28
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ENDED
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)
ARDEN HILLS, MINNESOTA 55112
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(651) 636-9770
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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 BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED BY RULE 12B-2 OF THE EXCHANGE ACT)
( ) YES (X ) 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 MAY 12, 2003
SELAS CORPORATION OF AMERICA
I N D E X
Page
Number
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed (Unaudited) Balance Sheets
as of March 31, 2003 and December 31, 2002 3, 4
Consolidated Condensed (Unaudited) Statements
of Operations for the Three Months Ended
March 31, 2003 and 2002 5
Consolidated Condensed(Unaudited)Statements
of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis 16-20
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 20
About Market Risk
Item 4. Controls and Procedures 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Certifications 23-25
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
SELAS CORPORATION OF AMERICA
Consolidated Condensed Balance Sheets
Assets
March 31, December 31,
2003 2002
(Unaudited) (Audited)
Current assets
Cash, including cash equivalents of
$413,000 in 2003 and $418,000 in 2002 $ 2,605,591 $ 2,039,044
and restricted cash of $413,000 in 2003
and $418,000 in 2002.
Accounts receivable (including unbilled
receivables of $1,327,000 in 2003
and $1,447,000 in 2002, less allowance
for doubtful accounts of $1,138,000 in
2003 and $1,109,000 in 2002) 16,042,102 15,627,864
Inventories 8,932,693 9,393,802
Refundable income tax 135,882 336,758
Deferred income taxes 1,914,405 1,818,384
Other current assets 1,304,369 1,064,829
Assets of discontinued operations 13,226,625 13,610,601
Total current assets 44,161,667 43,891,282
Property, plant and equipment
Land 231,943 231,943
Buildings 5,149,415 5,149,415
Machinery and equipment 30,421,790 29,903,795
35,803,148 35,285,153
Less: Accumulated depreciation 23,561,143 22,921,608
Net property, plant and equipment 12,242,005 12,363,545
Goodwill 5,376,317 5,376,317
Deferred income taxes 396,148 348,712
Other assets, less amortization 1,779,225 1,575,539
$63,955,362 $63,555,395
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Condensed Balance Sheets
Liabilities and Shareholders' Equity
March 31, December 31,
2003 2002
Current liabilities (Unaudited) (Audited)
Notes payable $ 11,806,538 $ 10,920,984
Current maturities of long-term debt 1,343,336 1,573,716
Accounts payable 9,868,460 11,046,373
Customers' advance payments on contracts 3,427,028 2,457,499
Guarantee obligations and estimated costs
of service 1,233,452 1,188,361
Other accrued liabilities 6,932,295 6,194,679
Liabilities of discontinued operations 6,751,327 6,955,654
Total current liabilities 41,362,436 40,337,266
Long-term debt 2,534,304 2,736,236
Other postretirement benefit obligations 3,894,811 3,866,154
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 1,506,994 1,743,256
Accumulated other comprehensive loss (1,725,614) (1,509,948)
Less: 515,754 common shares held
in treasury, at cost (1,265,078) (1,265,078)
Total shareholders' equity 16,163,811 16,615,739
$63,955,362 $63,555,395
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended
March 31, March 31,
2003 2002
Sales, net $14,636,016 $16,694,750
Operating costs and expenses
Cost of sales 10,736,131 13,081,789
Gross Margin 3,899,885 3,612,961
Selling, general and administrative
Expenses 4,220,451 3,683,966
Operating loss (320,566) (71,005)
Interest expense (190,911) (82,638)
Interest income 2,422 15,281
Other income, net 83,586 93,936
Loss from continuing operations
before income taxes (425,469) (44,426)
Income tax expense (benefit) 3,375 (63,405)
(Loss)Income from continuing operations (428,844) 18,979
Income (loss) from discontinued
operations, net of income taxes 192,582 (157,377)
(benefit)
Net loss before change in
accounting principle (236,262) (138,398)
Cumulative effect of change in
accounting principle -- (10,551,926)
Net loss $(236,262) $(10,690,324)
Income (loss) per share
Basic
Continuing operations $(.08) $ --
Discontinued operations .04 (.03)
Accounting principle change -- (2.06)
$ (.04) $(2.09)
Diluted
Continuing operations $ (.08) $ --
Discontinued operations .04 (.03)
Accounting principle change -- (2.06)
$ (.04) $(2.09)
Average shares outstanding
Basic 5,119,214 5,119,214
Diluted 5,119,214 5,119,214
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31, March 31,
2003 2002
Cash flows from operating activities:
Net loss $ (236,262) $(10,690,324)
Adjustments to reconcile net loss
to net cash provided (used) by operating
activities:
(Income) loss from discontinued operations (192,582) 157,377
