10-Q 1 aa10q1q03.txt 10Q 03/31/2003 28 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ENDED 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) ARDEN HILLS, MINNESOTA 55112 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (651) 636-9770 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) N/A (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. (X) YES ( ) NO INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED BY RULE 12B-2 OF THE EXCHANGE ACT) ( ) YES (X ) NO INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. COMMON SHARES, $1.00 PAR VALUE 5,119,214 (exclusive of 515,754 CLASS treasury shares) OUTSTANDING AT MAY 12, 2003 SELAS CORPORATION OF AMERICA I N D E X Page Number PART I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed (Unaudited) Balance Sheets as of March 31, 2003 and December 31, 2002 3, 4 Consolidated Condensed (Unaudited) Statements of Operations for the Three Months Ended March 31, 2003 and 2002 5 Consolidated Condensed(Unaudited)Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 6 Notes to Consolidated Financial Statements 7-15 Item 2. Management's Discussion and Analysis 16-20 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 20 About Market Risk Item 4. Controls and Procedures 20 PART II: OTHER INFORMATION Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 Certifications 23-25 PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements SELAS CORPORATION OF AMERICA Consolidated Condensed Balance Sheets Assets March 31, December 31, 2003 2002 (Unaudited) (Audited) Current assets Cash, including cash equivalents of $413,000 in 2003 and $418,000 in 2002 $ 2,605,591 $ 2,039,044 and restricted cash of $413,000 in 2003 and $418,000 in 2002. Accounts receivable (including unbilled receivables of $1,327,000 in 2003 and $1,447,000 in 2002, less allowance for doubtful accounts of $1,138,000 in 2003 and $1,109,000 in 2002) 16,042,102 15,627,864 Inventories 8,932,693 9,393,802 Refundable income tax 135,882 336,758 Deferred income taxes 1,914,405 1,818,384 Other current assets 1,304,369 1,064,829 Assets of discontinued operations 13,226,625 13,610,601 Total current assets 44,161,667 43,891,282 Property, plant and equipment Land 231,943 231,943 Buildings 5,149,415 5,149,415 Machinery and equipment 30,421,790 29,903,795 35,803,148 35,285,153 Less: Accumulated depreciation 23,561,143 22,921,608 Net property, plant and equipment 12,242,005 12,363,545 Goodwill 5,376,317 5,376,317 Deferred income taxes 396,148 348,712 Other assets, less amortization 1,779,225 1,575,539 $63,955,362 $63,555,395 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Condensed Balance Sheets Liabilities and Shareholders' Equity March 31, December 31, 2003 2002 Current liabilities (Unaudited) (Audited) Notes payable $ 11,806,538 $ 10,920,984 Current maturities of long-term debt 1,343,336 1,573,716 Accounts payable 9,868,460 11,046,373 Customers' advance payments on contracts 3,427,028 2,457,499 Guarantee obligations and estimated costs of service 1,233,452 1,188,361 Other accrued liabilities 6,932,295 6,194,679 Liabilities of discontinued operations 6,751,327 6,955,654 Total current liabilities 41,362,436 40,337,266 Long-term debt 2,534,304 2,736,236 Other postretirement benefit obligations 3,894,811 3,866,154 Contingencies and commitments Shareholders' equity Common shares, $1 par; 10,000,000 shares authorized; 5,634,968 shares issued 5,634,968 5,634,968 Additional paid-in capital 12,012,541 12,012,541 Retained earnings 1,506,994 1,743,256 Accumulated other comprehensive loss (1,725,614) (1,509,948) Less: 515,754 common shares held in treasury, at cost (1,265,078) (1,265,078) Total shareholders' equity 16,163,811 16,615,739 $63,955,362 $63,555,395 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Condensed Statements of Operations (Unaudited) Three Months Ended March 31, March 31, 2003 2002 Sales, net $14,636,016 $16,694,750 Operating costs and expenses Cost of sales 10,736,131 13,081,789 Gross Margin 3,899,885 3,612,961 Selling, general and administrative Expenses 4,220,451 3,683,966 Operating loss (320,566) (71,005) Interest expense (190,911) (82,638) Interest income 2,422 15,281 Other income, net 83,586 93,936 Loss from continuing operations before income taxes (425,469) (44,426) Income tax expense (benefit) 3,375 (63,405) (Loss)Income from continuing operations (428,844) 18,979 Income (loss) from discontinued operations, net of income taxes 192,582 (157,377) (benefit) Net loss before change in accounting principle (236,262) (138,398) Cumulative effect of change in accounting principle -- (10,551,926) Net loss $(236,262) $(10,690,324) Income (loss) per share Basic Continuing operations $(.08) $ -- Discontinued operations .04 (.03) Accounting principle change -- (2.06) $ (.04) $(2.09) Diluted Continuing operations $ (.08) $ -- Discontinued operations .04 (.03) Accounting principle change -- (2.06) $ (.04) $(2.09) Average shares outstanding Basic 5,119,214 5,119,214 Diluted 5,119,214 5,119,214 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Consolidated