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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED March 31, 2004

OR

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

COMMISSION FILE NUMBER   1-5005

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.

SELAS CORPORATION OF AMERICA

I N D E X

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PART I:   FINANCIAL INFORMATION

ITEM 1.   Financial Statements

SELAS CORPORATION OF AMERICA
Consolidated Condensed Balance Sheets
Assets
(Unaudited)

(See accompanying notes to the consolidated condensed financial statements)

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SELAS CORPORATION OF AMERICA
Consolidated Condensed Balance Sheets
Liabilities and Shareholders’ Equity
(Unaudited)

(See accompanying notes to the consolidated condensed financial statements)

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SELAS CORPORATION OF AMERICA
Consolidated Condensed Statements of Operations
(Unaudited)

(See accompanying notes to the consolidated condensed financial statements)

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SELAS CORPORATION OF AMERICA
Consolidated Condensed Statements of Cash Flows
(Unaudited)

(See accompanying notes to the consolidated condensed financial statements)

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SELAS CORPORATION OF AMERICA

Notes to Consolidated Condensed Financial Statements (Unaudited)

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ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Headquartered in Arden Hills, Minnesota, Selas Corporation of America is an international firm that designs, develops, engineers and manufactures micro-miniature medical and electronic products. The Company supplies micro-miniaturized components, systems and molded plastic parts, primarily to the hearing instrument manufacturing industry, as well as the computer, electronics, telecommunications and medical equipment industries. In addition to its Arden Hills headquarters, the Company has facilities in California, Singapore, and Germany. Within discontinued operations, the Company has facilities in Pennsylvania and Japan. See also notes 3 and 5 to the Condensed Consolidated Financial Statements.

Currently, the Company has one operating segment, its precision miniature medical and electronics products segment. In the past the Company had operated three segments, precision miniature medical and electronics products segment, heat technology segment, and tire holders, lifts and related products segment. In 2001, the Company began focusing on its precision miniature medical and electronics products segment and developing plans to exit the businesses that comprised the heat technology segment, and tire holders, lifts and related products segment. The Company successfully exited the tire holders, lifts and related products business in 2003 and is in the process of exiting the heat technology segment. The Company has classified its heat technology segment as discontinued operations.

The Company manufactures micro-miniature components, systems and molded plastic parts for hearing instruments, medical equipment, electronics, telecommunications and computer industry manufacturers. These components consist of volume controls, microphones, trimmer potentiometers and switches. The Company 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 65% of 2003 annual net sales for the Company’s precision miniature medical and electronic products business.

In the medical market, the Company is focused on sales of microelectronics, micromechanical assemblies and high-precision plastic molded components to medical device manufacturers. Targeted customers include medical product manufacturers of portable and lightweight battery powered devices, large AC-powered units often found in clinics and hospitals, as well as a variety of sensors designed to connect a patient to an electronic device.

The medical industry is faced with pressures to reduce the costs of healthcare. The Company offers medical manufacturers the capabilities to design, develop and manufacture components for medical devices that are easier to use, measure with greater accuracy and provide more functions while reducing the costs to manufacture these devices. Examples of the Company’s products used by medical device manufacturers include components found in intravenous fluid administration pumps that introduce drugs into the bloodstream. The Company manufacturers and supplies bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system.

The Company also manufactures a family of safety needle products for an OEM customer that utilizes the Company’s insert and straight molding capabilities. These products are assembled using full automation including built-in quality checks within the production lines. Other examples include sensors used to detect pathologies in specific organs of the body and monitoring devices to

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detect cardiac and respiratory functions. The early and accurate detection of pathologies allows for increased likelihood for successful treatment of chronic diseases and cancers. Accurate monitoring of multiple functions of the body, such as heart rate and breathing, aids in generating more accurate diagnosis and treatments for patients.

The Company has also expanded its micro-miniature components business through the manufacture of thermistors and film capacitors. The Company manufactures and sells thermistors and thermistor assemblies, which are solid state devices that produce precise changes in electrical resistance as a function of any change in absolute body temperature. The Company’s Surge-Gard TM product line, an inrush electric current limiting device used primarily in computer power supplies, represented approximately a third of the Company’s sales in 2003. The balance of sales represent various industrial, commercial and military sales for thermistor and thermistor assemblies to domestic an international markets.

