-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hzso5F4kDyNHBJHebOtpCmsSy1GGu0djhX0EmLc/SFd5yFWcfO0w+ov0xDhRI/h9 UJN7gWRe+cTvmvAA6JqJ6w== 0000088790-02-000016.txt : 20020813 0000088790-02-000016.hdr.sgml : 20020813 20020813163929 ACCESSION NUMBER: 0000088790-02-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SELAS CORP OF AMERICA CENTRAL INDEX KEY: 0000088790 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL PROCESS FURNACES & OVENS [3567] IRS NUMBER: 231069060 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05005 FILM NUMBER: 02730182 BUSINESS ADDRESS: STREET 1: 2034 LIMEKILN PK CITY: DRESHER STATE: PA ZIP: 19025 BUSINESS PHONE: 2156466600 MAIL ADDRESS: STREET 1: 2034 LIMEKILN PIKE CITY: DRESHER STATE: PA ZIP: 19025 10-Q 1 aa10q0202.txt 10Q JUNE 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-5005 SELAS CORPORATION OF AMERICA (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-1069060 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) DRESHER, PENNSYLVANIA 19025 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (215) 646-6600 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. (X) YES ( ) NO INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. COMMON SHARES, $1.00 PAR VALUE 5,119,214 (exclusive of 515,754 CLASS treasury shares) OUTSTANDING AT AUGUST 8, 2002 SELAS CORPORATION OF AMERICA I N D E X Page Number PART I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31, 2001 3, 4 Consolidated Statements of Operations for the Three Months Ended June 30, 2002 and 2001 (Unaudited) 5 Consolidated Statements of Operations for the Six Months Ended June 30, 2002 and 2001 (Unaudited) 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited) 7 Consolidated Statement of Shareholders' Equity for the Six Months Ended June 30, 2002 (Unaudited) 8 Notes to Consolidated Financial Statements 9-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II: OTHER INFORMATION Item 1. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits and Reports on Form 8-K 24 SELAS CORPORATION OF AMERICA Consolidated Balance Sheets Assets June 30, December 31, 2002 2001 (Unaudited) (Audited) Current assets Cash, including cash equivalents of $410,000 in 2002 and $391,000 in 2001 $ 1,981,238 $ 3,636,673 Accounts receivable (including unbilled receivables of $3,507,000 in 2002 and $1,857,000 in 2001, less allowance for doubtful accounts of $547,000 in 2002 and $456,000 in 2001) 22,559,170 17,376,784 Inventories 13,318,206 13,810,209 Deferred income taxes 1,718,875 1,521,809 Other current assets 1,177,484 1,033,689 Assets of discontinued operations 21,765,174 -- Total current assets 62,520,147 37,379,164 Property, plant and equipment Land 554,943 554,943 Buildings 7,175,875 7,143,408 Machinery and equipment 33,677,466 32,502,680 41,408,284 40,201,031 Less: Accumulated depreciation 27,024,287 25,621,190 Net property, plant and equipment 14,383,997 14,579,841 Assets of discontinued operations -- 16,773,442 Excess of cost over net assets of acquired subsidiaries, less accumulated amortiza- tion of $4,510,000 in 2002 and $4,562,000 in 2001 15,731,801 15,631,502 Deferred income taxes 210,933 350,014 Other assets including patents, less amortization 1,571,969 1,523,320 $94,418,847 $86,237,283 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Balance Sheets Liabilities and Shareholders' Equity June 30, December 31, 2002 2001 Current liabilities (Unaudited) (Audited) Notes payable $11,715,044 $ 9,422,202 Current maturities of long-term debt 1,475,568 1,496,033 Accounts payable 13,409,313 10,232,880 Federal, state and foreign income taxes 580,863 461,393 Customers' advance payments on contracts 2,241,653 2,809,988 Guarantee obligations and estimated costs of service 1,166,796 878,952 Other accrued liabilities 4,988,684 5,100,021 Liabilities of discontinued operations 13,610,537 -- Total current liabilities 49,188,458 30,401,469 Long-term debt 2,639,954 3,214,934 Other postretirement benefit obligations 3,827,439 3,878,948 Liabilities of discontinued operations -- 10,137,315 Contingencies and commitments Shareholders' equity Common shares, $1 par; 10,000,000 shares authorized; 5,634,968 shares issued 5,634,968 5,634,968 Additional paid-in capital 12,012,541 12,012,541 Retained earnings 23,390,565 23,297,747 Accumulated other comprehensive loss (1,010,000) (1,075,561) Less: 515,754 common shares held in treasury, at cost (1,265,078) (1,265,078) Total shareholders' equity 38,762,996 38,604,617 $94,418,847 $86,237,283 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, June 30, 2002 2001 Sales, net $22,775,493 $24,918,031 Operating costs and expenses Cost of sales 18,083,978 19,364,158 Selling, general and administrative expenses 4,211,139 4,228,177 Operating income 480,376 1,325,696 Interest (expense) (117,256) (138,745) Interest income 7,902 13,578 Other income (expense), net 159,469 (73,748) Income from continuing operations before income taxes 530,491 1,126,781 Income taxes 125,161 402,858 Income from continuing operations 405,330 723,923 Loss from discontinued operations, net of income taxes benefit (174,114) (589,121) Net income $ 231,216 $ 134,802 Earnings (loss) per share Basic Continuing operations $0.08 $0.14 Discontinued operations (0.03) (0.11) $0.05 $0.03 Diluted Continuing operations $0.08 $0.14 Discontinued operations (0.03) (0.11) $0.05 $0.03 Average shares outstanding Basic 5,119,000 5,119,000 Diluted 5,135,000 5,143,000 Comprehensive income $ 324,227 $ 66,922 