Cumulative effect of accounting principle -- 10,551,926
change
Depreciation and amortization 689,506 756,241
(Gain) loss on sale of property and (213) 1,325
equipment
Provision for deferred taxes (100,199) (99,077)
Changes in operating assets and liabilities:
Accounts receivable 207,202 (635,874)
Inventories 468,170 289,340
Other assets (362,420) (290,403)
Accounts payable (1,851,199) (22,778)
Accrued expenses 790,734 813,960
Customer advances 921,933 (670,185)
Other liabilities 30,989 (36,487)
Net cash provided by continuing operations 365,659 125,041
Net cash provided (used) by
discontinued operations 522,135 (331,227)
Net cash provided (used) by operating 887,794 (206,186)
activities
Cash flows from investing activities:
Purchases of property, plant and equipment (468,556) (492,237)
Proceeds from sale of property, plant
and equipment 213 --
Patents and intangibles (64,552) --
Net cash used by investing activities (532,895) (492,237)
Net cash used by discontinued operations (58,178) (37,450)
Net cash used by investing activities (591,073) (529,687)
Cash flows from financing activities:
Proceeds from short-term bank borrowings 798,620 932,327
Proceeds from borrowings to acquire
subsidiary company -- 136,173
Repayments of short-term bank borrowings (81,331) (494,722)
Repayments of long-term debt (458,778) (457,986)
Net cash provided by financing activities 258,511 115,792
Effect of exchange rate changes on cash 11,315 (39,415)
Net increase (decrease) in cash and cash
equivalents 566,547 (659,496)
Cash and cash equivalents, beginning of period 2,039,044 3,636,173
Cash and cash equivalents, end of period $2,605,591 $ 2,976,677
(See accompanying notes to the consolidated financial statements)
SELAS CORPORATION OF AMERICA
Notes to Consolidated Condensed 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 March 31, 2003 and
December 31, 2002, and the consolidated results of its operations for the
three months ended March 31, 2003 and 2002.
2. New Accounting Standards Adopted in the current quarter.
The Company adopted the following new Financial Accounting Standards Board
(FASB) issued Statements of Financial Accounting Standards (SFAS)
accounting pronouncements:
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the Company to record the fair value
of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also records a
corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation,
the obligation will be adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying
the obligation. The Company was required to adopt SFAS No. 143 on January
1, 2003. The adoption of SFAS No. 143 did not have a material effect on
the Company's financial statements.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses the accounting
for costs associated with disposal activities covered by SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and with
exit (restructuring) activities previously covered by Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This Statement
nullifies EITF Issue No. 94-3 in its entirety and requires that a
liability for all costs be recognized when the liability is incurred.
Generally, the ability to accrue for the cost of a workforce reduction
plan at the communication date will be limited. The cost of the plan will
be recognized over the future service period of the employees. This
Statement will be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material effect on the Company's financial statements
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002. The disclosure requirements
are effective for financial statements of interim and annual periods
ending after December 15, 2002, and did not have a material effect on the
Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003.
The application of this Interpretation is not expected to have a material
effect on the Company's financial statements. The Interpretation requires
certain disclosures in financial statements issued after January 31, 2003
if it is reasonably possible that the Company will consolidate or disclose
information about variable interest entities when the Interpretation
becomes effective.
3. Discontinued Operations
In the fourth quarter of 2002, the Company initiated its plan to dispose
of the Company's Tire Holders, Lifts and Related Products segment. This
segment consists of one wholly-owned subsidiary operating on a stand alone
basis that sells tire holders, lifts and related products to automotive
customers. The Company has accounted for the plan to dispose of the
subsidiaries as a discontinued operation and has reclassified the
historical financial data. This subsidiary generated sales of $3.8
million, and $4.0 million and net income of $171,000, and $259,000 for the
three months ended March 31, 2003 and 2002 respectively.
