10-Q 1 aa10q0302b.txt 10Q 09/30/2002 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 SEPTEMBER 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 NOVEMBER 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 September 30, 2002 and December 31, 2001 3, 4 Consolidated Statements of Operations for the Three Months Ended September 30, 2002 and 2001 5 Consolidated Statements of Operations for the Nine Months Ended September 30, 2002 and 2001 6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 7 Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 2002 8 Notes to Consolidated Financial Statements 9-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 PART II: OTHER INFORMATION Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 26 Item 99. Certifications 31-32 SELAS CORPORATION OF AMERICA Consolidated Balance Sheets Assets September 30, December 31, 2002 2001 (Unaudited) (Audited) Current assets Cash, including cash equivalents of $407,000 in 2002 and $391,000 in 2001 $ 2,579,368 $ 3,636,673 Accounts receivable (including unbilled receivables of $1,986,000 in 2002 and $1,857,000 in 2001, less allowance for doubtful accounts of $691,000 in 2002 and $456,000 in 2001) 19,252,446 17,376,784 Inventories 12,571,453 13,810,209 Deferred income taxes 1,848,622 1,521,809 Other current assets 2,175,256 1,033,689 Assets of discontinued operations 7,527,417 -- Total current assets 45,954,562 37,379,164 Property, plant and equipment Land 554,944 554,943 Buildings 7,225,070 7,143,408 Machinery and equipment 34,147,754 32,502,680 41,927,768 40,201,031 Less: Accumulated depreciation 27,672,460 25,621,190 Net property, plant and equipment 14,255,308 14,579,841 Assets of discontinued operations -- 16,773,442 Excess of cost over net assets of acquired subsidiaries, less accumulated amortiza- tion of $4,531,000 in 2002 and $4,562,000 in 2001 15,717,312 15,631,502 Deferred income taxes 138,148 350,014 Other assets including patents, less amortization 1,613,131 1,523,320 $77,678,461 $86,237,283 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Balance Sheets Liabilities and Shareholders' Equity September 30, December 31, 2002 2001 Current liabilities (Unaudited) (Audited) Notes payable $ 10,087,175 $ 9,422,202 Current maturities of long-term debt 1,549,237 1,496,033 Accounts payable 12,735,716 10,232,880 Federal, state and foreign income taxes 411,610 461,393 Customers' advance payments on contracts 2,091,348 2,809,988 Guarantee obligations and estimated costs of service 1,195,065 878,952 Other accrued liabilities 5,963,795 5,100,021 Liabilities of discontinued operations 4,470,942 -- Total current liabilities 38,504,888 30,401,469 Long-term debt 3,104,607 3,214,934 Other postretirement benefit obligations 3,918,570 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 16,886,919 23,297,747 Accumulated other comprehensive (loss) (1,118,954) (1,075,561) Less: 515,754 common shares held in treasury, at cost (1,265,078) (1,265,078) Total shareholders' equity 32,150,396 38,604,617 $77,678,461 $86,237,283 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, September 30, 2002 2001 Sales, net $18,994,528 $18,695,667 Operating costs and expenses Cost of sales 15,656,846 15,393,327 Selling, general and administrative Expenses 4,680,260 4,369,676 Operating loss (1,342,578) (1,067,336) Interest (expense) (201,373) (133,535) Interest income 9,413 11,399 Other income (expense), net 156,114 (156,754) Loss from continuing operations before income taxes (1,378,424) (1,346,226) Income taxes (151,915) (552,721) Loss from continuing operations (1,226,509) (793,505) Loss from discontinued operations, net of income tax benefit (5,277,137) (582,912) Net loss $(6,503,646) $(1,376,417) Loss per share Basic Continuing operations $(.24) $(.16) Discontinued operations (1.03) (.11) $(1.27) $(.27) Average shares outstanding Basic 5,119,000 5,119,000 Comprehensive loss $(6,612,600) $(1,083,640) (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statements of Operations (Unaudited) Nine Months Ended September 30, September 30, 2002 2001 Sales, net $62,499,980 $67,184,407 Operating costs and expenses Cost of sales 50,148,109 52,741,679 Selling, general and administrative Expenses 12,891,686 13,091,371 Operating income (loss) (539,815) 1,351,357 Interest (expense) (401,267) (426,667) Interest income 32,596 33,951 Other income (expense), net 409,893 (97,327) Income (loss) from continuing operations before income taxes (498,593) 861,314 Income taxes 44,819 301,353 