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 (within the meaning of the Private Securities Litigation Reform Act of 1995), 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” such as the potential sale of and marketing for the Dresher property, new digital products to gain market share, recovery of the telecommunications market, potential growth in the Company’s medical profits, future gross profit margins, future cost savings, net operating loss carryforwards, the impact of future cash flows, the ability to maintain financial covenants, the ability to meet working capital requirements, future level of funding of employee benefit plans, the ability to negotiate extension on purchases, the impact of foreign currencies and litigation; and
• statements in “Notes to the Company’s Condensed Consolidated Financial Statements”.

Forward-looking statements also include, without limitation, statements as to the Company’s:

• expected future results of operations and growth;
• ability to meet working capital requirements;
• business strategy;
• expected benefits from staff reductions;
• planned sale of the land and facility in Dresher, Pennsylvania, and remaining Heat Technology operations, and use of proceeds therefrom;
• expected increases in operating efficiencies;
• anticipated trends in the hearing-health market;
• estimate of goodwill impairment and amortization expense of the intangible assets; and

In addition, forward-looking statements also include the effects of changes in accounting pronouncements, the effects of litigation and the amount of insurance coverage, 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 Quarterly Report on Form 10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those

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expressed or implied by such forward-looking statements, including, without limitation, the following:

• the ability to implement the Company's business strategy;
• risks arising in connection with the insolvency of Selas SAS, and potential liabilities and actions arising in connection therewith;
• the volume and timing of orders received by the Company;
• changes in estimated future cash flows;
• foreign currency movements in markets the Company services;
• changes in the global economy and financial markets;
• changes in the mix of products sold;
• acceptance of the Company’s products;
• competitive pricing pressures;
• pending and potential future litigation;
• availability of electronic components for the Company’s products;
• ability to create and market products in a timely manner;
• ability to pay debt when it comes due;
• ability to sell businesses and assets marked for sale; and
• the risks associated with terrorist attacks, war and threats of attacks and wars.

For a description of these and other risks see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, 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.

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2004 compared with 2003

Consolidated net sales for the three months ended March 31, were as follows (in thousands):

The Company’s sales have been impacted by weakness in its primary hearing health market. Competitive pricing issues and a reduction in customer inventory levels resulted in approximately a 14 percent decline in sales into this market. Additionally, the Company’s medical products experienced a 34 percent decline in sales as two customers delayed orders reducing their internal inventory levels. The Company does not believe the decline in medical sales represents a long-term trend. These declines were offset primarily by a $1.1 million order from the Singapore military for helmets including the Company’s microphone and speaker products.

Gross profit margin for the three months ended March 31 was as follows (in thousands):

Gross profit margins for the quarter were negatively impacted as sales included a $1.1 million order from the Singapore military that included a large portion of third party content where the Company was not able to obtain a comparable margin to its own products. In 2003, the gross margin benefited from stronger sales in its medical market which is typically a higher margin business than the Company’s other product lines.

Selling, general and administrative expenses (SG&A) were as follows:

The higher selling expenses over the same year-ago period was the result of additional staffing in this area including third party recruiter fees associated with hiring a sales and marketing manager for its medical products. In addition, the Company incurred higher expenses associated with tradeshows.

Administrative expenses increased primarily due to the accrual of approximately $170,000 associated with a reduction in staffing. The staffing reductions were a combination of reductions due to the transfer of a portion of its manufacturing overseas and an effort to streamline its administrative functions. These actions will reduce the Company’s ongoing costs by between $1.5 million and $2 million annually. The Company expects to start seeing the benefit of these costs reductions starting in the second quarter of 2004. Additionally, the Company incurred higher bank fees associated with the renewal of its bank facilities in the quarter ended March 31, 2004.

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Research and development expenses increased as the Company continues its emphasis on new product development in an effort to improve the overall sales growth.

Interest expense for the three months ended March 31, 2004 was $96,000 compared to $140,000 for the same period in 2003. The decrease over last year’s expense was due to the lower outstanding debt balance partially offset by an increase in the interest rate.

Other income was $95,000 compared to $33,000 for the three months ended March 31, 2004 and 2003, respectively. The increase was primarily due to an increase of $56,000 in foreign currency exchange gains resulting from currency fluctuations affecting a portion of the Company’s debt that was Euro denominated until its amendment in March 2004.