In the fourth quarter of 2002, the Company disposed of the majority of the
Company's primary custom-engineered furnace business, Selas SAS (Paris),
along with a closely related subsidiary, Selas U.K. (Derbyshire). These
subsidiaries formed 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. The sale of the large custom-engineered
furnace division was completed in December 2002. A building located
outside of Paris, France and Selas Italiana, S.r.L. were excluded from the
sale. The purchase price was approximately $600,000 above the net asset
value at the time of sale. In addition, the purchaser assumed $1,356,000
of a receivable on a completed construction contract. The Company is
required to reimburse the purchaser for any portion of the receivable that
has not been collected by May 2003. Certain assets and liabilities
associated with completed contracts and discontinued operations were
retained. These are expected to be collected or paid in the normal course
of 2003. In addition, the Company continues to market the building and
expects to complete the sale in 2003.
The consolidated condensed financial statements reflect the Company's
presentation of discontinued operations.
4. Statements of Cash Flows
Supplemental disclosures of cash flow information:
Three Months Ended
--------------------------
March 31, March 31,
2003 2002
Interest received $ 507 $ 3,198
Interest paid $ 176,357 $ 110,936
Income taxes paid $ 71,147 $ 2,203
5. Business Segment Information
The Company has two operating segments. The Company is engaged in
providing engineered heat technology equipment and services to industries
throughout the world, and the manufacture of precision miniature medical
and electronic products. The results of operations and assets of these
segments are prepared on the same basis as the consolidated condensed
financial statements for the three months ended March 31, 2003 and 2002 and
the consolidated condensed financial statements included in the Company's
2002 Annual Report on 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.
Precision
For The Miniature
Three Months Medical and General
Ended Electronic Heat Corporate Discontinued
March 31, 2003 Products Technology Expenses Operations Total
Sales, net $ 8,993,038 $ 5,642,978 $ -- $ -- $14,636,016
Net income
(loss) 309,576 (431,119) (307,301) 192,582 (236,262)
Depreciation
and amortiza-
tion 604,865 84,640 -- -- 689,505
Property, plant
and equipment
additions 457,810 10,746 -- -- 468,556
Total assets $30,427,741 $20,300,996 $ -- $ 13,226,625 $63,955,362
Precision
For The Miniature
Three Months Medical and General
Ended Electronic Heat Corporate Discontinued
March 31, 2002 Products Technology Expenses Operations Total
Sales, net $ 8,818,358 $ 7,876,392 $ -- $ -- $ 16,694,750
Net income(loss)
before change in
accounting
pinciple 166,130 90,453 (237,604) (157,377) (138,398)
Cumulative effect
of change in
accounting
principle (9,428,354) (1,123,572) -- -- (10,551,926)
Net income (loss) (9,262,224) (1,033,119) (237,604) (157,377) (10,690,324)
Depreciation
and amortiza-
tion 627,485 128,756 -- -- 756,241
Property, plant
and equipment
additions 437,575 54,662 -- -- 492,237
Total assets $31,623,256 $21,051,453 $ -- $22,987,857 $ 75,662,566
6. Accounts Receivable
At March 31, 2003, the Company had $3,460,000 of trade accounts receivable
due from hearing health manufacturers and $3,753,000 in currently billed
and unbilled receivables from Heat Technology customers in the aluminum
and glassware industry.
The following analysis provides the detail of revenue recognition
methodology by segment for the three months ended March 31, 2003:
Precision
Miniature
Medical and
Electronic Heat
Products Technology Total
Upon Shipment $ 8,993,038 $ 2,610,931 $11,603,969
Percentage of
completion -- 3,032,047 3,032,047
Total Revenue $ 8,993,038 $ 5,642,978 $14,636,016
7. 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
September 2001 to be accounted for under the purchase method. SFAS No. 142
set forth new financial 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 no longer be amortized but
tested for impairment on a periodic basis. The Company discontinued the
amortization of goodwill effective January 1, 2002. The provisions of SFAS
No. 142 also required the completion of a transitional impairment test
(with any impairment identified) accounted for as a cumulative effect of a
change in accounting principle. As of the date of adoption, the Company had
unamortized goodwill in the amount of $15,632,000. The Company determined
the goodwill associated with the following operations had been impaired an
wrote off: $1,528,000 remaining goodwill pertaining to its European Heat
Technology operations; $404,000 of negative goodwill pertaining to its
Asian Heat Technology operations, and The Company also recognized an
impairment of, and wrote off $9,428,000 of goodwill associated with its
Precision Miniature Medical and Electronics Products business. The net
charge totaling $10,552,000 was recognized as a cumulative change in
accounting principle in the 2002 consolidated statement of operations. The
corresponding deferred tax asset of $743,000 was offset by a valuation
allowance. Changes in the estimated future cash flows from these businesses
could have a significant impact on the amount of any future impairment, if
any. In accordance with SFAS No. 142, the Company's remaining unamortized
goodwill will be tested for impairment on an annual basis.
