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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2003
-----------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
------------------------------------------------
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)
1260 RED FOX ROAD, ARDEN HILLS, MINNESOTA 55112
- ------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(651) 636-9770
- ------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
- ------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
(X) YES ( ) NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED BY RULE 12B-2 OF THE EXCHANGE ACT)
( ) YES (X ) NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON SHARES, $1.00 PAR VALUE 5,124,214 (exclusive of 515,754
- ------------------------------ -------------------------------
CLASS treasury shares)
---------------
OUTSTANDING AT JULY 22, 2003
SELAS CORPORATION OF AMERICA
I N D E X
---------
Page
Number
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed (Unaudited) Balance Sheets
as of June 30, 2003 and December 31, 2002 3, 4
Consolidated Condensed (Unaudited) Statements
of Operations for the Three Months Ended
June 30, 2003 and 2002 5
Consolidated Condensed (Unaudited) Statements
of Operations for the Six Months Ended
June 30, 2003 and 2002 6
Consolidated Condensed(Unaudited)Statements
of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 8-19
Item 2. Management's Discussion and Analysis 20-25
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 25
About Market Risk
Item 4. Controls and Procedures 25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a vote of 26
security holders
Item 6. Exhibits and Reports on Form 8-K 26
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELAS CORPORATION OF AMERICA
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
ASSETS
------
June 30, December 31,
2003 2002
(Unaudited) (Audited)
----------- ------------
Current assets
Cash, including cash equivalents of
$415,000 in 2003 and $418,000 in 2002 and $ 1,293,127 $ 2,039,044
restricted cash of $415,000 in 2003 and
$418,000 in 2002
Accounts receivable (including unbilled
receivables of $2,404,000 in 2003
and $1,447,000 in 2002,less allowance for
doubtful accounts of $1,066,000 in 2003
and $1,109,000 in 2002) 16,740,672 15,627,864
Inventories 9,332,828 9,393,802
Refundable income tax -- 336,758
Deferred income taxes 2,160,830 1,818,384
Other current assets 1,767,746 1,064,829
Assets of discontinued operations 12,146,281 13,610,601
----------- -----------
Total current assets 43,441,484 43,891,282
Property, plant and equipment
Land 231,943 231,943
Buildings 5,149,415 5,149,415
Machinery and equipment 32,128,149 29,903,795
----------- -----------
37,509,507 35,285,153
Less: Accumulated depreciation 25,324,378 22,921,608
----------- -----------
Net property, plant and equipment 12,185,129 12,363,545
Goodwill 5,376,317 5,376,317
Deferred income taxes 373,601 348,712
Other assets, less amortization 1,706,172 1,575,539
----------- -----------
$63,082,703 $63,555,395
=========== ===========
(See accompanying notes to the consolidated financial statements)
3
SELAS CORPORATION OF AMERICA
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
June 30, December 31,
2003 2002
Current liabilities (Unaudited) (Audited)
----------- ------------
Notes payable $12,404,543 $10,920,984
Current maturities of long-term debt 3,246,692 1,573,716
Accounts payable 11,686,286 11,046,373
Customers' advance payments on contracts 2,686,761 2,457,499
Guarantee obligations and estimated costs
of service 1,281,242 1,188,361
Other accrued liabilities 8,051,112 6,194,679
Liabilities of discontinued operations 4,982,840 6,955,654
----------- -----------
Total current liabilities 44,339,476 40,337,266
Long-term debt 382,406 2,736,236
Other postretirement benefit obligations 4,068,787 3,866,154
Contingencies and commitments
Shareholders' equity
Common shares, $1 par; 10,000,000 shares
authorized; 5,634,968 shares issued 5,634,968 5,634,968
Additional paid-in capital 12,008,915 12,012,541
Retained earnings 179,442 1,743,256
Accumulated other comprehensive loss (2,266,213) (1,509,948)
Less: 515,754 common shares held
in treasury, at cost (1,265,078) (1,265,078)
----------- -----------
Total shareholders' equity 14,292,034 16,615,739
----------- ----------
$63,082,703 $63,555,395
=========== ===========
(See accompanying notes to the consolidated financial statements)
4
SELAS CORPORATION OF AMERICA
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
------------------------------
June 30, June 30,
2003 2002
------------ ------------
Sales, net $ 17,244,911 $ 17,983,975
Operating costs and expenses
Cost of sales 13,841,161 14,118,475
------------ ------------
Gross Margin 3,403,750 3,865,500
Selling, general and administrative
Expenses 4,129,269 3,891,738
------------ ------------
Operating loss (725,519) (26,238)
Interest expense (215,273) (117,256)
Interest income 6,714 7,902
Other income, net 165,329 159,093
------------ ------------
Income (Loss) from continuing operations
before income taxes (768,749) 23,501
Income tax (benefit) (119,838) (50,861)
------------ ------------
Income (loss) from continuing operations (648,911) 74,362
Income (loss) from discontinued operations,
net of income taxes (benefit) (682,268) 156,853
------------ ------------
Net income (loss) $ (1,331,179) $ 231,215
============ ============
Income (loss) per share
Basic
Continuing operations $ (.13) $ .01
Discontinued operations (.13) .03
------------ ------------
$ (.26) $ .04
============ ============
Diluted
Continuing operations $ (.13) $ .01
Discontinued operations (.13) .03
------------ ------------
$ (.26) $ .04
============ ============
Average shares outstanding
Basic 5,124,214 5,119,214
Diluted 5,124,214 5,119,214
(See accompanying notes to the consolidated financial statements)
5
SELAS CORPORATION OF AMERICA
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
------------------------------
June 30, June 30,
2003 2002
------------ ------------
Sales, net $ 31,880,927 $ 34,678,725
Operating costs and expenses
Cost of sales 24,577,292 27,200,264
------------ ------------
Gross Margin 7,303,635 7,478,461
Selling, general and administrative
Expenses 8,349,720 7,575,704
------------ ------------
Operating loss (1,046,085) (97,243)
Interest expense (406,184) (199,894)
Interest income 9,136 23,183
Other income, net 248,915 253,029
------------ ------------
Loss from continuing operations
before income taxes (1,194,218) (20,925)
Income tax (benefit) (116,463) (114,266)
------------ ------------
Income (loss) from continuing operations (1,077,755) 93,341
Loss from discontinued operations,
net of income tax (benefit) (489,686) (524)
------------ ------------
Net income (loss) before change in
Accounting principle (1,567,441) 92,817
Cumulative effect of change in
Accounting principle -- (10,551,926)
------------ ------------
Net loss $ (1,567,441) $(10,459,109)
============ ============
Income(loss) per share
Basic
Continuing operations $ (.21) $ .02
Discontinued operations (.10) (.00)
Accounting principle change -- (2.06)
------------ ------------
$ (.31) $ (2.04)
============ ============
Diluted
Continuing operations $ (.21) $ .02
Discontinued operations (.10) (.00)
Accounting principle change -- (2.06)
------------ ------------
$ (.31) $ (2.04)
