cash 134,067 (221,608)
Net decrease in cash and cash
equivalents (1,655,435) (808,024)
Cash and cash equivalents, beginning of
period 3,636,673 3,782,359
Cash and cash equivalents, end of period $ 1,981,238 $ 2,974,335
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 2002
(Unaudited)
Common Stock
Additional
Number of Paid-in
Shares Amount Capital
Balance January 1,
2002 5,634,968 $5,634,968 $12,012,541
Net income
Foreign currency
translation gain -- -- --
Derivative financial
instrument fair
value adjustment -- -- --
Comprehensive income -- -- --
Balance June 30,
2002 5,634,968 $5,634,968 $12,012,541
Accumulated
Other
Comprehensive
Retained Income Comprehensive
Earnings (Loss) Income
Balance January 1,
2002 $23,297,747 $(1,075,561)
Net income 92,818 $ 92,818
Foreign currency
translation gain -- 33,704 33,704
Derivative financial
instrument fair
value adjustment -- 31,857 31,857
Comprehensive income -- -- $ 158,379
Balance June 30,
2002 $23,390,565 $(1,010,000)
Total
Treasury Shareholders'
Stock Equity
Balance January 1,
2002 $(1,265,078) $38,604,617
Net income -- 92,818
Foreign currency
translation gain -- 33,704
Derivative financial
instrument fair value
adjustment -- 31,857
Comprehensive income -- --
Balance June 30,
2002 $(1,265,078) $38,762,996
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
1. In the opinion of management, the accompanying consolidated condensed
financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly Selas
Corporation of America's consolidated financial position as of
June 30, 2002 and December 31, 2001, and the consolidated results
of its operations for the three and six months ended June 30, 2002
and 2001 and consolidated statements of shareholders' equity and
cash flows for the six months then ended.
2. The accounting policies followed by the Company are set forth in
note 1 to the Company's financial statements in the 2001 Selas
Corporation of America Annual Report.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143,
'Accounting for Asset Retirement Obligation,' which addresses
financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations
with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the
asset. Adoption is required for fiscal years beginning after June
15, 2002, with earlier adoption encouraged. The Company is in the
process of analyzing the implications of SFAS 143 and does not
believe that the adoption of this statement will have a material
impact on the net earnings of the Company.
In April 2002, the FASB issued SFAS No. 145 'Rescission of FASB
Statements Nos. 4,44 and 64, Amendment of FASB No. 14, and
Technical Corrections.' The Statement rescinds or amends a number
of existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS 145 is effective for transactions
occurring after May 15, 2002. The Company is in the process of
analyzing the implications of SFAS 145 and does not believe that the
adoption of this statement will have a material impact on the net
earnings of the Company.
In July 2002, the FASB issued SFAS No. 146, 'Accounting for Costs
Associated with Exit or Disposal Activities.' This standard
addresses the accounting and reporting for costs of so-called exit
activities (including restructuring) and for the disposal of
long-lived assets. The standard changes some of the criteria for
recognizing a liability for these activities. It is effective
beginning in 2003 with the liability recognition criteria under the
standard applied prospectively. The Company is in the process of
analyzing the potential impact of adoption on the accounting
policies regarding exit and disposal activities and does not believe
it will have a material impact on the net earnings of the Company.
3. Discontinued Operations
In the fourth quarter of 2001, the Company initiated its plan to
dispose of the Company's primary custom-engineered furnace
business, Selas SAS (Paris), along with two other closely related
subsidiaries, Selas Italiana, S.r.L. (Milan) and Selas U.K.
(Derbyshire). These subsidiaries form the Company's large
custom-engineered furnaces division used primarily in the steel
and glass industries worldwide. The furnaces engineered by this
division are custom-engineered to meet customer specific
requirements. These subsidiaries generated approximately $8.3
million and $8.9 million of revenue and a loss from discontinued
operations of $590,000 and $920,000 for the six months ended June
30, 2002 and 2001, respectively. The Company has accounted for
the plan to dispose of the subsidiaries as a discontinued
operation and accordingly, has reclassified the historical
financial data of these subsidiaries.