8. Inventories consist of the following at:
March 31, December 31,
2003 2002
Raw material $ 2,638,650 $ 2,958,909
Work-in-process 2,741,359 2,874,125
Finished products and components 3,552,684 3,560,768
$ 8,932,693 $ 9,393,802
9. Notes Payable and Long Term Debt
Notes payable at March 31, 2003 and December 31, 2002 are summarized below:
March 31, December 31,
2003 2002
Notes payable:
Short term borrowings, Europe $ 6,768,646 $ 6,427,529
Short term borrowings, 4,613,253 3,982,137
domestic
Short term borrowings, Asia 424,639 511,318
Total notes payable $11,806,538 $10,920,984
During the first quarter of 2003 the Company did not meet certain
covenants, pertaining to its consolidated total liabilities to
consolidated tangible capital funds ratio, and its fixed coverage ratio,
as set forth in its credit facilities. The Company has obtained waivers
from the bank for these covenants.
The Company and its domestic subsidiaries entered into a revolving credit
loan facility and a supplemental facility for which borrowings of
$6,500,000 could be outstanding at any one time. The revolving credit
loan facility, which had a maximum limit of $4,500,000, had borrowings of
$3,253,253 as of March 31, 2003 bearing an interest rate of 3.80% (LIBOR
plus 2.5%). The loan carries a commitment fee of .25% per annum, payable
on the unborrowed portion of the line. The domestic revolving credit loan
facilities have been extended to April 1, 2004.
In March 2003, the Company amended its agreement for its domestic and
foreign revolving credit and term loan facilities and obtained a new
facility in the amount of 1,000,000 euros (approximately $1,067,000) for
the issuance of advance payment guarantees (APG's). The new facility can
be expanded to 1,750,000 euros (approximately $1,867,000) after the sale
of discontinued operations and the payoff of the French Overdraft and
Domestic Supplemental Facilities. APG's bear an interest rate of 3% per
annum. The supplemental facility, which had a maximum limit of $2,000,000,
had borrowings of $1,360,000 as of March 31, 2003 bearing interest at a
rate of 5.05% (LIBOR plus 3.75%). The loan carries a commitment fee of
.25% per annum, payable on the unborrowed portion of the line. The
domestic supplemental loan credit facility has been extended to the
earlier of January 1, 2004 or the sale of assets from discontinued
operations in 2003.
Long-term debt at March 31, 2003 and December 31, 2002 is summarized below:
March 31, December 31,
2003 2002
Term loans, Europe $ 1,358,155 $ 1,581,889
Term loans, domestic 2,514,483 2,722,247
Other borrowings 5,002 5,816
3,877,640 4,309,952
Less: current maturities 1,343,336 1,573,716
$ 2,534,304 $ 2,736,236
The terms of the domestic loan agreements require monthly principal
payments of approximately $64,000 through April 2004, with a balloon
payment due at the end of the loans. At March 31, 2003, the borrowings
under the credit agreement bore interest, payable monthly, at an interest
rate of 3.80% (LIBOR plus 2.50%). The credit agreement is subject to a
prepayment penalty of 3%.
The Company's French subsidiary, Selas (SAS), financed its premises outside
of Paris with bank borrowings maturing August 31, 2006, which require
quarterly installments of principal of approximately $47,000 (44,000
Euros). The loan accrues interest payable quarterly. The interest rate on
March 31, 2003 was 3.28% (the Euro Interbank Offered Rate (EURIBOR) plus
.7%). The loan balance as of March 31, 2003 was $636,000 (597,000 Euros).