============ ============
Average shares outstanding
Basic 5,124,214 5,119,214
Diluted 5,124,214 5,119,214
(See accompanying notes to the consolidated financial statements)
6
SELAS CORPORATION OF AMERICA
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Six Months Ended
------------------------------
June 30, June 30,
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (1,567,441) $(10,459,109)
Adjustments to reconcile net loss
to net cash provided (used) by operating
activities:
Loss from discontinued operations 489,686 524
Cumulative effect of accounting principle change -- 10,551,926
Depreciation and amortization 1,375,525 1,514,911
(Gain)on sale of property and equipment (7,334) (3,322)
Provision for deferred taxes (195,445) (1,448)
Changes in operating assets and liabilities:
Accounts receivable 1,025,067 (3,489,842)
Inventories 141,104 47,677
Other assets (531,969) (179,859)
Accounts payable (2,603,142) 128,234
Accrued expenses 1,055,098 807,465
Customer advances (105,491) (985,449)
Other liabilities 100,588 (60,963)
------------ ------------
Net cash (used) by continuing operations (823,754) (2,129,255)
Net cash provided by discontinued operations 985,970 863,924
------------ ------------
Net cash used by operating activities 162,216 (1,265,331)
Cash flows from investing activities:
Purchases of property, plant and equipment (838,335) (1,050,962)
Proceeds from sale of property, plant
and equipment 22,676 12,311
Patents and intangibles (127,967) --
------------ ------------
Net cash used by investing activities (943,626) (1,038,651)
Net cash used by discontinued operations (92,329) (120,440)
------------ ------------
Net cash used by investing activities (1,035,955) (1,159,091)
Cash flows from financing activities:
Proceeds from short-term bank borrowings 1,068,781 1,683,901
Proceeds from borrowings to acquire
subsidiary company -- 136,173
Repayments of short-term bank borrowings (205,922) (376,034)
Repayments of long-term debt (811,408) (809,120)
------------ ------------
Net cash provided by financing activities 51,451 634,920
Effect of exchange rate changes on cash 76,371 134,067
------------ ------------
Net(decrease) in cash and cash equivalents (745,917) (1,655,435)
Cash and cash equivalents, beginning of period 2,039,044 3,636,173
------------ ------------
Cash and cash equivalents, end of period $ 1,293,127 $ 1,980,738
============ ============
(See accompanying notes to the consolidated financial statements)
7
SELAS CORPORATION OF AMERICA
Notes to Consolidated Condensed Financial Statements (Unaudited)
- ----------------------------------------------------------------
1. In the opinion of management, the accompanying consolidated condensed
financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly Selas Corporation of
America's consolidated financial position as of June 30, 2003 and December
31, 2002, and the consolidated results of its operations for the three and
six months ended June 30, 2003 and 2002. Certain reclassifications have
been made to the June 30, 2003 balance sheet related to discontinued
operations at December 31, 2002. These reclassifications have no impact on
the income statement.
2. New Accounting Standards
The Company adopted the following new Financial Accounting Standards Board
(FASB) issued Statements of Financial Accounting Standards (SFAS)
accounting pronouncements:
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the Company to record the fair value of
an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also records a
corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation,
the obligation will be adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying
the obligation. The Company was required to adopt SFAS No. 143 on January
1, 2003. The adoption of SFAS No. 143 did not have a material effect on the
Company's financial statements.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses the accounting
for costs associated with disposal activities covered by SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and with
exit (restructuring) activities previously covered by Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This Statement
nullifies EITF Issue No. 94-3 in its entirety and requires that a liability
for all costs be recognized when the liability is incurred. Generally, the
ability to accrue for the cost of a workforce reduction plan at the
communication date will be limited. The cost of the plan will be recognized
over the future service period of the employees. This Statement will be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS No. 146 did not have a material
effect on the Company's financial statements
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002. The
8
disclosure requirements are effective for financial statements of interim
and annual periods ending after December 15, 2002, and did not have a
material effect on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. The
application of this Interpretation will not have an effect on the Company's
financial statements. The Interpretation requires certain disclosures in
financial statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective.
3. Discontinued Operations
In the fourth quarter of 2002, the Company initiated its plan to dispose of
the Company's Tire Holders, Lifts and Related Products segment. This
segment consisted of one wholly-owned subsidiary, Deuer Manufacturing, Inc.
(Deuer), operating on a stand alone basis that sold tire holders, lifts and
related products to automotive customers. The Company accounted for the
plan to dispose of this subsidiary as a discontinued operation and
reclassified the historical financial data. The subsidiary generated sales
of $7.9 million, and $8.8 million and net income of $257,000, and $550,000
for the six months ended June 30, 2003 and 2002, respectively. On July 22,
2003 the Company sold 100 percent of the shares of Deuer for a purchase
price of approximately $7.0 million, subject to a working capital
adjustment. The purchase price was determined by negotiations between the
parties.
In the fourth quarter of 2002, the Company disposed of the majority of the
Company's primary custom-engineered furnace business, Selas SAS (Paris),
along with a closely related subsidiary, Selas U.K. (Derbyshire). These
subsidiaries formed the Company's large custom-engineered furnaces division
used primarily in the steel and glass industries worldwide. The furnaces
engineered by this division are custom-engineered to meet customer specific
requirements. The sale of the large custom-engineered furnace division was
completed in December 2002. A building located outside of Paris, France and
Selas Italiana, S.r.L. were excluded from the sale. The purchase price was
approximately $600,000 above the net asset value at the time of sale. In
addition, the purchaser assumed $1,356,000 of a receivable on a completed
construction contract. The Company is required to reimburse the purchaser
for any portion of the receivable that has not been collected by May 2003,
although it has not yet done so. Certain assets and liabilities associated
with completed contracts and discontinued operations were retained. These
are expected to be collected or paid in the normal course of 2003. In July,
2003, Selas SAS filed in solvency in France. See Note 14 for further
explanation.