Income (loss) from continuing operations (543,412) 559,961 Loss from discontinued operations, net of income taxes (5,867,416) (1,503,104) Net loss $ (6,410,828) $ (943,143) Earnings (loss) per share Basic Continuing operations $(.10) $.11 Discontinued operations (1.15) (.29) $(1.25) $(.18) Average shares outstanding Basic 5,119,000 5,119,000 Comprehensive loss $(6,454,221) $ (794,424) (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, September 30, 2002 2001 Cash flows from operating activities: Net loss $ (6,410,828) $ (943,143) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 2,376,445 3,102,830 (Gain) loss on sale of property and equipment 1,225 (1,271) Deferred taxes (349) (634,333) Changes in operating assets and liabilities: Increase in accounts receivable (1,619,958) (1,490,028) (Increase) decrease in inventories 1,418,500 (2,360,055) (Increase) decrease in other assets 449,928 (255,950) Increase in accounts payable 3,400,252 296,548 Increase in accrued expenses 1,061,710 615,693 Increase (decrease) in customer advances (1,220,921) 1,956,067 Increase in other liabilities 27,371 376,926 Net cash provided (used) by operating activities (516,625) 663,284 Net cash provided (used) by discontinued operations 1,194,972 (976,988) Net cash provided (used) by operations 678,347 (313,704) Cash flows from investing activities: Purchases of property, plant and equipment (1,729,393) (1,439,751) Proceeds from sale of property, plant and equipment 11,773 11,136 Acquisition of subsidiary companies, net of cash acquired (68,143) Net cash (used) by investing activities (1,717,620) (1,496,758) Cash flows from financing activities: Proceeds from short-term bank borrowings 1,514,624 4,162,333 Proceeds from long-term bank borrowings -- 2,136,343 Proceeds from borrowings to acquire subsidiary company 277,624 672,136 Repayments of short-term bank borrowings (966,488) (2,875,159) Repayments of long-term debt (999,487) (1,945,752) Payment of dividends -- (691,349) Net cash provided (used) by financing activities (173,727) 1,458,552 Effect of exchange rate changes on cash 155,695 (91,355) Net decrease in cash and cash equivalents (1,057,305) (443,265) Cash and cash equivalents, beginning of period 3,636,673 3,782,359 Cash and cash equivalents, end of period $ 2,579,368 $ 3,339,094 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Statement of Shareholders' Equity Nine Months Ended September 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 loss -- -- -- Foreign currency translation gain -- -- -- Derivative financial instrument fair value adjustment -- -- -- Comprehensive loss -- -- -- Balance September 30, 2002 5,634,968 $5,634,968 $12,012,541 Accumulated Other Retained Comprehensive Comprehensive Earnings Income (Loss) Income (Loss) Balance January 1, 2002 $23,297,747 $(1,075,561) Net loss (6,410,828) $ (6,410,828) Foreign currency translation loss -- (79,604) (79,604) Derivative financial instrument fair value adjustment -- 36,211 36,211 Comprehensive loss -- -- $6,454,221 Balance September 30, 2002 $16,886,919 $(1,118,954) Total Treasury Shareholders' Stock Equity Balance January 1, 2002 $(1,265,078) $38,604,617 Net loss -- (6,410,828) Foreign currency Translation loss -- (79,604) Derivative financial instrument fair value adjustment -- 36,211 Comprehensive income -- -- Balance September 30, 2002 $(1,265,078) $32,150,396 (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 September 30, 2002 and December 31, 2001, and the consolidated results of its operations for the three and nine months ended September 30, 2002 and 2001 and consolidated statements of shareholders' equity and cash flows for the nine 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 October 2001, the FASB issued SFAS No. 144, 'Accounting for the Impairment or Disposal of Long-Lived Assets', which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and the disposal of a segment of a business. The Company adopted the statement as of January 1, 2002, which did not have a material impact on the net earnings of the Company. 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 No. 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 No.145 is effective for transactions occurring after May 15, 2002. There has been no impact on the Company's consolidated financial statements. 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 the exit and disposal activities. 