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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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 office) (Zip Code)
Registrant's telephone number, including area code (215) 646-6600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares, $1 par value American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act: None
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 periods
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
The aggregate market value, as of March 9, 1999, of the voting stock held
by non-affiliates of the registrant was approximately $28,272,522
(Aggregate market value is estimated solely for the purposes of this
report and shall not be construed as an admission for the purposes of
determining affiliate status.)
At March 9, 1999, there were 5,260,004 of the Company's common shares
outstanding (exclusive of 363,564 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1998 annual report to shareholders are
incorporated by reference into Part II of this report. Portions of the
Company's proxy statement for the 1999 annual meeting of shareholders are
incorporated by reference into Part III of this report. Except for the
parts of such documents that have been specifically incorporated herein
by reference, such documents shall not be deemed "filed" for the purposes
of this report.
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PART I
ITEM 1. Business
Selas Corporation of America (together with its subsidiaries, unless the
context otherwise requires, referred to herein as the "Company", was
incorporated in Pennsylvania in 1930. The Company is a diversified firm
with international operations and sales that engages in the design,
development, engineering and manufacturing of a range of products. The
Company, headquartered in Dresher, Pennsylvania with subsidiaries in
Minnesota, Ohio, California, England, France, Germany, Italy, Portugal
and Singapore (and a 50% joint venture in Japan), operates directly or
through subsidiaries in three business segments.
Under the SelasTM name, the Heat Technology segment designs and
manufactures specialized industrial heat technology systems and equipment
for steel, glass and other manufacturers worldwide. The Company's
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components and molded plastic parts primarily
for the hearing instrument manufacturing and other medical equipmnet
industries and also for the electronics, telecommunications and computer
industries. The Company's Tire Holders, Lifts and Related Products
segment manufactures products, primarily based on cable winch designs,
for use principally as original equipment by the pick-up truck and
minivan segment of the automotive industry.
Financial data relating to industry segments, geographical summary of
assets and operations, export sales and major customers are set forth in
Note 4 of the Company's consolidated financial statements.
HEAT TECHNOLOGY
The Company specializes in the controlled application of heat to achieve
precise process and temperature control. The Company's principal heat
technology equipment and systems are large custom-engineered furnaces and
smaller standard-engineered systems, burners and combustion control
equipment.
CUSTOM-ENGINEERED FURNACES
Products and Industries Served. The Company designs specialized furnaces
for use primarily in the steel and glass industries worldwide. The
furnaces are engineered to subject a customer's products to carefully
controlled heating and cooling processes in order to improve the physical
characteristics of those products. Each furnace is custom-engineered by
the Company to meet the customer's specific requirements. The Company
believes that the SelasTM name, its reputation for quality and its
leadership in the design and engineering of direct gas-fired heat
processing furnaces are important factors in its business. The Company
also offers gas-fired radiant tube and electric heating technology for
heat processing furnaces.
-3-
ITEM 1. Business - (Continued)
The Company's custom-engineered systems for the steel industry include
continuous annealing furnaces and continuous galvanizing furnaces.
Continuous annealing furnaces are used to heat-treat semi-finished steel
sheet and strip to soften it to improve the ductility of the steel,
thereby making it suitable for use in the manufacture of automobiles,
appliances and other items. Continuous galvanizing furnaces consist of
continuous annealing furnaces plus the components used to apply a zinc
coating to steel strip to improve its resistance to corrosion.
The Company's furnaces for the glass industry are used for the tempering
and bending of glass. The glass tempering process toughens glass plate
through a controlled process of heating and cooling. Glass manufacturers
use the Company's glass bending furnaces to heat and bend plate glass for
automotive and architectural uses.
From time to time, the Company also designs various other specialized
furnaces for use by manufacturers in a variety of industries to suit
particular process requirements. For example, over the years the Company
has engineered large barrel line furnaces used for the continuous heat
treatment of steel pipe, tube or bar.
Marketing and Competition. The Company markets its custom-engineered
furnaces on a global basis. Marketing personnel are located at the
Company's offices in Dresher, Paris, Ratingen, Derbyshire, Milan, Leiria,
and at the offices of its 50%-owned affiliate, Nippon Selas Co., Ltd., in
Tokyo. Over the years, the Company has installed custom-engineered
systems throughout the world, in Europe, North America, South America,
Asia, Australia and Africa. In a particular period, a single contract
may account for a large percentage of sales, but the Company is not
dependent on any custom-engineered systems customer on an ongoing basis.
Company engineering and marketing personnel maintain contact with
potential major steel and glass customers to determine their needs for
new furnaces, typically for expansion or new technology. The Company's
furnaces have long useful lives, and replacement business is not a major
factor in sales of custom-engineered systems. The Company has and
continues to perform modifications to older existing furnaces to improve
production quantities, along with quality of the end product.
The Company also markets its products and services through agents and
licensees located in various parts of the world. Typically, the
Company's license agreements provide that the licensee will act as the
Company's sales agent in a particular territory, is granted a license to
utilize the Company's heat processing technology in that territory, and
is granted the right to utilize technical services provided by the
Company. In exchange, the Company receives certain fees when the
licensee sells the Company's products or services in the territory.
-4-
ITEM 1. Business - (Continued)
Over the years, Japanese steel producers have aligned themselves in semi-
exclusive relationships with furnace manufacturers. For a number of
years, the Company has licensed direct fired furnace technology to NKK
Corporation, the second largest steel producer in Japan.
Furnaces for continuous galvanizing and annealing lines generally utilize
either direct fired or radiant tube technology. The Company is the
market leader for furnaces based on direct fired technology, and also
sells furnaces of the radiant tube design utilized primarily by its
competitors. Some of the Company's competitors are larger and have
greater financial resources. In recent years, the Company has faced
increased competition from competitors supplying smaller, less
sophisticated steel lines. These competitors do not generally offer
custom engineering on a par with the Company, but have been willing to
offer a more standarized and less sophisticated furnace for a lower
price.
Operations. The Company's custom-engineered furnace business is
conducted principally by its wholly-owned subsidiaries, Selas S.A.
(Paris), CFR-CECF Forumi-Ripoche, S.A. (Paris), Selas Waermetechnik GmbH
(Ratingen), Selas Italiana, S.r.L. (Milan), Selas U.K. (Derbyshire), and
CFR Portugal (Leiria). These subsidiaries currently employ
approximately 153 persons, of whom 18 are administrative personnel and
135 are sales, engineering and operations personnel. A small number of
engineering and marketing management personnel located at the Company's
Dresher, Pennsylvania headquarters facility are also involved from time
to time in the custom-engineered furnace business.
On large-scale projects, such as a continuous steel strip annealing or
galvanizing line, the customer frequently contracts for the entire line
on a turnkey basis with an engineering and construction firm specializing
in line terminal equipment, and the Company acts as a subcontractor for
the design, engineering, supply of material and installation of the
furnace portion of the line, or, alternatively, as a subcontractor only
for design and engineering. When the Company provides only design and
engineering services, the prime contractor handles the fabrication and
erection of the furnace. With the exception of certain proprietary
parts, the Company does not manufacture the components used in such
systems.
The Company's custom-engineered furnace business is historically cyclical
in nature.
On February 26, 1998, the company's wholly-owned subsidiary, Selas S.A.,
acquired the stock of CFR, a Paris, France firm engaged in the engineered
industrial furnace business. This acquisition was made to complement the
Company's existing heat processing operations in Europe, particularly the
Company's custom-engineered furnace business. CFR engineers and designs
batch and continuous furnaces that are used for heat treating both
ferrous and non-ferrous metals, and also furnaces used for the hardening
and etching of glass and
-5-
ITEM 1. Business - (Continued)
ceramic tableware. Recently, CFR's principal products have been
continuous custom-engineered furnaces for aluminum strip, furnaces for
hardening and etching glass and ceramic tableware, along with Bell
furnaces for heat treating ferrous metals. CFR was formed by the merger
of three French companies, CECF, Fofumi and Ripoche, once the largest
industrial furnace company in France. The Company believes that CFR
enjoys a good reputation in the French market for engineered industrial
furnaces. CFR's sales have primarily been in France, although CFR has
some sales in other European countries. CFR's products are not in
competition with the Company's existing products in Europe. CFR does
have several European competitors for each product offered and some of
its competitors are larger and have greater financial resources.
At its facilities in Paris, France and Maisse, France, CFR employs
approximately 50 full-time employees of whom 8 are executive and
administrative personnel, 27 are sales and engineering personnel, and 15
are fabrication and assembly personnel. Certain information regarding
the acquisition of the CFR business is set forth in note 2 to the
Company's consolidated financial statements.
STANDARD-ENGINEERED SYSTEMS, BURNERS AND COMBUSTION CONTROL EQUIPMENT
Standard-Engineered Systems. At its Dresher, Pennsylvania facility, the
Company engineers and fabricates a variety of smaller furnaces and heat
processing equipment. Although these systems are based on standard
designs, the Company often adapts or re-engineers them to meet particular
customer needs. These smaller systems are
generally used by manufacturers in sophisticated applications for the
heat treatment of finished and semi-finished parts.
The Company's standard-engineered systems include atmosphere-
controlled furnaces for heat treating finished metal parts. Its
continuous heat treating systems include not only the hardening and
tempering furnaces central to the system, but also the ancillary loading,
quenching and washing equipment.
The Company also manufacturers large non-atmosphere-controlled batch-type
furnaces in a variety of designs. The Company's carbottom furnaces
enable its customers to remove the furnace hearth, running on tracks
similar to a railroad car, from the stationary furnace for loading and
unloading. With its hood furnaces, the furnace itself can be lifted from
the stationary hearth for loading and unloading. Carbottom and hood
furnaces are used to heat treat large, usually semi-finished, metal parts
of a variety of shapes and sizes. Clamshell furnaces designed by the
Company open and close around steel rolls to produce a gradation of metal
characteristics due to the differential heating of the steel roll. The
Company's standard batch furnaces are supplied to customers with a need
for the precise, accurately controlled application of heat to their
products.
-6-
ITEM 1. Business - (Continued)
The Company's standard systems also include automatic brazing and
soldering systems used in the assembly of radiators, air conditioner
coils and electrical appliances. The precise application of heat in
these systems improves a customer's product quality and uniformity while
reducing production costs. The Company also produces the fuel mixing and
monitoring systems, burners and product handling equipment necessary for
these systems.
The Company also produces custom designed barrel furnaces used primarily
to heat treat long metal parts, and also produces specialized glass lehrs
for heating glass products.
Burners and Combustion Control Equipment. The Company designs,
manufactures and sells an array of original equipment and replacement
gas-fired industrial burners for many applications. The Company is a
producer of burners used in fluid processing furnaces serving the
petrochemical industry. One type of fluid processing burner is capable
of minimizing the emission of oxides of nitrogen as combustion products.
As many jurisdictions reduce the permissable level of emissions of these
compounds, the Company believes that the demand for "low NOx" burners
will increase. The Company also produces burners suitable for creating a
high temperature furnace environment desirable in steel and glass heat
treating furnaces. The Company's burners accommodate a wide variety of
fuel types, environmental constraints and customer production
requirements.
The Company furnishes many industries with gas combustion control
equipment sold both as component parts and as systems that have been
custom-engineered to meet a particular customer's needs. This equipment
is provided with the Company's original custom-engineered and standard
heat treating equipment, as replacement or additional components for
existing furnaces being refurbished or upgraded, and as original
components for heat treating equipment manufactured by
others. The components of the combustion control systems include mixing
valves capable of mixing gas and air and controlling the air/gas ratio,
pressure and total flow of the mixed gases. The Company also produces
its Qual-O-RimeterTM automated monitoring and control device used in
conjunction with its mixing valves to maintain precise, uniform heat
release and flame shape, despite fluctuations in fuel mix and quality,
air temperature and humidity.
Additional combustion control products include Flo-ScopeTM flow meters,
which measure the rate of flow of gases, and automatic fire checks and
automatic blowouts, which arrest flame and pressure resulting from
backfire from the burners into the pipe line.
Marketing and Competition. The Company markets its standard-engineered
systems products on a global basis through its sales and marketing
personnel located in Dresher, Pennsylvania, and also sells these products
through licensees and agents located in various parts of the world.
Although the Company competes for orders for such products with many
other manufacturers, some of which are larger and have greater financial
resources, the Company believes that its reputation and its high standard
for quality allow it to compete effectively with other manufacturers.
-7-
ITEM 1. Business - (Continued)
Operations. At its Dresher facility, the Company employs approximately
60 persons, of whom 18 are executive and administrative personnel, 17 are
sales and engineering personnel and 25 are personnel engaged in
manufacturing. The hourly personnel are represented by a union, and the
current union contract expires May 16, 2001. The Company considers its
relations with its employees to be satisfactory.
The principal components used in the Company's heat processing equipment
and other products are steel, special castings (including high-alloy
materials), electrical and electronic controls and materials handling
equipment. These items are available from a wide range of independent
suppliers.
Research and Development. The Company conducts research and development
activities at its Dresher facility to support its heat processing
services and products. The Company's research efforts are designed to
develop new products and technology as well as to improve existing
products and technology. The Company also conducts research on behalf of
particular customers in connection with customers' unusual process needs.
Research and development expenditures for heat processing aggregated
$77,000, $120,000, and $56,000 in 1998, 1997 and 1996, respectively.
It is the Company's policy to apply for domestic and foreign patents on
those inventions and improvements which it considers significant and
which are likely to be incorporated in its products. It owns a number of
United States and foreign patents. It is licensed under patents owned by
others and has granted licenses to others on a fee basis. The Company
believes that, although these patents collectively are valuable, no one
patent or group of patents is of material importance to its business as a
whole.
PRECISION MINIATURE MEDICAL AND ELECTRONIC PRODUCTS
Resistance Technology, Inc. ("RTI"), a wholly-owned subsidiary,
manufactures microminiature components and molded plastic parts primarily
for the hearing instrument manufacturing industry worldwide. RTI
Electronics, Inc. ("RTIE"), formed in 1997, has expanded RTI's
microminiature components business through the manufacture of electrical
resistors known as thermistors and film capacitors.
Products and Industries Served. RTI is a leading manufacturer and
supplier of microminiature electromechanical components to hearing
instrument manufacturers. These components consist of volume controls,
trimmer potentiometers and switches. RTI also manufactures hybrid
amplifiers and integrated circuit components ("hybrid amplifiers"), along
with faceplates for in-the-ear and in-the-canal hearing instruments.
Components are offered in a variety of sizes, colors and capacities in
order to accommodate a hearing manufacturer's individualized
specifications. Sales to hearing instrument manufacturers represented
approximately 68% of 1998 annual net sales for the Company's precision
miniature medical and electronic products business.
-8-
ITEM 1. Business - (Continued)
Hearing instruments, which fit behind or in a person's ear to amplify and
process sound for a hearing impaired person, generally are composed of
four basic parts and several supplemental components for control or
fitting purposes. The four basic parts are microphones, amplifier
circuits, miniature receivers/speakers and batteries. RTI's hybrid
amplifiers are a type of amplifier circuit. Supplemental components
include volume controls, trimmer potentiometers, which shape sound
frequencies to respond to the particular nature of a person's hearing
loss, and switches used to turn the instrument on and off and to go from
telephone to normal speech modes. Faceplates and an ear shell molded to
fit the user's ear often serve as a housing for hearing instruments.
The potential range of applications for RTI's molded plastic parts is
broad. RTI has produced intravenous flow restrictors for a medical
instruments manufacturer and cellular telephone battery sockets for a
telecommunications equipment manufacturer. Sales by RTI to industries
other than the hearing instrument industry represented approximately 12%
of 1998 annual net sales for the Company's precision miniature medical
and electronic products business.
RTI manufactures its components on a short lead-time basis in order to
supply "just-in-time" delivery to its customers. Due to the short lead-
time, the Company does not include orders from RTI's customers in its
published backlog figures.
RTIE is a wholly owned subsidiary of the Company that is under the
management direction of RTI. This subsidiary was established in
February, 1997, when the Company acquired the assets and certain
liabilities of the Rodan Division of Ketema, Inc. RTIE manufactures and
sells thermistors and thermistor assemblies, which are solid state
devices that produce precise changes in electrical resistance as a
TM function of any change in absolute body temperature. RTIE's Surge-Gard
product line, an inrush current limiting device used primarily in
computer power supplies, represents approximately 50% of RTIE's sales.
The balance of sales represent various industrial, commercial and
military sales for thermistor and thermistor assemblies to domestic and
international markets.
RTI's principal raw materials are plastics, various metal oxide powders
and silver paste, for which there are multiple sources of supply.
In order to enhance its product line offering, RTI has made several
strategic acquisitions in 1998. These acquisitions bolster RTI's and
RTIE's precision miniature mechanical and electronic products.
On May 27, 1998, RTI Electronics acquired the stock of IMB Electronics
Products, Inc., a manufacturer of film capacitors, which are energy
storage devices used primarily to resist changes in voltage. The film
capacitor business represents a product line addition for the power and
computer industries which RTIE serves. Effective January 1, 1999, IMB
Electronics Products, Inc. was merged into RTI.
-9
ITEM 1. Business - (Continued)
On October 28, 1998, a newly formed subsidiary of RTI, RTI Technologies
PTE LTD acquired certain assets and liabilities of Lectret, a
manufacturer of microphone capsules. The acquisition expands RTI's
product capability in the hearing health market by adding a microphone
product line.
Certain information regarding the acquisition of the RTIE, IMB and RTI
Technologies PTE LTD businesses is set forth in note 2 to the Company's
Consolidated Financial Statements.