The Company anticipates paying the discontinued operations
long-term debt of $2,035,962 and notes payable of $6,533,816 and
therefore, has reclassified these amounts into continuing
operations as of June 30, 2002.
These consolidated financial statements have been restated to
reflect the Company's presentation of discontinued operations.
4. Inventories consist of the following:
June 30, December 31,
2002 2001
Raw material $ 4,290,009 $ 4,593,829
Work-in-process 4,648,431 4,855,037
Finished products and components 4,379,766 4,361,343
$13,318,206 $13,810,209
5. Income Taxes
Consolidated income taxes for the six months ended June 30, 2002
and 2001 are $197,000 and $854,000 which result in effective tax
rates of 22.3% and 38.6%, respectively. The rate of tax in
relation to pre-tax income in 2002 is lower than the same period in
2001 because tax benefits from certain foreign net operating losses,
which were previously fully reserved by a valuation allowance, were
utilized for income tax purposes. The rate of tax in relation to
pre-tax income in 2001 is higher than in 2002 because tax benefits from
certain net operating losses were not utilized for income tax purposes.
6. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 240 lawsuits as of June 30, 2002 (approximately
250 as of March 31, 2002) alleging that plaintiffs have or may
have contracted asbestos-related diseases as a result of exposure
to asbestos products or equipment containing asbestos sold by one
or more named defendants. Due to the noninformative nature of the
complaints, the Company does not know whether any of the complaints
state valid claims against the Company. The lead insurance carrier
has informed the Company that the primary policy for the period
July 1, 1972 July 1, 1975 has been exhausted and that the lead
carrier will no longer provide a defense under that policy. The
Company has requested that the lead carrier substantiate this
situation. The Company has contacted representatives of the
Company's excess insurance carrier for some or all of this period.
The Company does not believe that the asserted exhaustion of the
primary insurance coverage for this period will have a material
adverse effect on the financial condition, liquidity, or results of
operations of the Company. Management is of the opinion that the
number of insurance carriers involved in the defense of the suits
and the significant number of policy years and policy limits to
which these insurance carriers are insuring the Company make the
ultimate disposition of these lawsuits not material to the
Company's consolidated financial position or results of operations.
On August 2, 2002, Societe Generale started a court action before the
Commercial Court of Nanterre, France, claiming that Selas SAS, the
Company's French subsidiary, has not paid the balance of its accounts
under the overdraft facility with Societe Generale amounting to
259,343 Euros (approximately $265,023 as of August 12, 2002) plus
interest and legal costs of up to 3,000 Euros. A hearing has been set
for September 26, 2002. The Company believes that this amount is not
yet due and that this matter can be resolved without further litigation.
The Company is also involved in other lawsuits arising in the
normal course of business. While it is not possible to predict
with certainty the outcome of these matters, management is of the
opinion that the disposition of these lawsuits and claims will not
materially affect the Company's consolidated financial position,
liquidity, or results of operations.
7. Statements of Cash Flows
Supplemental disclosures of Six Months Ended
cash flow information: June 30, June 30,
2002 2001
Interest received $ 5,891 $ 30,906
Interest paid $ 176,050 $ 333,750
Income taxes paid $ 51,374 $1,057,002
8. Accounts Receivable
At June 30, 2002, the Company had $2,431,111 of trade accounts
receivable due from the major U.S. automotive manufacturers and
$4,640,468 of trade accounts receivable due from hearing health
manufacturers. The Company also had $140,000 in receivables from
long-term contracts for customers in the steel industry in North
America, Europe and Asia.
9. Notes Payable and Long Term Debt
On April 15, 2002, the Company entered into a second waiver
amendment agreement for its domestic and foreign revolving credit
and term loan facilities and obtained a new domestic supplemental
credit facility in the amount of $5,000,000 to be used for
additional domestic borrowing and for the issuance of advance
payment guarantees. A subsequent amendment to the second waiver
agreement reduced the amount of the supplemental credit facility to
$4,000,000. The outstanding balance as of June 30, 2002 is $2,000,000.
10. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months
Ended June 30, 2002
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income from continuing
operations $ 405,330 5,119,214 $.08
Loss from discontinued
operations (174,114) 5,119,214 (.03)
Income available to
common shareholders $ 231,216 5,119,214 $.05
Effect of Dilutive
Securities
Stock options -- 15,396 --
Diluted Earnings Per Share $ 231,216 5,134,610 $.05
For the Six Months
Ended June 30, 2002
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income from continuing
operations $ 683,098 5,119,214 $.13
Loss from discontinued
operations (590,280) 5,119,214 (.12)
Income available to
common shareholders $ 92,818 5,119,214 $.01
Effect of Dilutive
Securities
Stock options -- 3,849 --
Diluted Earnings Per Share $ 92,818 5,123,063 $.01
For the Three Months
Ended June 30, 2001
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income from continuing
operations $ 723,923 5,119,214 $.14
Loss from discontinued
operations (589,121) 5,119,214 (.11)
Income available to
common shareholders 134,802 5,119,214 .03
Effect of Dilutive
Securities
Stock options -- 23,702 --
Diluted Earnings Per Share $ 134,802 5,142,916 $.03
For the Six Months
Ended June 30, 2001
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income from continuing
operations $ 1,353,466 5,119,214 $ .26
Loss from discontinued
operations (920,192) 5,119,214 (.17)
Income available to
common shareholders 433,274 5,119,214 .09
Effect of Dilutive
Securities
Stock options -- 10,110 --
Diluted Earnings Per Share $ 433,274 5,129,324 $ .09
11. Business Segment Information
The Company has three operating segments. The Company is engaged
in providing engineered heat technology equipment and services to
industries throughout the world, the manufacture of precision
miniature medical and electronic products and the manufacture of
original equipment for light trucks and vans. The results of
operations and assets of these segments are prepared on the same
basis as the condensed consolidated financial statements for the
six months ended June 30, 2002 and 2001 and the consolidated
financial statements included in the 2001 Form 10-K.
The Company's reportable segments reflect separately managed,
strategic business units that provide different products and
services, and for which financial information is separately
prepared and monitored.
Segments
Tire Precision
For The Holders, Miniature
Six Months Lifts and Medical and
Ended Heat Related Electronic
June 30, 2002 Technology Products Products
Sales, net $17,098,541 $ 8,848,736 $17,558,175
Net income
(loss) $ 200,296 $ 549,250 $ 430,996
Depreciation
and amoriza-
tion $ 259,709 $ 86,820 $ 1,255,202
Property, plant
and equipment
additions $ 66,190 $ 120,440 $ 984,772
Total assets $24,471,610 $ 6,432,930 $41,749,133
Segments - continued
For The
Six Months General
Ended Corporate Discontinued
June 30, 2002 Expenses Operations Total
Sales, net $43,505,452
Net income
(loss) $(497,444) $ (590,280) $ 92,818
Depreciation
and amoriza-
tion -- -- $ 1,601,731
Property, plant
and equipment
additions -- -- $ 1,171,402
Total assets -- $21,765,174 $94,418,847
Segments
Tire Precision
For the Holders, Miniature
Six Months Lifts and Medical and
Ended Heat Related Electronic
June 30, 2001 Technology Products Products
Sales, net $19,931,622 $7,299,705 $21,257,413
Net income
(loss) $ 1,275,169 $ (8,712) $ 456,760
Depreciation
and amoriza-
tion $ 297,228 $ 100,092 $ 1,658,623
Property, plant
and equipment
additions $ 117,742 $ 3,040 $ 976,503
Total assets $25,701,629 $5,998,938 $42,556,958
Segments - Continued
For the
Six Months General
Ended Corporate Discontinued
June 30, 2001 Expenses Operations Total
Sales, net -- -- $48,488,740
Net income
(loss) $(369,751) $ (920,192) $ 433,274
Depreciation
and amoriza-
tion -- -- $ 2,055,943
Property, plant
and equipment
additions -- -- $ 1,097,285