The loan is subject to a prepayment penalty of 3%. The debt is secured by
the land and building of Selas S.A. The land and building are for sale and
the expected proceeds will be used to pay down liabilities.
Our ability to pay the principal and interest on our indebtedness as it
comes due will depend upon our current and future performance. Our
performance is affected by general economic conditions and by financial,
competitive, political, business and other factors. Many of these factors
are beyond our control.
We believe that funds expected to be generated from operations, the
available borrowing capacity through our revolving credit loan facilities
as amended, the potential sale of certain assets, and the control of
capital spending will be sufficient to meet our anticipated cash
requirements for operating needs. If, however, we do not generate
sufficient cash or complete such financings on a timely basis, we may be
required to seek additional financing or sell equity on terms which may not
be as favorable as we could have otherwise obtained. No assurance can be
given that any refinancing, additional borrowing or sale of equity will be
possible when needed or that we will be able to negotiate acceptable
terms. In addition, our access to capital is affected by prevailing
conditions in the financial and equity capital markets, as well as our own
financial condition.
10.Income Taxes
Income tax expense for the three months ended March 31, 2003 was $3,000
compared with a tax benefit of $63,000 for the three months ended March
31, 2002, which results in effective tax rates of minus .8% and a benefit
of 142.7%, respectively. The effective rate of benefit in relation to
pre-tax loss in 2003 is low because tax benefits from certain foreign net
operating losses, were fully reserved by a valuation allowance. The rate
of tax benefit in relation to pre-tax loss in 2002 is high because tax
benefits from certain foreign net operating losses, that were previously
fully reserved by a valuation reserve, were utilized for income tax
purposes.
11. Accounting for Stock Options
The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Therefore, no compensation expense has been recognized for the
stock option plans. SFAS No. 123 "Accounting for Stock-Based
Compensation", amended by SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure", requires the Company to disclose
pro forma net income and pro forma earnings per share amounts as if
compensation expense was recognized for options granted after 1995. Using
this approach, net income and earnings per share would have been reduced
to the pro forma amounts indicated in the table:
Three Months Ended
March 31,
2003 2002
Net income (loss) as reported $(236,262) $(10,690,324)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards, net
of related tax effects (21,711) (44,963)
Pro forma net income $(257,973) $(10,735,287)
Earnings per share:
Basic-as reported $(.04) $(2.09)
Basic-pro forma $(.05) $(2.10)
The aggregate fair value was calculated by using the fair value of each
option grant on the date of grant, utilizing the Black-Scholes
option-pricing model and the following key assumptions for the plan:
Three Months Ended
March 31,
2003 2002
Risk-free interest rates 3.11% - 4.16 4.46% - 4.99%
Volatility 55% 46%
Expected lives (months) 74 78
12. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months Ended
March 31, 2003
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share
Loss from continuing
operations $ (428,844) 5,119,214 $(.08)
Income from discontinued
operations 192,582 5,119,214 .04
Loss available to
common shareholders $ (236,262) 5,119,214 $ (.04)
Effect of Dilutive -- -- --
Securities
Stock options -- -- --
Diluted Earnings Per Share $ (236,262) 5,119,214 $(.04)
For the Three Months Ended
March 31, 2002
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share
Income from continuing
operations $ 18,979 5,119,214 --
Loss from discontinued
operations (157,377) 5,119,214 (.03)
Effect of accounting change (10,551,926) 5,119,214 ( 2.06)
Loss available to
common shareholders $(10,690,324) 5,119,214 $(2.09)
Effect of Dilutive -- -- --
Securities
Stock options -- -- --
Diluted Earnings Per Share $(10,690,324) 5,119,214 $(2.09)
Excluded from the computation of diluted earnings per share were options
to purchase approximately 466,000 common shares whose effect would have
been anti-dilutive.
13. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 108 lawsuits as of December 31, 2002-(approximately 87
lawsuits as of December 31, 2001) 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.- There has been no significant changes in either the
number of cases settled or pending since December 31,2002. 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 believes 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.
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.