Marketing and Competition. RTI sells its hearing instrument components
directly to domestic hearing instrument manufacturers through an internal
sales force. Sales of molded plastic parts to industries other than
hearing instrument manufacturers are made through a combination of
independent sales representatives and internal sales force. In recent
years, three companies have accounted for a substantial portion of the
U.S. hearing instrument sales. In 1998, these three customers accounted
for approximately 28% of RTI's net sales.
Internationally, sales representatives employed by Resistance Technology,
GmbH ("RT, GmbH"), a German company 80% of whose capital stock is owned
by RTI, solicit sales from European hearing instrument manufacturers and
facilitate sales with Japanese and Australian hearing instrument markets.
RTI believes that it is the largest supplier worldwide of microminiature
electromechanical components to hearing instrument manufacturers and that
its full product line and automated manufacturing process allow it to
compete effectively with other manufacturers with respect to these
products.
In the market of hybrid amplifiers and molded plastic faceplates, RTI's
primary competition is from the hearing instrument manufacturers
themselves. The hearing instrument manufacturers produce a substantial
portion of their internal needs for these components.
RTIE sells its thermistors and film capacitors through a combination of
independent sales representatives and internal sales force.
RTIE has many competitors, both domestic and foreign, that sell various
thermistor and film capacitors and some of these competitors are larger
and have greater financial resources. In addition, RTIE holds a
relatively small market share in the world-market of thermistor and film
capacitor products.
Operations. RTI currently employs 264 people, of whom 54 are executive
and administrative personnel and 210 are sales, engineering and
operations personnel at RTI's two facilities near Minneapolis, Minnesota.
A small number of sales personnel employed by RT, GmbH are located in
Munich, Germany and RTI Technologies employs 43 people at its Singapore
location.
-10-
ITEM 1. Business - (Continued)
At its facilities in Anaheim, California, RTIE employs 118 full-time
employees, of which 17 are salaried and 101 hourly.
As a consumer products manufacturer, RTI is subject to claims for
personal injuries allegedly caused by its products. While the Company
maintains what it believes to be adequate insurance coverage, it retains
a self-insured deductible under its liability insurance policies.
Research and Development. RTI and RTIE conduct research and development
activities primarily to improve its existing products and technology.
Their research and development expenditures were $1,290,000, $1,154,000
and $1,083,000 in 1998, 1997 and 1996, respectively.
RTI owns a number of United States patents which cover a number of
product designs and processes. The Company believes that, although these
patents collectively add some value to the Company, no one patent or
group of patents is of material importance to its business as a whole.
TIRE HOLDERS, LIFTS AND RELATED PRODUCTS
Deuer Manufacturing, Inc. ("Deuer"), a wholly-owned subsidiary,
manufactures tire holders, lifts, and other related products based
principally on cable winch designs.
Products and Industries Served. Deuer is a leading supplier of spare
tire holders used on light trucks and mini-vans manufactured by the major
domestic automotive manufacturers. Deuer's spare tire holder holds the
spare tire to the underbody of the vehicle by means of a steel cable
running to the underside of the vehicle's frame. One end of the steel
cable is attached to a hub placed through the center of the spare tire's
rim, and the other end is attached to a hand-operated winch mounted at an
accessible location on the vehicle. The spare tire holding system
permits the spare tire to be stored in a remote location and to be easily
removed without the need to crawl under the vehicle. During 1998, sales
of spare tire holders accounted for approximately 89% of Deuer's net
sales.
Deuer also produces a variety of hand-operated hoist-pullers, using
primarily a cable winch design, sold under the Mini-MuleTM brand name.
These products, which retail from $30 to $60, are portable hand winches
designed for a variety of uses, such as pulling objects, rigging loads
and installing fencing. Deuer furnishes these hoist-pullers in a variety
of sizes and capacities. It also manufactures accessories for use with
the products, including slings, clamps, blocks and gantries.
Deuer manufactures products on a short lead time basis in order to
furnish "just-in-time" delivery to its automotive customers. Because of
the substantial variances between manufacturers' estimated and actual
requirements, the Company does not include blanket order commitments from
automotive manufacturers in its published backlog figures.
-11-
ITEM 1. Business - (Continued)
Marketing and Competition. Deuer sells its spare tire holders directly
to domestic automotive manufacturers. Deuer's spare tire holders are
sold to Chrysler Corporation, General Motors, Toyota, Ford Motor Company,
New United Motor Manufacturing, Inc. and Mobile Home Manufactures. The
design and quality of Deuer's spare tire holders have been recognized by
its major customers. The Company sells its hoist-pullers through a
network of distributors as well as directly to some large retail outlets.
Deuer is one of several suppliers of spare tire holders to domestic mini-
van and light truck manufacturers. Some of Deuer's competitors are
larger and have greater financial resources. The Company believes that
price and Deuer's reputation for quality and reliability of delivery are
important factors in competition for business from the domestic
automotive manufacturers. A number of other domestic and foreign
manufacturers sell hoist-pullers to the retail market, and Deuer's share
of this market is relatively small.
Operations. At its Dayton facility, Deuer employs 35 executive and
administrative personnel and approximately 148 manufacturing employees.
Some of the manufacturing employees are represented by a union, and the
current union contract expires in October 2002. Deuer considers its
relations with its employees to be satisfactory.
Deuer's principal raw material is coil rolled steel and metal cable which
is widely available. Deuer also conducts research and development
activities which consist of the development of new products and
technology and the modification of existing products. Deuer's research
and development expenditures aggregated $239,000, $253,000 and $265,000
in 1998, 1997 and 1996, respectively.
As a consumer products manufacturer, Deuer is subject to claims for
personal injuries allegedly caused by its products. While the Company
maintains what it believes to be adequate insurance coverage, it retains
a self-insured deductible under its liability insurance policies.
ITEM 2. Properties
The Company owns the manufacturing facility in Dresher, Pennsylvania in
which its standard-engineered systems, burners and combustion control
equipment are produced. The Company's headquarters are located on the
same 17 acre site. The 136,000 square foot Dresher facility has more
space than is currently needed for the Company's operations and
headquarters, and the Company is seeking to lease all or a portion of the
excess office and manufacturing space to a suitable tenant. This
property is subject to a mortgage. See note 8 of the Company's
consolidated financial statements.
RTI leases a 47,000 sq. ft. manufacturing facility in Arden Hills,
Minnesota from a partnership consisting of two former officers of RTI and
Mark S. Gorder who serves as an officer of RTI and on the Company's Board
of Directors. At this facility, RTI manufactures all of its products
other than plastic component parts. The lease expires in October, 2003,
with two successive 5-year renewal
-12-
ITEM 2. Properties - (Continued)
options. In addition, RTI owns, subject to a mortgage from a third party
lender, a 34,000 sq. ft. building in Vadnais Heights, Minnesota at which
RTI produces plastic component parts. (See notes 8, 17, and 18 of the
Company's consolidated financial statements.)
RTIE leases a building in Anaheim, California, which contains its
manufacturing facilities and offices and consists of a total of 50,000
square feet. The lease expires September, 2008.
Deuer owns its 92,000 square foot manufacturing facility located on 6.5
acres in Dayton, Ohio, where it produces its spare tire holders and
hoist-pullers. The facility is furnished with a variety of steel
fabrication equipment, including punch presses, drill presses, screw
machines, grinders, borers, lathes and welders. This property is subject
to a mortgage. See note 8 of the Company's consolidated financial
statements.
Selas S.A. owns the land and building which houses its engineering, sales
and administrative operations in Gennevilliers, France (outside of
Paris). The land under the building is owned by Selas S.A. and the
property outside of the building is jointly owned by the building owners
in the office complex. The building has 22,000 square feet. This
property is subject to a mortgage. See note 8 of the Company's
consolidated financial statements.
Selas Italiana S.r.L., the Company's Italian subsidiary, Selas
Waermetechnik GmbH, the Company's German subsidiary and Selas UK, the
Company's United Kingdom subsidiary, lease facilities in Milan, Italy,
Ratingen, Germany, and Derbyshire, UK, respectively. The Milan and
Derbyshire facilities are comprised of engineering, sales and
administrative offices with the leases expiring in October 2001 and a
month to month basis, respectively. The Ratingen facilities are used for
sales, administrative and engineering activities and assembly of small
furnaces and furnace components, with the lease expiring February, 2000.
Resistance Technology, GmbH, leases office space in Munich, Germany, on a
year-to-year basis, for its sales personnel. Management expects to be
able to extend these leases. RTI Technologies PTE LTD leases a building
in Singapore which houses its production facilities and administrative
offices. The building contains 6,000 square feet and its lease expires
June, 2001.
CFR leases facilities in Paris and Maisse, both in France. The
facilities in Paris house engineering, sales and administrative
operations and has 10,000 square feet. The Maisse facility is 40,000
square feet and houses CFR's fabrication and assembly operations. The
Paris lease expires January, 2000 and the Maisse lease expires February,
2001, each with two three-year optional renewal terms. Management
expects to be able to extend these leases. CFR Portugal leases a
building in Leiria, Portugal which houses its fabrication facilities and
administrative offices.
-13-
ITEM 3. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 147 lawsuits as of December 31, 1998 (215 as of December
31, 1997) 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.
The Company was one of approximately 500 defendants in a class action on
behalf of approximately 2,700 present and former employees of a Texas
steel mill. The cases were being defended by one or more of the
Company's insurance carriers presently known to be "at risk". In
October, 1998 the class action suit was settled. The Company's insurance
carriers have not asked the Company to contribute to any settlement
payments made by them in connection with this settlement.
In 1995, a dispute which was submitted to arbitration, arose under a
contract between a customer and a subsidiary of the Company. Substantial
claims were asserted against the subsidiary Company under the terms of
the contract. The Company recorded revenue of approximately $1,400,000
in 1994 and has an uncollected receivable of $140,000. In June, 1998,
the arbitrator found in favor of the customer. The Company has refused
to recognize the validity of the arbitration proceedings and decision and
believes it is entitled to a new hearing before an international or
French tribunal. The Company believes that the disposition of this claim
will not materially affect the Company's consolidated financial position
or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
-14-
ITEM 4A. Executive Officers of the Company
The names, ages and offices (as of February 26, 1999) of the Company's
officers were as follows:
Name Age Office
Stephen F. Ryan 63 Chairman, President and
Chief Executive Officer
Christian Bailliart 50 Vice President and Chairman-
Director Generale of Selas S.A.
James C. Deuer 70 Vice President and President
of Deuer Manufacturing, Inc.
Mark S. Gorder 52 Vice President and President of
Resistance Technology, Inc.
Robert W. Ross 50 President Heat Technology Group
Vice President and Secretary
Francis A. Toczylowski 48 Vice President and Treasurer
Mr. Ryan joined the Company in May 1988, as President and Chief Executive
Officer. In December, 1998, he was elected Chairman of the Board of
Directors. Mr. Bailliart joined Selas S.A. in 1974 and in January 1,
1993 was promoted to Vice President of the Company and Chairman-Director
Generale of Selas S.A. In 1989 he was promoted to Chairman-Director
Generale of Selas S.A. from Vice President,
Treasurer. Mr. Deuer joined the Company as President of Deuer
Manufacturing when it was acquired in May, 1986 and was promoted to Vice
President of the Company and President of Deuer Manufacturing in
December, 1990. From 1965 to 1986 he was President of Deuer
Manufacturing. Mr. Gorder joined the Company October 20, 1993 when
Resistance Technology, Inc. (RTI) was acquired. Prior to the
acquisition, Mr. Gorder was President and one of the founders of RTI,
which began operations in 1977. Mr. Gorder was promoted to Vice
President of the Company and elected to the Board of Directors in 1996.
Mr. Ross joined the Company in October 1990 as Vice President -
Treasurer, was appointed Chief Financial Officer January 1, 1994 and
elected Secretary February 21, 1995. In December, 1998, he was appointed
President of the Heat Technology Group of the Company. From 1981 to 1990
he was with ALPO Pet Foods, a division of Grand Metropolitan PLC, as a
Controller from 1981 and as Vice President, Controller from 1988. Mr.
Toczylowski joined the Company in 1981 and has held several positions in
the accounting and finance area, most recently serving as Corporate
Controller. In December, 1998, he was elected Vice President and
Treasurer.
-15-
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common shares are listed on the American Stock Exchange.
The high and low sale prices during each quarterly period during the
past two years were as follows:
MARKET AND DIVIDEND INFORMATION
1998 1997
Market Market
Price Range Price Range
QUARTER HIGH LOW HIGH LOW
First . . . . . . . . . . . 12-5/8 9-1/8 13-1/16 10
Second . . . . . . . . . . . 9-7/8 8-3/4 12-5/8 9-13/16
Third . . . . . . . . . . . 9 6-7/16 13-1/2 11-1/4
Fourth . . . . . . . . . . . 8-7/16 6-5/8 13-3/16 8-15/16
At February 8, 1999, the Company had 471 shareholders of record.
1998 1997 1996
Dividends per share:
First Quarter $.045 $.043 $.04
Second Quarter .045 .045 .04
Third Quarter .045 .045 .04
Fourth Quarter .045 .045 .043
The payment of any future dividends is subject to the discretion of the
Board of Directors and is dependent on a number of factors, including the
Company's capital requirements, financial condition, financial covenants
and cash availability.
ITEM 6. Selected Financial Data
Certain selected financial data is incorporated by reference to "Selas
Corporation of America Five-Year Summary of Operations", page 4, and
"Other Financial Highlights" (excluding graphs), page 5, of the Company's
1998 annual report to shareholders.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis is incorporated by reference to page
6 through 10 of the Company's 1998 annual report to shareholders.
Forward-Looking and Cautionary Statements. Certain statements herein
that include forward-looking terminology such as "may", "will", "should",
"expect", "anticipate", "estimate", "plan" or "continue" or the negative
thereof or other variations thereon are, or could be deemed to be,
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These
-16-
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - (Continued)
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, and the cyclical nature of the market for large heat
technology contracts.
The Company's heat technology business, which has contributed
substantially to the Company's consolidated results, is affected by,
among other things, the capital expenditures of steel and glass
manufacturers and processors, industries that are highly cyclical in
nature. It is difficult to predict demand for the Company's heat
technology products, and the financial results of the Company's heat
technology business have fluctuated, and may continue to fluctuate,
materially from year to year.
Several of the Company's competitors have been able to offer more
standardized and less technologically advanced heat technology systems
and equipment at lower prices. Although the Company believes that it has
produced higher quality systems and equipment than these lower priced
competitors, in certain instances price competition has had an adverse
effect on the Company's sales and margins. There can be no assurance
that the Company will be able to maintain or enhance its technical
capabilities or compete successfully with its existing and future
competitors.
There can be no assurance that the Company will remain a competitive
supplier to the automobile and truck industry in view of, among other
things, the general trend in recent years in that industry toward a
reduction in the number of third-party suppliers and toward more
integrated component suppliers.
The Company's precision miniature medical and electronics business has
benefitted from its ability to automate and keep costs and prices low.
There can be no assurance that the Company will be able to continue to
achieve such automation and its historical profit margins particularly as
the technology of hearing instruments changes and as the business expands
into other product lines.
The Company has international operations, as a result, the Company's
performance may be materially affected by foreign economies and currency
movements.
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.
-17-
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's consolidated cash flows and earnings are subject to
fluctuations due to changes in foreign currency exchange rates. The
Company attempts to limit its exposure to changing foreign currency
exchange rates through operational and financial market actions. The
Company does not hold derivatives for trading purposes.
The Company manufactures and sells its products in a number of locations
around the world, resulting in a diversified revenue and cost base that
is exposed to fluctuations in European and Asian currencies. This
diverse base of foreign currency revenues and costs serves to create a
hedge that limits the Company's net exposure to fluctuations in these
foreign currencies.
Short-term exposures to changing foreign currency exchange rates are
occasionally managed by financial market transactions, principally
through the purchase of forward foreign exchange contracts (with
maturities of six months or less) to offset the earnings and cash flow
impact of the nonfunctional currency denominated receivables and payables
relating to select custom engineered heat technology segment contracts.
The decision by management to hedge any such transaction is made on a
case-by-case basis. Foreign exchange forward contracts are denominated
in the same currency as the receivable or payable being covered, and the
term and amount of the forward foreign exchange contract substantially
mirrors the term and amount of the underlying receivable or payable. The
receivables and payables being covered arise from trade and intercompany
transactions of and among the Company's foreign subsidiaries. At
December 31, 1998 the Company did not have any forward foreign exchange
contracts outstanding.
To manage exposure to interest rate movements and to reduce its borrowing
costs, the Company's French subsidiary, Selas S.A., has entered into an
interest rate swap agreement. Selas S.A. is exposed to changes in
interest rates primarily due to its borrowing activities which are
related to long term debt used to finance its office building. The swap
agreement requires fixed interest payments based on an effective rate of
8.55% for the remaining term through May, 2006. A 100 (10% adverse
change) basis point move in interest rates would affect the Company's
floating and fixed rate instruments, including short and long-term debt
and derivative instruments, by approximately $.1 million at December 31,
1998. The fair value of the Company's variable rate debt is not
significantly different from its recorded amount.
Swap and forward foreign exchange contracts are entered into for periods
consistent with related underlying exposures. The Company does not enter
into contracts for speculative purposes and does not use leveraged
instruments.
-18-
ITEM 8. Financial Statements and Supplementary Data
The Company's consolidated balance sheets as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows
and shareholders' equity for each of the three years in the period ended
December 31, 1998, and the report of independent auditors thereon and the
quarterly results of operations (unaudited) for the two year period ended
December 31, 1998 are incorporated by reference to pages 11 to 39 of the
Company's 1998 annual report to shareholders.