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statements of Operations (Unaudited) Six Months Ended June 30, June 30, 2002 2001 Sales, net $ 43,505,452 $48,488,740 Operating costs and expenses Cost of sales 34,491,263 37,348,352 Selling, general and administrative expenses 8,211,426 8,721,695 Operating income 802,763 2,418,693 Interest (expense) (199,894) (293,132) Interest income 23,183 22,552 Other income (expense), net 253,780 59,427 Income before income taxes 879,832 2,207,540 Income taxes 196,734 854,074 Income from continuing operations 683,098 1,353,466 Loss from discontinued operations, net of income taxes benefit (590,280) (920,192) Net income $ 92,818 $ 433,274 Earnings (loss) per share Basic Continuing operations $0.13 $0.26 Discontinued operations (0.12) (0.17) $0.01 $0.09 Diluted Continuing operations $0.13 $0.26 Discontinued operations (0.12) (0.17) $0.01 $0.09 Average shares outstanding Basic 5,119,000 5,119,000 Diluted 5,123,000 5,129,000 Comprehensive income $ 158,379 $ 279,990 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, June 30, 2001 2002 Cash flows from operating activities: Net income $ 92,818 $ 433,274 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,601,731 2,055,943 (Gain) loss on sale of property and equipment (3,322) 5,522 Deferred taxes (1,448) (514,280) Changes in operating assets and liabilities: (Increase)in accounts receivable (4,297,386) (1,983,037) (Increase) decrease in inventories 669,307 (1,279,074) (Increase) in other assets (100,338) (52,225) Increase (decrease) in accounts payable 907,571 (140,802) Increase (decrease) in accrued expenses 835,633 (631,601) Increase (decrease) in customer advances (985,449) 1,360,054 Increase (decrease) in other liabilities (60,963) 423,898 Net cash (used) by operating activities (1,341,846) (322,328) Net cash provided (used) by discontinued operations 76,515 (1,460,996) Cash flows from investing activities: Purchases of property, plant and equipment (1,171,402) (1,097,285) Proceeds from sale of property, plant and equipment 12,311 -- Acquisition of subsidiary companies, net of cash acquired -- (68,143) Net cash (used) by investing activities (1,159,091) (1,165,428) Cash flows from financing activities: Proceeds from short-term bank borrowings 1,683,901 3,090,998 Proceeds from long-term bank borrowings -- 2,353,494 Proceeds from borrowings to acquire subsidiary company 136,173 672,136 Repayments of short-term bank borrowings (376,034) (1,964,133) Repayments of long-term debt (809,120) (1,329,301) Payment of dividends -- (460,858) Net cash provided by financing activities 634,920 2,362,336 Effect of exchange rate changes on cash 134,067 (221,608) Net decrease in cash and cash equivalents (1,655,435) (808,024) Cash and cash equivalents, beginning of period 3,636,673 3,782,359 Cash and cash equivalents, end of period $ 1,981,238 $ 2,974,335 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statement of Shareholders' Equity Six Months Ended June 30, 2002 (Unaudited) Common Stock Additional Number of Paid-in Shares Amount Capital Balance January 1, 2002 5,634,968 $5,634,968 $12,012,541 Net income Foreign currency translation gain -- -- -- Derivative financial instrument fair value adjustment -- -- -- Comprehensive income -- -- -- Balance June 30, 2002 5,634,968 $5,634,968 $12,012,541 Accumulated Other Comprehensive Retained Income Comprehensive Earnings (Loss) Income Balance January 1, 2002 $23,297,747 $(1,075,561) Net income 92,818 $ 92,818 Foreign currency translation gain -- 33,704 33,704 Derivative financial instrument fair value adjustment -- 31,857 31,857 Comprehensive income -- -- $ 158,379 Balance June 30, 2002 $23,390,565 $(1,010,000) Total Treasury Shareholders' Stock Equity Balance January 1, 2002 $(1,265,078) $38,604,617 Net income -- 92,818 Foreign currency translation gain -- 33,704 Derivative financial instrument fair value adjustment -- 31,857 Comprehensive income -- -- Balance June 30, 2002 $(1,265,078) $38,762,996 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA PART I - FINANCIAL INFORMATION ITEM 1. Notes to Consolidated Financial Statements (Unaudited) 1. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly Selas Corporation of America's consolidated financial position as of June 30, 2002 and December 31, 2001, and the consolidated results of its operations for the three and six months ended June 30, 2002 and 2001 and consolidated statements of shareholders' equity and cash flows for the six months then ended. 2. The accounting policies followed by the Company are set forth in note 1 to the Company's financial statements in the 2001 Selas Corporation of America Annual Report. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, 'Accounting for Asset Retirement Obligation,' which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Adoption is required for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The Company is in the process of analyzing the implications of SFAS 143 and does not believe that the adoption of this statement will have a material impact on the net earnings of the Company. In April 2002, the FASB issued SFAS No. 145 'Rescission of FASB Statements Nos. 4,44 and 64, Amendment of FASB No. 14, and Technical Corrections.' The Statement rescinds or amends a number of existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS 145 is effective for transactions occurring after May 15, 2002. The Company is in the process of analyzing the implications of SFAS 145 and does not believe that the adoption of this statement will have a material impact on the net earnings of the Company. In July 2002, the FASB issued SFAS No. 146, 'Accounting for Costs Associated with Exit or Disposal Activities.' This standard addresses the accounting and reporting for costs of so-called exit activities (including restructuring) and for the disposal of long-lived assets. The standard changes some of the criteria for recognizing a liability for these activities. It is effective beginning in 2003 with the liability recognition criteria under the standard applied prospectively. The Company is in the process of analyzing the potential impact of adoption on the accounting policies regarding exit and disposal activities and does not believe it will have a material impact on the net earnings of the Company. 3. Discontinued Operations In the fourth quarter of 2001, the Company initiated its plan to dispose of the Company's primary custom-engineered furnace business, Selas SAS (Paris), along with two other closely related subsidiaries, Selas Italiana, S.r.L. (Milan) and Selas U.K. (Derbyshire). These subsidiaries form the Company's large custom-engineered furnaces division used primarily in the steel and glass industries worldwide. The furnaces engineered by this division are custom-engineered to meet customer specific requirements. These subsidiaries generated approximately $8.3 million and $8.9 million of revenue and a loss from discontinued operations of $590,000 and $920,000 for the six months ended June 30, 2002 and 2001, respectively. The Company has accounted for the plan to dispose of the subsidiaries as a discontinued operation and accordingly, has reclassified the historical financial data of these subsidiaries. The Company anticipates paying the discontinued operations long-term debt of $2,035,962 and notes payable of $6,533,816 and therefore, has reclassified these amounts into continuing operations as of June 30, 2002. These consolidated financial statements have been restated to reflect the Company's presentation of discontinued operations. 4. Inventories consist of the following: June 30, December 31, 2002 2001 Raw material $ 4,290,009 $ 4,593,829 Work-in-process 4,648,431 4,855,037 Finished products and components 4,379,766 4,361,343 $13,318,206 $13,810,209 5. Income Taxes Consolidated income taxes for the six months ended June 30, 2002 and 2001 are $197,000 and $854,000 which result in effective tax rates of 22.3% and 38.6%, respectively. The rate of tax in relation to pre-tax income in 2002 is lower than the same period in 2001 because tax benefits from certain foreign net operating losses, which were previously fully reserved by a valuation allowance, were utilized for income tax purposes. The rate of tax in relation to pre-tax income in 2001 is higher than in 2002 because tax benefits from certain net operating losses were not utilized for income tax purposes. 6. Legal Proceedings The Company is a defendant along with a number of other parties in approximately 240 lawsuits as of June 30, 2002 (approximately 250 as of March 31, 2002) alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. Due to the noninformative nature of the complaints, the Company does not know whether any of the complaints state valid claims against the Company. The lead insurance carrier has informed the Company that the primary policy for the period July 1, 1972 July 1, 1975 has been exhausted and that the lead carrier will no longer provide a defense under that policy. The Company has requested that the lead carrier substantiate this situation. The Company has contacted representatives of the Company's excess insurance carrier for some or all of this period. The Company does not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on the financial condition, liquidity, or results of operations of the Company. Management is of the opinion that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits to which these insurance carriers are insuring the Company make the ultimate disposition of these lawsuits not material to the Company's consolidated financial position or results of operations. On August 2, 2002, Societe Generale started a court action before the Commercial Court of Nanterre, France, claiming that Selas SAS, the Company's French subsidiary, has not paid the balance of its accounts under the overdraft facility with Societe Generale amounting to 259,343 Euros (approximately $265,023 as of August 12, 2002) plus interest and legal costs of up to 3,000 Euros. A hearing has been set for September 26, 2002. The Company believes that this amount is not yet due and that this matter can be resolved without further litigation. The Company is also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect the Company's consolidated financial position, liquidity, or results of operations. 7. Statements of Cash Flows Supplemental disclosures of Six Months Ended cash flow information: June 30, June 30, 2002 2001 Interest received $ 5,891 $ 30,906 Interest paid $ 176,050 $ 333,750 Income taxes paid $ 51,374 $1,057,002 8. Accounts Receivable At June 30, 2002, the Company had $2,431,111 of trade accounts receivable due from the major U.S. automotive manufacturers and $4,640,468 of trade accounts receivable due from hearing health manufacturers. The Company also had $140,000 in receivables from long-term contracts for customers in the steel industry in North America, Europe and Asia. 9. Notes Payable and Long Term Debt On April 15, 2002, the Company entered into a second waiver amendment agreement for its domestic and foreign revolving credit and term loan facilities and obtained a new domestic supplemental credit facility in the amount of $5,000,000 to be used for additional domestic borrowing and for the issuance of advance payment guarantees. A subsequent amendment to the second waiver agreement reduced the amount of the supplemental credit facility to $4,000,000. The outstanding balance as of June 30, 2002 is $2,000,000. 10. Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings per share: For the Three Months Ended June 30, 2002 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share Income from continuing operations $ 405,330 5,119,214 $.08 Loss from discontinued operations (174,114) 5,119,214 (.03) Income available to common shareholders $ 231,216 5,119,214 $.05 Effect of Dilutive Securities Stock options -- 15,396 -- Diluted Earnings Per Share $ 231,216 5,134,610 $.05 For the Six Months Ended June 30, 2002 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share Income from continuing operations $ 683,098 5,119,214 $.13 Loss from discontinued operations (590,280) 5,119,214 (.12) Income available to common shareholders $ 92,818 5,119,214 $.01 Effect of Dilutive Securities Stock options -- 3,849 -- Diluted Earnings Per Share $ 92,818 5,123,063 $.01 For the Three Months Ended June 30, 2001 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share Income from continuing operations $ 723,923 5,119,214 $.14 Loss from discontinued operations (589,121) 5,119,214 (.11) Income available to common shareholders 134,802 5,119,214 .03 Effect of Dilutive Securities Stock options -- 23,702 -- Diluted Earnings Per Share $ 134,802 5,142,916 $.03 For the Six Months Ended June 30, 2001 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share Income from continuing operations $ 1,353,466 5,119,214 $ .26 Loss from discontinued operations (920,192) 5,119,214 (.17) Income available to common shareholders 433,274 5,119,214 .09 Effect of Dilutive Securities Stock options -- 10,110 -- Diluted Earnings Per Share $ 433,274 5,129,324 $ .09 11. Business Segment Information The Company has three operating segments. The Company is engaged in providing engineered heat technology equipment and services to industries throughout the world, the manufacture of precision miniature medical and electronic products and the manufacture of original equipment for light trucks and vans. The results of operations and assets of these segments are prepared on the same basis as the condensed consolidated financial statements for the six months ended June 30, 2002 and 2001 and the consolidated financial statements included in the 2001 Form 10-K. The Company's reportable segments reflect separately managed, strategic business units that provide different products and services, and for which financial information is separately prepared and monitored. Segments Tire Precision For The Holders, Miniature Six Months Lifts and Medical and Ended Heat Related Electronic June 30, 2002 Technology Products Products Sales, net $17,098,541 $ 8,848,736 $17,558,175 Net income (loss) $ 200,296 $ 549,250 $ 430,996 Depreciation and amoriza- tion $ 259,709 $ 86,820 $ 1,255,202 Property, plant and equipment additions $ 66,190 $ 120,440 $ 984,772 Total assets $24,471,610 $ 6,432,930 $41,749,133 Segments - continued For The Six Months General Ended Corporate Discontinued June 30, 2002 Expenses Operations Total Sales, net $43,505,452 Net income (loss) $(497,444) $ (590,280) $ 92,818 Depreciation and amoriza- tion -- -- $ 1,601,731 Property, plant and equipment additions -- -- $ 1,171,402 Total assets -- $21,765,174 $94,418,847 Segments Tire Precision For the Holders, Miniature Six Months Lifts and Medical and Ended Heat Related Electronic June 30, 2001 Technology Products Products Sales, net $19,931,622 $7,299,705 $21,257,413 Net income (loss) $ 1,275,169 $ (8,712) $ 456,760 Depreciation and amoriza- tion $ 297,228 $ 100,092 $ 1,658,623 Property, plant and equipment additions $ 117,742 $ 3,040 $ 976,503 Total assets $25,701,629 $5,998,938 $42,556,958 Segments - Continued For the Six Months General Ended Corporate Discontinued June 30, 2001 Expenses Operations Total Sales, net -- -- $48,488,740 Net income (loss) $(369,751) $ (920,192) $ 433,274 Depreciation and amoriza- tion -- -- $ 2,055,943 Property, plant and equipment additions -- -- $ 1,097,285 Total assets $20,379,749 $94,637,274 12. Revenue Recognition The following analysis provides a detail of revenue recognition methodology by segment for the six months ended June 30, 2002: Tire Precision Holders, Miniature Lifts and Medical and Heat Related Electronic Technology Products Products Total Upon Shipment $ 4,557,857 $ 8,848,736 $17,558,175 $30,964,768 Percentage of completion 12,540,684 -- -- 12,540,684 Total Revenue $17,098,541 $ 8,848,736 $17,558,175 $43,505,452 13. Business Combinations and Goodwill and Other Intangible Assets As of January 1, 2002, the Company adopted SFAS No. 141, 'Business Combinations,' and SFAS No. 142, 'Goodwill and Other Intangible Assets.' SFAS No. 141 requires all business combinations entered into after June 30, 2001 to be accounted for under the purchase method. SFAS No. 142 sets forth new financial accounting and reporting standards for the acquisition of intangible assets, other than those acquired in a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer amortized but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified accounted for as a cumulative effect of a change in accounting principle. The Company has conducted transitional impairment testing with regards to its goodwill and has determined a potential impairment in the Precision Miniature Medical and Electronic Products segment. Further valuations will be completed by the fourth quarter, and the results will be reported in the Company's December 31, 2002 financial statements. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective January 1, 2002. The effect of adopting this new standard was to reduce amortization expense by approximately $390,000 and to increase net earnings by $336,000 (net of tax expense of $54,000) or $0.07 diluted earnings per share for the six months ended June 30, 2002. A reconciliation of previously reported net earnings (loss) and earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows: Three Months Ended June 30, June 30, 2002 2001 Reported net earnings $ 231,000 $ 135,000 Add: goodwill amortization, net of tax -- 160,000 Adjusted net earnings $ 231,000 $ 295,000 Basic earnings per share Reported net earnings $ .05 $.03 Goodwill amortization, net of tax -- .03 Adjusted net earnings $ .05 $.06 Diluted earnings per share Reported net earnings $ .05 $.03 Goodwill amortization, net of tax -- .03 Adjusted net earnings $ .05 $.06 Six Months Ended June 30, June 30, 2002 2001 Reported net earnings $ 93,000 $ 433,000 Add: goodwill amortization, net of tax -- 314,000 Adjusted net earnings $ 93,000 $ 747,000 Basic earnings per share Reported net earnings $ .01 $.09 Goodwill amortization, net of tax -- .06 Adjusted net earnings $ .01 $.15 Diluted earnings per share Reported net earnings $ .01 $.09 Goodwill amortization, net of tax -- .06 Adjusted net earnings $ .01 $.15 Changes in the carrying amount of goodwill for the six months ended June 30, 2002 by operating segment in accordance with SFAS No. 141, are as follows: Segments Tire Precision Holders, Miniature Lifts and Medical and Heat Related Electronic Technology Products Products Total Balance as of December 31, 2001 $ 1,004,741 $ -- $14,626,761 $15,631,502 Translation adjustment 145,306 -- -- 145,306 Reclassification to other intangible assets -- -- (45,007) (45,007) Balance as of June 30, 2002 $ 1,150,047 -- $14,581,754 $15,731,801 In connection with the adoption of SFAS No. 142, the Company reclassified certain costs to other intangible assets included in the following table. Patents and other intangible assets at June 30, 2002 and December 31, 2001, subject to amortization expense, are as follows: June 30, 2002 Carrying Accumulated Amount Amortization Net Patents $ 505,712 $ (505,712) $ -- Other intangible assets 930,757 (618,691) 312,066 Total $1,436,469 $(1,124,403) $ 312,066 December 31, 2001 Carrying Accumulated Amount Amortization Net Patents $ 505,712 $ (505,018) $ 694 Other intangible assets 802,252 (442,395) 359,857 Total $1,307,964 $ (947,413) $ 360,551 Amortization expense for patents and other intangible assets subject to amortization was approximately $109,000 for the six months ended June 30, 2002. Estimated amortization expense for each of the three succeeding years is $142,000, $131,000, $39,000, for years 2003 through 2005. Patents and other intangible assets are classified in the caption 'Other Assets Including Patents, Less Amortization' on the consolidated balance sheet. The remaining balance in this account consists mainly of the cash surrender value on life insurance policies related to a supplemental pension plan and development costs. PART I - FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In the fourth quarter of 2001, the Company initiated its plan to dispose of the Company's primary custom-engineered furnace business, Selas SAS (Paris), along with two other closely related subsidiaries Selas Italiana, S.r.L. (Milan) and Selas U.K. (Derbyshire). These subsidiaries form the Company's large custom-engineered furnaces division used primarily in the steel and glass industries worldwide. The furnaces engineered by this division are custom-engineered to meet customer specific requirements. These subsidiaries generated approximately $8.3 million and $8.9 million of revenue and a loss from operations of $590,000 and $920,000 for the six months ended June 30, 2002 and 2001, respectively. The Company has accounted for the plan to dispose of the subsidiaries as a discontinued operation and, accordingly, has reclassified the historical financial data of these subsidiaries. See further information in note 3 to the consolidated financial statements. In accordance with SFAS No. 142, the Company has conducted transitional impairment testing with regards to its goodwill and has determined a potential impairment in the Precision Miniature Medical and Electronic Products segment. Further valuations will be completed by the fourth quarter and the results will be reported in the Company's December 31, 2002 financial statements. Consolidated net sales decreased to $22.8 million and $43.5 million for the three and six months ended June 30, 2002 compared to $24.9 million and $48.5 million for the same periods ended June 30, 2001. Net sales for the heat technology segment decreased to $9.2 million and $17.1 million for the three and six months ended June 30, 2002 compared to $11 million and $19.9 million for the same periods in 2001. The