Total assets $20,379,749 $94,637,274
12. Revenue Recognition
The following analysis provides a detail of revenue recognition
methodology by segment for the six months ended June 30, 2002:
Tire Precision
Holders, Miniature
Lifts and Medical and
Heat Related Electronic
Technology Products Products Total
Upon Shipment $ 4,557,857 $ 8,848,736 $17,558,175 $30,964,768
Percentage of
completion 12,540,684 -- -- 12,540,684
Total Revenue $17,098,541 $ 8,848,736 $17,558,175 $43,505,452
13. Business Combinations and Goodwill and Other Intangible Assets
As of January 1, 2002, the Company adopted SFAS No. 141, 'Business
Combinations,' and SFAS No. 142, 'Goodwill and Other Intangible
Assets.' SFAS No. 141 requires all business combinations entered
into after June 30, 2001 to be accounted for under the purchase
method. SFAS No. 142 sets forth new financial accounting and
reporting standards for the acquisition of intangible assets, other
than those acquired in a business combination, and for goodwill and
other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill be separately disclosed
from other intangible assets in the statement of financial
position, and no longer amortized but tested for impairment on a
periodic basis. The provisions of this accounting standard also
require the completion of a transitional impairment test within six
months of adoption, with any impairments identified accounted for
as a cumulative effect of a change in accounting principle.
The Company has conducted transitional impairment testing with
regards to its goodwill and has determined a potential impairment
in the Precision Miniature Medical and Electronic Products
segment. Further valuations will be completed by the fourth
quarter, and the results will be reported in the Company's
December 31, 2002 financial statements.
In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill effective January 1, 2002. The effect of
adopting this new standard was to reduce amortization expense by
approximately $390,000 and to increase net earnings by $336,000
(net of tax expense of $54,000) or $0.07 diluted earnings per share
for the six months ended June 30, 2002. A reconciliation of
previously reported net earnings (loss) and earnings (loss) per
share to the amounts adjusted for the exclusion of goodwill
amortization net of the related income tax effect follows:
Three Months Ended
June 30, June 30,
2002 2001
Reported net earnings $ 231,000 $ 135,000
Add: goodwill amortization,
net of tax -- 160,000
Adjusted net earnings $ 231,000 $ 295,000
Basic earnings per share
Reported net earnings $ .05 $.03
Goodwill amortization, net of tax -- .03
Adjusted net earnings $ .05 $.06
Diluted earnings per share
Reported net earnings $ .05 $.03
Goodwill amortization, net of tax -- .03
Adjusted net earnings $ .05 $.06
Six Months Ended
June 30, June 30,
2002 2001
Reported net earnings $ 93,000 $ 433,000
Add: goodwill amortization,
net of tax -- 314,000
Adjusted net earnings $ 93,000 $ 747,000
Basic earnings per share
Reported net earnings $ .01 $.09
Goodwill amortization, net of tax -- .06
Adjusted net earnings $ .01 $.15
Diluted earnings per share
Reported net earnings $ .01 $.09
Goodwill amortization, net of tax -- .06
Adjusted net earnings $ .01 $.15
Changes in the carrying amount of goodwill for the six months ended
June 30, 2002 by operating segment in accordance with SFAS No. 141, are
as follows:
Segments
Tire Precision
Holders, Miniature
Lifts and Medical and
Heat Related Electronic
Technology Products Products Total
Balance as of
December 31, 2001 $ 1,004,741 $ -- $14,626,761 $15,631,502
Translation
adjustment 145,306 -- -- 145,306
Reclassification to
other intangible
assets -- -- (45,007) (45,007)
Balance as of
June 30, 2002 $ 1,150,047 -- $14,581,754 $15,731,801
In connection with the adoption of SFAS No. 142, the Company
reclassified certain costs to other intangible assets included in the
following table.