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None
-19-
PART III
The information called for by Items 10, 11, 12 and 13 (except the
information concerning executive officers included in Item 4A) is
incorporated by reference to the Company's definitive proxy statement
relating to its 1999 Annual Meeting of Shareholders which the Company
filed on March 18, 1999. However, the portions of such proxy statement
constituting the report of the Compensation Committee of the Board of
Directors and the graph showing performance of the Company's common
shares and certain share indices shall not be deemed to be incorporated
herein or filed for purposes of the Securities Exchange Act of 1934.
-20-
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents are filed as a part of this
report:
1. Financial Statements - The Company's consolidated financial
statements, as described below, are incorporated by reference to
pages 11 through 39 of the Company's 1998 annual report to
shareholders.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
Financial statements for 50% or less owned companies which are
accounted for by the equity method have been omitted because they do
not, considered individually or in the aggregate, constitute
significant subsidiaries.
2. Financial Statement Schedules
Page
Report of Independent Auditors on the
Consolidated Financial Statement Schedules 24
Schedule I - Condensed Financial Information
of Registrant (Parent only) 25,26,27,28
Schedule II - Valuation and Qualifying
Accounts 29,30
All other schedules are omitted because they are
not applicable, or because the required information
is included in the consolidated financial statements or notes
thereto.
-21-
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K - (Continued)
3. Exhibits
3A. The Company's Articles of Incorporation as amended May 18,
1984 and April 25, 1991. Exhibit 3A to the Company's report on Form
10-K for the year ended December 31, 1984 and Exhibit 3A1 to the
Company's report on Form 10-K for the year ended December 31, 1991
are hereby incorporated herein by reference.
3B. The Company's By-Laws as amended. Exhibit 3B to the Company's
Report on Form 10-K for the year ended December 31, 1995 is hereby
incorporated by reference.
4A. Amended and Restated Credit Agreement dated July 31, 1998 among the
Company, Deuer Manufacturing, Inc., Resistance Technology, Inc., RTI
Export, Inc. and RTI Electronics, Inc. Exhibit 4A to the Company's
report on Form 10-Q for the nine months ended September 30, 1998 is
hereby incorporated by reference.
4B. Amended and Restated Revolving Credit Note, dated July 31, 1998, of
the Company in favor of First Union National Bank. Exhibit 4B to
the Company's report on Form 10-Q for the nine months ended
September 30, 1998 is hereby incorporated by reference.
4H. Guaranty dated February, 1998 of the Company in favor of First
Union/First Fidelity, N.A. Pennsylvania. Exhibit 4H to the
Company's report on Form 10-K for the year ended December 31, 1997
is hereby incorporated by reference.
10A. Form of termination agreement between the Company and Messrs. Ryan,
Deuer, Gorder, Ross and Toczylowski.
10B. 1985 Stock Option Plan, as amended. Exhibit 10C to the Company's
Registration Statement on Form S-2 filed on June 15, 1990 (No. 33-
35443) is hereby incorporated herein by reference.
10C. Form of Stock Option Agreements granted under the 1985 Stock Option
Plan. Exhibit 10D to the Company's Registration Statement on Form
S-2 filed on June 15, 1990 (No. 33-35443) is hereby incorporated
herein by reference.
10D. Form of Amendments to Stock Option Agreements granted under the 1985
Stock Option Plan. Exhibit 10D to the Company's Registration
Statement on Form S-2 filed on June 15, 1990 (No. 33-35443) is
hereby incorporated herein by reference.
10E. Amended and Restated 1994 Stock Option Plan. Exhibit 10E to the
Company's report on Form 10-K for the year ended December 31, 1997
is hereby incorporated by reference.
-22-
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K - (Continued)
10F. Form of Stock Option Agreements granted under the Amended and
Restated 1994 Stock Option Plan. Exhibit 10F to the Company's
report on Form 10-K for the year ended December 31, 1995 is hereby
incorporated by reference.
10G. Agreement between Selas S.A., a wholly-owned subsidiary, and
Europarc Gennevilliers dated May 16, 1991 relating to the purchase
of land and building to house its operations in France, accompanied
by an English translation. Exhibit 10G to the Company's report on
Form 10-K for the year ended December 31, 1995 is hereby
incorporated by reference.
10H. Supplemental Retirement Plan (amended and restated effective January
1, 1995). Exhibit 10I to the Company's report on Form 10-K for the
year ended December 31, 1995 is hereby incorporated by reference.
10I. Management Employment Agreement dated October 20, 1993 between
Resistance Technology, Inc. and Mark S. Gorder. Exhibit 10J to the
Company's report on Form 10-K for the year ended December 31, 1995
is hereby incorporated by reference.
10J. Amended and Restated Office/Warehouse Lease, between Resistance
Technology, Inc. and Arden Partners I, L.L.P. (of which Mark S.
Gorder is one of the principal owners) dated November 1, 1996.
Exhibit 10J to the Company's report on Form 10-K for the year ended
December 31, 1996 is hereby incorporated by reference.
10K. Non-Employee Directors' Stock Option Plan and Form of Stock Option
Agreements under such Plan. Exhibit 10K to the Company's
Registration Statement on Form S-8 filed on October 30, 1998 is
hereby incorporated herein by reference.
13. "Selas Corporation of America Five-Year Summary of Operations"
contained on page of the Company's 1998 annual report to
shareholders; "Other Financial Highlights" (excluding graphs)
contained on page 5 of the Company's 1998 annual report to
shareholders; "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained on pages 6-10 of the
Company's 1998 annual report to shareholders; and the Company's
consolidated financial statements, including the "Notes to
Consolidated Financial Statements" and the "Report of Independent
Auditors" contained on pages 11-35 of the Company's 1998 annual
report to shareholders.
-23-
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K - (Continued)
21. List of significant subsidiaries of the Company.
23. Consent of Independent Auditors.
24. Powers of Attorney.
99. Portions of the Company's definitive proxy statement for its 1999
Annual Meeting of Shareholders responsive to Items 10, 11, 12 and 13
in Part III hereof, which was filed on March 20, 1999, are hereby
incorporated herein by reference. However, the portions of such
proxy statement constituting the report of the Compensation
Committee of the Board of Directors and the graph showing
performance of the Company's common shares and certain share indices
shall not be deemed to be incorporated herein or filed for purposes
of the Securities Exchange Act of 1934.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
during the three months ended December 31, 1998.
-24-
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Shareholders
Selas Corporation of America:
Under date of February 19, 1999, we reported on the consolidated balance
sheets of Selas Corporation of America and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1998, as contained in the 1998 annual
report to shareholders. These consolidated financial statements and our
reports thereon are incorporated by reference in the annual report on
Form 10-K for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related financial statement schedules as listed in the accompanying index
(Item 14). These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects, the information set forth
herein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 19, 1999
-25-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of Registrant
Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
Current assets:
Cash and cash equivalents $ 70,837 $ 478,119
Accounts receivable (including
$5,862,697 and $5,266,063 due from
subsidiaries in 1998 and 1997,
respectively, eliminated in con-
solidation), less allowance for doubt-
ful accounts of $10,000 in both years 8,892,207 11,292,250
Inventories, at cost 3,509,970 3,775,592
Prepaid expenses and other current
assets 1,592,723 1,993,501
Total current assets 14,065,737 17,539,462
Investment in wholly-owned subsidiaries 53,697,350 50,887,202
Property and equipment, at cost 5,897,016 5,871,795
Less: accumulated depreciation (4,713,782) (4,532,232)
1,183,234 1,339,563
Other assets and investment in
unconsolidated affiliate 2,394,617 1,072,562
Total Assets $71,340,938 $70,838,789
=========== ===========
-26-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of Registrant
Balance Sheets
December 31, 1998 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
Current liabilities:
Notes payable and current maturities
of long-term debt $ 4,441,554 $ 2,350,000
Accounts payable (including $13,503,551
and $13,237,300 due to subsidiaries
in 1998 and 1997, respectively,
eliminated in consolidation) 14,531,749 15,721,628
Accrued expenses 2,806,974 4,088,328
Total current liabilities 21,780,277 22,159,956
Long-term debt 2,170,024 4,520,024
Other postretirement benefit obligations 3,535,050 3,471,378
Deferred income taxes 227,347 230,945
Pension plan obligation -- 56,973
Contingencies and commitments
Shareholders' equity
Common stock 5,615,081 5,589,324
Retained earnings and other equity 38,395,096 35,192,126
Less: 363,564 common shares held in
treasury, at cost (381,937) (381,937)
Total shareholders' equity
43,628,240 40,399,513
Total Liabilities and
Shareholders' Equity $71,340,938 $70,838,789
=========== ===========
See accompanying notes to the consolidated financial statements.
-27-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of Registrant
Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Sales, net $13,431,912 $24,187,052 $20,792,859
Add back: license fees and
corporate charges paid by
subsidiaries, eliminated in
consolidation 805,796 618,366 1,512,699
14,237,708 24,805,418 22,305,558
Costs and expenses:
Cost of goods sold 9,582,358 19,344,767 16,504,848
Selling, general and adminis-
trative expenses 3,761,810 4,458,784 3,894,184
Rent and depreciation 360,801 375,156 398,207
13,704,969 24,178,707 20,797,239
Income before income taxes and
equity in net income of
subsidiaries 532,739 626,711 1,508,319
Provision for income taxes
(benefits) (753,789) 45,295 560,111
Income before equity in net
income of subsidiaries 1,286,528 581,416 948,208
Equity in net income of
subsidiaries 2,322,994 3,805,793 3,181,987
Net income $ 3,609,522 $ 4,387,209 $ 4,130,195
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
-28-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of the Registrant
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
OPERATING ACTIVITIES
Net income $ 3,609,522 $ 4,387,209 $ 4,130,195
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 259,716 251,733 227,377
Other adjustments (3,050,628) (4,405,561) (3,507,200)
Net changes in operating
assets and liabilities 57,727 2,507,566 3,665,156
Net cash provided by operating
activities 876,337 2,740,947 4,515,528
INVESTING ACTIVITIES
Dividend from unconsolidated
affiliate -- -- 16,742
Acquisition of subsidiary
company -- (5,152,840) --
Purchase of property, plant and
equipment (93,415) (259,787) (257,767)
Net cash (used) by investing
activities (93,415) (5,412,627) (241,025)
FINANCING ACTIVITIES
Proceeds from borrowings used
to acquire subsidiary -- 3,500,000 --
Proceeds from exercise of
stock options 10,196 155,519 --
Proceeds from short term
borrowings 2,091,554 -- --
Payment of dividends (941,954) (929,685) (847,712)
Repayment of long term debt (2,350,000) (2,521,645) (1,859,448)
Net cash provided (used) by
financing activities (1,190,204) 204,189 (2,707,160)
Increase (decrease) in cash
and cash equivalents (407,282) (2,467,491) 1,567,343
Cash and cash equivalents,
beginning of year 478,119 2,945,610 1,378,267
Cash and cash equivalents, end
of year $ 70,837 $ 478,119 $ 2,945,610
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
-29-
SCHEDULE II
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
Column A Column B Column C
Additions
Balance at Charged to
Beginning Costs and
Classification of Period Expenses Other
Year ended December 31, 1998:
Reserves deducted in the balance
sheet from the asset to which
they apply:
Allowance for doubtful
accounts $ 681,356 $1,324,093 $ 106,973a
========== ========== ==========
Deferred tax asset valuation
allowance $1,696,824 $ (76,662)(d) $ --
========= ========== ==========
Reserve not shown elsewhere:
Reserve for estimated future
costs of service and
guarantees $2,705,293 $ 355,013 $ 51,393 a
========== ========== ==========
Year ended December 31, 1997:
Reserve deducted in the balance
sheet from the asset to which
they apply:
Allowance for doubtful
accounts $ 787,121 $ 15,833 $(93,153)a
========== ========== ==========
Deferred tax asset valuation
allowance $2,315,437 $ (618,613) $ --
========== ========== ==========
Reserve not shown elsewhere:
Reserve for estimated future
costs of service and
guarantees $1,725,690 $1,287,940 $(118,806)a
========= ========== ==========
Year ended December 31, 1996:
Reserve deducted in the balance
sheet from the asset to which
it applies:
Allowance for doubtful
accounts $ 792,249 $ 196,952 $(35,428)a
========== ========== ==========
Deferred tax asset valuation
allowance $2,685,305 $ (369,868) $ --
========== ========== ==========
Reserve not shown elsewhere:
Reserve for estimated future
costs of service and
guarantees $ 844,787 $1,000,677 $(19,130)a
========== ========== ==========
(Continued)
-30-
SCHEDULE II
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
Column A Column D Column E
Balance at
End of
Classification Deductions Period
Year ended December 31, 1998:
Reserves deducted in the balance sheet
from the asset to which they apply:
Allowance for doubtful accounts $ 118,689 (b) $1,993,733
========== ==========
Deferred tax asset valuation allowance -- $1,620,162
========== ==========
Reserve not shown elsewhere:
Reserve for estimated future costs of
service and guarantees $ 816,810 (c) $2,294,889
========== ==========
Year ended December 31, 1997:
Reserve deducted in the balance sheet
from the asset to which they apply:
Allowance for doubtful accounts $ 28,445 (b) $ 681,356
========== ==========
Deferred tax asset valuation allowance -- $1,696,824
========== ==========
Reserve not shown elsewhere:
Reserve for estimated future costs
of service and guarantees $ 189,531 (c) $2,705,293
========== ==========
Year ended December 31, 1996:
Reserve deducted in the balance sheet
from the asset to which it applies:
Allowance for doubtful accounts $ 166,652 (b) $ 787,121
========== ==========
Deferred tax asset valuation allowance $ -- $2,315,437
========== ==========
Reserve not shown elsewhere:
Reserve for estimated future costs
of service and guarantees $ 100,644 (c) $1,725,690
========== ==========
(a) Represents difference between translation rates of foreign currency
at
beginning and end of year and average rate during year.
(b) Uncollectible accounts charged off.
(c) "After job" costs charged to reserve.
(d) Valuation allowance adjustment. See note 11 to the consolidated
financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SELAS CORPORATION OF AMERICA
(Registrant)
By:
Francis A. Toczylowski
Vice President and
Treasurer
Dated: March 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons (including a
majority of members of the Board of Directors) on behalf of the
registrant and in the capacities and on the dates indicated.
*By: /s/ Stephen F. Ryan
Stephen F. Ryan Stephen F. Ryan
Attorney-In-Fact Chairman, President, Chief
Executive Officer and Director
March 23, 1999 March 23, 1999
*
John H. Austin, Jr. Francis A. Toczylowski
Director Vice President and Treasurer
March 23, 1999 March 23, 1999
*
Frederick L. Bissinger
Director
March 23, 1999
*
Roy C. Carriker
Director
March 23, 1999
*
Mark S. Gorder
Director
March 23, 1999
*
Michael J. McKenna
Director
March 23, 1999
*
Ralph R. Whitney, Jr.
Director
March 23, 1999
EXHIBIT INDEX
EXHIBITS:
10A. Form of termination agreement between the Company and Messrs. Ryan,
Deuer, Gorder, Ross and Toczylowski.
13. "Selas Corporation of America Five-Year Summary of Operations"
contained on page 4 of the Company's 1998 annual report to
shareholders; "Other Financial Highlights" (excluding graphs)
contained on page 5 of the company's 1998 annual report to
shareholders; "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained on pages 6-10 of the
Company's 1997 annual report to shareholders; and the Company's
consolidated financial statements, including the "Notes to
Consolidated Financial Statements" and the "Report of Independent
Auditors" contained on pages 11-39 of the Company's 1998 annual
report to shareholders.
21. List of significant subsidiaries of the Company.
23. Consent of Independent Auditors.
24. Powers of Attorney.
March 26, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Reference: Selas Corporation of America;
Commission File #1-5005
Gentlemen:
The Company's 1998 Annual Report on Form 10-K has been filed
electronically, via Edgar.
The financial statements for the year ended December 31, 1998 do not
reflect any changes in accounting principles or practices, or the method
of applying any such principles or practices from the preceding year.
Very truly yours,
Francis A. Toczylowski
Vice President and Treasurer
RWR:jc
Enclosures
cc: American Stock Exchange
Attention: Mr. Thomas Mason
86 Trinity Place
New York, NY 10006
(Three copies, one with Exhibits)
Via Certified Mail
EXHIBIT 10A
1999 EXTENSION AGREEMENT
AGREEMENT dated as of January 1, 1999 between
("Executive") and Selas Corporation of America ("Selas").
BACKGROUND
Executive and Selas are parties to an Agreement re: Termination
Following Change of Control or Asset Sale, the term of which, as
previously extended, expires December 31, 1998 (as previously amended,
the "Agreement"), which, as an inducement to Executive to continue his
active participation in the business of Selas or an affiliate of Selas,
provides for certain payments to the Executive under the circumstances
and pursuant to the terms therein set forth. Capitalized terms used
herein have such meanings as are ascribed thereto in the Agreement.
Executive and Selas desire to confirm in writing their understanding
that the term of the Agreement, insofar as the term thereof is a function
of the period during which a Change of Control or Asset Sale may occur,
is extended from December 31, 1998 until December 31, 1999.
NOW, THEREFORE, in consideration of the agreements herein contained
and contained in the Agreement, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Clause (i) in paragraph 5 of the Agreement is hereby amended by
changing the date "December 31, 1998" to "December 31, 1999."
2. The Agreement, as amended hereby, is hereby ratified and
confirmed in all respects.
IN WITNESS WHEREOF, Selas and Executive have executed this Agreement
as of the date first above written.
SELAS CORPORATION OF AMERICA
BY:
Name:
Title:
Name:
EXHIBIT 13
SELAS CORPORATION OF AMERICA
is a diversified firm with international operations and sales that
engages in the design, development, engineering and manufacturing of a
range of products. The Company, headquartered in Dresher, Pennsylvania
with subsidiaries in Minnesota, Ohio, California, England, France,
Germany, Italy, Portugal, and Singapore (and a 50% joint venture in
Japan), operates directly or through subsidiaries in three business
segments.