decrease in sales in this segment was due in part to the timing of revenue recognized on a contract as well as delays by the customer partially offset by higher sales at Nippon Selas, the Company's Japanese subsidiary. Sales of smaller heat treating furnaces produced by the Company's CFR and Ermat subsidiaries were slightly higher due to an increase in backlog. CFR and Ermat manufacture small heat treating furnaces utilized in the glass and aluminum industries worldwide. Sales and earnings of heat treating contracts are recognized on the percentage-of-completion method and generally require more than twelve months to complete. Consolidated backlog for the heat technology segment decreased to $11.2 million at June 30, 2002 compared to $15.6 at the same time last year. Sales of the Company's precision miniature medical and electronic products segment decreased to $8.7 million and $17.6 million for the three and six months ended June 30, 2002 compared to $10 million and $21.3 million for the same periods in 2001. Revenue decreased in the current periods compared to 2001 because of lower shipments of both component and system parts to the hearing health industry, lower sales of products to the medical infusion market and lower sales of thermistor and capacitor parts to the electronics and telecommunications industries. The Company's sales in this segment are affected by the telecommunication industry which continues its ongoing slump and the hearing health markets which have been flat for the last several years. Net sales of the tire holders, lifts and related products segment increased to $4.8 million and $8.9 million for the three and six months ended June 30, 2002 compared to $4 million and $7.3 million for the same periods in 2001. The increase in revenue was due to higher shipments of tire lifts to the Company's automotive customers reflecting, in part, the receipt of a new contract during the second half of 2001. Sales for the tire holders, lifts and related products segment for the second half of 2002 are expected to be lower than the first six months of the year due to the loss of a contract to supply tire lifts to one of its automotive customers. The Company continues to pursue tire lift orders for this and other customers during the year 2002. The Company's gross profit margin as a percentage-of-sales decreased to 20.6% and 20.7% for the three and six month periods ended June 30, 2002 compared to 22.3% and 23% for the same periods in 2001. Gross profit margins for the heat technology segment decreased to 16.9% and 17.7% for the three and six months ended June 30, 2002 compared to 23.6% and 23% for the comparable periods in 2001. Heat technology gross profit margins vary markedly from contract to contract, depending on customer specifications and other conditions related to the project. The gross profit margins for the first six months of 2002 were impacted by revenue recognized on several contracts at CFR whose margins were not as profitable as those completed in 2001 and higher than usual costs on several orders completed by some of the Company's subsidiaries which supply replacement parts. Gross profit margins for the precision miniature medical and electronic products segment increased to 26.3% compared to 24.6% for the three month periods ended Jun 30, 2002 and decreased to 25.4% from 26.8% for the six month periods ended June 30, 2002 and 2001, respectively. The increase in the current quarter compared to 2001 was due, in part, to the amortization of goodwill which was included in the cost of sales in 2001 but has been discontinued in 2002 in accordance with current accounting standards. The margins in the first six months of 2002 were lower than 2001, despite the decrease in goodwill amortization in 2002, due to the mix of products sold between the periods, because hearing health component parts, for which revenues have been declining, have higher profit margins compared to some of the segment's other products, particularly hearing health system parts, for which sales have also decreased compared to the prior year. Gross profit margins for the tire holders, lifts and relate products segment increased to 17.2% and 17.4% for the three and six months ended June 30, 2002 compared to 13% and 12% for the same periods in 2001. The favorable result in the current year is due to an increase in efficiencies from higher production of tire lifts for the Company's automotive customers. Selling, general and administrative expenses (SG&A) remained constant at $4.2 million for the quarters ended June 30, 2002 and 2001 and decreased to $8.2 million in 2002 from $8.7 million in 2001 for the six months then ended. The lower SG&A expenses were due to cost savings measures implemented by the Company during the current economic slowdown, primarily salary and headcount reductions. Interest expense for the three and six months ended June 30, 2002 decreased to $117,000 and $200,000 compared to $139,000 and $293,000 for the same periods in 2001. The decrease was due to lower interest rates during the current year on higher average borrowings. Interest income for the quarter ended June 30, 2002 decreased to $8,000 compared to $14,000 for the same period in 2001. Interest income for the first six months of 2002 and 2001 remained constant at $23,000 which reflects interest imputed on a trade note receivable in 2002 offset by lower average cash balances available for investing in the current