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking and Cautionary Statements
Certain statements included in this Quarterly Report on Form 10-Q or
documents the Company files with the Securities and Exchange Commission,
which are not historical facts, are forward-looking statements (as such term
is defined in the Securities Exchange Act of 1934, and the regulations
thereunder), which are intended to be covered by the safe harbors created
thereby. These statements may include, but are not limited to statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Forward-looking statements include, without limitation, statements as to
the Company's expected future results of operations and growth, the Company's
business strategy, the expected benefits of reduction in employee headcount,
the expected sale of the Company's Tire Holders, Lifts and Related Products
segment and use of proceeds, the expected increases in operating
efficiencies, anticipated trends in the hearing health market related to the
Company's Precision Miniature Medical and Electronic Products segment,
estimates of goodwill impairments and amortization expense of other
intangible assets, the effects of changes in accounting pronouncements and
statements as to trends or the Company's or management's beliefs,
expectations and opinions. Forward-looking statements are subject to risks
and uncertainties and may be affected by various factors that may cause
actual results to differ materially from those in the forward-looking
statements. In addition to the factors discussed in this annual report to
shareholders, certain risks, uncertainties and other factors can cause actual
results and developments to be materially different from those expressed or
implied by such forward-looking statements, including, without limitation,
the following:
o the ability to implement the Company's business strategy;
o the volume and timing of orders received by the Company;
o foreign currency movements in markets the Company services;
o changes in global economy and financial markets;
o changes in the mix of products sold;
o acceptance of the Company's products;
o competitive pricing pressures;
o availability of electronic components for the Company's products;
o ability to create and market products in a timely manner;
o ability to pay debt when it comes due;
o ability to sell businesses marked for sale; and
o the risks associated with terrorist attacks, war and threats of attacks
and wars.
For a description of other risks see "Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 or in other filings
the Company makes from time to time with the Securities and Exchange
Commission. 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.
2003 compared with 2002
The Company has embarked on a strategy to focus on its Precision Miniature
Medical and Electronics Products markets for future growth. As part of this
strategy, in December 2002, the Company initiated its plan to sell its Tire
Holders, Lifts and Related Products segment. This segment consists of one
wholly-owned subsidiary, Deuer Manufacturing, Inc., that operates on a stand
alone basis. Deuer generated approximately $3.8 million and $4.0 million of
revenue and $171,000 and $259,000 of net income for the three months ended
March 31, 2003 and 2002, respectively. The Company has accounted for the
plan to sell the subsidiary as a discontinued operation. See note 3 to the
consolidated financial statements included herein.
Consolidated net sales for the three months ended March 31, were as follows
(in thousands):
2003 2002 Change
Precision Miniature Medical and
Electronic Products $8,993 $8,818 $175
Heat Technology 5,643 7,877 (2,234)
Total $14,636 $16,695 $(2,059)
Precision Miniature Medical and Electronic Products segment sales for the
quarter ended March 31, 2003 were up over the same year-ago period, primarily
due to stronger sales in its medical markets, partially offset by lower sales
in the hearing health market. Heat Technology segment sales continue to be
impacted by the poor worldwide economy for capital goods and the war in the
Middle East where the Company has several customers.
Gross margin for the three months ended March 31 was as follows (in
thousands):
2003 2002 Change
Precision Miniature Medical and
Electronic Products $2,606 $2,149 $ 457
Heat Technology 1,294 1,464 (170)
Total $3,900 $3,613 $ 287
Gross margin, as a percent of segment sales for the quarter ended March 31,
was as follows:
2003 2002 Change
Precision Miniature Medical and
Electronic Products 29.0 24.4 4.6
Heat Technology 22.9 18.6 4.3
Total 26.6 21.6 5.0
The Precision Miniature Medical and Electronic Products segment benefited
from stronger sales in its medical market which is typically a higher margin
business than either the hearing health or electronics markets.
The Heat Technology segment gross profit margins vary markedly from contract
to contract, depending on customer specifications and other conditions
related to the project. The dollar gross margin was lower due to the
substantially lower sales volume in the quarter ended March 31, 2003. As a
percent of sales, the gross profit margins for the first quarter of 2003 were
positively impacted by reduced estimated costs to complete on a job in
northern Europe that is substantially complete and no other jobs incurring
any large unexpected increases in their estimates to complete.