Under the Selas TMname, the Heat Technology segment designs and
manufactures specialized industrial heat technology systems and equipment
for steel, glass and other manufacturers worldwide. The Company's
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components and molded plastic parts primarily
for the hearing instrument manufacturing industry and also for the
electronics, telecommunications, computer and medical equipment
industries. The Company's Tire Holders, Lifts and Related Products
segment manufactures products, primarily based on cable winch designs,
for use principally as original equipment by the pick-up truck and
minivan segment of the automotive industry.
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31 1998 1997
Net sales . . . . . . . . . . . . $ 99,555,000 $111,165,000
Operating income . . . . . . . . $ 4,858,000 $ 7,171,000
Net income . . . . . . . . . . . $ 3,610,000 $ 4,387,000
Earnings per share:
Basic . . . . . . . . . . . $.69 $.84
Diluted . . . . . . . . . . . $.68 $.82
Working capital . . . . . . . . . $ 17,211,000 $ 18,642,000
Total assets . . . . . . . . . . $ 87,781,000 $ 81,795,000
Total shareholders' equity . . . $ 43,628,000 $ 40,399,000
MARKET AND DIVIDEND INFORMATION
1998 1997
Market Market
Price Range Price Range
QUARTER HIGH LOW HIGH LOW
First . . . . . . . . . . . 12-5/8 9-1/8 13-1/16 10
Second . . . . . . . . . . . 9-7/8 8-3/4 12-5/8 9-13/16
Third . . . . . . . . . . . 9 6-7/16 13-1/2 11-1/4
Fourth . . . . . . . . . . . 8-7/16 6-5/8 13-3/16 8-15/16
At February 8, 1999, the Company had 471 shareholders of record.
1998 1997 1996
Dividends per share:
First Quarter $.045 $.043 $.04
Second Quarter .045 .045 .04
Third Quarter .045 .045 .04
Fourth Quarter .045 .045 .043
The payment of any future dividends is subject to the discretion of the
Board of Directors and is dependent on a number of factors, including the
Company's capital requirements, financial condition, financial covenants
and cash availability.
Selas is an equal opportunity employer.
THE COMMON STOCK OF SELAS CORPORATION OF AMERICA IS LISTED ON THE
AMERICAN STOCK EXCHANGE UNDER THE SYMBOL SLS.
SELAS CORPORATION OF AMERICA
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share data)
Years Ended December 31 1998 (a) 1997 (b) 1996
Sales, net $ 99,555 $ 111,165 $ 103,426
Cost of sales 76,832 87,704 80,870
Selling, general and
administrative expenses 17,864 16,289 15,034
Interest expense 1,139 1,040 1,212
Interest (income) (145) (237) (298)
Other (income) expense, net (85) 8 83
Income before income taxes 3,950 6,361 6,525
Income taxes 340 1,974 2,395
Net income $ 3,610 $ 4,387 $ 4,130
======== ======== =========
Earnings per share:
Basic $.69 $.84 $.80
========= ========= ==========
Diluted $.68 $.82 $.78
========= ========= ==========
Comprehensive income (c) $ 3,996 $ 3,520 $ 3,833
========= ========= ==========
Weighted average number of
shares outstanding during
year
Basic 5,233,016 5,213,124 5,190,075
========= ========= =========
Diluted 5,310,354 5,354,978 5,271,959
========= ========= =========
Continued
SELAS CORPORATION OF AMERICA
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for per share data)
Years Ended December 31 1995 1994
Sales, net $ 71,215 $ 73,663
Cost of sales 52,060 52,813
Selling, general and
administrative expenses 14,397 14,727
Interest expense 1,336 1,282
Interest (income) (340) (303)
Other (income) expense, net 36 165
Income before income taxes 3,726 4,979
Income taxes 1,426 1,875
Net income $ 2,300 $ 3,104
========= =========
Earnings per share:
Basic $.44 $.60
========== ==========
Diluted $.44 $.60
========== ==========
Comprehensive income (c) $ 2,322 $ 4,176
========= ==========
Weighted average number of
shares outstanding during
year
Basic 5,189,048 5,179,246
========== =========
Diluted 5,202,411 5,215,736
========== =========
(a) On February 28, 1998, the Company acquired the stock of CFR, a
Paris, France based company.
On May 27, 1998, a subsidiary of the Company acquired the stock of
IMB Electronic Products, Inc.
On October 28, 1998, a newly formed subsidiary of the Company, RTI
Technologies PTE LTD acquired certain assets
and liabilities of Lectret.
(b) On February 21, 1997, the Company acquired the assets of RTI
Electronics, Inc.
(c) In 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." See
note 1 to the consolidated financial statements.
OTHER FINANCIAL HIGHLIGHTS
Years Ended December 31 1998 (a) 1997 (b) 1996
(In thousands, except for per share data)
Working capital $17,211 $18,642 $19,822
Total assets $87,781 $81,795 $91,162
Long-term debt $ 6,266 $ 7,015 $ 6,837
Long-term benefit obligations $ 4,096 $ 4,081 $ 4,310
Shareholders' equity:
Capital stock and additional
paid-in capital $17,556 $17,382 $17,214
Retained earnings 25,798 23,130 19,673
Accumulated other
comprehensive income 656 269 1,136
Treasury stock (382) (382) (382)
Total shareholders'
equity $43,628 $40,399 $37,641
Depreciation and amortization $ 3,809 $ 3,469 $ 2,826
Dividends per share $.18 $.178 $.163
Continued
OTHER FINANCIAL HIGHLIGHTS
Years Ended December 31
(In thousands, except for
per share data) 1995 1994
Working capital $15,751 $17,935
Total assets $67,960 $70,120
Long-term debt $ 9,100 $11,136
Long-term benefit
obligations $ 4,409 $ 4,431
Shareholders' equity:
Capital stock and
additional
paid-in capital $17,214 $17,182
Retained earnings 16,390 14,886
Accumulated other
comprehensive income 1,434 1,412
Treasury stock (382) (382)
Total shareholders'
equity $34,656 $33,098
Depreciation and
amortization $ 2,771 $ 2,732
Dividends per share $.154 $.137
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Consolidated net sales decreased 10.4% to $99.5 million in 1998 from
$111.2 million in 1997. Net sales from the heat technology segment
decreased to $46.4 million in 1998 compared to $63 million in 1997. The
decline in sales in 1998 is attributable in part to lower sales backlog
of large custom engineered contracts as of the beginning of 1998 compared
to the beginning of 1997. The February, 1998 acquisition of CFR
generated sales of $14.5 million for the year which partially offset some
of the decrease for the period. Sales and earnings of large custom
engineered contracts are recognized on the percentage of completion
method and generally require more than twelve months to complete. The
Company is not dependent on any one heat technology customer on an
ongoing basis. Backlog for the heat technology segment was $24.8 million
as of December 31, 1998 compared to $12.2 million at December 31, 1997.
The Company's precision miniature medical and electronic products segment
net sales increased to $37 million in 1998 from $33.3 million in 1997.
The increase in sales is partially attributable to the acquisition of IMB
Electronic Products, Inc. (IMB) in May, 1998 and RTI Technologies PTE LTD
(RTIT) in October, 1998. Also impacting this segment's increased revenue
were higher sales of hybrid electromechanical systems and plastic
component sales to its hearing health customers, which were partially
offset by lower sales in the electronic products segment due to the Asian
economic situation.
Net sales for the tire holders, lifts and related products segment
increased to $16.1 million in 1998 compared to sales of $14.9 million in
1997. The increase in revenue is primarily due to higher unit sales of
tire lifts to the domestic automotive industry.
The Company's gross profit margin as a percentage-of-sales increased
slightly to 22.8% in 1998 from 21.1% in 1997. Gross profit margins for
the heat technology segment increased to 18.7% for 1998 compared to 14.7%
in 1997. Heat technology gross profit margins vary markedly from
contract to contract, depending on customer specifications and other
conditions related to the contract. The gross profit margins in 1998 and
1997 were impacted by several contracts that had higher than expected
costs. Heat
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
technology reserves for guarantee obligations and estimated future costs
of services decreased to $2.3 million in 1998 from $2.7 million in 1997
due to the completion of several contracts during the year. Guarantee
obligations and estimated future service costs on these contracts extend
for up to one year from completion.
Gross profit margins for the precision miniature medical and electronic
products segment declined to 29.3% in 1998 from 35.1% in 1997. The lower
gross profit margins are partially attributable to the acquisition of IMB
in May, 1998 and RTIT in October, 1998 as their products, while
profitable, do not achieve the historical gross profit margins of this
business segment. To a lesser degree, the gross profit margins are
impacted by the mix of sales between 1998 and 1997 as electromechanical
systems and plastic component parts have varying profit margins. Further
affecting the gross profit margins of the electronic products line is the
severe price competition from competitors and the Asian economic
situation.
Gross profit margins for the tire holders, lifts and related products
segment improved to 19.8% in 1998 from 17% in 1997. The improvement in
1998 is due to efficiencies from higher production through the increased
sale of tire lifts.
Selling, general and administrative expenses increased 9.7% to $17.9
million as compared to 1997 expenses of $16.3 million. Approximately
$1.5 million of the increase is due to the acquisitions of CFR and IMB
during the year.
Research and development costs amounted to $1.6 million in 1998 compared
to $1.5 million in 1997. Interest expense increased in 1998 to $1.1
million compared to $1 million in 1997, due to increased borrowings
partially offset by lower average interest rates. Interest income
decreased to $.1 million in 1998 compared to $.2 million in 1997, due to
lower average funds available for investment in 1998.
Other (income) expense included gains on foreign currency transactions of
$176,000 and $14,000 in 1998 and 1997, respectively.
The effective tax rate in 1998 and 1997 on income before income taxes was
8.6% and 31%, respectively. The lower rate in 1998 is due principally to
the reduction of the valuation allowance on deferred tax assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In the second quarter of 1998, the Company reduced the valuation
allowance applied against deferred tax benefits associated with domestic
postretirement benefit obligations by $724,512 and against certain
domestic employee pension plan obligations by $33,694. The reduction in
the valuation allowance was based on several factors including: recent
acquisitions, past earnings history and trends, reasonable and prudent
tax planning strategies, and the expiration dates of carryforwards.
Realization of future tax benefits related to deferred tax assets is
dependent on many factors, including acquisitions, past earnings history
and trends, reasonable and prudent tax planning strategies, the
expiration dates of carryforwards, the Company's ability to generate
taxable income within the foreign subsidiary's net operating loss period
and the timing of the reversal of the postretirement benefit and pension
plan obligations in the future. Management has considered these factors
in reaching its conclusion as to the adequacy of the valuation allowance
for financial reporting purposes. The Company continually reviews the
adequacy of the valuation allowance and recognizes benefits only as
reassessment indicates that it is more likely than not benefits will be
realized.
Consolidated net income of $3.6 million in 1998 decreased 17.7% from $4.4
million in 1997. The Company's heat technology segment had lower
earnings of $1.1 million in 1998 compared to $1.8 million in 1997 due to
lower sales and several contracts that had higher costs. The precision
miniature medical and electronic products segment's income decreased to
$1.6 million in 1998 from $2.1 million in 1997, as a result of the
change in the product mix of sales and increased competition. The
Company's tire holders, lifts and related products segment increased its
net income in 1998 to $.9 million compared to $.5 million in 1997 as a
result of its increased tire lift production and sales. Net income was
also impacted by the reduction of the valuation allowance applied against
deferred tax benefits of $.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated net working capital decreased to $17.2 million at December
31, 1998 from $18.6 million at December 31, 1997. The lower working
capital was due in part to the 1998 acquisitions of CFR, IMB and RTIT,
repayment of long-term debt obligations, payment of dividends and capital
expenditures, partially offset by the earnings for the year. The major
changes in the components of working capital were an increase in
inventories of $2.6 million offset by an increase in short-term
borrowings of $4.3 million, both due to the 1998 acquisitions. Other
changes are a decrease in accounts receivable and a decrease in accrued
expenses and customer advances, which are primarily due to the level of
activity in the heat technology segment. The change in deferred taxes is
the result of the reduction of the valuation allowance and the
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
recognition of tax benefits connected with foreign net operating losses.
The Company's long-term debt at December 31, 1998 was $6.3 million. The
decrease in long-term debt is due to repayments during the year. The
increase in notes payable is the result of the acquisitions of CFR, IMB
and RTIT during 1998. Under the terms of Selas' credit facility, there
are covenants that may restrict the payment of future dividends. The
credit facility required the Company to maintain consolidated tangible
capital funds of approximately $23.7 milion through December 31, 1998
consisting of shareholders' equity, plus subordinated debt, less
intangible assets increased annually by 60% of net income and 60% of the
aggregate amount of contributions to capital. At December 31, 1998, the
Company exceeded the amount required to satisfy this covenant in the
credit facility by $3 million.
The Company's French subsidiary, Selas S.A., has an interest rate swap
agreement for the purpose of managing interest rate expense. The total
notional amount of $2.1 million will decrease consistent with the terms
of the related long-term debt agreement. The swap agreement requires
fixed interest payments based on an effective rate of 8.55% for the
remaining term through May, 2006. Additional interest incurred during
1998 and 1997 in connection with the swap arrangement amounted to $81,512
and $95,584, respectively.
The Company believes that its present working capital position combined
with funds expected to be generated from operations and the available
borrowing capacity through its revolving credit loan facilities will be
sufficient to meet its anticipated cash requirements for operating needs
and capital expenditures.
A significant portion of the heat technology segment sales are
denominated in foreign currencies, primarily the French franc.
Generally, the income statement effect of changes in foreign currencies
is partially or wholly offset by the European subsidiaries' ability to
make corresponding price changes in the local currency. The impact of
fluctuations in foreign currencies did not have a material effect on the
financial results of the Company in 1998, 1997 or 1996.
The Company is a defendant along with a number of other parties in
approximately 147 lawsuits as of December 31, 1998 (215 as of December
31, 1997) 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
The Company was one of approximately 500 defendants in a class action on
behalf of approximately 2,700 present and former employees of a Texas
steel mill. The cases were being defended by one or more of the
Company's insurance carriers presently known to be "at risk". In
October, 1998, the class action suit was settled. The Company's
insurance carriers have not asked the Company to contribute to any
settlement payments made by them in connection with this settlement.
The Company is aware of the issues associated with the Year 2000 problem.
The "Year 2000" matter relates to whether computer hardware, software and
equipment will properly recognize date sensitive information referring to
the Year 2000. Potential computer system and equipment failures arising
from years beginning with "20" rather than "19" are a known risk.
The Company currently has a program underway to remediate by the second
quarter of 1999 all of the Company's significant computer systems that
are not Year 2000 compliant. The program is divided into three major
components: (1) identification of all information technology systems
("IT Systems") and non-information technology systems ("Non-IT Systems")
that are not Year 2000 compliant; (2) repair or replacement of the
identified non-compliant systems; and (3) testing of the repaired or
replaced systems. Approximately 25% of the IT Systems the Company uses
are in-house developed. Commercially developed software, the majority of
which is periodically upgraded through existing maintenance contracts,
accounts for the balance. Part (1) and (2) of the Company's Year 2000
program are substantially complete. Review of accounting and financial
reporting systems is finished, and the Company is continuing to review
Non-IT Systems that have embedded microprocessors in various types of
equipment. Part (2), repairing and replacing, has been completed for
both in-house and commercially developed IT Systems. Part (3), testing,
is underway and the Company has targeted the end of the second quarter of
1999 as a completion date.
The Company has been inquiring of certain key suppliers and business
partners about their Year 2000 readiness. While no assurances can be
given that key suppliers and business partners will remedy their own Year
2000 issues, the Company to date has not identified any material impact
on its ability to continue normal business operations with suppliers or
other third parties who fail to address the Year 2000 issue.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Actual costs associated with implementation of the Company's Year 2000
program are not expected to be material to the Company's operations and
financial condition. Costs of $200,000 to $250,000, primarily for
software and outside services, have been or are expected to be incurred
and expensed. As of December 31, 1998, approximately $150,000 of costs
have been expended.
The Company will continue to monitor and evaluate the impact of the Year
2000 issue on its operations. Until the Company has completed the final
testing part of its program, the risks from potential Year 2000 failures
cannot be fully assessed. Due to this situation, the Company cannot now
begin final contingency plans. These plans will be developed as
potential Year 2000 failures are identified in the final testing stages.
Nevertheless, if remediation is not accomplished successfully in a timely
fashion and successful contingency plans are not implemented, the Company
believes the Year 2000 issue could have a material adverse effect on the
Company.
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency -- the Euro.
The Euro trades on currency exchanges and may be used in business
transactions. The conversion to the Euro will eliminate currency
exchange risk between the member countries. Beginning in January 2002,
new Euro-denominated bills and coins will be issued, and legacy
currencies will be withdrawn from circulation. The Company has
recognized this situation and is currently in the process of developing a
plan to address any issue being raised by the currency conversion.
Possible issues include, but are not limited to, the need to adapt
computer and financial systems to recognize Euro-denominated
transactions, as well as the impact of one common European currency on
pricing. The Company anticipates that any unaddressed issues will be
resolved during 1999.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement
standardizes the accounting for derivative instruments, including
derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The statement is
effective for fiscal years beginning after June 15, 1999. Management has
not yet determined the impact that the adoption of this statement may
have on earnings, financial condition or liquidity of the Company. The
Company plans to adopt SFAS No. 133 as permitted by this accounting
standard by January 1, 2000.
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1 "Accounting For the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is
effective for financial statements for fiscal years beginning after
December 15, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP provides guidance on the financial
reporting of start-up costs and organization costs. The SOP requires
costs related to start-up activities and organization costs be expensed
as incurred. The statement is effective for financial statements for
fiscal years beginning after December 15, 1998.