year. Other income (expense) included realized and unrealized gains on foreign exchange of $203,000 and $165,000 for the three and six months ended June 30, 2002 compared with losses of $63,000 for three months and gains of $50,000 for the six months in 2001. Other income for the six months ended June 30, 2002 also included gains from the sale of investments of $83,000. Consolidated income taxes for the six months ended June 30, 2002 and 2001 are $197,000 and $854,000 which result in effective tax rates of 22.3% and 38.6%, respectively. The rate of tax in relation to pre-tax income in 2002 is lower than the same period in 2001 because tax benefits from certain foreign net operating losses, which were previously fully reserved by a valuation allowance, were utilized for income tax purposes. The rate of tax in relation to pre-tax income in 2001 is higher than in 2002 because tax benefits from certain net operating losses were not utilized for income tax purposes. Consolidated net income increased to $231,000 for the three months ended June 30, 2002 compared to $135,000 for the same period in 2001 and decreased to $93,000 compared to $433,000 for the six months ended June 30, 2002 and 2001, respectively. The improvement in the results of the second quarter despite the decrease in sales and lower gross profit margins was attributable to the discontinuation of goodwill amortization and gains on foreign exchange. Discontinued operations generated losses of $174,000 and $590,000 for the three and six months ended June 30,2002 compared to losses of $589,000 and $920,000 for the same periods in 2001. The improvement in results for the current periods despite the lower sales in the current year was due to realized and unrealized gains on foreign exchange in the second quarter. Liquidity and Capital Resources Consolidated net working capital increased to $13.2 million at June 30, 2002 from $7 million at December 31, 2001. The main reason for this increase was the reclassification of assets and liabilities of discontinued operations as current based on the assumption of disposal within the next twelve months. Exclusive of this reclassification, consolidated net working capital decreased to $5.2 million at June 30, 2002. The decrease was due primarily to purchases of property and equipment and paydown of long term debt partially offset by borrowings to fund a prior acquisition. The major changes in the components of working capital for the period were lower cash and cash equivalent of $1.6 million, higher accounts receivable of $5.2 million, lower inventories of $.5 million, higher notes payable of $2.3 million, higher accounts payable of $3.2 million and lower customer advance payments on contracts of $.6 million. These changes relate mainly to the ongoing operations of the Company. As part of the ongoing operations of the Company, management periodically performs a strategic analysis of all assets of the Company to ensure that an appropriate rate of return is achieved from the invested capital. On April 15, 2002, the Company entered into a second waiver amendment agreement for its domestic and foreign revolving credit and term loan facilities and obtained a new domestic supplemental credit facility in the amount of $5,000,000 to be used for additional domestic borrowing and for the issuance of advance payment guarantees. A subsequent amendment to the second waiver agreement reduced the amount of the supplemental credit facility to $4,000,000. See additional information in Note 9 to the 2001 Annual Report on Form 10-K. During the first quarter of 1999, the Company implemented a program to repurchase up to 250,000 shares of its common stock, which at the time represented approximately 5% of its total shares outstanding. The shares have been purchased from time to time on the open market. As of June 30, 2002, the Company has repurchased a total of 152,190 shares of its common stock at a cost of $883,141. The Company believes that its present working capital position, combined with funds expected to be generated from operations, the available borrowing capacity through its amended credit loan facilities, the potential sale of its large custom engineered furnace business, the curtailment of dividend payments and control of capital spending will be sufficient to meet its anticipated cash requirements for operating needs and capital expenditures for 2002. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, 'Accounting for Asset Retirement Obligation,' which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Adoption is required for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The Company is in the process of analyzing the implications of SFAS 143 and does not believe that the adoption of this statement will have a material impact on the net earnings of the Company. In April 2002, the FASB issued SFAS No. 145 'Rescission of FASB Statements Nos. 4,44 and 64, Amendment of FASB No. 14, and Technical Corrections.' The Statement rescinds or amends a number of existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS 145 is effective for transactions occurring after May 15, 2002. The Company is in the process of analyzing the implications of SFAS 145 and does not believe that the adoption of this statement wiil have a material impact on the net earnings of the Company. In July 2002, the FASB issued SFAS No. 146, 'Accounting for Costs Associated with Exit or Disposal Activities.' This standard