Patents and other intangible assets at June 30, 2002 and December 31,
2001, subject to amortization expense, are as follows:
June 30, 2002
Carrying Accumulated
Amount Amortization Net
Patents $ 505,712 $ (505,712) $ --
Other intangible
assets 930,757 (618,691) 312,066
Total $1,436,469 $(1,124,403) $ 312,066
December 31, 2001
Carrying Accumulated
Amount Amortization Net
Patents $ 505,712 $ (505,018) $ 694
Other intangible
assets 802,252 (442,395) 359,857
Total $1,307,964 $ (947,413) $ 360,551
Amortization expense for patents and other intangible assets subject to
amortization was approximately $109,000 for the six months ended June
30, 2002. Estimated amortization expense for each of the three
succeeding years is $142,000, $131,000, $39,000, for years 2003
through 2005.
Patents and other intangible assets are classified in the caption
'Other Assets Including Patents, Less Amortization' on the consolidated
balance sheet. The remaining balance in this account consists mainly
of the cash surrender value on life insurance policies related to a
supplemental pension plan and development costs.
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In the fourth quarter of 2001, the Company initiated its plan to
dispose of the Company's primary custom-engineered furnace business,
Selas SAS (Paris), along with two other closely related subsidiaries
Selas Italiana, S.r.L. (Milan) and Selas U.K. (Derbyshire). These
subsidiaries form the Company's large custom-engineered furnaces
division used primarily in the steel and glass industries worldwide.
The furnaces engineered by this division are custom-engineered to meet
customer specific requirements. These subsidiaries generated
approximately $8.3 million and $8.9 million of revenue and a loss from
operations of $590,000 and $920,000 for the six months ended June 30,
2002 and 2001, respectively. The Company has accounted for the plan to
dispose of the subsidiaries as a discontinued operation and,
accordingly, has reclassified the historical financial data of these
subsidiaries. See further information in note 3 to the consolidated
financial statements.
In accordance with SFAS No. 142, the Company has conducted transitional
impairment testing with regards to its goodwill and has determined a
potential impairment in the Precision Miniature Medical and Electronic
Products segment. Further valuations will be completed by the fourth
quarter and the results will be reported in the Company's December
31, 2002 financial statements.
Consolidated net sales decreased to $22.8 million and $43.5 million for
the three and six months ended June 30, 2002 compared to $24.9 million
and $48.5 million for the same periods ended June 30, 2001. Net sales
for the heat technology segment decreased to $9.2 million and $17.1
million for the three and six months ended June 30, 2002 compared to
$11 million and $19.9 million for the same periods in 2001. The
decrease in sales in this segment was due in part to the timing of revenue
recognized on a contract as well as delays by the customer partially offset
by higher sales at Nippon Selas, the Company's Japanese subsidiary. Sales of
smaller heat treating furnaces produced by the Company's CFR and Ermat
subsidiaries were slightly higher due to an increase in backlog. CFR
and Ermat manufacture small heat treating furnaces utilized in the
glass and aluminum industries worldwide. Sales and earnings of heat
treating contracts are recognized on the percentage-of-completion
method and generally require more than twelve months to complete.
Consolidated backlog for the heat technology segment decreased to $11.2
million at June 30, 2002 compared to $15.6 at the same time last year.
Sales of the Company's precision miniature medical and electronic
products segment decreased to $8.7 million and $17.6 million for the
three and six months ended June 30, 2002 compared to $10 million and
$21.3 million for the same periods in 2001. Revenue decreased in the
current periods compared to 2001 because of lower shipments of both
component and system parts to the hearing health industry, lower sales
of products to the medical infusion market and lower sales of
thermistor and capacitor parts to the electronics and
telecommunications industries. The Company's sales in this segment are
affected by the telecommunication industry which continues its ongoing
slump and the hearing health markets which have been flat for the last
several years. Net sales of the tire holders, lifts and related
products segment increased to $4.8 million and $8.9 million for the
three and six months ended June 30, 2002 compared to $4 million and
$7.3 million for the same periods in 2001. The increase in revenue was
due to higher shipments of tire lifts to the Company's automotive
customers reflecting, in part, the receipt of a new contract during the
second half of 2001. Sales for the tire holders, lifts and related
products segment for the second half of 2002 are expected to be lower
than the first six months of the year due to the loss of a contract to
supply tire lifts to one of its automotive customers. The Company
continues to pursue tire lift orders for this and other customers
during the year 2002.