The consolidated condensed financial statements reflect the Company's
presentation of discontinued operations.
9
4. Statements of Cash Flows
Supplemental disclosures of cash flow information:
Six Months Ended
-----------------------------
June 30, June 30,
2003 2002
--------- ----------
Interest received $ 3,422 $ 5,891
Interest paid $ 366,886 $ 176,050
Income taxes paid $ 40,510 $ 18,652
5. Business Segment Information
The Company has two operating segments. The Company is engaged in the
manufacture of precision miniature medical and electronic products, and
providing engineered heat technology equipment and services to industries
throughout the world. The results of operations and assets of these
segments are prepared on the same basis as the consolidated condensed
financial statements for the three and six months ended June 30, 2003 and
2002 and the consolidated condensed financial statements included in the
Company's 2002 Annual Report on Form 10-K.
The Company's reportable segments reflect separately managed, strategic
business units that provide different products and services, and for which
financial information is separately prepared and monitored.
Precision
For The Miniature
Six Months Medical and General
Ended Electronic Heat Corporate Discontinued
June 30, 2003 Products Technology Expenses Operations Total
- ------------- ------------ ---------- ----------- ------------ -----------
Sales, net $ 18,667,896 $13,213,031 $ -- $ -- $31,880,927
============ =========== =========== ============ ===========
Net income
(loss) 625,649 (1,035,221) (668,183) (489,686) (1,567,441)
============ =========== ========== ============ ===========
Depreciation
and amortiza-
tion 1,258,769 116,756 -- -- 1,375,525
============ =========== ========== ============ ===========
Property, plant
and equipment
additions 818,344 19,991 -- -- 838,335
============ ============ ========== ============ ===========
Total assets $ 29,940,134 $20,996,288 $ -- $ 12,146,281 $63,082,703
============ =========== ========== ============ ===========
10
Precision
For The Miniature
Six Months Medical and General
Ended Electronic Heat Corporate Discontinued
June 30, 2002 Products Technology Expenses Operations Total
- ------------- ------------ ---------- ----------- ------------ -----------
Sales, net $ 17,545,826 $17,132,899 $ -- $ -- $34,678,725
============ =========== =========== =========== ===========
Net income(loss)
Before change in
Accounting
Principle 432,007 198,778 (537,444) (524) 92,817
=========== =========== =========== =========== ===========
Cumulative effect
of change in
accounting
principle (9,428,354) (1,123,572) -- -- (10,551,926)
=========== =========== =========== =========== ===========
Net income (loss) (8,996,347) (924,794) (537,444) (524) (10,459,109)
=========== =========== =========== =========== ===========
Depreciation
and amortiza-
tion 1,255,202 259,709 -- -- 1,514,911
=========== =========== =========== =========== ===========
Property, plant
and equipment
additions 984,772 66,190 -- -- 1,050,962
============ ============ =========== =========== ===========
Total assets $41,749,133 $24,471,610 $ -- $28,116,060 $94,418,847
=========== =========== =========== =========== ===========
6. Accounts Receivable
At June 30, 2003, the Company had $3,338,000 of trade accounts receivable
due from hearing health manufacturers and $7,295,000 in currently billed
and unbilled receivables from Heat Technology customers in the aluminum and
glassware industry.
The following analysis provides the detail of revenue recognition
methodology by segment for the six months ended June 30, 2003:
Precision
Miniature
Medical and
Electronic Heat
Products Technology Total
------------ ------------ -----------
Upon Shipment $ 18,667,896 $ 5,620,430 $24,288,326
Percentage of
completion -- 7,592,601 7,592,601
------------ ------------ -----------
Total Revenue $ 18,667,896 $ 13,213,031 $31,880,927
============ ============ ===========
11
7. Business Combinations and Goodwill and Other Intangible Assets
As of January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires all business combinations entered into after
September 2001 to be accounted for under the purchase method. SFAS No. 142
set forth new financial and reporting standards for the acquisition of
intangible assets, other than those acquired in a business combination, and
for goodwill and other intangible assets subsequent to their acquisition.
This accounting standard requires that goodwill no longer be amortized but
tested for impairment on a periodic basis. The Company discontinued the
amortization of goodwill effective January 1, 2002. The provisions of SFAS
No. 142 also required the completion of a transitional impairment test
(with any impairment identified) accounted for as a cumulative effect of a
change in accounting principle. As of the date of adoption, the Company had
unamortized goodwill in the amount of $15,632,000. The Company determined
the goodwill associated with the following operations had been impaired and
wrote off: $1,528,000 remaining goodwill pertaining to its European Heat
Technology operations; $404,000 of negative goodwill pertaining to its
Asian Heat Technology operations, and the Company also recognized an
impairment of, and wrote off $9,428,000 of goodwill associated with its
Precision Miniature Medical and Electronics Products business. The net
charge totaling $10,552,000 was recognized as a cumulative change in
accounting principle in the 2002 consolidated statement of operations. The
corresponding deferred tax asset of $743,000 was offset by a valuation
allowance. Changes in the estimated future cash flows from these businesses
could have a significant impact on the amount of any future impairment, if
any. In accordance with SFAS No. 142, the Company's remaining unamortized
goodwill will be tested for impairment on an annual basis.
8. Inventories consist of the following at:
June 30, December 31,
2003 2002
----------- ------------
Raw material $ 2,704,625 $ 2,958,909
Work-in-process 3,170,018 2,874,125
Finished products and components 3,458,185 3,560,768
----------- -----------
$ 9,332,828 $ 9,393,802
=========== ===========
9. Notes Payable and Long Term Debt
Notes payable at June 30, 2003 and December 31, 2002 are summarized below:
June 30, December 31,
2003 2002
----------- -----------
Notes payable:
Short term borrowings, Europe $ 7,354,534 $ 6,427,529
Short term borrowings, domestic 4,749,253 3,982,137
Short term borrowings, Asia 300,756 511,318
----------- -----------
Total notes payable $12,404,543 $10,920,984
=========== ===========
At June 30, 2003 the Company was not in compliance with certain financial
covenants contained in its credit facility. These covenants pertained to
the company's consolidated tangible capital funds, consolidated total
liabilities to consolidated tangible capital funds ratio, consolidated
current ratio and its fixed coverage ratio. The Company has obtained
waivers of these covenants from the bank.