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 $11.1 million and $11.6 million of revenue and a loss from discontinued operations of $5.9 million and $1.5 million for the nine months ended September 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. In October 2002, the Company entered into an agreement with Andritz AG to sell most of the intellectual property, operating assets and certain liabilities of its discontinued large custom engineered furnace business operated by its wholly owned subsidiaries Selas SAS and Selas UK. The sale is contingent upon certain conditions which are expected to be fulfilled in the fourth quarter. The Company anticipates paying the discontinued operations long-term debt of $1.8 million and notes payable of $5.9 million and, therefore, has classified these amounts as continuing operations as of September 30, 2002. These consolidated financial statements have been restated to reflect the Company's presentation of discontinued operations. 4. Inventories consist of the following: September 30, December 31, 2002 2001 Raw material $ 4,164,684 $ 4,593,829 Work-in-process 4,020,695 4,855,037 Finished products and components 4,386,074 4,361,343 $12,571,453 $13,810,209 5. Income Taxes Income taxes for the nine months ended September 30, 2002 and 2001 were $45,000 and $301,000 which resulted in effective tax rates of (9.0)% and 35.0%, respectively. The rate of tax in relation to pre-tax loss in 2002 results from foreign operating losses that are fully reserved by a valuation allowance while domestic operations have reportable taxable income. The rate of tax in relation to pre-tax income in 2001 is high 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 253 lawsuits as of December 31, 2001 (approximately 100 as of December 31, 2000) 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 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 August 2002, a French bank initiated court action claiming the unpaid balance of its overdraft facility was due. This matter was subsequently resolved with the Company and the court action was withdrawn without any material impact on the Company. 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 Nine Months Ended September 30, September 30, 2002 2001 Interest received $ 6,469 $ 33,922 Interest paid $ 278,409 $ 463,119 Income taxes paid $ 318,644 $1,534,496 8. Accounts Receivable At September 30, 2002, the Company had $2,079,000 of trade accounts receivable due from major U.S. automotive manufacturers and $3,664,000 of trade accounts receivable due from hearing health manufacturers. 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 $2,000,000 and waived certain restrictive covenants. 10. Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings per share: For the Three Months Ended September 30, 2002 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share (Loss) from continuing operations $ (1,226,509) 5,119,214 $(.24) (Loss) from discontinued operations (5,277,137) 5,119,214 (1.03) (Loss) available to common shareholders $ (6,503,646) 5,119,214 $(1.27) For the Nine Months Ended September 30, 2002 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share (Loss) from continuing operations $ (543,412) 5,119,214 $ (.10) (Loss) from discontinued operations (5,867,416) 5,119,214 (1.15) (Loss) available to common shareholders $(6,410,828) 5,119,214 $(1.25) For the Three Months Ended September 30, 2001 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share (Loss) from continuing operations $ (793,505) 5,119,214 $(.16) (Loss) from discontinued operations (582,912) 5,119,214 (.11) (Loss) available to common shareholders $ (1,376,417) 5,119,214 $ (.27) For the Nine Months Ended September 30, 2001 Income Shares Per Share Numerator Denominator Amount Basic Earnings Per Share Income from continuing operations $ 559,961 5,119,214 $ .11 (Loss) from discontinued operations (1,503,104) 5,119,214 (.29) (Loss) available to common shareholders $ (943,143) 5,119,214 $ (.18) 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 nine months ended Sept 30, 2002 and 2001 and the consolidated financial statements included in the Company's 2001 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. Segments Tire Precision For The Holders, Miniature Nine Months Lifts and Medical and Ended Heat Related Electronic September 30, 2002 Technology Products Products Sales, net $23,490,000 $12,881,000 $26,129,000 Net income (loss) $(1,066,000) $ 814,000 $ 460,000 Depreciation and amortiza- tion $ 336,000 $ 130,000 $ 1,910,000 Property, plant and equipment additions $ 95,000 $ 