The Company's gross profit margin as a percentage-of-sales decreased to
20.6% and 20.7% for the three and six month periods ended June 30, 2002
compared to 22.3% and 23% for the same periods in 2001. Gross profit
margins for the heat technology segment decreased to 16.9% and 17.7%
for the three and six months ended June 30, 2002 compared to 23.6% and
23% for the comparable periods in 2001. Heat technology gross profit
margins vary markedly from contract to contract, depending on customer
specifications and other conditions related to the project. The gross
profit margins for the first six months of 2002 were impacted by
revenue recognized on several contracts at CFR whose margins were not
as profitable as those completed in 2001 and higher than usual costs
on several orders completed by some of the Company's subsidiaries which
supply replacement parts. Gross profit margins for the precision
miniature medical and electronic products segment increased to 26.3%
compared to 24.6% for the three month periods ended Jun 30, 2002 and
decreased to 25.4% from 26.8% for the six month periods ended June 30,
2002 and 2001, respectively. The increase in the current quarter
compared to 2001 was due, in part, to the amortization of goodwill which
was included in the cost of sales in 2001 but has been discontinued in
2002 in accordance with current accounting standards. The margins in
the first six months of 2002 were lower than 2001, despite the decrease
in goodwill amortization in 2002, due to the mix of products sold
between the periods, because hearing health component parts, for which revenues
have been declining, have higher profit margins compared to some of the
segment's other products, particularly hearing health system parts,
for which sales have also decreased compared to the prior year. Gross
profit margins for the tire holders, lifts and relate products segment
increased to 17.2% and 17.4% for the three and six months ended June
30, 2002 compared to 13% and 12% for the same periods in 2001. The
favorable result in the current year is due to an increase in
efficiencies from higher production of tire lifts for the Company's
automotive customers.
Selling, general and administrative expenses (SG&A) remained constant
at $4.2 million for the quarters ended June 30, 2002 and 2001 and
decreased to $8.2 million in 2002 from $8.7 million in 2001 for the six
months then ended. The lower SG&A expenses were due to cost savings
measures implemented by the Company during the current economic
slowdown, primarily salary and headcount reductions.
Interest expense for the three and six months ended June 30, 2002
decreased to $117,000 and $200,000 compared to $139,000 and $293,000
for the same periods in 2001. The decrease was due to lower interest
rates during the current year on higher average borrowings. Interest
income for the quarter ended June 30, 2002 decreased to $8,000 compared
to $14,000 for the same period in 2001. Interest income for the first
six months of 2002 and 2001 remained constant at $23,000 which reflects
interest imputed on a trade note receivable in 2002 offset by lower
average cash balances available for investing in the current year.
Other income (expense) included realized and unrealized gains on
foreign exchange of $203,000 and $165,000 for the three and six months
ended June 30, 2002 compared with losses of $63,000 for three months
and gains of $50,000 for the six months in 2001. Other income for the
six months ended June 30, 2002 also included gains from the sale of
investments of $83,000.
Consolidated income taxes for the six months ended June 30, 2002 and
2001 are $197,000 and $854,000 which result in effective tax rates of
22.3% and 38.6%, respectively. The rate of tax in relation to pre-tax
income in 2002 is lower than the same period in 2001 because tax benefits
from certain foreign net operating losses, which were previously fully
reserved by a valuation allowance, were utilized for income tax purposes.
The rate of tax in relation to pre-tax income in 2001 is higher than in 2002
because tax benefits from certain net operating losses were not utilized
for income tax purposes.
Consolidated net income increased to $231,000 for the three months
ended June 30, 2002 compared to $135,000 for the same period in 2001
and decreased to $93,000 compared to $433,000 for the six months ended
June 30, 2002 and 2001, respectively. The improvement in the results
of the second quarter despite the decrease in sales and lower gross
profit margins was attributable to the discontinuation of goodwill
amortization and gains on foreign exchange.