Selling, general and administrative expenses (SG&A):
2003 2002 Change
Dollars (in thousands) $4,220 $3,684 $536
Percent of Sales 28.8% 22.1% 6.7%
The higher SG&A expenses in the three-months ended March 31, 2003, compared
to the same year-ago period are due to higher selling and administrative
costs in Europe. The Company has retained certain operations within Europe
that were included in discontinued operations in the prior year.
Additionally, the Company incurred higher research and development costs in
its Precision Miniature Medical and Electronic Products business as it
strives to introduce more products into the hearing health market.
Interest expense for the three months ended March 31, 2003 was $191,000
compared to $83,000 for the same period in 2002. The increase over last
year's first quarter was due to interest expense on certain European debt that
was classified as discontinued operations in 2002. Interest income for the
quarter ended March 31, 2003 decreased to $2,000 compared to $15,000 for the
same period in 2002. The decrease is due to lower average cash balances
available for investing in the current year.
Other income (expense) includes realized and unrealized gains (loss) on
foreign exchange. The quarter ended March 31, 2003 includes a gain of $27,000
compared to a loss of $73,000 for the three months ended March 31, 2002 due
to a weaker U.S. dollar compared to the Euro. The loss in the first quarter
of 2002 was offset by other income of approximately $95,000 in proceeds
received from the demutualization of the Company' life insurance carrier.
Income tax expense for the three months ended March 31, 2003 was $3,000
compared with a benefit of $63,000 for the three months ended March 31, 2002,
which resulted in effective tax rates of minus .8% and 142.7%, respectively.
The effective rate of tax benefit in relation to the pre-tax loss in 2003 was
low because tax benefits from certain foreign net operating losses, were
fully reserved by a valuation allowance. The rate of tax benefit in relation
to the pre-tax loss in 2002 was high because tax benefits from certain
foreign net operating losses, which were previously fully reserved by a
valuation reserve, were utilized for income tax purposes.
For the three months ended March 31, 2003, the net loss from continuing
operations was $429,000 compared with income of $19,000 in last year's first
quarter. The loss, compared to net income in the prior year, was primarily
due to increased SG&A expenses due to higher overhead in our European
operations compared to last year, higher research and development costs, and
a decreased income tax benefit due to uncertainty as to the utilization of
foreign net operating loss carry forwards.
Discontinued operations generated net income of $193,000 for the three months
ended March 31, 2003 compared to net losses of $157,000 in last year's first
quarter. The net income in the current year is from the Company's wholly
owned subsidiary, Deuer manufacturing, Inc. Deuer generated net income of
$259,000 the first quarter of 2002, partially offset by losses of $416,000
from the Company's large furnace business which was sold in December 2002.
Liquidity and Capital Resources
Consolidated net working capital decreased to $2.8 million at March 31, 2003
from $3.5 million at December 31, 2002. The decrease was primarily from
decreased liabilities due to payments made, the purchase of property and
equipment, and pay down of long-term debt.
The Company's cash flows from operating, investing and financing activities,
as reflected in the statement of cash flows, are summarized as follows (in
thousands):
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
Cash provided (used) by:
Continuing operations $ 366 $ 125
Discontinued operations 464 (368)
Investing activities (533) (492)
Financing activities 259 116
Effect of exchange rate
changes on cash 11 (39)
Increase in cash $ 567 $ 567
The Company had the following bank arrangements (in thousands):
March 31, December 31,
2003 2002
Total availability under
existing facilities $20,397 $20,369
Borrowings and commitments:
Notes payable 11,807 10,921
Long-term debt 3,877 4,310
Total borrowings 15,684 15,231
Advance payment guarantees
(off-balance sheet) (a) 1,240 2,160
Total outstanding borrowings
and commitments 16,924 17,391
Remaining availability under
Existing facilities $3,473 $2,978
(a)Advance Payment Guarantees (APG's) are required by some customers in the
Heat Technology segment. The APG's are a form of borrowing, providing a
performance guarantee to the customer in the event of a default in delivery
or a failure of the furnace being supplied. Although the guarantee period
can vary widely, an APG is typically in force from six months to one year.
Borrowings under the majority of the Company's credit facilities bear
interest at LIBOR plus 2.5% to 3.75%.