12
The Company and its domestic subsidiaries entered into a revolving credit
loan facility and a supplemental facility for which borrowings of
$6,500,000 could be outstanding at any one time. The revolving credit loan
facility, which had a maximum limit of $4,500,000, had borrowings of
$3,389,253 as of June 30, 2003 bearing an interest rate of 3.60% (LIBOR
plus 2.5%). The loan carries a commitment fee of .25% per annum, payable on
the unborrowed portion of the line. The domestic revolving credit loan
facilities have been extended to April 1, 2004.
In March 2003, the Company amended its agreement for its domestic and
foreign revolving credit and term loan facilities and obtained a new
facility in the amount of 1,000,000 euros (approximately $1,067,000) for
the issuance of advance payment guarantees (APG's) by the Company's wholly
owned subsidiary, Selas SAS. At June 30, 2003 APG's totaling $257,000 were
outstanding. APG's bear an interest rate of 3% per annum. The supplemental
facility, which had a maximum limit of $2,000,000, had borrowings of
$1,360,000 as of June 30, 2003 bearing interest at a rate of 4.85% (LIBOR
plus 3.75%). The loan carries a commitment fee of .25% per annum, payable
on the unborrowed portion of the line. The domestic supplemental loan
credit facility has been extended to the earlier of January 1, 2004 or the
sale of assets from discontinued operations in 2003. In July, 2003, Selas
SAS filed insolvency in France. See Note 14 for further explanation.
Long-term debt at June 30, 2003 and December 31, 2002 is summarized below:
June 30, Dec 31,
2003 2002
----------- -----------
Long Term Debt:
Term loans, Europe $ 1,298,086 $ 1,581,889
Term loans, domestic 2,326,857 2,722,247
Other borrowings 4,155 5,816
----------- -----------
3,629,098 4,309,952
Less: current maturities 3,246,692 1,573,716
----------- -----------
$ 382,406 $ 2,736,236
=========== ===========
The terms of the domestic loan agreements require monthly principal
payments of approximately $64,000 through April 2004, with a balloon
payment due at the end of the loans. At June 30, 2003, the borrowings under
the credit agreement bore interest, payable monthly, at an interest rate of
3.60% (LIBOR plus 2.50%). The credit agreement is subject to a prepayment
penalty of 3%.
The Company's French subsidiary, Selas SAS, financed its premises outside
of Paris with bank borrowings maturing August 31, 2006, which require
quarterly installments of principal of approximately $49,000 (44,000
Euros). The loan accrues interest payable quarterly. The interest rate on
June 30, 2003 was 2.85% (the Euro Interbank Offered Rate (EURIBOR) plus
.7%). The loan balance as of June 30, 2003 was $617,000 (553,000 Euros).
The loan is subject to a prepayment penalty of 3%. The debt is secured by
the land and building of Selas SAS. In July, 2003, Selas SAS filed
insolvency in France. See Note 14 for further explanation.
Our ability to pay the principal and interest on our indebtedness as it
comes due will depend upon our current and future performance. Our
performance is affected by general economic conditions and by financial,
competitive, political, business and other factors. Many of these factors
are beyond our control.
We believe that funds expected to be generated from operations, the
available borrowing capacity through our revolving credit loan facilities
as amended, the potential sale of certain assets, and the control of
capital spending will be sufficient to meet our anticipated cash
requirements for operating needs. If, however, we do not generate
13
sufficient cash or complete such financings on a timely basis, we may be
required to seek additional financing or sell equity on terms which may not
be as favorable as we could have otherwise obtained. No assurance can be
given that any refinancing, additional borrowing or sale of equity will be
possible when needed or that we will be able to negotiate acceptable terms.
In addition, our access to capital is affected by prevailing conditions in
the financial and equity capital markets, as well as our own financial
condition.
10. Income Taxes
Income taxes reflected a benefit for the six months ended June 30, 2003 of
$116,000 compared with a benefit $114,000 for the six months ended June 30,
2002, which results in effective tax benefit rates of 9.75% and 546.1%,
respectively. The effective rate of benefit in relation to pre-tax loss in
2003 is low because tax benefits from certain foreign net operating losses,
were fully reserved by a valuation allowance. The rate of tax benefit in
relation to pre-tax loss in 2002 is high because tax benefits from certain
foreign net operating losses, that were previously fully reserved by a
valuation reserve, were utilized for income tax purposes.