200,000 $ 1,434,000 Total assets $23,296,000 $ 6,642,000 $40,213,000 Segments continued For The Nine Months General Ended Corporate Discontinued September 30, 2002 Expenses Operations Total Sales, net $62,500,000 Net income (loss) $ (751,000) $(5,868,000) $(6,411,000) Depreciation and amortiza- tion -- -- $ 2,376,000 Property, plant and equipment additions -- -- $ 1,729,000 Total assets -- $ 7,527,000 $77,678,000 Segments Tire Precision For the Holders, Miniature Nine Months Lifts and Medical and Ended Heat Related Electronic September 30, 2001 Technology Products Products Sales, net $26,752,000 $11,131,000 $29,301,000 Net income (loss) $ 457,000 $ 374,000 $ 385,000 Depreciation and amortiza- tion $ 449,000 $ 150,000 $ 2,504,000 Property, plant and equipment additions $ 172,000 $ 21,000 $ 1,247,000 Total assets $27,183,000 $ 6,364,000 $43,069,000 Segments continued For the Nine Months General Ended Corporate Discontinued September 30, 2001 Expenses Operations Total Sales, net -- -- $67,184,000 Net income (loss) $(656,000) $(1,503,000) $ (943,000) Depreciation and amortiza- tion -- -- $ 3,103,000 Property, plant and equipment additions -- -- $ 1,440,000 Total assets -- $22,648,000 $99,264,000 12. Revenue Recognition The following analysis provides a detail of revenue recognition methodology by segment for the nine months ended September 30, 2002: Tire Precision Holders, Miniature Lifts and Medical and Heat Related Electronic Technology Products Products Total Upon Shipment $ 6,778,000 $12,881,000 $26,129,000 $45,788,000 Percentage of completion 16,712,000 -- -- 16,712,000 Total Revenue $23,490,000 $12,881,000 $26,129,000 $62,500,000 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 September 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 annual 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 $581,000 and to increase net earnings by $499,000 (net of tax expense of $82,000) or $.10 diluted earnings per share for the nine months ended September 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 September 30, September 30, 2002 2001 Reported net loss $(6,504,000) $(1,376,000) Add: goodwill amortization, net of tax -- 183,000 Adjusted net loss $(6,504,000) $(1,193,000) Basic loss per share Reported net loss $(1.27) $(.27) Goodwill amortization, net of tax -- .04 Adjusted net loss $(1.27) $(.23) Nine Months Ended September 30, September 30, 2002 2001 Reported net loss $(6,411,000) $ (943,000) Add: goodwill amortization, net of tax -- 497,000 Adjusted net loss $(6,411,000) $ (466,000) Basic loss per share Reported net loss $(1.25) $(.18) Goodwill amortization, net of tax -- .10 Adjusted net loss $(1.25) $(.08) Changes in the carrying amount of goodwill for the nine months ended September 30, 2002 by operating segment in accordance with SFAS No. 142, 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 139,889 -- -- 139,889 Reclassification to other intangible assets -- -- (54,079) (54,079) Balance as of September 30, 2002 $ 1,144,630 -- $14,572,682 $15,717,312 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 September 30, 2002 and December 31, 2001, subject to amortization expense, are as follows: September 30, 2002 Carrying Accumulated Amount Amortization Net Patents $ 505,712 $ (505,712) $ -- Other intangible assets 954,764 (681,341) 273,423 Total $1,460,476 $(1,187,053) $ 273,423 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 $123,000 for the nine months ended September 30, 2002. Estimated amortization expense for each of the five succeeding years is $172,000, $101,000, $-0-, $-0- and $-0- for years 2003 through 2007. 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 $11.1 million and $11.6 million of revenue and a loss from operations of $5.9 million and $1.5 million for the nine months ended September 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. Discontinued operations generated losses of $5,277,000 and $5,867,000 for the three and nine months ended September 30, 2002 compared to losses of $583,000 and $1,503,000 for the same periods in 2001. During the quarter ended September 30, 2002 several contracts were negatively impacted by cost overruns that are not recoverable. Also, certain assets were written-down as their ultimately recoverability has become doubtful due to the pending sale of the business. Additionally, the Company has listed the large furnace businesses headquarter building for sale and wrote down the carrying value to its estimated net realizable value. In October 2002, the Company entered into an agreement to sell most of the intellectual property, operating assets and liabilities of its discontinued operations. The sale is contingent upon certain conditions that are expected to be fulfilled in the fourth quarter of 2002. 