The Company plans to adopt these SOP's in connection with the preparation
of the December 31, 1999 consolidated financial statements as permitted
by SOP 98-1 and 98-5. The adoption of these standards is not expected to
have a material impact on consolidated results, financial conditions, or
long-term liquidity.
1997 COMPARED WITH 1996
Consolidated sales increased 7.5% to $111.2 million in 1997 from $103.4
million in 1996. Net sales from the heat technology segment were $63
million in 1997 compared to $62.8 million in 1996. The slight increase
in sales for 1997 is attributed to the high level of backlog at December
31, 1996, coupled with additional bookings in 1997. The turmoil in the
Asian markets also had an impact on sales and bookings in 1997 as several
highly expected orders were delayed and put on hold by our customers.
Approximately 10.6% of 1997 revenue is related to contracts or sales to
customers in Asia. Due to the nature of the Company's large custom-
engineered contracts, one contract may account for a large percentage of
sales in a particular period; however, the Company is not dependent on
any one heat technology customer on an ongoing basis. Backlog for the
heat technology segment was down to $12.2 million at December 31, 1997
compared to $55.5 million at December 31, 1996. In February, 1998 this
business segment received orders for several projects in excess of $17
million.
The Company's precision miniature medical and electronic products segment
sales increased to $33.3 million in 1997 from $27.4 million in 1996. The
majority of the increase in sales for 1997 is attributed to the February,
1997 acquisition of RTI Electronics which had sales of $5.7 million in
1997. There was also a mix in products sold to the hearing aid industry
as plastic component part sales were slightly below the 1996 level and
microminiature system sales were higher in 1997.
Net sales for the tire holders, lifts and related products segment
increased to $14.9 million in 1997 from $13.2 million in 1996. The
increase in sales is primarily due to higher tire lift sales to domestic
automotive manufacturers, and, to a lesser degree, to overseas automotive
manufacturers.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's gross profit margin as a percentage-of-sales decreased to
21.1% in 1997 from 21.8% in 1996. Gross profit margins for the heat
technology segment decreased to 14.7% in 1997 from 16% in 1996. Heat
technology gross profit margins vary markedly from contract to contract,
depending on customer specifications and other conditions related to the
contract. The gross profit margins were impacted by two contracts in
1997 and one contract in 1996 that had losses that impacted the segment's
overall gross profit margins. Heat technology reserves for guarantee
obligations and estimated future costs of services increased to $2.7
million in 1997 from $1.7 million in 1996 due to several large custom-
engineered contracts in process, recently completed, or near completion
in 1997 compared to 1996. Guarantee obligations and estimated future
service costs on these contracts extend for up to one year from
completion.
Gross profit for the precision miniature medical and electronic products
segment decreased to 35.1% in 1997 from 39% in 1996. The lower gross
profit margins in 1997 are attributable to the acquisition of RTI
Electronics in February, 1997 as its products, while profitable, do not
achieve the historical gross profit margins of this business segment.
Also impacting the lower 1997 gross profit margins, but to a lesser
degree, is the mix of sales between 1997 and 1996 as microminiature
systems and plastic component parts have varying profit margins.
Gross profit margins for the tire holders, lifts and related products
segment improved to 17% in 1997 from 13.6% in 1996. The improvement in
1997 is due to efficiencies from higher production through the increased
sales of tire lifts.
Selling, general and administrative (SG&A) expenses increased 8.3% to
$16.3 million in 1997, up from $15 million in 1996. Approximately $.4
million of the increase is due to costs related to the proposed
acquisition of MRL Industries, Inc., which acquisition has since been
terminated, and the SG&A costs of RTI Electronics which account for the
balance of the increase in 1997 or approximately $.9 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Research and development costs amounted to $1.5 million in 1997 compared
to $1.4 million in 1996.
Interest expense decreased in 1997 to $1 million compared to $1.2 million
in 1996, due to lower average borrowings in 1997. Interest income
decreased to $.2 million in 1997 compared to $.3 million in 1996, due to
lower average funds available for investment in 1997.
Other (income) expense included a gain on foreign currency transactions
of $14,000 in 1997 compared to a loss of $8,000 in 1996.
The effective tax rate in 1997 and 1996 on income before income taxes was
31% and 36.7%, respectively. The lower rate in 1997 is due to the
benefit of utilizing net foreign operating loss carryforwards, coupled
with lower effective state taxes in 1997.
Consolidated net income of $4.4 million in 1997 was up 6.2% from $4.1
million in 1996. The largest increase was in the Company's tire holders,
lifts and related products segment which increased to $.5 million in 1997
compared to $.1 million in 1996. The precision miniature medical and
electronic products increased its net income in 1997 to $2.1 million from
$2.0 million in 1996. The Company's heat technology segment was impacted
by additional costs of $.4 million relating to the proposed acquisition
of MRL Industries, Inc. which resulted in lower earnings in 1997 of $1.8
million compared to $2 million in 1996.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements herein that include forward-looking terminology such
as "may", "will", "should", "expect", "anticipate", "estimate", "plan" or
"continue" or the negative thereof or other variations thereon are, or
could be deemed to be, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. 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, and the cyclical
nature of the market for large heat technology contracts. Reference is
made to the Company's 1998 Annual Report on Form 10-K regarding other
important factors that could cause the actual results, performance or
achievement of the Company to differ materially from those contained in
or implied by any forward-looking statement made by or on behalf of the
Company, including forward-looking statements contained herein.
SELAS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 1998 1997 1996
Sales, net . . . . . . . . $ 99,554,554 $111,164,563 $103,426,075
Operating costs and expenses
Cost of sales . . . . . 76,832,570 87,703,693 80,870,331
Selling, general and
administrative expenses 17,863,587 16,289,388 15,033,728
Operating income . . . . . 4,858,397 7,171,482 7,522,016
Interest expense . . . . . 1,139,274 1,039,524 1,212,194
Interest (income). . . . . (145,047) (237,592 (297,806)
Other (income) expense, net (85,677) 8,385 82,475
Income before income taxes 3,949,847 6,361,165 6,525,153
Income taxes . . . . . . 340,325 1,973,956 2,394,958
Net income . . . . . . . . $ 3,609,522 $ 4,387,209 4,130,195
============ ============ =========
Earnings per share
Basic . . . . . . . . . $.69 $.84 $.80
============ ============ ============
Diluted . . . . . . . . $.68 $.82 $.78
============ ============ ============
Comprehensive income . . . $ 3,996,304 $ 3,519,950 $3,833,014
============ ============ ==========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
ASSETS 1998 1997
Current assets
Cash, including cash equivalents
of $313,000 in 1998 and
$2,579,000 in 1997 . . . . . . . . . .$ 2,784,284 $ 3,034,903
Accounts and notes receivable, (including
unbilled receivables of $3,898,000 in
1998 and $6,574,000 in 1997) less
allowance for doubtful accounts of
$1,994,000 in 1998 and $681,000 in
1997 30,494,933 30,931,625
Inventories . . . . . . . . . . . . . . 12,628,623 9,999,140
Deferred income taxes . . . . . . . . . .3,603,701 2,840,423
Other current assets . . . . . . . . . . 1,332,135 919,608
Total current assets . . . . . . . . 50,843,676 47,725,699
Investment in unconsolidated affiliate . . . 538,913 472,689
Property, plant and equipment
Land . . . . . . . . . . . . . . . . . .1,077,522 1,041,869
Buildings . . . . . . . . . . . . . . . 12,129,811 10,839,950
Machinery and equipment . . . . . . . . 25,788,736 22,720,633
38,996,069 34,602,452
Less: Accumulated depreciation . . . . 20,038,177 17,284,665
Net property, plant and equipment. . 18,957,892 17,317,787
Deferred pension cost . . . . . . . . . . . -- 56,973
Excess of cost over net assets of acquired
subsidiaries, less accumulated
amortization of $2,452,000 and
$1,696,000 16,813,073 15,502,201
Other assets, less amortization . . . . . 627,009 719,715
$87,780,563 $81,795,064
=========== ===========
See accompanying notes to the consolidated financial statements.
December 31, 1998 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
Current liabilities
Notes payable . . . . . . . . . . . . . $ 4,701,279 $ 975,804
Current maturities of long-term debt . . 3,178,241 2,618,463
Accounts payable . . . . . . . . . . . .15,410,642 14,336,607
Federal, state and foreign income taxes . 838,634 693,240
Customers' advance payments on contracts 697,270 902,592
Guarantee obligations and estimated future
costs of service . . . . . . . . . . . 2,294,889 2,705,293
Other accrued liabilities . . . . . . 6,512,016 6,851,846
Total current liabilities . . . . 33,632,971 29,083,845
Long-term debt . . . . . . . . . . . . 6,265,720 7,015,080
Pension plan obligation . . . . . . . . -- 56,973
Other postretirement benefit obligations 4,096,057 4,024,217
Deferred income taxes . . . . . . . . . 157,575 1,215,436
Contingencies and commitments
Shareholders' equity
Common shares, $1 par; 10,000,000 shares
authorized; 5,615,081 and 5,589,324
shares issued, respectively . . . . . 5,615,081 5,589,324
Additional paid-in capital . . . . . . 11,941,498 11,792,878
Retained earnings . . . . . . . . . . . 25,797,823 23,130,255
Accumulated other comprehensive income 655,775 268,993
44,010,177 40,781,450
Less: 363,564 common shares held in
treasury, at cost . . . . . . . . . 381,937 381,937
Total shareholders' equity . . . 43,628,240 40,399,513
$87,780,563 $81,795,064
=========== ===========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1998
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 3,609,522
Adjustments to reconcile net income to net cash
provided byoperating activities:
Depreciation and amortization . . . . . . . . 3,809,245
Equity in (income) loss of unconsolidated
affiliate (2,924)
(Gain) loss on sale of property and equipment 999
Deferred taxes . . . . . . . . . . . . . . . . (2,013,714)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . 2,036,197
(Increase) in inventories . . . . . . . . . (609,863)
(Increase) decrease in other assets . . . . 47,134
Increase (decrease) in accounts payable . . 280,579
Increase (decrease) in accrued expenses . . (2,513,121)
Increase (decrease) in customer advances . (1,108,010)
Increase (decrease) in other liabilities . 115,049
Net cash provided by operating activities 3,651,093
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . (3,554,540)
Proceeds from sale of equity in affiliate . . . . --
Proceeds from sales of property and equipment. . . 18,837
Dividend from unconsolidated affiliate . . . . . . --
Acquisition of subsidiary companies, net of cash
acquired (2,776,230)
Net cash (used) by investing activities . (6,311,933)
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . . 4,095,199
Repayments of short-term borrowings . . . . . . . . --
Proceeds from borrowings used to acquire
subsidiaries 2,542,373
Proceeds from long-term debt . . . . . . . . . . . . --
Repayments of long-term debt . . . . . . . . . . . . (3,483,296)
Proceeds from exercise of stock options . . . . . . 10,196
Payment of dividends . . . . . . . . . . . . . . . (941,954)
Net cash provided (used) by financing
activities 2,222,518
Effect of exchange rate changes on cash . . . . . . . 187,703
Increase (decrease) in cash and cash equivalents . . . (250,619)
Cash and cash equivalents beginning of year. . . . . . 3,034,903
Cash and cash equivalents end of year. . . . . . . . . $ 2,784,284
===========
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1997
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 4,387,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . 3,468,498
Equity in (income) loss of unconsolidated
affiliate . . . . . . . . . . . . . . . . . . 4,715
(Gain) loss on sale of property and equipment . 3,965
Deferred taxes . . . . . . . . . . . . . . . . . (683,615)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . 5,900,924
(Increase) in inventories . . . . . . . . . (1,296,090)
(Increase) decrease in other assets . . . . (651,087)
Increase (decrease) in accounts payable . . (2,788,173)
Increase (decrease) in accrued expenses . . (1,334,874)
Increase (decrease) in customer advances . (3,373,838)
Increase (decrease) in other liabilities . (29,709)
Net cash provided by operating
activities . . . . . . 3,607,925
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . (3,662,783)
Proceeds from sale of equity in affiliate . . . . . . --
Proceeds from sales of property and equipment. . . . . 12,052
Dividend from unconsolidated affiliate . . . . . . . . --
Acquisition of subsidiary companies, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . (5,151,620)
Net cash (used) by investing activities . (8,802,351)
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . . 1,000,725
Repayments of short-term borrowings . . . . . . . . (513,448)
Proceeds from borrowings used to acquire
subsidiaries . . . . . . . . . . . . . . . . . . . 3,500,000
Proceeds from long-term debt . . . . . . . . . . . . 176,793
Repayments of long-term debt . . . . . . . . . . . . (2,846,487)
Proceeds from exercise of stock options . . . . . . 155,518
Payment of dividends . . . . . . . . . . . . . . . (929,684)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . 543,417
Effect of exchange rate changes on cash . . . . . . . (657,908)
Increase (decrease) in cash and cash equivalents . . . (5,308,917)
Cash and cash equivalents beginning of year. . . . . . 8,343,820
Cash and cash equivalents end of year. . . . . . . . . $ 3,034,903
===========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1996
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 4,130,195
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . 2,826,038
Equity in (income) loss of unconsolidated
affiliate . . . . . . . . . . . . . . . . . . 115,880
(Gain) loss on sale of property and equipment . (1,163)
Deferred taxes . . . . . . . . . . . . . . . . . (718,935)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . (19,912,666)
(Increase) in inventories . . . . . . . . . (677,400)
(Increase) decrease in other assets . . . . 788,452
Increase (decrease) in accounts payable . . 15,103,964
Increase (decrease) in accrued expenses . . 7,635,111
Increase (decrease) in customer advances . 2,553,785
Increase (decrease) in other liabilities . (53,122)
Net cash provided by operating activities . 11,790,139
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . (2,859,166)
Proceeds from sale of equity in affiliate . . . . 575,826
Proceeds from sales of property and equipment. . . 35,827
Dividend from unconsolidated affiliate . . . . . . 16,742
Acquisition of subsidiary companies, net of cash
acquired . . . . . . . . . . . . . . . . . . . --
Net cash (used) by investing
activities . . . . . . . . . . . . . . (2,230,771)
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . --
Repayments of short-term borrowings . . . . . . . (2,012,413)
Proceeds from borrowings used to acquire
subsidiaries . . . . . . . . . . . . . . . . . --
Proceeds from long-term debt . . . . . . . . . . . --
Repayments of long-term debt . . . . . . . . . . . (2,102,684)
Proceeds from exercise of stock options . . . . . --
Payment of dividends . . . . . . . . . . . . . . (847,712)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . (4,962,809)
Effect of exchange rate changes on cash . . . . . . (165,103)
Increase (decrease) in cash and cash equivalents . . 4,431,456
Cash and cash equivalents beginning of year. . . . . 3,912,364
Cash and cash equivalents end of year. . . . . . . . $ 8,343,820
============
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Common Stock Additional
Number of Paid-In
Shares Amount Capital
Balance, January 1, 1996 5,553,639 $5,553,639 $11,660,792
Net income
Translation (loss)
Change in minimum pension
liability
Cash dividends paid
($.163 per share)
Comprehensive income
Balance, December 31, 1996 5,553,639 5,553,639 11,660,792
Net income
Translation (loss)
Exercise of 35,685 stock
options 35,685 35,685 132,086
Cash dividends paid
($.178 per share)
Comprehensive income
Balance, December 31, 1997 5,589,324 5,589,324 11,792,878
Net income
Translation gain
Exercise of 2,200 stock
options 2,200 2,200 8,505
Issuance of 23,557 shares
for acquisition 23,557 23,557 140,115
Cash dividends paid
($.18 per share)
Comprehensive income
Balance, December 31, 1998 5,615,081 $5,615,081 $11,941,498
========== ========== ===========
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Accumulated
Other
Retained Comprehensive Comprehensive
Earnings Income Income
Balance, January 1, 1996 $16,390,247 $1,433,433
Net income 4,130,195 $ 4,130,195
Translation (loss) (303,691) (303,691)
Change in minimum pension
liability 6,510 6,510
Cash dividends paid
($.163 per share) (847,712)
Comprehensive income $ 3,833,014
===========
Balance, December 31, 1996 19,672,730 1,136,252
Net income 4,387,209 $ 4,387,209
Translation (loss) (867,259) (867,259)
Exercise of 35,685 stock
options
Cash dividends paid
($.178 per share) (929,684)
Comprehensive income $ 3,519,950
===========
Balance, December 31, 1997 23,130,255 268,993
Net income 3,609,522 $ 3,609,522
Translation gain 386,782 386,782
Exercise of 2,200 stock
options
Issuance of 23,557 shares
for acquisition
Cash dividends paid
($.18 per share) (941,954)
Comprehensive income $ 3,996,304
===========
Balance, December 31, 1998 $25,797,823 $ 655,775
========== ==========
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Total
Treasury Shareholders'
Stock Equity
Balance, January 1, 1996 $(381,937) $34,656,174
Net income 4,130,195
Translation (loss) (303,691)
Change in minimum pension
liability 6,510
Cash dividends paid
($.163 per share) (847,712)
Comprehensive income
Balance, December 31, 1996 (381,937) 37,641,476
Net income 4,387,209
Translation (loss) (867,259)
Exercise of 35,685 stock
options 167,771
Cash dividends paid
($.178 per share) (929,684)
Comprehensive income
Balance, December 31, 1997 (381,937) 40,399,513
Net income 3,609,522
Translation gain 386,782
Exercise of 2,200 stock
options 10,705
Issuance of 23,557 shares
for acquisition 163,672
Cash dividends paid
($.18 per share) (941,954)
Comprehensive income
Balance, December 31, 1998 $(381,937) $43,628,240
========== ===========
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Selas Corporation of America is a diversified firm with international
operations and sales that engages in the design, development, engineering
and manufacturing of a range of products. The Company, headquartered in
Dresher, Pennsylvania with subsidiaries in Minnesota, Ohio, California,
England, France, Germany, Italy, Portugal and Singapore (and a 50% joint
venture in Japan), operates directly or through subsidiaries in three
business segments.