In March 2003, the Company entered into an amended agreement for its domestic
and European revolving credit and term loan facilities and obtained a new
facility in the amount of an additional 1,000,000 Euros (approximately
$1,090,000) for the issuance of advance payment guarantees (APG's). The new
facility can be expanded to 1,750,000 Euros (approximately $1,908,000) after
the sale of discontinued operations and the payoff of certain existing
facilities. APG's bear an interest rate of 3% per annum. In addition the
agreement calls for pay downs if the sale of certain assets is consummated.
These facilities expire either on January 1, 2004 or April 1, 2004.
Our ability to pay the principal and interest on our indebtedness as it comes
due will depend upon our current and future performance. Our performance is
affected by general economic conditions and by financial, competitive,
political, business and other factors. Many of these factors are beyond our
control.
We believe that funds expected to be generated from operations, the sale of
assets, the available borrowing capacity through our revolving credit loan
facilities as amended, the potential sale of certain assets, and the control
of capital spending will be sufficient to meet our anticipated cash
requirements for operating needs through March 31,2004. If, however, we do
not generate sufficient cash or complete such financings on a timely basis,
we may be required to seek additional financing or sell equity on terms which
may not be as favorable as we could have otherwise obtained. No assurance
can be given that any refinancing, additional borrowing or sale of equity
will be possible when needed or that we will be able to negotiate acceptable
terms. In addition, our access to capital is affected by prevailing
conditions in the financial and equity capital markets, as well as our own
financial condition.
Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 reporting period.
Certain accounting estimates and assumptions are particularly sensitive
because 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 2002 financial statements
contained in or incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
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 2002. There have been no material changes in
the Company's portfolio of financial instruments or market risk exposures
which have occurred since year-end.
ITEM 4. Controls and Procedures
Quarterly evaluation of the Company's Disclosure Controls and Internal
Controls.
Within the 90 days prior to the date of this Annual Report on Form 10-Q, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls.
The Company's management, including the CEO and CFO, does not expect that its
Disclosure Controls or its "internal controls and procedures for financial
reporting" ("Internal Controls" ) will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Conclusions.
Based upon the Controls Evaluation, the CEO and CFO have concluded that,
subject to the limitations noted above, the Disclosure Controls are effective
to timely alert management to material information relating to the Company
during the period when its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Annual Report, there have
been no significant changes in Internal Controls or in other factors that
could significantly affect Internal Controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The information contained in note 6 to the Consolidated Condensed
Financial Statements is incorporated by reference herein.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of the Company's Chief Executive Officer pursuant to
18 U.S. S. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
99.2 Certification of the Company's Chief Financial Officer pursuant to
18 U.S. S. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
(b) Reports on Form 8-K
None.
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: May 14, 2003 /s/ Robert F. Gallagher
Robert F. Gallagher
Chief Financial Officer and
Treasurer
CERTIFICATIONS Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
I, Mark S. Gorder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Selas Corporation of
America;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Mark S. Gorder
Mark S. Gorder
Chief Executive Officer
CERTIFICATIONS Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
I, Robert F. Gallagher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Selas Corporation of
America;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Robert F. Gallagher
Robert F. Gallagher
Chief Financial Officer and Treasurer
EXHIBIT INDEX
99.1 Certification of principal executive officer pursuant to U.S.C.
Section 135 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of principal financial officer pursuant to U.S.C.
Section 135 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
EXHIBIT 99.1 CERTIFICATIONS
CERTIFICATION PURSUANT TO
18 U.S.C.SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark S. Gorder, Chief Executive Officer of Selas Corporation of America
'the Company', certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
the quarterly report on Form 10-Q of the Company for the three months
ended March 31, 2003 'the Report' fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)); and
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: May 14, 2003
/s/ Mark S. Gorder
Mark S. Gorder
Chief Executive Officer
EXHIBIT 99.2 CERTIFICATIONS
CERTIFICATION PURSUANT TO
18 U.S.C.SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert F. Gallagher, Chief Financial Officer of Selas Corporation of
America(the 'Company'), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
the quarterly report on Form 10-Q of the Company for the three months
ended March 31, 2003 'the 'Report' fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)); and
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: May 14, 2003
/s/ Robert F. Gallagher
Robert F. Gallagher
Chief Financial Officer and Treasurer