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 of 2002 and the results will be reported on in the Company's December 31, 2002 financial statements. Consolidated net sales for the three months ended September 30, were as follows 'in thousands': 2002 2001 Change Heat Technology $6,392 $6,821 (429) Tire Holders, Lifts and Related Products 4,032 3,831 201 Precision Miniature Medical and Electronic Products 8,571 8,044 527 Total 18,995 18,696 299 Consolidated net sales for the nine months ended September 30, were as follows (in thousands): 2002 2001 Change Heat Technology $23,490 $26,752 (3,262) Tire Holders, Lifts and Related Products 12,881 11,131 1,750 Precision Miniature Medical and Electronic products 26,129 29,301 (3,172) Total 62,500 67,184 (4,684) Heat technology segment sales continue to be impacted by the poor worldwide economy for capital goods, both in the current quarter and year-to-date. We expect this trend to continue into the fourth quarter. Tire Holders, Lifts and Related Products sales are within the North American automotive market and have benefited from a much stronger than expected market. We expect market demand will continue being strong through the fourth quarter. While Precision Miniature Medical and Electronic (Precision) products sales for the quarter ended September 30, 2002 were up over the same year-ago period, this was partially due to weak sales in last year's third quarter. Year-to-date sales for the Precision products have suffered from a slump in its primary markets, including the hearing health market, electronics and telecommunications. We expect this trend to continue for the remainder of 2002. Gross margin for the three months ended September 30 was as follows (in thousands): 2002 2001 Change Heat Technology $664 $462 202 Tire Holders, Lifts and Related Products 767 754 13 Precision Miniature Medical and Electronic products 1,906 2,086 (180) Total 3,337 3,302 35 Gross margin for the nine months ended September 30 was as follows (in thousands): 2002 2001 Change Heat Technology $3,691 $5,035 (1,344) Tire Holders, Lifts and Related Products 2,304 1,628 676 Precision Miniature Medical and Electronic products 6,356 7,780 (1,424) Total 12,351 14,443 (2,092) Gross margin, as a percent of segment sales for both the quarter ended and year-to-date (YTD) for the nine months ended September 30, were as follows: 2002 2001 Change Quarter YTD Quarter YTD Quarter YTD Heat Technology 10.4 15.7 6.8 18.8 3.6 (3.1) Tire Holders, Lifts and Related Products 19.0 17.9 19.7 14.6 (0.7) 3.3 Precision Miniature Medical and Electronic products 22.2 24.3 25.9 26.6 (3.7) (2.3) Total 17.6 19.8 17.7 21.5 (0.1) (1.7) 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 both the quarter and nine months ended September 30, 2002 were impacted by revenue recognized on several glass furnace contracts 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. Margins for the quarter ended September 30, 2001 were also adversely impacted by glass furnace contracts. For the nine months ended September 30, 2002,gross margins in the Tire Holders, Lifts and Related Products segment are higher due to the stronger sales volume to cover fixed costs. The high margins in the quarter ended September 30, 2001 were due to product mix. The gross margin in the Precision Miniature Medical and Electronic products segment benefited from new accounting standards whereby goodwill is no longer amortized. Despite the decrease in goodwill amortization in 2002, the gross margin declined due to competitive pricing pressures in the hearing health, telecommunications, and electronic components markets. Selling, general and administrative expenses (SG&A) for the quarter and nine months ended September 30, 2002 and 2001 were: 2002 2001 Change Quarter YTD Quarter YTD Quarter YTD Dollars (thousands) $4,680 $12,892 $4,370 $13,091 $310 $(199) Percent of Sales 24.6% 20.6% 23.4% 19.5% 1.3% 1.1% The lower SG&A expenses in the nine-months ended September 30, 2002, compared to the same year-ago period were due to cost savings measures implemented by the Company during the current economic slowdown, primarily salary and headcount reductions. SG&A expense for the quarter ended September 30, 2002 increased