11. Accounting for Stock Options
The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Therefore, no compensation expense has been recognized for the stock
option plans. SFAS No. 123 "Accounting for Stock-Based Compensation",
amended by SFAS No. 148 "Accounting for Stock-Based Compensation-Transition
and Disclosure", requires the Company to disclose pro forma net income and
pro forma earnings per share amounts as if compensation expense was
recognized for options granted after 1995. The pro forma amounts are as
follows:
Three Months Ended
June 30,
---------------------------
2003 2002
----------- ------------
Net income (loss) as reported $(1,331,179) $ 231,215
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (21,711) (44,963)
----------- ------------
Pro forma net income (loss) $(1,352,890) $ 186,252
=========== ============
Earnings (loss) per share:
Basic and diluted - as reported $ (.26) $ .04
Basic and diluted - pro forma $ (.26) $ .04
Six Months Ended
June 30,
---------------------------
2003 2002
----------- ------------
Net (loss) as reported $(1,567,441) $(10,459,109)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (43,422) (89,926)
----------- ------------
Pro forma net loss $(1,610,863) $(10,548,035)
=========== ============
Loss per share:
Basic and diluted - as reported $ (.31) $ (2.04)
Basic and diluted - pro forma $ (.31) $ (2.06)
14
The aggregate fair value was calculated by using the fair value of each
option grant on the date of grant, utilizing the Black-Scholes
option-pricing model and the following key assumptions for the plan:
Six Months Ended
June 30,
--------
2003 2002
---- ----
Risk-free interest rates 3.11% - 4.16% 4.46% - 4.99%
Volatility 55% 46%
Expected lives (months) 74 78
12. Income (Loss) Per Share
The following table sets forth the computation of basic and diluted
loss per share:
For the Three Months Ended
June 30, 2003
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic Loss Per Share
Loss from continuing
Operations $ (648,911) 5,124,214 $ (.13)
Loss from discontinued
operations (682,268) 5,124,214 (.13)
------------ ------------
Loss available to
common shareholders $ (1,331,179) 5,124,214 $ (.26)
Effect of Dilutive Securities -- -- --
Stock options -- -- --
------------ ------------ ------------
Diluted Loss Per Share $ (1,331,179) 5,124,214 $ (.26)
============ ============ ============
For the Six Months Ended
June 30, 2003
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic Loss Per Share
Loss from continuing
operations $ (1,077,755) 5,124,214 $ (.21)
Loss from discontinued
Operations (489,686) 5,124,214 (.10)
------------ ------------
Loss available to
common shareholders $ (1,567,441) 5,124,214 $ (.31)
Effect of Dilutive Securities -- -- --
Stock options -- -- --
------------ ------------ ------------
Diluted Loss Per Share $ (1,567,441) 5,124,214 $ (.31)
============ ============ ============
15
For the Three Months Ended
June 30, 2003
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic Earnings Per Share
Income from continuing
operations $ 74,362 5,119,214 $ .01
Income from discontinued
operations 156,853 5,119,214 .03
------------ ------------
Income available to
Common shareholders $ 231,215 5,119,214 $ .04
Effect of Dilutive Securities -- -- --
Stock options -- -- --
------------ ------------ ------------
Diluted Earnings Per Share $ 231,215 5,119,214 $ .04
============ ============ ============
For the Six Months Ended
June 30, 2003
------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic Earnings (Loss) Per Share
Income from continuing
operations $ 93,341 5,119,214 $ .02
Loss from discontinued
operations (524) 5,119,214 --
Effect of accounting change (10,551,926) 5,119,214 (2.06)
------------ ------------
Loss available to
common shareholders $(10,459,109) 5,119,214 $ (2.04)
Effect of Dilutive Securities -- -- --
Stock options -- -- --
------------ ------------ ------------
Diluted Loss Per Share $(10,459,109) 5,119,214 $ (2.04)
============ ============ ============
Excluded from the computation of diluted earnings per share were options to
purchase approximately 466,000 common shares whose effect would have been
anti-dilutive.
13. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 130 lawsuits as of June 30, 2003(approximately 108 lawsuits
as of December 31, 2002)alleging that plaintiffs have or may have
contracted asbestos-related diseases as a result of exposure to asbestos
products or equipment containing asbestos sold by one or more named
defendants. Due to the noninformative nature of the complaints, the Company
does not know whether any of the complaints state valid claims against the
Company. The lead insurance carrier has informed the Company that the
primary policy for the period July 1, 1972 - July 1, 1975 has
16
been exhausted and that the lead carrier will no longer provide a defense
under that policy. The Company has requested that the lead carrier
substantiate this situation. The Company has contacted representatives of
the Company's excess insurance carrier for some or all of this period. The
Company does not believe that the asserted exhaustion of the primary
insurance coverage for this period will have a material adverse effect on
the financial condition, liquidity, or results of operations of the
Company. Management believes that the number of insurance carriers involved
in the defense of the suits and the significant number of policy years and
policy limits to which these insurance carriers are insuring the Company
make the ultimate disposition of these lawsuits not material to the
Company's consolidated financial position or results of operations.
In July 2003, Selas SAS received notice of an unfavorable French court
ruling on a subcontractor claim. The award was (euro)968,000 ($1,113,000)
in principal plus (euro)217,000 ($250,000) interest for a total judgement
of (euro)1,185,000 ($1,363,000). At June 30, 2003, the Company increased
its accrual to the full amount taking a charge of $649,000 in the quarter
ended June 30, 2003. This accrual was a part of the large furnace business
sold in December 2002 and, consequently, the charge taken in the quarter
ended June 30, 2003 is reflected in discontinued operations. In July, 2003,
Selas SAS filed insolvency in France. See Note 14 for further explanation.
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.
14. Subsequent Events
On August 4, 2003 the Company's wholly owned subsidiary, Selas SAS, filed
insolvency in the Commercial Court of Nanterre, France and is being managed
through a court appointed judiciary administrator. At June 30, 2003, Selas
SAS had total assets of $18.5 million and $29.0 million of liabilities. A
portion of the liabilities, including approximately $7.5 million in bank
debt and approximately $3 million of other liabilities, are either
guaranteed by the Company or are a joint liability with the Company. The
Company expects to take a minimum net charge of approximately $1.1 million
in the third quarter as a result of the insolvency due primarily to the
effect of the remaining translation adjustment, net of income taxes. In
addition, the Company may be subject to additional litigation or
liabilities as a result of the French insolvency. The insolvency filing by
Selas SAS represented a default under the Company's banking agreement. The
Company obtained a waiver from the bank of this default.
Pro forma financial statements are provided below. The Proforma financial
statements eliminate Selas SAS and its subsidiaries from the consolidated
balance sheet excluding amounts representing joint liabilities with the
Company or amounts guaranteed by the Company. The pro forma statement of
operations eliminates Selas SAS and its subsidiaries except for interest
expense on debt guaranteed by the Company. The statements of operations
treat intercompany sales to one of Selas SAS's subsidiaries as third party
sales.