Under the Selas TM name, the Heat Technology segment designs and
manufactures specialized industrial heat technology systems and equipment
for steel, glass and other manufacturers worldwide. The Company's
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components and molded plastic parts primarily
for the hearing instrument manufacturing industry and also for the
electronics, telecommunications, computer and medical equipment
industries. The Company's Tire Holders, Lifts and Related Products
segment manufactures products, primarily based on cable winch designs,
for use principally as original equipment by the pick-up truck and
minivan segment of the automotive industry.
CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany transactions have been eliminated in consolidation.
AFFILIATED COMPANY - The Company accounts for its investment in a 50%
interest in Nippon Selas Co. Ltd., Tokyo, Japan on the equity method.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
INVENTORIES - Inventories, other than inventoried costs relating to long-
term contracts, are stated at the lower of cost or market. The cost of
the inventories was determined by the average cost and first in, first
out method. Inventoried costs relating to long-term contracts are stated
at the production and engineering cost, including overhead as well as
actual costs incurred from sub-contractors, which are not in excess of
estimated realizable value.
REVENUE RECOGNITION - As long-term contracts progress, the Company
records sales and cost of sales based on the percentage-of-completion
method, whereby the sales value is determined by multiplying the total
contract amount by the percent of costs incurred to estimated total
costs. Such contract costs and expenses incurred on a progress basis at
the time the sales value is recorded are charged to cost of sales.
General and administrative costs are expensed as incurred. The Company
provides currently for anticipated and known contract losses. Guarantee
obligations and estimated future contract costs of services on large
custom-engineered contracts are based on past experience of similar
projects. Due to the nature of large custom-engineered contracts, the
guarantee obligations and estimated future costs will vary significantly
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
from contract to contract. Revisions in cost estimates during the
progress of the work under the contracts have the effect of including in
the current accounting period adjustments necessary to reflect the
results indicated by the revised estimates of final cost. Sales of
manufactured products not sold under long-term contracts are recorded
upon shipment to the customer.
License fees under agreements not requiring substantial services are
recognized at time of effectiveness of the license agreement.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried
at cost. Depreciation is computed by straight line and accelerated
methods using estimated useful lives of 5 to 50 years for buildings and
improvements, and 3 to 12 years for machinery and equipment.
Improvements are capitalized and expenditures for
maintenance, repairs and minor renewals are charged to expense when
incurred. At the time assets are retired or sold, the costs and
accumulated depreciation are eliminated and the resulting gain or loss,
if any, is reflected in the consolidated statement of operations.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED SUBSIDIARIES - Goodwill
represents the excess of purchase price over fair value of net assets
acquired and is amortized on a straight-line basis over the expected
periods to be benefited, which currently is between fifteen and forty
years.
Patents and other intangible assets are valued at the lower of amortized
cost or fair market value and are amortized on a straight-line basis over
the expected periods to be benefited, which currently is 5 to 20 years.
The Company assesses the recoverability of intangible assets by
determining whether the amortization of the balance over its remaining
life can be recovered through projected undiscounted future cash flows of
the business for which the intangible assets arose. The amount of the
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds or fair value of the asset, where appropriate. The
assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
INCOME TAXES - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company has only limited
involvement with derivative financial instruments and does not use them
for trading purposes. They are used to manage well-defined interest rate
and foreign currency risks. The differential to be paid or
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
received on interest rate swap agreements is accrued as interest rates
change and recognized as an adjustment to interest expense. The gains
and losses on foreign currency exchange contracts are deferred and
recognized when the offsetting gains and losses are recognized on the
related hedged items.
EMPLOYEE BENEFIT OBLIGATIONS - The Company provides health care insurance
for certain domestic retirees and employees. The Company also provides
retirement related benefits for certain foreign employees. The Company
measures the costs of its obligation based on its best estimate. The net
periodic costs are recognized as employees render the services necessary
to earn the postretirement benefit.
Deferred pension costs are actuarially determined and are amortized on a
straight-line basis over the expected periods to be benefited, which
currently is 15 years.
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits." SFAS 132 revises the employers' disclosure
about pensions and other postretirement benefit plans, however, it does
not change the measurement or recognition of those plans. Prior year
disclosures have been restated.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs,
including supporting services, amounted to $1,606,000 in 1998, $1,527,000
in 1997 and $1,404,000 in 1996. Such costs are charged to expense when
incurred.
EARNINGS PER SHARE - Basic earnings per share are computed by dividing
net income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share reflects
the potential dilution of securities that could share in the earnings.
USE OF ESTIMATES - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, the recording of reported amounts of revenues and expenses
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
COMPREHENSIVE INCOME - In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 establishes the standards for
the reporting of comprehensive income and its components. Comprehensive
income consists of net income, minimum pension liability adjustment and
foreign currency translation adjustments and is presented in the
Consolidated Statement of Shareholders' Equity. The adoption of SFAS 130
had no impact on total shareholders' equity. Prior year financial
statements have been reclassified to conform to SFAS 130 requirements.
SEGMENT DISCLOSURES - In 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS 131 establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic
areas and major customers. Prior year financial statements have been
reclassified to conform to SFAS 131 requirements.
2. ACQUISITIONS
On February 28, 1998, the Company acquired the stock of CFR, a firm in
the engineered industrial furnace business. The principal market served
by CFR is engineered batch and continuous furnaces for heat treating both
ferrous and non-ferrous metals, along with supplying furnaces for the
hardening and etching of glass and ceramic tableware. CFR had sales for
the year ended December 31, 1997 of 107.5 million French francs (FF) or
approximately $18.3 million. The purchase price was 15 million FF or
approximately $2.5 million which was paid for by additional bank
borrowings of 15 million FF at a fixed rate of 5.65% for 5 years. The
acquisition was accounted for as a purchase and the excess of the fair
value of the assets (goodwill) is being amortized on a straight line
basis over 20 years.
On May 27, 1998, a subsidiary of the Company acquired the stock of IMB
Electronic Products, Inc., (IMB) a manufacturer of film capacitors,
which are energy storage devices used primarily to resist changes in
voltage. IMB had sales for the fiscal year ending November 30, 1997 of
$2,953,000. The purchase price of $1.3 million was funded through the
domestic line of credit. The acquisition was accounted for as a purchase
and the excess of the fair value of the assets (goodwill) is being
amortized on a straight line basis over 20 years.
On October 28, 1998, a newly formed subsidiary of the Company, RTI
Technologies PTE LTD, acquired certain assets and liabilities of Lectret,
a manufacturer of microphone capsules. The purchase price of $1.1
million was financed through the domestic line of credit. The
acquisition was accounted for as a purchase and the excess of the fair
value of the assets (goodwill) is being amortized on a straight line
basis over 15 years.
On February 21, 1997, the Company acquired the assets and assumed certain
liabilities of Rodan Division of Ketema, Inc., a manufacturer of
thermistors and thermistor assemblies used primarily as an electric
current limiting device to protect computer installations. The purchase
price was $4.75 million in cash and, additionally, up to a maximum of
85,000 shares of the Company's common stock tied to the operation's
earnings for the twelve months ended February 28, 1998. During 1998, the
Company issued 23,557 shares of the Company's common stock with a value
of $163,672 as additional consideration related to the acquisition. The
number of shares was tied to the operation's earnings for the twelve
months ended February 28, 1998. Goodwill was increased by the value of
the common stock issued. This acquisition was accounted for as a
purchase and the excess of the fair value of the assets (goodwill) is
being amortized on a straight line basis over 15 years. In financing the
acquisition, the Company increased its bank borrowings by $3.5 million.
The following table presents the unaudited proforma results of operations
as if the acquisition of CFR, IMB, RTIT and the Rodan Division of Ketema,
Inc. had occurred at the beginning of each respective period presented
after giving effect to certain adjustments, including amortization of
goodwill, increased interest expense on acquisition debt and related
income tax effects. These proforma results have been prepared for
comparative purposes only and do not purport to be indicative of what
would have occurred had the acquisition been made as of those dates or
results which may occur in the future.
2. ACQUISITIONS - (Continued)
Years Ended December 31
1998 1997
Net sales $103,636,000 $132,465,000
============ ============
Net income $ 3,872,000 $ 5,449,000
============ ============
Earnings per share:
Basic $.74 $1.05
============ ============
Diluted $.73 $1.02
============ ============
3. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Years Ended December 31
1998 1997 1996
Interest received $ 156,968 $ 218,061 $ 283,353
Interest paid $1,078,324 $ 913,312 $1,010,092
Income taxes paid $2,011,520 $2,311,305 $2,179,053
During 1998, the Company issued 23,557 shares of the Company's common
stock with a value of $163,672 as additional consideration related to the
1997 acquisition of the Rodan Division of Ketema, Inc. The number of
shares was tied to the operation's earnings for the twelve months ended
February 28, 1998.
4. BUSINESS SEGMENT INFORMATION
During 1998, the Company has adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which requires that
companies disclose segment data based on how management makes decisions
about allocating resources to segments and measuring their performance.
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 spare tire holders and lifts
for U.S. manufacturers of original equipment for light trucks and vans.
The results of operations and assets of these segments for the years
ended December 31, 1998, 1997 and 1996 are prepared on the same basis as
the consolidated financial statements.
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. The
accounting policies for each segment are described in the Company's
summary of significant accounting policies. See note 1 for further
information.
Interest expense has been allocated to the segments based on the specific
loan balance outstanding during the year. The corporate component of
operating income represents corporate selling, general and administrative
expenses.
For the year ended
December 31, 1998 Segments
Tire Holders,
Lifts
Heat and Related
Technology Products
Sales $46,404,713 $16,155,730
Operating costs and
expenses 45,246,138 14,782,644
General corporate expenses,
net -- --
Operating income 1,158,575 1,373,086
Interest expense 628,362 313
Interest (income) (122,948) --
(Earnings) of affiliate (2,924) --
Other (income) expense, net (69,325) (27,409)
Income before income
taxes (benefits) 725,410 1,400,182
Income taxes (benefits) (914,422) 523,799
Income taxes (benefits)
general corporate
expenses, net -- --
Net income $ 1,639,832 $ 876,383
=========== ===========
Depreciation and
amortization $ 636,323 $ 221,320
=========== ===========
Property, plant and
equipment additions $ 298,274 $ 157,928
=========== ===========
Total assets $44,106,733 $ 6,481,758
=========== ===========
Continued
4. BUSINESS SEGMENT INFORMATION (Continued)
For the year ended
December 31, 1998 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales $36,994,111 $99,554,554
Operating costs and
expenses 33,858,895 93,887,677
General corporate expenses,
net -- 808,480
Operating income 3,135,216 4,858,397
Interest expense 510,599 1,139,274
Interest (income) (22,099) (145,047)
(Earnings) of affiliate -- (2,924)
Other (income) expense, net 13,981 (82,753)
Income before income
taxes (benefits) 2,632,735 3,949,847
Income taxes (benefits) 1,054,340 663,717
Income taxes (benefits)
general corporate
expenses, net -- (323,392)
Net income $ 1,578,395 $ 3,609,522
=========== ===========
Depreciation and
amortization $ 2,951,602 $ 3,809,245
=========== ===========
Property, plant and
equipment additions $ 3,098,338 $ 3,554,540
=========== ===========
Total assets $37,192,072 $87,780,563
=========== ===========
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1997 Segments
Tire Holders, Lifts
Heat and Related
Technology Products
Sales, net $62,971,797 $14,938,301
Operating costs and
expenses 59,311,804 14,114,362
General corporate
expenses, net -- --
Operating income 3,659,993 823,939
Interest expense 396,578 1,174
Interest (income) (236,353) --
Losses of affiliate 4,715 --
Other (income) expense, net 113,357 (35,500)
Income before income
taxes (benefits) 3,381,696 858,265
Income taxes 939,902 318,601
Income taxes (benefits)
general corporate
expenses, net -- --
Net income $ 2,441,794 $ 539,664
=========== ===========
Depreciation and
amortization $ 511,014 $ 241,708
=========== ===========
Property, plant and
equipment additions $ 370,235 $ 342,649
=========== ===========
Total assets $42,487,156 $ 5,922,281
=========== ===========
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1997 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales, net $33,254,465 $111,164,563
Operating costs and
expenses 29,407,506 102,833,672
General corporate
expenses, net -- 1,159,409
Operating income 3,846,959 7,171,482
Interest expense 641,772 1,039,524
Interest (income) (1,239) (237,592)
Losses of affiliate -- 4,715
Other (income) expense, net (74,187) 3,670
Income before income
taxes (benefits) 3,280,613 6,361,165
Income taxes 1,179,217 2,437,720
Income taxes (benefits)
general corporate
expenses, net -- (463,764)
Net income $ 2,101,396 $ 4,387,209
=========== ============
Depreciation and
amortization $ 2,715,776 $ 3,468,498
=========== ============
Property, plant and
equipment additions $ 2,949,899 $ 3,662,783
=========== ============
Total assets $33,385,627 $ 81,795,064
=========== ============
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1996 Segments
Tire Holders
Lifts
Heat and Related
Technology Products
Sales $ 62,801,105 $ 13,208,814
Operating costs and
expenses 58,696,391 13,104,340
General corporate
expenses, net -- --
Operating income 4,104,714 104,474
Interest expense 646,656 729
Interest (income) (296,995) --
Losses of affiliate 115,880 --
Other (income) expense, net 20,003 (34,396)
Income before income
taxes (benefits) 3,619,170 138,141
Income taxes 1,326,613 42,094
Income taxes (benefits)
general corporate
expenses, net -- --
Net income $ 2,292,557 $ 96,047
============ ============
Depreciation and
amortization $ 487,422 $ 318,039
============ ============
Property, plant and
equipment additions $ 504,384 $ 109,940
============ ============
Total assets $ 59,138,027 $ 5,212,886
============ ============
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1996 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales $ 27,416,156 $103,426,075
Operating costs and
expenses 23,563,515 95,364,246
General corporate
expenses, net -- 539,813
Operating income 3,852,641 7,522,016
Interest expense 564,809 1,212,194
Interest (income) (811) (297,806)
Losses of affiliate -- 115,880
Other (income) expense, net (19,012) (33,405)
Income before income
taxes (benefits) 3,307,655 6,525,153
Income taxes 1,242,176 2,610,883
Income taxes (benefits)
general corporate
expenses, net -- (215,925)
Net income $ 2,065,479 $ 4,130,195
============ ============
Depreciation and
amortization $ 2,020,577 $ 2,826,038
============ =============
Property, plant and
equipment additions $ 2,244,842 $ 2,859,166
============ =============
Total assets $ 26,811,359 $ 91,162,272
============ ============
4. BUSINESS SEGMENT INFORMATION - (Continued)
The geographical distribution of identifiable assets and net sales to
geographical areas for the years ended December 31, 1998, 1997, and 1996
are set forth below:
Identifiable Assets
1998 1997 1996
United States $58,806,813 $58,660,565 $ 53,007,230
France 31,224,448 25,311,908 40,459,744
Other 2,815,754 3,432,986 3,855,373
Eliminations (5,066,452) (5,610,395) (6,160,075)
Consolidated $87,780,563 $81,795,064 $ 91,162,272
=========== =========== ============
Net Sales to Geographical Areas
United States $46,037,182 $ 55,833,866 $ 46,843,283
Austria 1,336,418 21,033,610 22,210,245
France 9,911,425 571,618 131,870
Germany 8,660,921 2,132,966 2,687,857
All other countries 33,608,608 31,592,503 31,552,820
Consolidated $99,554,554 $111,164,563 $103,426,075
=========== ============ ============
Due to the nature of the Company's heat technology products, one contract
may account for a large percentage of sales in a particular period;
however, the Company is not dependent on any one heat technology customer
on an ongoing basis.
Geographic net sales are allocated based on the location of the customer.
All other countries include primarily net sales to the United Kingdom,
Saudi Arabia and Mexico.
Consolidated net sales in 1998 do not result from sales to any one
individual customer in excess of 10% of total sales. Consolidated net
sales in 1998 include approximately $21,176,000 attributable to the steel
industry.
Consolidated net sales in 1997 include approximately $34,719,000 or 31%
from contracts with two customers executed by the Company's heat
technology group. Approximately $51,780,000 of consolidated net sales
were attributable to customers in the steel industry.
4. BUSINESS SEGMENT INFORMATION - (Continued)
Consolidated net sales in 1996 include approximately $22,132,000 or 21%
from contracts with one customer executed by the Company's wholly-owned
European subsidiary, Selas S.A. Approximately $45,258,000 of
consolidated net sales were attributable to customers in the steel
industry.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1998 and
1997. FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties.
1998
Carrying Fair
Amount Value
Financial assets
Cash, including cash
equivalents . . . . $ 2,784,284 $ 2,784,284
Accounts and notes
receivables . . . . 30,494,933 30,494,933
Financial liabilities
Notes payable . . . . 4,701,279 4,701,279
Trade accounts
payables. . . . . . 15,410,642 15,410,642
Customer advance
payments on
contracts . . . . . 697,270 697,270
Other accrued
liabilities . . . . 6,512,016 6,512,016
Long-term debt. . . . 9,443,961 9,184,268
1997
Carrying Fair
Amount Value
Financial assets
Cash, including cash
equivalents . . . . $ 3,034,903 $ 3,034,903
Accounts and notes
receivables . . . . 30,931,625 30,931,625
Financial liabilities
Notes payable . . . . 975,804 975,804
Trade accounts
payables. . . . . . 14,336,607 14,336,607
Customer advance
payments on
contracts . . . . . 902,592 902,592
Other accrued
liabilities . . . . 6,851,846 6,851,846
Long-term debt. . . . 9,633,543 9,419,381
5. FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The carrying amounts shown in the table are included in the statement of
financial position under the indicated captions.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash, including cash equivalents, short-term accounts and notes
receivables, other current assets, notes payable to banks, trade accounts
payables, and other accrued expenses: The carrying amounts approximate
fair value because of the short maturity of those instruments.