Discontinued operations generated losses of $174,000 and $590,000 for
the three and six months ended June 30,2002 compared to losses of
$589,000 and $920,000 for the same periods in 2001. The improvement in
results for the current periods despite the lower sales in the current
year was due to realized and unrealized gains on foreign exchange in the
second quarter.
Liquidity and Capital Resources
Consolidated net working capital increased to $13.2 million at June 30,
2002 from $7 million at December 31, 2001. The main reason for this
increase was the reclassification of assets and liabilities of
discontinued operations as current based on the assumption of disposal
within the next twelve months. Exclusive of this reclassification,
consolidated net working capital decreased to $5.2 million at June 30,
2002. The decrease was due primarily to purchases of property and
equipment and paydown of long term debt partially offset by borrowings
to fund a prior acquisition. The major changes in the components of working
capital for the period were lower cash and cash equivalent of $1.6
million, higher accounts receivable of $5.2 million, lower inventories
of $.5 million, higher notes payable of $2.3 million, higher accounts
payable of $3.2 million and lower customer advance payments on
contracts of $.6 million. These changes relate mainly to the ongoing
operations of the Company. As part of the ongoing operations of the
Company, management periodically performs a strategic analysis of all
assets of the Company to ensure that an appropriate rate of return is
achieved from the invested capital.
On April 15, 2002, the Company entered into a second waiver amendment
agreement for its domestic and foreign revolving credit and term loan
facilities and obtained a new domestic supplemental credit facility in
the amount of $5,000,000 to be used for additional domestic borrowing
and for the issuance of advance payment guarantees. A subsequent
amendment to the second waiver agreement reduced the amount of the
supplemental credit facility to $4,000,000. See additional information
in Note 9 to the 2001 Annual Report on Form 10-K.
During the first quarter of 1999, the Company implemented a program to
repurchase up to 250,000 shares of its common stock, which at the time
represented approximately 5% of its total shares outstanding. The
shares have been purchased from time to time on the open market. As of
June 30, 2002, the Company has repurchased a total of 152,190 shares of
its common stock at a cost of $883,141.
The Company believes that its present working capital position, combined
with funds expected to be generated from operations, the available borrowing
capacity through its amended credit loan facilities, the potential sale of its
large custom engineered furnace business, the curtailment of dividend
payments and control of capital spending will be sufficient to meet its
anticipated cash requirements for operating needs and capital expenditures
for 2002.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, 'Accounting
for Asset Retirement Obligation,' which addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
The standard applies to legal obligations with the retirement of
long-lived assets that result from the acquisition, construction,
development and (or) normal use of the asset. Adoption is required for
fiscal years beginning after June 15, 2002, with earlier adoption
encouraged. The Company is in the process of analyzing the
implications of SFAS 143 and does not believe that the adoption of this
statement will have a material impact on the net earnings of the
Company.
In April 2002, the FASB issued SFAS No. 145 'Rescission of FASB
Statements Nos. 4,44 and 64, Amendment of FASB No. 14, and Technical
Corrections.' The Statement rescinds or amends a number of existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. SFAS 145 is effective for transactions occurring after May
15, 2002. The Company is in the process of analyzing the implications
of SFAS 145 and does not believe that the adoption of this statement
wiil have a material impact on the net earnings of the Company.
In July 2002, the FASB issued SFAS No. 146, 'Accounting for Costs
Associated with Exit or Disposal Activities.' This standard addresses
the accounting and reporting for costs of so-called exit activities
(including restructuring) and for the disposal of long-lived assets.
The standard changes some of the criteria for recognizing a liability
for these activities. It is effective beginning in 2003 with the
liability recognition criteria under the standard applied
prospectively. The Company is in the process of analyzing the
potential impact of adoption on the accounting policies regarding exit
and disposal activities and does not believe it will have a material
impact on the net earnings of the Company.
Significant Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expense during the reported period.