17
Selas Corporation of America
Pro Forma Balance Sheet
As of June 30, 2003
As Pro Forma Pro Forma
Presented Adjustment Results
Assets
Cash and cash equivalents $ 1,293,127 $ (575,921)(1) $ 717,206
Accounts receivable 16,740,672 (9,011,100)(1) 7,729,572
Inventories 9,332,828 (625,356)(1) 8,707,472
Prepaid expenses and other
current assets 3,928,576 (958,641)(1) 2,969,935
Assets of discontinued operations 12,146,281 (5,348,541)(1) 6,797,740
------------ ------------ ------------
Total current assets 43,441,484 (16,519,559) 26,921,925
Property plant and equipment 37,509,507 (3,653,845)(1) 33,855,662
Less: accumulated depreciation 25,324,378 2,575,571(1) (22,748,807)
------------ ------------ ------------
Net property plant and equipment 12,185,129 (1,078,274)(1) 11,106,855
Excess of cost over net assets
acquired, less amortization 5,376,317 --(1) 5,376,317
Other assets 2,079,773 154,624(1) 2,234,397
------------ ------------ ------------
Total assets 63,082,703 (17,443,209) 45,639,494
============ ============ ============
Liabilities and equity
Bank Debt 15,651,235 (995,718)(2) 14,655,517
Accounts payable 11,686,286 (8,208,760)(3) 3,477,526
Other liabilities 3,968,003 (2,298,198)(3) 1,669,805
Liabilities of discontinued
operations 4,982,840 (3,415,570)(4) 1,567,270
Other accrued liabilities 8,051,112 (2,810,194)(3) 5,240,918
------------ ------------ ------------
Total current liabilities 44,339,476 (17,728,440) 26,611,036
Other long term liabilities 4,451,193 (541,336)(3) 3,909,857
Shareholders' equity
Common Stock 5,634,968 -- 5,634,968
Other stockholder's equity 8,657,066 826,567(5) 9,483,633
------------ ------------ ------------
Total liabilities and
stockholders' equity $ 63,082,703 $(17,443,209) $ 45,639,494
============ ============ ============
(1) Eliminate all assets of Selas SAS and its subsidiaries from the
consolidation.
(2) Eliminate bank debt of Selas SAS and its subsidiaries not guaranteed by the
Company.
(3) Eliminate all liabilities of Selas SAS and its subsidiaries.
(4) Eliminate liabilities of discontinued operations of Selas SAS that are not
a joint obligation of Selas SAS and the Company.
(5) Net equity impact from elimination of liabilities and assets of Selas SAS
and its subsidiaries from the consolidation.
18
Selas Corporation of America
Pro Forma Statement of Operations
For the Six Months Ended June 30, 2003
As Pro Forma Pro Forma
Presented Adjustment Results
Sales, net $ 31,880,927 $ 9,087,633(1) $ 22,793,294
Operating cost and expenses 24,577,292 8,082,494(1) 16,494,798
------------ ------------ ------------
Gross Margin 7,303,635 1,005,139 6,298,496
Selling, general and administrative
expenses 8,349,720 1,822,957(1) 6,526,763
------------ ------------ ------------
Operating loss (1,046,085) (817,818) (228,267)
Interest expense (406,184) (83,994)(2) (322,190)
Other income 258,051 88,393(1) 169,658
------------ ------------ ------------
(Loss) before income taxes (1,194,218) (813,419) (380,799)
Income tax benefit (116,463) (25,489)(1) (90,974)
------------ ------------ ------------
(Loss) from continuing operations $ (1,077,755) $ (787,930) $ (289,825)
============ ============ ============
(Loss) per share from continuing
operations:
Basis $ (.21) $ (.15) $ (.06)
Diluted (.21) (.15) (.06)
Average shares outstanding
Basic 5,124,214 5,124,214
Diluted 5,124,214 5,124,214
(1) Eliminate third party sales, cost of sales, selling general and
administrative expenses, other income, and income tax benefit of Selas SAS
and its subsidiaries.
(2) Eliminate interest expense from Selas SAS and its subsidiaries debt not
guaranteed by the Company.
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Forward-Looking and Cautionary Statements
- -----------------------------------------
Certain statements included in this Quarterly Report on Form 10-Q or documents
the Company files with the Securities and Exchange Commission, which are not
historical facts, are forward-looking statements (as such term is defined in the
Securities Exchange Act of 1934, and the regulations thereunder), which are
intended to be covered by the safe harbors created thereby. These statements may
include, but are not limited to statements in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Forward-looking statements include, without limitation, statements as to the
Company's expected future results of operations and growth, the Company's
business strategy, the expected benefits of reduction in employee headcount, the
planned sale of the Company's remaining discontinued operations, and use of
proceeds, the expected increases in operating efficiencies, anticipated trends
in the hearing health market related to the Company's Precision Miniature
Medical and Electronic Products segment, estimates of goodwill impairments and
amortization expense of other intangible assets, the effects of changes in
accounting pronouncements and statements as to trends or the Company's or
management's beliefs, expectations and opinions. Forward-looking statements are
subject to risks and uncertainties and may be affected by various factors that
may cause actual results to differ materially from those in the forward-looking
statements. In addition to the factors discussed in this Report on Form 10-Q,
certain risks, uncertainties and other factors can cause actual results and
developments to be materially different from those expressed or implied by such
forward-looking statements, including, without limitation, the following:
o the ability to implement the Company's business strategy;
o risks arising in connection with the insolvency of Selas SAS and
potential liabilities and actions arising in connection
therewith;
o the volume and timing of orders received by the Company;
o foreign currency movements in markets the Company services;
o changes in global economy and financial markets;
o changes in the mix of products sold;
o acceptance of the Company's products;
o pending and potential future litigation;
o competitive pricing pressures;
o availability of electronic components for the Company's products;
o ability to create and market products in a timely manner;
o ability to pay debt when it comes due;
o ability to sell businesses marked for sale; and
o the risks associated with terrorist attacks, war and threats of
attacks and wars.
For a description of other risks see "Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 or in other filings the
Company makes from time to time with the Securities and Exchange Commission. The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
20
2003 compared with 2002
- -----------------------
The Company has embarked on a strategy to focus on its Precision Miniature
Medical and Electronics Products markets for future growth. As part of this
strategy, in December 2002, the Company initiated its plan to sell its Tire
Holders, Lifts and Related Products segment. This segment consisted of one
wholly-owned subsidiary, Deuer Manufacturing, Inc., that operated on a stand
alone basis. Deuer generated approximately $7.9 million and $8.8 million of
revenue and $257,000 and $550,000 of net income for the six months ended June
30, 2003 and 2002, respectively. The Company accounted for the plan to sell the
subsidiary as a discontinued operation. See note 3 to the consolidated financial
statements included herein.