Long-term debt: The fair value of the Company's long-term debt is
estimated by discounting the future cash flows of each instrument at
rates currently offered to the Company for similar debt instruments of
comparable maturities by the Company's bankers.
See note 9 regarding the fair value of derivative financial instruments.
The estimated fair value of financial instruments has been determined
based on available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company might realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value.
6. INVENTORIES
Inventories consist of the following:
Finished
Raw Work-in- products and
December 31 materials process components Total
1998
Domestic . . $3,226,583 $ 2,514,280 $4,657,729 $10,398,592
Foreign . . 192,308 1,772,286 265,437 2,230,031
Total . . $3,418,891 $ 4,286,566 $4,923,166 $12,628,623
========== =========== ========== ===========
1997
Domestic . . $2,936,574 $2,036,831 $3,971,429 $ 8,944,834
Foreign . . 117,970 685,133 251,203 1,054,306
Total . . $3,054,544 $2,721,964 $4,222,632 $ 9,999,140
========== ========== ========== ===========
7. LONG-TERM CONTRACTS AND RECEIVABLES
Accounts and notes receivable at December 31, 1998 and 1997 include the
following elements from long-term contracts:
1998 1997
Amounts billed . . . . . . . . . . . . $ 8,443,357 $14,236,348
Retainage, due upon completion . . . . 398,664 715,924
Unbilled receivables . . . . . . . . . 3,897,965 6,574,392
Total . . . . . . . . . . . . . . . $12,739,986 $21,526,664
=========== ===========
The balances billed but not paid by customers, pursuant to retainage
provisions included in long-term contracts, will be due upon completion
of the contracts and acceptance by the customer. The retainage balances
at December 31, 1998 are anticipated to be collected in 1999.
The unbilled receivables are comprised principally of amounts of revenue
recognized on contracts (on the percentage-of-completion method) for
which billings had not been presented to the customers because the
amounts were not billable under the contract terms at the balance sheet
date. In accordance with the contract terms the unbilled receivables at
December 31, 1998 will be billed in 1999.
Inventories include costs relating to long-term sales contracts of
$203,132 and $187,666 at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Company had $1,793,489 and $1,799,128,
respectively, of trade accounts receivable due from major U.S. automotive
manufacturers. At December 31, 1998 and 1997, the Company had $4,218,009
and $2,685,219, respectively, of trade accounts receivable due from
hearing aid manufacturers. The Company also had $11,886,926 and
$19,803,826 at December 31, 1998 and 1997, respectively, in currently
billed and unbilled receivables from long-term contracts for customers in
the steel industry in North America and Europe.
8. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE
Notes payable at December 31, 1998 and 1997 are summarized below:
1998 1997
Notes payable:
Short term borrowings, European banks $2,609,725 $ 975,804
Short term borrowings, Domestic banks 2,091,554 --
Total notes payable $4,701,279 $ 975,804
========== ==========
Consolidated European subsidiaries have working capital credit
arrangements with European banks aggregating $13,220,000. Of this
amount, $3,682,000 may be used to borrow funds for working capital or
guarantee customer advance payments on contracts. The remaining
$9,538,000 may be used only for guaranteeing customer advance payments,
of which $2,898,000 was utilized at December 31, 1998 at interest rates
ranging from .5% to .75%. At December 31, 1998 the Company's European
subsidiaries had borrowings of $2,609,725, which bear interest at annual
rates ranging from 5.35% to 7.71%. These credit arrangements have no
expiration dates and are guaranteed by the Company.
The maximum amounts of short-term borrowings and bank guarantees at any
month end were $7,447,000 in 1998, $15,002,000 in 1997 and $21,954,000 in
1996. The average short-term borrowings and bank guarantees outstanding
during 1998, 1997 and 1996 amounted to $4,865,000, $8,498,000 and
$10,636,000, respectively. The average short-term interest rates in
1998, 1997 and 1996 for outstanding borrowings were 6%, 9% and 11%,
respectively.
The Company and its domestic subsidiaries entered into revolving credit
loan facilities under which borrowings or letters of credit aggregating
$4,000,000 could be outstanding at any one time. On October 28, 1998,
$1,100,000 of available funds were used by a subsidiary to purchase
certain assets and liabilities of Lectret. These borrowings bear a 60
day London Interbank Offered Rate (LIBOR) plus 1.25% variable rate. At
December 31, 1998, the rate was 6.4696%. At December 31, 1998, the
balance on this portion of the outstanding credit line was $1,100,000.
On May 27, 1998, $1,278,000 of available funds were used by a subsidiary
to purchase the stock of IMB Electronic Products, Inc. At December 31,
1998, $991,554 of the original $1,278,000 borrowing was outstanding on
the line which bears interest at 6.31%. Borrowings under the facility,
excluding the $1,100,000 portion, bear interest at a rate of 1.25% above
LIBOR and a commitment fee of 1/4% per annum is payable on the unborrowed
portion of the line. The credit facility expires on August 1, 2000.
The maximum amounts of short term borrowings at any month end 1998 were
$2,589,000. The average short term borrowings outstanding during 1998
were $1,497,000. The average short term interest rate in 1998 was 7%.
8. NOTES PAYABLE AND LONG-TERM DEBT - (Continued)
LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is summarized below:
1998 1997
Long-term debt:
Term loans, Domestic banks $ 4,520,024 $ 6,870,024
Term loans, European banks 3,926,376 1,697,171
Mortgage notes 906,584 917,606
Other borrowings 90,977 148,742
9,443,961 9,633,543
Less: current maturities 3,178,241 2,618,463
$ 6,265,720 $ 7,015,080
=========== ===========
On February 20, 1997, the Company amended its existing domestic term loan
agreement with a commercial bank to increase its borrowings by $3.5
million to purchase the assets of the Rodan Division of Ketema through
its wholly-owned subsidiary, RTI Electronics. See note 2 regarding the
acquisition. Under the terms of the amended agreement, principal amounts
are repayable over the next five years on a monthly basis with aggregate
principal payments of $700,000 per year. Borrowings under this amended
agreement bear interest at a rate of 1.5% above LIBOR (7.06% at December
31, 1998) payable monthly. The previous borrowings under the amended
agreement were unchanged as principal amounts are repayable over the next
two years on a monthly basis with aggregate principal payments of
$1,650,000 per year. Additional payments of principal are required
depending upon the annual earnings of the Company's domestic operations
and as a result of this requirement, the Company will have an additional
principal payment of approximately $226,000 in 1999. No additional
payment was required in 1998. At December 31, 1998, these borrowings
under the credit agreement bore interest, payable monthly, at a fixed
interest rate of 6-3/4%. The credit agreement is subject to a prepayment
penalty of 3%, to the extent the loan is paid off with additional
borrowings.
The credit agreement and revolving credit loan facilities are secured by
the Company's domestic assets, except RTI's land and building which are
pledged under a separate agreement, and the Company's domestic
subsidiaries' stock. The agreements contain restrictive covenants
regarding the payment of cash dividends, maintenance of working capital,
net worth, and shareholders' equity, along with the maintenance of
certain financial ratios. The Company and its domestic subsidiaries are
required to maintain consolidated tangible capital funds of approximately
$23.7 million through December 31, 1998 consisting of shareholders'
equity, plus subordinated debt, less intangible assets, increased
annually after December 31, 1998 by 60% of net income and contributions
to capital. At December 31, 1998, the Company exceeded the amount
required to satisfy this covenant in the loan agreement by $3 million.
8. NOTES PAYABLE AND LONG-TERM DEBT - (Continued)
The Company's French subsidiary, Selas S.A., financed its premises
outside of Paris with bank borrowings maturing August 31, 2006 with
required quarterly installments of principal of $53,571 (FF 300,000).
The loan carries interest payable quarterly at the Paris Interbank
Offered Rate (PIBOR) plus .7% (3.95% at December 31, 1998). The loan
balances as of December 31, 1998 and 1997 were $1,607,143 (FF 9,000,000)
and $1,697,171 (FF 10,200,000), respectively. This loan can be prepaid,
subject to a premium of 3% of the amount prepaid. The debt is secured by
the land and building of Selas S.A.
The Company assumed a mortgage at the date of acquisition of RTI which is
payable in monthly installments of $9,285, including interest, through
July 1, 2019. The mortgage has an interest rate of 11% and is secured by
the land and building of RTI. Prepayment of the mortgage is permitted;
however, it is subject to a penalty which is tied to the current interest
rates and the length of the loan. The lender has the right to call the
loan at any time after July 1, 1999 on ninety days written notice to the
Company. The mortgage note has been classified as long-term debt in
accordance with its normal terms since the Company has the ability and
intent to maintain this obligation for longer than one year.
On February 28, 1998 the Company's French subsidiary entered into a loan
to borrow $2,678,571 (FF 15,000,000) to purchase the assets of CFR. See
note 2 regarding the acquisition. Under the terms of the agreement,
principal amounts are repayable over the next five years on a quarterly
basis of $133,929 (FF 750,000). The loan carries interest at a fixed
rate of 5.65%. At December 31, 1998 the loan balance was $2,276,786 (FF
12,750,000).
The aggregate maturities of long-term debt for the five years ending
December 31, 2003 and thereafter are as follows:
Years ending December 31 Aggregate Maturity
1999 . . . . . . . . . . . . $ 3,178,241
2000 . . . . . . . . . . . . 3,042,784
2001 . . . . . . . . . . . . 1,453,954
2002 . . . . . . . . . . . . 870,621
2003 . . . . . . . . . . . . 352,169
2004 and thereafter . . . . 546,192
$ 9,443,961
==============
9. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements are used to reduce the potential impact of
increases in interest rates on floating-rate long-term debt. At December
31, 1998, the Company's French subsidiary was a party to one interest
rate swap agreement. The interest rate swap agreement is with major
European financial institutions having a total notional amount of $2.1
million at December 31, 1998. The notional amount will decrease
consistent with the terms of the related long-term debt agreement. The
swap agreement requires fixed interest payments based on an effective
rate of 8.55% for the remaining term through May, 2006. The subsidiary
continually monitors its position and the credit ratings of its
counterparties and does not anticipate nonperformance by the
counterparties. Additional interest incurred during 1998, 1997 and 1996
in connection with the swap agreement amounted to $81,512, $95,584 and
$101,738, respectively.
9. DERIVATIVE FINANCIAL INSTRUMENTS - (Continued)
The fair value of the interest rate swap agreement was $1.9 million at
December 31, 1998. The fair value of this financial instrument (used for
hedging purposes) represents the aggregate replacement cost based on
financial institution quotes. The Company is exposed to market risks
from changes in interest rates and fluctuations in foreign exchange
rates.
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1998 and 1997 are as follows:
1998 1997
Salaries, wages and commissions . . . $ 2,652,296 $ 2,825,558
Taxes, including payroll withholdings
and VAT, excluding income taxes . . 1,696,040 2,217,951
Accrued pension costs . . . . . . . . 611,794 669,193
Accrued professional fees . . . . . . 748,464 541,967
Accrued insurance . . . . . . . . . . 306,585 218,392
Other . . . . . . . . . . . . . . . . 496,837 378,785
$ 6,512,016 $ 6,851,846
=========== ===========
11. DOMESTIC AND FOREIGN INCOME TAXES
Domestic and foreign income taxes (benefits) are comprised as follows:
Years Ended December 31
1998 1997 1996
Current
Federal . . . . . $ 1,296,209 $ 2,222,160 $ 2,168,819
State . . . . . 246,035 197,799 454,367
Foreign . . . . . 811,795 237,612 490,707
2,354,039 2,657,571 3,113,893
Deferred
Federal . . . . . (476,590) (543,436) (552,526)
State . . . . . (220,237) (130,176) (61,116)
Foreign . . . . . (1,316,887) (10,003) (105,293)
(2,013,714) (683,615) (718,935)
Income taxes . . . . $ 340,325 $ 1,973,956 $ 2,394,958
=========== =========== ===========
Income (loss) before income taxes is as follows:
Foreign . . . . . $ (758,980) $ 938,388 $ 1,015,187
Domestic . . . . . 4,708,827 5,422,777 5,509,966
$ 3,949,847 $ 6,361,165 $ 6,525,153
=========== =========== ===========
11. DOMESTIC AND FOREIGN INCOME TAXES - (Continued)
The following is a reconciliation of the statutory federal income tax
rate to the effective tax rate based on income (loss):
Years Ended December 31
1998 1997 1996
Tax provision at
statutory rate 34.0% 34.0% 34.0%
Net foreign operating
loss carryforwards (1.3) (1.5) 0.3
Effect of foreign tax rates (5.0) -- 1.8
Change in domestic valuation
allowance (19.2) -- --
Goodwill amortization 3.2 1.8 1.7
State taxes net of federal
benefit 0.4 0.7 4.0
Tax benefits related to
export sales (3.6) (3.2) (2.7)
Other 0.1 (0.8) (2.4)
Domestic and foreign income
tax rate 8.6% 31.0% 36.7%
===== ==== ====
The significant components of deferred income taxes (benefits) for the
years ended December 31, 1998, 1997 and 1996 are as follows:
Years Ended December 31
1998 1997 1996
Deferred income tax (benefit) $(1,894,475) $ (38,853) $(342,743)
(Decrease) in beginning-of-
the-year balance of the
valuation allowance for
deferred tax assets (76,664) (618,613) (369,868)
Other (42,575) (26,149) (6,324)
$(2,013,714) $(683,615) $(718,935)
=========== ========= =========
11. DOMESTIC AND FOREIGN INCOME TAXES - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
Deferred tax assets: 1998 1997
Postretirement benefit obligations $1,353,770 $1,274,049
Net operating loss carryforwards 2,613,379 849,669
State income taxes 432,762 463,220
Guarantee obligations and estimated future
costs of service accruals 749,147 895,034
Employee pension plan obligations 208,011 208,155
Compensated absences, principally due to
accrual for financial reporting purposes 285,780 290,209
Other 1,021,777 836,411
Total gross deferred tax assets 6,664,626 4,816,747
Less: valuation allowance 1,620,162 1,696,824
Net deferred tax assets 5,044,464 3,119,923
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation and
capitalized interest 1,389,500 1,219,890
Other 208,838 275,046
Total gross deferred tax liabilities 1,598,338 1,494,936
Net deferred tax assets $3,446,126 $1,624,987
========== ==========
Domestic and foreign deferred taxes are comprised as follows:
December 31, 1998 Federal State
Current deferred
asset $1,573,791 $ 78,192
Non-current deferred
asset (liability) 66,841 279,298
Net deferred tax
asset $1,640,632 $ 357,490
========== ==========
December 31, 1998 Foreign Total
Current deferred
asset $1,951,718 $3,603,701
Non-current deferred
asset (liability) (503,714) (157,575)
Net deferred tax
asset $1,448,004 $3,446,126
========== ==========
11. DOMESTIC AND FOREIGN INCOME TAXES - (Continued)
December 31, 1997 Federal State
Current deferred
asset $1,847,390 $ 400,228
Non-current deferred
(liability) (729,294) (67,029)
Net deferred tax
asset $1,118,096 $ 333,199
========== ==========
December 31, 1997 Foreign Total
Current deferred
asset $ 592,805 $2,840,423
Non-current deferred
(liability) (419,113) (1,215,436)
Net deferred tax
asset $ 173,692 $1,624,987
========== ==========
At December 31, 1998, the Company had $646,038 of income tax receivable
included in accounts and notes receivable.
The valuation allowance for deferred tax assets as of January 1, 1998 was
$1,696,824. The net change in the total valuation allowance for the year
ended December 31, 1998 was a decrease of $76,662. In the second
quarter, the Company reduced the valuation allowance applied against
deferred tax benefits associated with domestic postretirement benefit
obligations by $724,512 and against certain domestic employee pension
plan obligations by $33,694. The reduction in the valuation allowance
was based on several factors including: recent acquisitions, past
earnings history and trends, reasonable and prudent tax planning
strategies, and the expiration dates of carryforwards. The Company has
determined that it is more likely than not that the $758,206 of deferred
tax assets will be realized. The offsetting valuation allowance increase
of approximately $681,544 is maintained against deferred tax assets which
the Company has determined are not more than likely to be realized.
Subsequently recognized tax benefits, if any, relating to the valuation
allowance for deferred tax assets will be reported in the consolidated
statement of operations.
11. DOMESTIC AND FOREIGN INCOME TAXES - (Continued)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, along with reasonable and prudent tax planning
strategies and the expiration dates of carryforwards, management
believes it is more likely than not the Company will realize the benefits
of these deductible differences, net of the existing valuation
allowances, at December 31, 1998.
At December 31, 1998 the Company has net operating loss carryforwards for
foreign income tax purposes of $6,493,683 of which $314,136 expire in
2001, $449,441 expire in 2002, $2,294,311 expire in 2003 and $3,435,795
have no expiration date and are available to offset future foreign
taxable income.
No provision has been made for United States income tax which may be
payable on undistributed income of the Company's foreign subsidiaries
since it is the Company's intention to reinvest the unremitted earnings.