addresses the accounting and reporting for costs of so-called exit activities (including restructuring) and for the disposal of long-lived assets. The standard changes some of the criteria for recognizing a liability for these activities. It is effective beginning in 2003 with the liability recognition criteria under the standard applied prospectively. The Company is in the process of analyzing the potential impact of adoption on the accounting policies regarding exit and disposal activities and does not believe it will have a material impact on the net earnings of the Company. Significant Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. Certain accounting estimates and assumptions are particularly sensitive because of their significance to the consolidated financial statements and the possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions include the Company's revenue recognition, discontinued operations and deferred taxes policies. These and other significant accounting policies are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 to the Company's 2001 financial statements contained in or incorporated by reference in the Company's Annual Report on Form 10-K for the year ending December 31, 2001. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk For information regarding the Company's exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Annual Report on Form 10-K for 2001. There have been no significant changes in the Company's portfolio of financial instruments or market risk exposures which have occurred since year-end. Forward-Looking and Cautionary Statements Certain statements herein that include forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "believe", "estimate", "plan" or "continue" or the negative thereof or other variations thereon are, or could be deemed to be, "forward-looking statements" within the meaing of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are affected by known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to differ materially from the results, performance and achievements expressed or implied in the Company's forward-looking statements. These risks, uncertainties and factors include competition by competitors with more resources than the Company, foreign currency risks arising from the Company's foreign operations, the cyclical nature of the market for large heat technology contracts, fluctuations in the Company's results of operations, the Company's ability to maintain or enhance its technical capabilities, the general trend in recent years in the automobile and truck industry toward a reduction in the number of third-party suppliers and toward more integrated component suppliers, the Company's ability to continue to achieve automation and maintain its historical profit margins in the precision miniature medical and electronics business particularly as the technology of hearing instruments changes and as the business expands into other product lines, the effects of unfavorable conditions in the hearing health market and the impact of the Asian economic situation on the Company's precision minature medical and electronics business and the Company's ability to pay interest and principal on its indebtedness or obtain new or additional debt or equity financing. These and other risks, uncertainties and other factors are described elsewhere in this Report or in the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2001. The Company cautions that the foregoing list of important factors is not intended to be, and is not, exhaustive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings See note 6 to the Consolidated Financial Statements. ITEM 4. Submission of Matters to a Vote of Security Holders The 2002 Annual Meeting of Shareholders of the Company was held on May 10, 2002. At the 2002 Annual Meeting: (i) Messrs. John H. Duerden and Robert N. Masucci were elected to the Board of Directors of the Company for terms expiring at the 2005 Annual Meeting. In such elections, 4,263,584 votes were cast for Mr. Duerden and 4,194,484 votes were cast for Mr. Masucci. Under Pennsylvania law, votes cannot be cast against a candidate. Proxies filed at the 2002 Annual Meeting by the holders of 316,027 shares withheld authority to vote for Mr. Duerden and those filed by the holders of 385,127 shares withheld authority to vote for Mr. Masucci. No "broker nonvotes" were received at the 2002 Annual Meeting with respect to the election of directors. The terms of the following directors continued after the Annual Meeting: Frederick L. Bissinger, Nicholas A. Giordano, Mark S. Gorder and Michael J. McKenna. (ii) 4,526,576 shares were voted in favor of ratifying the appointment of KPMG LLP as the Company's auditors for 2002 and 49,854 shares were voted against such proposal. Proxies filed at the 2002 Annual Meeting by the holders of 3,181 shares instructed the proxy holders to abstain from voting on such proposal. No "broker nonvotes" were received at the 2002 Annual Meeting with respect to this proposal. ITEM 6. Exhibits and Reports on Form 8-K Selas Corporation of America filed a current report on Form 8-K/A on April 24, 2002 to file the Second Waiver Amendment Agreement. SELAS CORPORATION OF AMERICA SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SELAS CORPORATION OF AMERICA (Registrant) Date: August 13, 2002 Francis A. Toczylowski Vice President, Treasurer and Secretary (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----