Income taxes reflected an expense for the three months ended March 31, 2004 of $118,000 compared with $25,000 for the three months ended March 31, 2003, which results in effective tax rates of (19.5)% and (68.1)%, respectively. The effective rate in 2004 was primarily due to foreign taxes on its German and Singapore operations. The Company is in a net operating loss position for Federal income tax purposes and, consequently, no benefit from the current period domestic operating loss was recognized. The effective tax rate in 2003 was primarily due to the recognition of state and Federal taxes on its domestic operations while recognizing no benefit generated from the operating losses of its European Heat Technology operations.

For the three months ended March 31, 2004, the net loss from continuing operations was $724,000 compared with a loss of $61,000 for the same period last year. The increased loss was a combination of the factors noted above reflecting lower gross margin and higher selling, research and development, and administrative expenses.

Discontinued operations generated a net loss for the three months ended March 31, 2004 of $79,000 compared to a net loss of $176,000 for the same three month period last year. The smaller loss in 2004 was the result of the Company no longer including any results from its European Heat Technology operations in the current 2004 quarter as a result of the insolvency of Selas SAS, the Company’s French subsidiary in August 2003. The 2003 loss from the European Heat Technology operations was partially offset by income from the Company’s wholly owned subsidiary, Deuer Manufacturing, Inc., which was sold in the third quarter of 2003. See note 3 of the Consolidated Condensed Financial Statements.

Liquidity and Capital Resources

Consolidated net working capital remained relatively flat at approximately $1.9 million at March 31, 2004 and at December 31, 2003.

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):

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The Company had the following bank arrangements (in thousands):

Borrowings under the majority of the Company’s credit facilities bear interest at prime plus 3%. See Note 7 of the Consolidated Condensed Financial Statements.

The Company and its domestic subsidiaries entered into a revolving credit loan facility maturing April 1, 2005 for which borrowings of $4,500,000 could be outstanding at any one time. The Company had borrowings of $2,981,000 as of March 31, 2004 bearing an interest rate of 7.0% (prime plus 3.0%). The loan carries a commitment fee of .25% per annum, payable on the unborrowed portion of the line. The Company’s foreign subsidiary had borrowings of $285,000 out of a total availability of $1,058,000.

The Company and its domestic subsidiaries entered into a $5,510,000 note maturing April 1, 2005. This facility requires quarterly principal payments of $300,000 commencing June 30, 2004 and bears interest of 7.0% (prime plus 3.0%). Proceeds from the sale of the Dresher building or the Company’s burner and components business will be used to reduce the Company’s borrowings and will represent a permanent reduction in the Company’s availability under these facilities.

Selas believes that funds expected to be generated from operations, the available borrowing capacity through its revolving credit loan facilities, the potential sale of certain assets, curtailment of the dividend payment and control of capital spending will be sufficient to meet its anticipated cash requirements for operating needs through April 1, 2005. However, the Company’s ability to pay the principal and interest on its indebtedness as it comes due will depend upon current and future performance. Performance is affected by general economic conditions and by financial, competitive, political, business and other factors. Many of these factors are beyond the Company’s control. If, however, the Company does not generate sufficient cash or complete such financings on a timely basis, it may be required to seek additional financing or sell equity on terms, which may not be as favorable as it 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 Selas will be able to negotiate acceptable terms. In addition, access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as the Company’s financial condition.

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Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.

Certain accounting estimates and assumptions are particularly sensitive because their significance to the consolidated condensed 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, accounts receivable reserves, inventory reserves, discontinued operations, goodwill, long-lived assets and deferred taxes policies. These and other significant accounting policies are described in and incorporated by reference from “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1 to the financial statements contained in or incorporated by reference in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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, 2003. There have been no material changes in the Company’s portfolio of financial instruments or market risk exposures which have occurred since December 31, 2003.

ITEM 4.   Controls and Procedures

Quarterly evaluation of the Company’s Disclosure Controls and Internal Controls.

The Company’s management, with the participation of its chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2004. Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective in reaching a reasonable level of assurance that management is timely alerted to material information relating to the Company during the period when the Company’s periodic reports are being prepared.

During the quarter ended March 31,2004, there has not occurred any change in the Company’s internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

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PART II — OTHER INFORMATION

ITEM 1.   Legal Proceedings

The information contained in Notes 12 and 13 to the Consolidated Condensed Financial Statements in part 1 of this quarterly report is incorporated by reference herein.

ITEM 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity

None.

ITEM 3.   Defaults upon Senior Securities

None.

ITEM 4.   Submission of Matters to a Vote of Security Holders

None.

ITEM 5.   Other Information

None.

ITEM 6.   Exhibits and Reports on Form 8-K

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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.

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EXHIBIT INDEX

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