Furthermore, based on current federal income tax laws, the federal income
tax on future dividends will be offset by foreign tax credits in certain
instances. At December 31, 1998, the Company has not recognized a
deferred tax liability of approximately $1,690,000 on undistributed
retained earnings of such subsidiaries of $4,970,000.
12. EMPLOYEE BENEFIT PLANS
During 1998, the Company has adopted SFAS No. 132, "Employers' Disclosure
about Pension and Other Postretirement Benefits." SFAS 132 revises the
employers disclosure about pensions and other postretirement benefit
plans, however, it does not change the measurement or recognition of the
plans. Prior year disclosures have been restated.
The Company has two defined benefit pension plans. One covers salaried
employees and the other plan covers union employees. The following table
sets forth the plans' funded status and amounts recognized in the
Company's statements of financial position at December 31, 1998 and 1997:
December 31
1998 1997
Change in Projected Benefit Obligation
Projected benefit obligation at
January 1 $ 4,854,807 $ 4,548,693
Service cost (excluding administra-
tive expenses) 190,634 156,396
Interest cost 327,160 319,109
Actuarial (gain)/loss 246,923 148,333
Benefit paid (321,217) (317,724)
Projected benefit obligation at
December 31 5,298,307 4,854,807
Change in Fair Value of Plan Assets
Fair value of plan assets at
January 1 4,125,563 3,646,712
Actual return on plan assets 804,213 640,938
Employer contribution 289,627 202,012
Expenses (33,749) (46,375)
Benefits paid (321,217) (317,724)
Fair value of plan assets at
December 31 4,864,437 4,125,563
Funded status (433,870) (729,244)
Unrecognized net actuarial (gain)/loss (304,525) (75,125)
Unrecognized net obligation 110,245 165,366
Unrecognized prior service cost 16,356 26,783
(Accrued) pension cost after adjustment
of minimum liability at December 31 $ (611,794) $ (612,220)
=========== ===========
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability $ (611,794) $ (669,193)
Intangible asset -- 56,973
Net amount recognized $ (611,794) $ (612,220)
=========== ===========
As of December 31, 1997, the Company has recognized the additional
minimum liability of $56,973 and an intangible asset of $56,973.
12. EMPLOYEE BENEFIT PLANS- (Continued)
Net periodic pension cost for these plans for the years 1998, 1997 and
1996 included the following components:
Years Ended December 31
1998 1997 1996
Service cost - benefits
earned during the period $ 220,141 $ 182,973 $ 187,955
Interest cost on projected
benefit obligation 327,160 319,109 306,788
Expected return on assets (323,648) (285,980) (257,206)
Amortization of net obligation 55,121 55,121 55,121
Amortization of prior service
cost 10,427 10,427 10,427
Net periodic pension cost $ 289,201 $ 281,650 $ 303,085
========= ========= =========
The discount rate used to determine the projected benefit obligation for
both the salaried and union plans was 6.5% for 1998, 7% for 1997 and
7.25% for 1996.
The projected benefit obligation was determined by using an assumed rate
of increase in compensation levels of 5% for 1998, 1997 and 1996 for the
salaried plan. The expected long-term rate of return on assets for both
plans was 8%.
The Company's French subsidiary, Selas S.A., is obligated to contribute
to an employee profit sharing plan under which annual contributions are
determined on the basis of a prescribed formula using capitalization,
salaries and certain revenues. Amounts are paid into a bank trust fund
the year following the contribution calculation. Profit sharing expense
for 1998, 1997 and 1996 was $0, $0 and $96,970, respectively.
The Company has defined contribution plans for most of its domestic
employees not covered by collective bargaining agreements. Under these
plans, eligible employees may contribute amounts through payroll
deductions supplemented by employer contributions for investment in
various investments specified in the plans. The Company contribution to
these plans for 1998, 1997 and 1996 was $377,447, $362,292 and $288,556,
respectively.
12. EMPLOYEE BENEFIT PLANS- (Continued)
The Company provides postretirement medical benefits to certain domestic
full-time employees who meet minimum age and service requirements. The
Company's policy is to pay the cost of these postretirement benefits when
required on a cash basis. The Company also has provided certain foreign
employees with retirement related benefits.
The following table presents the amounts recognized in the Company's
consolidated balance sheet at December 31, 1998 and 1997 for
postretirement medical benefits:
Accumulated postretirement medical benefit obligation:
December 31
Change in Projected Benefit Obligation 1998 1997
Projected benefit obligation at January 1 $ 2,801,051 $ 2,783,518
Service cost (excluding administrative
expenses) 30,611 27,707
Interest cost 187,324 192,610
Actuarial (gain)/loss 71,387 50,031
Benefits paid (223,272) (252,815)
Projected benefit obligation at
December 31 2,867,101 2,801,051
Change in Fair Value of Plan Assets
Employer contribution 223,272 252,815
Benefits paid (223,272) (252,815)
Fair value of plan assets at December 31 -- --
Funded status 2,867,101 2,801,051
Unrecognized net actuarial gain 403,329 489,686
Accrued postretirement benefit cost $ 3,270,430 $ 3,290,737
=========== ===========
Accrued postretirement medical benefit costs are classified as other
postretirement benefit obligations as of December 31, 1998 and 1997.
12. EMPLOYEE BENEFIT PLANS - (Continued)
Net periodic postretirement medical benefit costs for 1998, 1997 and 1996
include the following components:
Years Ended December 31
1998 1997 1996
Service cost $ 30,611 $ 27,707 $ 25,834
Interest cost 187,324 192,610 194,081
Amortization of unrecognized
gain (14,970) (18,702) (18,171)
Net periodic postretirement
medical benefit cost $202,965 $201,615 $201,744
======== ======== ========
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed
for 1998; the rate was assumed to decrease gradually to 6% by the year
2006 and remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated
postretirement medical benefit obligation as of December 31, 1998 by
$280,621 and the aggregate of the service and interest cost components of
net periodic postretirement medical benefit cost for the year ended
December 31, 1998 by $18,879.
The weighted-average discount rate used in determining the accumulated
postretirement medical benefit obligation at December 31, 1998 and 1997
was 6.5% and 7.25%, respectively.
The Company provides retirement related benefits to a former employee,
and to certain foreign subsidiary employees in accordance with industry-
wide collective labor agreements. The liabilities established for these
benefits at December 31, 1998 and 1997 were $825,627 and $733,480,
respectively, and are classified as other postretirement benefit
obligations as of December 31, 1998 and 1997.
13. CURRENCY TRANSLATION ADJUSTMENTS
All assets and liabilities of foreign operations are translated into U.S.
dollars at prevailing rates of exchange in effect at the balance sheet
date. Revenues and expenses are translated using average rates of
exchange for the year. The functional currency of the Company's foreign
operations is the currency of the country in which the entity resides;
such currencies are the French franc, German mark, Italian lira, British
pound, Singapore dollar and Japanese yen. Adjustments resulting from the
process of translating the financial statements of foreign subsidiaries
into U.S. dollars are reported as a separate component of shareholders'
equity, net of tax where appropriate. Gains and losses arising from
foreign currency transactions are reflected in the consolidated
statements of operations as incurred. Foreign currency transaction gains
(losses) included in the statement of operations for 1998, 1997 and 1996
were $175,609, $13,819 and $(8,200), respectively.
14. COMMON STOCK AND STOCK OPTIONS
On April 22, 1997, the Board of Directors declared a three-for-two split
of the Company's stock, pursuant to which 1,737,510 shares were issued.
Shareholders of record on June 10, 1997 received one additional share for
each two common shares held. The effect of this transaction was to
reduce additional paid-in capital by $1,737,510 with a corresponding
increase in common stock which has been retroactively recorded. All
common share data in these financial statements and notes have been
adjusted to reflect this transaction.
Under the Company's 1985 and 1994 Stock Option Plans, options to an
aggregate of 900,000 shares of common stock may be granted to certain
officers and key employees and in 1998 the Board of Directors established
a 1998 Stock Option Plan to issue up to 75,000 shares to certain non-
employee Directors, both at no less than 100% of the fair market value at
the date of grant. All options are exercisable until the earlier of
termination pursuant to the plans or ten years from date of grant.
At December 31, 1998, there were 114,200 additional shares available for
grant under the 1994 plan and 50,000 additional shares available for
grant under the 1998 plan. The per share weighted-average fair values of
stock options granted during 1998 ranged from $3.07 to $4.25 on the date
of grants using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 1.9%; risk
free interest rates ranged from 4.39% to 5.71%; expected life of 6 years
and expected volatility of the stock over the life of the options which
is based on the past 9 years of the stock's activity.
The Company applies APB Opinion No. 25 in accounting for its Plans, and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date of its stock
options under SFAS No. 123, the Company's net income would have been
reduced to the proforma amount indicated below:
1998 1997 1996
Net income as reported $3,609,522 $4,387,209 $4,130,195
Net income proforma $3,297,704 $4,346,245 $4,092,615
Basic earnings per share as
reported $.69 $.84 $.80
Basic earnings per share
proforma $.63 $.83 $.79
Options of 225,000 were granted in 1998. No options were granted in 1997
or 1996. Proforma net income reflects options granted in 1998 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the proforma net income
amounts presented above because compensation cost is reflected over the
options vesting periods of 2 to 5 years and compensation cost for options
granted prior to January 1, 1995 is not considered.
14. COMMON STOCK AND STOCK OPTIONS- (Continued)
Stock option activity during the periods indicated is as follows:
Number of Weighted-average
Shares Exercise Price
Outstanding at January 1, 1996 441,488 $ 7.11
Options forfeited (22,500) 9.33
Outstanding at December 31, 1996 418,988 $ 6.99
Options exercised (35,700) 4.35
Outstanding at December 31, 1997 383,288 $ 7.24
Options granted 225,000 9.61
Options exercised (2,200) 4.63
Options forfeited (2,200) 6.10
Outstanding at December 31, 1998 603,888 $ 8.14
========
At December 31, 1998, the range of exercise prices were $3.77-$11.42 and
weighted-average remaining contractual life of outstanding options was
4.7 years.
At December 31, 1998 and 1997, the number of options exercisable was
330,568 and 279,158, respectively and the weighted average price of these
options were $7.58 and $7.73, respectively.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of unaudited quarterly results of
operations.
1998 First Second
Quarter Quarter (1)
Net sales . . . . . . $21,867,000 $25,222,000
=========== ===========
Gross profit . . . . $ 5,256,000 $ 6,487,000
=========== ===========
Net income . . . . . $ 559,000 $ 1,766,000
=========== ===========
Earnings per share
Basic $.11 $.34
=========== ===========
Diluted $.10 $.33
=========== ===========
1998 Third Fourth
Quarter Quarter
Net sales . . . . . . $25,203,000 $27,263,000
=========== ===========
Gross profit . . . . $ 5,783,000 $ 5,196,000
=========== ===========
Net income . . . . . $ 918,000 $ 367,000
=========== ===========
Earnings per share
Basic $.18 $.07
=========== ===========
Diluted $.17 $.07
=========== ===========
(1) In the second quarter, the Company reduced the valuation allowance
applied
against deferred tax benefits associated with domestic postretirement
benefit and employee pension plan obligations by $758,000.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)
1997 First Second
Quarter Quarter
Net sales . . . . . . $30,905,000 $27,101,000
=========== ===========
Gross profit . . . . $ 6,445,000 $ 6,483,000
=========== ===========
Net income . . . . $ 1,162,000 $ 1,379,000
=========== ===========
Earnings per share
Basic $.22 $.26
=========== ===========
Diluted $.22 $.26
=========== ===========
1997 Third Fourth
Quarter Quarter
Net sales . . . . . . $28,328,000 $24,830,000
=========== ===========
Gross profit . . . . $ 5,475,000 $ 5,058,000
=========== ===========
Net income . . . . $ 1,139,000 $ 707,000
=========== ===========
Earnings per share
Basic $.22 $.14
=========== ===========
Diluted $.21 $.13
=========== ===========
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
1998
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $3,609,522 5,233,016 $0.69
=====
Effect of Dilutive Securities
Stock options 77,338
Earnings contingency --
Diluted Earnings Per Share
Income available to common
shareholders plus assumed
conversions $3,609,522 5,310,354 $0.68
==================================
For additional disclosures regarding the earnings contingency and stock
options, see notes 2 and 14, respectively.
16. EARNINGS PER SHARE(Continued)
The following table sets forth the computation of basic and diluted
earnings per share:
1997
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $4,387,209 5,213,124 $0.84
=====
Effect of Dilutive Securities
Stock options 141,063
Earnings contingency 791
Diluted Earnings Per Share
Income available to common
shareholders plus assumed
conversions $4,387,209 5,354,978 $0.82
==================================
For additional disclosures regarding the earnings contingency and stock
options, see notes 2 and 14, respectively.
16. EARNINGS PER SHARE (Continued)
The following table sets forth the computation of basic and diluted
earnings per share:
1996
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $4,130,195 5,190,075 $0.80
=====
Effect of Dilutive Securities
Stock options 81,884
Earnings contingency --
Diluted Earnings Per Share
Income available to common
shareholders plus assumed
conversions $4,130,195 5,271,959 $0.78
==================================
For additional disclosures regarding the earnings contingency and stock
options, see notes 2 and 14, respectively.
17. CONTINGENCIES AND COMMITMENTS
The Company is a defendant along with a number of other parties in
approximately 147 lawsuits as of December 31, 1998 (215 as of December
31, 1997) 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.
The Company was one of approximately 500 defendants in a class action on
behalf of approximately 2,700 present and former employees of a Texas
steel mill. The cases were being defended by one or more of the
Company's insurance carriers presently known to be "at risk". In
October, 1998 the class action suit was settled. The Company's insurance
carriers have not asked the Company to contribute to any settlement
payments made by them in connection with this settlement.
In 1995, a dispute which was submitted to arbitration, arose under a
contract between a customer and a subsidiary of the Company. Substantial
claims were asserted against the subsidiary Company under the terms of
the contract. The Company recorded revenue of approximately $1,400,000
in 1994 and has an uncollected receivable of $140,000. In June, 1998,
the arbitrator found in favor of the customer. The Company has refused
to recognize the validity of the arbitration proceedings and decision and
believes it is entitled to a new hearing before an international or
French tribunal. The Company believes that the disposition of this claim
will not materially affect 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.
17. CONTINGENCIES AND COMMITMENTS - (Continued)
Total rent expense for 1998, 1997 and 1996 under leases pertaining
primarily to engineering, manufacturing, sales and administrative
facilities, with an initial term of one year or more, aggregated
$1,020,000, $873,000 and $904,000, respectively. Remaining rentals
payable under such leases are as follows: 1999 - $1,015,000; 2000 -
$962,000; 2001 - $903,000; 2002 - $773,000; 2003 - $643,000.
18. RELATED-PARTY TRANSACTIONS
One of the Company's subsidiaries leases office and factory space from a
partnership consisting of three present or former officers of the
subsidiary. The subsidiary is required to pay all real estate taxes and
operating expenses. In the opinion of management, the terms of the lease
agreement are comparable to those which could be obtained from
unaffiliated third parties. The total rent expense incurred under the
lease was approximately $330,000 for 1998 and 1997 and $373,000 for 1996.
Annual lease commitments approximate $330,000 through December, 1999.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Selas Corporation of America:
We have audited the accompanying consolidated balance sheets of Selas
Corporation of America and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Selas
Corporation of America and subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
February 19, 1999
EXHIBIT 21
Significant Subsidiaries of
Selas Corporation of America
SUBSIDIARY PLACE OF INCORPORATION
CFR-CECF Forumi-Ripoche, S.A. France
CFR Portugal Portugal
Deuer Manufacturing, Inc. Ohio
Resistance Technology GmbH Germany
Vertrieb von Elecktronikteilen
Resistance Technology, Inc. Minnesota
RTI Electronics, Inc. Delaware
RTI Technologies PTE LTD Singapore
SEER France
Selas S.A. France
Selas Italiana, S.A. Italy
Selas Engineering UK Ltd. England
Selas Waermetechnik, GmbH Germany
EXHIBIT 23
SELAS CORPORATION OF AMERICA
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Selas Corporation of America:
We consent to the incorporation by reference in the Registration
Statements No. 33-33712 on Form S-3, No. 33-35802 on Form S-8, No. 333-
16377 on Form S-8, and No. 333-66433 on Form S-8 of Selas Corporation of
America and subsidiaries of our reports dated February 19, 1999 relating
to the consolidated balance sheets of Selas Corporation of America and
subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash
flows and related financial statement schedules for each of the years in
the three-year period ended December 31, 1998, which reports are included
in or incorporated by reference in the December 31, 1998 annual report on
Form 10-K of Selas Corporation of America.
KPMG LLP
Philadelphia, Pennsylvania
March 26, 1999
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned does hereby
consent and appoint Stephen F. Ryan and Francis A. Toczylowski, or either
of them, his attorney to do any and all acts, including the execution of
documents, which said attorneys, or either of them, may deem necessary or
advisable to enable Selas Corporation of America (the "Company") to
comply with the Securities Exchange Act of 1934, as amended, and the
rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the filing under said Act of an annual
report of the Company on Form 10-K for the year ended December 31, 1998,
including the power and authority to sign in the name and on behalf of
the undersigned, in any and all capacities in which the signature of the
undersigned would be appropriate, such annual report and any and all
amendments thereto and generally to do and perform all things necessary
to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 23rd day of March, 1999.
/s/ John H. Austin Jr.
John H. Austin, Jr.
/s/ Frederick L. Bissinger
Frederick L. Bissinger
/s/ Roy C. Carriker
Roy C. Carriker
/s/ Mark S. Gorder
Mark S. Gorder
/s/ Michael J. McKenna
Michael J. McKenna
/s/ Ralph R. Whitney, Jr.
Ralph R. Whitney, Jr.