Consolidated net sales for the three months ended June 30, were as follows (in
thousands):
2003 2002 Change
-------- -------- -------
Precision Miniature Medical and
Electronic Products $ 9,675 $ 8,727 $ 948
Heat Technology 7,570 9,257 (1,687)
-------- -------- -------
Total $ 17,245 $ 17,984 $ (739)
======== ======== =======
Consolidated net sales for the six months ended June 30, were as follows (in
thousands):
2003 2002 Change
-------- -------- -------
Precision Miniature Medical and
Electronic Products $ 18,668 $ 17,546 $ 1,122
Heat Technology 13,213 17,133 (3,920)
-------- -------- -------
Total $ 31,881 $ 34,679 $(2,798)
======== ======== =======
Precision Miniature Medical and Electronic Products segment sales for both the
three and six months ended June 30, 2003 were up over the same year-ago period,
primarily due to stronger sales in its medical markets, partially offset by
lower sales in the hearing health market. Heat Technology segment sales for both
the three and six months ended June 30, 2003 continue to be impacted by the poor
worldwide economy for capital goods and hostilities in the Middle East where the
Company has several customers. Weak sales of the Company's small furnace line
and an unfavorable French court ruling on a dispute with a subcontractor forced
the Company's wholly-owned subsidiary, Selas SAS, to file insolvency on August
4,2003. See note 14 to the financial statements.
Gross margin for the three months ended June 30 was as follows (in thousands):
2003 2002 Change
------ ------ ------
Precision Miniature Medical and
Electronic Products $2,643 $2,301 $ 342
Heat Technology 761 1,563 (802)
------ ------ ------
Total $3,404 $3,864 $ (460)
====== ====== ======
21
Gross margin for the six months ended June 30 was as follows (in thousands):
2003 2002 Change
------ ------ ------
Precision Miniature Medical and
Electronic Products $5,249 $4,451 $ 798
Heat Technology 2,055 3,028 (973)
------ ------ ------
Total $7,304 $7,479 $ (175)
====== ====== =======
Gross margin, as a percent of segment sales for the three and six months ended
June 30, was as follows:
2003 2002 Change
------ ------ ------
Quarter YTD Quarter YTD Quarter YTD
------- ------- ------- ------- ------- -------
Precision Miniature Medical
and Electronic Products 27.3 28.1 26.4 25.4 .9 2.7
Heat Technology 10.0 15.6 16.9 17.7 (6.9) (2.1)
Total 19.7 22.9 21.5 21.6 (1.8) 1.3
During the three and six month period ended June 30, 2003, the Precision
Miniature Medical and Electronic Products segments gross profit margins
benefited from stronger sales in its medical market which is typically a higher
margin business than either the hearing health or electronics markets.
The Heat Technology segment gross profit margins vary markedly from contract to
contract, depending on customer specifications and other conditions related to
the project. The gross margin was lower due to the substantially lower sales
volume in the quarter ended June 30, 2003 compared to the quarter ended June 30,
2002.
Selling, general and administrative expenses (SG&A) were as follows:
2003 2002 Change
------ ------ ------
Quarter YTD Quarter YTD Quarter YTD
------- ------- ------- ------- ------- -------
Dollars (thousands) $ 4,129 $ 8,350 $ 3,892 $ 7,576 $ 237 $ 774
Percent of Sales 23.9% 26.2% 21.6% 21.8% 2.3% 4.4%
The higher SG&A expenses in both the three and six months ended June 30, 2003,
compared to the same year-ago period were due to higher selling and
administrative costs in Europe. The Company has retained certain employees
within Europe who were included in discontinued operations in the prior year.
Additionally, the Company incurred higher research and development costs in its
Precision Miniature Medical and Electronic Products business as it strives to
introduce more products into the hearing health market.
Interest expense for the three and six months ended June 30, 2003 was $215,000
and $406,000 compared to $117,000 and $200,000 for the same periods in 2002. The
increase over last year's first quarter was due to interest expense on certain
European debt that was classified as discontinued operations in 2002. Interest
income for the six months ended June 30,2003 was $9,000 compared to $23,000 for
the same period in 2002, the decrease is attributable to interest on a trade
receivable in 2002.
Other income (expense) includes realized and unrealized gains (loss) on foreign
exchange. The six months ended June 30, 2003 includes a gain of $163,000
compared to a gain of $165,000 for the six months ended June 30, 2002.
Income taxes reflected a benefit for the six months ended June 30, 2003 of
$116,000 compared with a benefit $114,000 for the six months ended June 30,
2002, which results in effective tax benefit rates 9.75% and 546.1%,
22
respectively. The effective rate of benefit in relation to pre-tax loss in 2003
is low because tax benefits from certain foreign net operating losses, were
fully reserved by a valuation allowance. The rate of tax benefit in relation to
pre-tax loss in 2002 is high because tax benefits from certain foreign net
operating losses, which were previously fully reserved by a valuation reserve,
were utilized for income tax purposes.
For the three and six months ended June 30, 2003, the net loss from continuing
operations was $649,000 and $1,078,000 compared with income of $74,000 and
$93,000 for the same periods last year. The loss, compared to net income in the
prior year, was primarily due to decreased sales, increased SG&A expenses due to
higher overhead in our European operations compared to last year, and higher
research and development costs.
Discontinued operations generated a net loss of $682,000 and $489,000 for the
three and six months ended June 30, 2003, compared to net income of $157,000 and
$0 for the same three and six-month periods last year. The net loss in the
current year is a result of additional accruals related to an unfavorable French
court ruling affecting the Company's large furnace business, which was sold in
December 2002. The loss was partially offset by net income generated from the
Company's wholly owned subsidiary, Deuer Manufacturing Inc. Deuer generated
income of $126,000 and $297,000 for the three and six month period ended June
30, 2003.
Liquidity and Capital Resources
- -------------------------------
Consolidated net working capital decreased to a negative $898,000 at June 30,
2003 from $3.5 million at December 31, 2002. The decrease was primarily from the
reclassification of long term debt that is due April 1,2004.
The Company's cash flows from operating, investing and financing activities, as
reflected in the statement of cash flows, are summarized as follows (in
thousands):
Six Months Six Months
Ended Ended
June 30, June 30,
2003 2002
------- -------
Cash provided (used) by:
Continuing operations $ (824) $(2,129)
Discontinued operations 893 744
Investing activities (943) (1,038)
Financing activities 52 635
Effect of exchange rate
changes on cash 76 134
------- -------
Decrease in cash $ (746) $(1,655)
======= =======
The Company had the following bank arrangements (in thousands):
June 30, December 31,
2003 2002
------- -------
Total availability under
existing facilities $20,918 $20,369
------- -------
Borrowings and commitments:
Notes payable 12,404 10,921
Long-term debt 3,629 4,310
------- -------
Total borrowings 16,034 15,231
Advance payment guarantees
(off-balance sheet)(a) 1,770 2,160
------- -------
Total outstanding borrowings and
commitments 17,805 17,391
------- -------
Remaining availability under
Existing facilities $ 3,113 $ 2,978
======= =======
23
(a) Advance Payment Guarantees (APG's) are required by some customers in the
Heat Technology segment. The APG's provide a performance guarantee to the
customer in the event of a default in delivery or a failure of the furnace
being supplied. Although the guarantee period can vary widely, an APG is
typically in force from six months to one year.