Certain accounting estimates and assumptions are particularly sensitive
because of their significance to the consolidated financial statements and the
possibility that future events affecting them may differ markedly. The
accounting policies of the Company with significant estimates and assumptions
include the Company's revenue recognition, discontinued operations and deferred
taxes policies. These and other significant accounting policies are described
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 1 to the Company's 2001 financial statements contained
in or incorporated by reference in the Company's Annual Report on Form 10-K
for the year ending December 31, 2001.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding the Company's exposure to certain market
risks, see Item 7A, Quantitative and Qualitative Disclosures About
Market Risk, in the Annual Report on Form 10-K for 2001. There have
been no significant changes in the Company's portfolio of financial
instruments or market risk exposures which have occurred since year-end.
Forward-Looking and Cautionary Statements
Certain statements herein that include forward-looking terminology such as
"may", "will", "should", "expect", "anticipate", "believe", "estimate", "plan"
or "continue" or the negative thereof or other variations thereon are, or could
be deemed to be, "forward-looking statements" within the meaing of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are affected
by known and unknown risks, uncertainties and other factors that may cause the
Company's actual results, performance or achievements to differ materially
from the results, performance and achievements expressed or implied in the
Company's forward-looking statements. These risks, uncertainties and factors
include competition by competitors with more resources than the Company,
foreign currency risks arising from the Company's foreign operations, the
cyclical nature of the market for large heat technology contracts, fluctuations
in the Company's results of operations, the Company's ability to maintain or
enhance its technical capabilities, the general trend in recent years in the
automobile and truck industry toward a reduction in the number of third-party
suppliers and toward more integrated component suppliers, the Company's ability
to continue to achieve automation and maintain its historical profit margins
in the precision miniature medical and electronics business particularly as the
technology of hearing instruments changes and as the business expands into
other product lines, the effects of unfavorable conditions in the hearing
health market and the impact of the Asian economic situation on the Company's
precision minature medical and electronics business and the Company's ability
to pay interest and principal on its indebtedness or obtain new or additional
debt or equity financing. These and other risks, uncertainties and other
factors are described elsewhere in this Report or in the Company's filings with
the Securities and Exchange Commission, including its Annual Report on
Form 10-K for the year ended December 31, 2001.
The Company cautions that the foregoing list of important factors is not
intended to be, and is not, exhaustive. The Company does not undertake to
update any forward-looking statement that may be made from time to time by
or on behalf of the Company.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See note 6 to the Consolidated Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Shareholders of the Company was held on May
10, 2002.
At the 2002 Annual Meeting:
(i) Messrs. John H. Duerden and Robert N. Masucci were elected to
the Board of Directors of the Company for terms expiring at the 2005
Annual Meeting. In such elections, 4,263,584 votes were cast for Mr.
Duerden and 4,194,484 votes were cast for Mr. Masucci. Under
Pennsylvania law, votes cannot be cast against a candidate. Proxies
filed at the 2002 Annual Meeting by the holders of 316,027 shares
withheld authority to vote for Mr. Duerden and those filed by the
holders of 385,127 shares withheld authority to vote for Mr. Masucci.
No "broker nonvotes" were received at the 2002 Annual Meeting with
respect to the election of directors. The terms of the following directors
continued after the Annual Meeting: Frederick L. Bissinger, Nicholas
A. Giordano, Mark S. Gorder and Michael J. McKenna.
(ii) 4,526,576 shares were voted in favor of ratifying the
appointment of KPMG LLP as the Company's auditors for 2002 and 49,854
shares were voted against such proposal. Proxies filed at the 2002
Annual Meeting by the holders of 3,181 shares instructed the proxy
holders to abstain from voting on such proposal. No "broker nonvotes"
were received at the 2002 Annual Meeting with respect to this proposal.
ITEM 6. Exhibits and Reports on Form 8-K
Selas Corporation of America filed a current report on Form 8-K/A on
April 24, 2002 to file the Second Waiver Amendment Agreement.
SELAS CORPORATION OF AMERICA
SIGNATURE
Pursuant to the requirements 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.
SELAS CORPORATION OF AMERICA
(Registrant)
Date: August 13, 2002
Francis A. Toczylowski
Vice President, Treasurer and
Secretary
(Principal Financial Officer)