compared with the prior year's third quarter primarily due to the write-off of a $684,000 receivable from a European Heat Technology customer who has filed bankruptcy. This cost was partially offset by the aforementioned costs saving measures. Interest expense for the three and nine months ended September 30, 2002 was $201,000 and $401,000 compared to $133,000 and $427,000 for the same periods in 2001. The increase in the quarter ended September 30, 2002 was due to higher average outstanding borrowings and an adjustment of the prior quarter's accrual. For the nine-months ended September 30, 2002, interest expense was lower due to lower interest rates during the current year on higher average borrowings. Interest income for the quarter ended September 30, 2002 decreased to $9,000 compared to $11,000 for the same period in 2001. Interest income for the first nine months of 2002 and 2001 remained constant at $33,000 to $34,000 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) primarily includes realized and unrealized gains (losses) on foreign exchange. Other income (expense) improved in the three and nine month periods as a result of the improvement of the European currencies against the U. S. dollar. Income taxes for the three months ended September 30, 2002 and 2001 were $152,000 and $553,000 which result in effective tax rates of 11.0% and 41.1%, respectively. The rate of tax in relation to pre-tax loss in 2002 is low because tax benefits from certain foreign net operating losses are fully reserved by a valuation allowance. Income taxes for the nine months ended September 30, 2002 and 2001 were $45,000 and $301,000 which result in effective tax rates of (9.0)% and 35.0%, respectively. The rate of tax in relation to pre-tax loss in 2002 results from foreign operating losses that are fully reserved by a valuation allowance while domestic operations have reportable taxable income. The rate of tax in relation to pre-tax income in 2001 is high because tax benefits from certain net operating losses were not utilized for income tax purposes. For the three months ended September 30, 2002, the net loss from continuing operations was $1,227,000 compared with $794,000 in last year's third quarter. The increase in the loss was primarily due to increased SG&A expenses due to the write-off of a $684,000 European Heat Treat receivable and a decreased income tax benefit due to uncertainty as to the utilization of foreign net operating loss carry forwards. These factors were partially offset by the discontinuation of goodwill amortization. For the nine months ended September 30, 2002, the loss from continuing operations was $543,000 compared with income of $560,000 in the same year-ago period. The change in operating results for the nine months ended September 30, 2002 was primarily due to the lower sales volume, a decline in gross margin, as well as the factors mentioned for the third quarter. These factors were partially offset by the discontinuation of goodwill amortization in 2002. Liquidity and Capital Resources Consolidated net working capital increased to $7.4 million at September 30, 2002 from $7.0 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 $4.4 million at September 30, 2002. This decrease was due primarily to purchases of property and equipment and pay down 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 equivalents of $1.1 million, higher accounts receivable of $1.9 million, lower inventories of $1.2 million, higher notes payable of $665,000, higher accounts payable of $2.5 million, lower customer advance payments on contracts of $719,000 and higher accrued liabilities of $863,000. 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 $2,000,000 and waived certain restrictive covenants. See additional information in Note 9 to the 2001 Annual Report on Form 10-K. The Company believes its working capital position, combined with funds expected to be generated from operations, the available borrowing capacity through its amended credit loan facilities, the pending sale of its large 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. 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 September 30, 2002, the Company has repurchased a total of 152,190 shares of its common stock at a cost of $883,141. No purchases have been made under this program in 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 No. 145 is effective for transactions occurring after May 15, 2002. There has been no impact on the Company's consolidated financial statements. 