Borrowings under the majority of the Company's credit facilities bear interest
at LIBOR plus 2.5% to 3.75%.
The Company and its domestic subsidiaries entered into a revolving credit loan
facility and a supplemental facility for which borrowings of $6,500,000 could be
outstanding at any one time. The revolving credit loan facility, which had a
maximum limit of $4,500,000, had borrowings of $3,389,253 as of June 30, 2003
bearing an interest rate of 3.60% (LIBOR plus 2.5%). The loan carries a
commitment fee of .25% per annum, payable on the unborrowed portion of the line.
The domestic revolving credit loan facilities have been extended to April 1,
2004.
In March 2003, the Company amended its agreement for its domestic and foreign
revolving credit and term loan facilities and obtained a new facility in the
amount of 1,000,000 euros (approximately $1,067,000) for the issuance of advance
payment guarantees (APG's) by the Company's wholly owned subsidiary, Selas SAS.
At June 30, 2003 APG's totaling $257,000 were outstanding. APG's bear an
interest rate of 3% per annum. The supplemental facility, which had a maximum
limit of $2,000,000, had borrowings of $1,360,000 as of June 30, 2003 bearing
interest at a rate of 4.85% (LIBOR plus 3.75%). The loan carries a commitment
fee of .25% per annum, payable on the unborrowed portion of the line. The
domestic supplemental loan credit facility has been extended to the earlier of
January 1, 2004 or the sale of assets from discontinued operations in 2003.In
July, 2003, Selas SAS filed insolvency in France. See Note 14 of the financial
statements for further explanation.
Our ability to pay the principal and interest on our indebtedness as it comes
due will depend upon our current and future performance. Our performance is
affected by general economic conditions and by financial, competitive,
political, business and other factors. Many of these factors are beyond our
control.
We believe that funds expected to be generated from operations, the sale of
assets, the available borrowing capacity through our revolving credit loan
facilities as amended, the potential sale of certain assets, and the control of
capital spending will be sufficient to meet our anticipated cash requirements
for operating needs through March 31,2004. If, however, we do not generate
sufficient cash or complete such financings on a timely basis, or if we incur
additional liabilities as a result of the Selas SAS insolvency, we may be
required to seek additional financing or sell equity on terms which may not be
as favorable as we could have otherwise obtained. No assurance can be given that
any refinancing, additional borrowing or sale of equity will be possible when
needed or that we will be able to negotiate acceptable terms. In addition, our
access to capital is affected by prevailing conditions in the financial and
equity capital markets, as well as our own financial condition.
Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period.
24
Certain accounting estimates and assumptions are particularly sensitive because
their significance to the consolidated financial statements and the possibility
that future events affecting them may differ markedly. The accounting policies
of the Company with significant estimates and assumptions include the Company's
revenue recognition, discontinued operations, and deferred taxes policies. These
and other significant accounting policies are described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Note 1 to the Company's 2002 financial statements contained in or incorporated
by reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
For information regarding the Company's exposure to certain market risks, see
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002. There
have been no material changes in the Company's portfolio of financial
instruments or market risk exposures which have occurred since December 31,
2002.
ITEM 4. Controls and Procedures
-----------------------
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
The Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls") as of the end of
the period covered by this Form 10-Q and any change in material controls over
financial reporting that occurred during the period covered by this Form 10-Q.
This evaluation ("Controls Evaluation") was done under the supervision and with
the participation of management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. The
Company conducts periodic evaluations of its internal controls to enhance where
necessary its procedures and controls.
Conclusions.
Based upon the Controls Evaluation, the CEO and CFO have concluded that, the
Disclosure Controls are effective in reaching a reasonable level of assurance
that management is timely alerted to material information relating to the
Company during the period when its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO conducted an evaluation of
internal controls over financial reporting ("Internal Controls") to determine
whether there have been changes in Internal Controls that have occurred during
the period that have material affected or which are reasonably likely to
material affect Internal Controls. Based on this evaluation, there has been no
such change during the period covered by this report.
25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The information contained in note 13 to the Consolidated Condensed Financial
Statements in part 1 of this quarterly report is incorporated by reference
herein.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 2003 Annual Meeting of Shareholders of the Company was held on April 23,
2003.
At the 2003 Annual Meeting:
Messrs. Frederick L. Bissinger and Nicholas A. Giordano were elected to the
Board of Directors of the Company for terms expiring at the 2006 Annual Meeting.
In such elections, 3,305,687 votes were cast for Mr. Bissinger and 3,308,687
were cast for Mr. Giordano. Under Pennsylvania law, votes cannot be cast against
a candidate. Proxies filed at the 2003 Annual Meeting by the holders of 356,628
shares withheld authority to vote for Mr. Bissinger and those filed by the
holders of 353,628 shares withheld authority to vote for Mr. Giordano. The terms
of the following directors continued after the Annual Meeting: Mark S. Gorder,
Michael J. McKenna and Robert N. Masucci.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
31.1 Certification of principal executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of principal executive officer pursuant to U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of principal financial officer pursuant to U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K filed on July 23, 2003 to report sale of its subsidiary Deuer
Manufacturing Inc.
Form 8-K filed on August 5,2003 to report its French Subsidiary's
insolvency filing.
26
SELAS CORPORATION OF AMERICA
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELAS CORPORATION OF AMERICA
(Registrant)
Date: August 14, 2003 By: /s/ Mark S. Gorder
-------------------------------------
Mark S. Gorder
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ Robert F. Gallagher
-------------------------------------
Robert F. Gallagher
Chief Financial Officer and Treasurer
27
EXHIBIT INDEX
31.1 Certification of principal executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of principal executive officer pursuant to U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of principal financial officer pursuant to U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
28