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. The Company believes that its present working capital position, combined with funds expected to be generated from operations and the available borrowing capacity through its revolving credit loan facilities, will be sufficient to meet its anticipated cash requirements for operating needs and capital expenditures for 2002. Significant Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Certain accounting estimates and assumptions are particularly sensitive because their significance to the consolidated financial statements and the possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions include the Company's revenue recognition, discontinued operations, and deferred taxes policies. These and other significant accounting policies are described in 'Management' 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 ended 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 material changes in the Company's portfolio of financial instruments or market risk exposures which have occurred since year-end. ITEM 4. Controls and Procedures (a) Evaluation of disclosure and procedures - Based on their evaluation of the Company's disclosure and procedures as defined in Exchange Act Rule 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing of this Quarterly Report on Form 10-Q, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective. (b) Changes in internal controls There were no significant changes in the Company's internal controls or in other factors that would significantly affect these controls subsequent to the date of the principal executive officer's and principal financials officer's evaluation referred to above, including any corrective actions with regard to significant deficiencies and material weaknesses. Forward-Looking and Cautionary Statements The Company may from time to time make written or oral forward-looking statements, including those contained in the foregoing Management's Discussion and Analysis. In order to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company has identified in its Annual Report on Form 10-K for the year ending December 31, 2001, certain important factors which could cause the Company's actual results, performance or achievement to differ materially from those that may be contained in or implied by any forward-looking statement made by or on behalf of the Company. All such forward-looking statements are qualified by reference to the cautionary statements herein and in such Annual Report on Form 10-K. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings See note 6 to the Consolidated Financial Statements. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 99.2 Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (b) Reports on Form 8-K None. SELAS CORPORATION OF AMERICA SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SELAS CORPORATION OF AMERICA (Registrant) Dated: November 14, 2002 By: /s/ Robert F. Gallagher Robert F. Gallagher Chief Financial Officer CERTIFICATION I, Mark S. Gorder, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Selas Corporation of America; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 By: /s/ Mark S. Gorder Mark S. Gorder Chief Executive Officer CERTIFICATION I, Robert F. Gallagher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Selas Corporation of America; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 By: /s/ Robert F. Gallagher Robert F. Gallagher Chief Financial Officer EXHIBIT INDEX 99.1 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EXHIBIT 99.1 CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark S. Gorder, Chief Executive Officer of Selas Corporation of America 'the Company', certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: the quarterly report on Form 10-Q of the Company for the three months and nine months ended September 30, 2002 'the Report' fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 By: /s/ Mark S. Gorder Mark S. Gorder Chief Executive Officer EXHIBIT 99.2 CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert F. Gallagher, Chief Financial Officer of Selas Corporation of America (the 'Company'), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: the quarterly report on Form 10-Q of the Company for the three months and nine months ended September 30, 2002 'the 'Report' fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 By: /s/ Robert F. Gallagher Robert F. Gallagher Chief Financial Officer