Condensed Statements of Cash Flows (Unaudited) Three Months Ended March 31, March 31, 2003 2002 Cash flows from operating activities: Net loss $ (236,262) $(10,690,324) Adjustments to reconcile net loss to net cash provided (used) by operating activities: (Income) loss from discontinued operations (192,582) 157,377 Cumulative effect of accounting principle -- 10,551,926 change Depreciation and amortization 689,506 756,241 (Gain) loss on sale of property and (213) 1,325 equipment Provision for deferred taxes (100,199) (99,077) Changes in operating assets and liabilities: Accounts receivable 207,202 (635,874) Inventories 468,170 289,340 Other assets (362,420) (290,403) Accounts payable (1,851,199) (22,778) Accrued expenses 790,734 813,960 Customer advances 921,933 (670,185) Other liabilities 30,989 (36,487) Net cash provided by continuing operations 365,659 125,041 Net cash provided (used) by discontinued operations 522,135 (331,227) Net cash provided (used) by operating 887,794 (206,186) activities Cash flows from investing activities: Purchases of property, plant and equipment (468,556) (492,237) Proceeds from sale of property, plant and equipment 213 -- Patents and intangibles (64,552) -- Net cash used by investing activities (532,895) (492,237) Net cash used by discontinued operations (58,178) (37,450) Net cash used by investing activities (591,073) (529,687) Cash flows from financing activities: Proceeds from short-term bank borrowings 798,620 932,327 Proceeds from borrowings to acquire subsidiary company -- 136,173 Repayments of short-term bank borrowings (81,331) (494,722) Repayments of long-term debt (458,778) (457,986) Net cash provided by financing activities 258,511 115,792 Effect of exchange rate changes on cash 11,315 (39,415) Net increase (decrease) in cash and cash equivalents 566,547 (659,496) Cash and cash equivalents, beginning of period 2,039,044 3,636,173 Cash and cash equivalents, end of period $2,605,591 $ 2,976,677 (See accompanying notes to the consolidated financial statements) SELAS CORPORATION OF AMERICA Notes to Consolidated Condensed Financial Statements (Unaudited) 1. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly Selas Corporation of America's consolidated financial position as of March 31, 2003 and December 31, 2002, and the consolidated results of its operations for the three months ended March 31, 2003 and 2002. 2. New Accounting Standards Adopted in the current quarter. The Company adopted the following new Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) accounting pronouncements: In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company was required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Company's financial statements. In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses the accounting for costs associated with disposal activities covered by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and with exit (restructuring) activities previously covered by Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." This Statement nullifies EITF Issue No. 94-3 in its entirety and requires that a liability for all costs be recognized when the liability is incurred. Generally, the ability to accrue for the cost of a workforce reduction plan at the communication date will be limited. The cost of the plan will be recognized over the future service period of the employees. This Statement will be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on the Company's financial statements In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002, and did not have a material effect on the Company's financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. 3. Discontinued Operations In the fourth quarter of 2002, the Company initiated its plan to dispose of the Company's Tire Holders, Lifts and Related Products segment. This segment consists of one wholly-owned subsidiary operating on a stand alone basis that sells tire holders, lifts and related products to automotive customers. The Company has accounted for the plan to dispose of the subsidiaries as a discontinued operation and has reclassified the historical financial data. This subsidiary generated sales of $3.8 million, and $4.0 million and net income of $171,000, and $259,000 for the three months ended March 31, 2003 and 2002 respectively. In the fourth quarter of 2002, the Company disposed of the majority of the Company's primary custom-engineered furnace business, Selas SAS (Paris), along with a closely related subsidiary, Selas U.K. (Derbyshire). These subsidiaries formed the Company's large custom-engineered furnaces division used primarily in the steel and glass industries worldwide. The furnaces engineered by this division are custom-engineered to meet customer specific requirements. The sale of the large custom-engineered furnace division was completed in December 2002. A building located outside of Paris, France and Selas Italiana, S.r.L. were excluded from the sale. The purchase price was approximately $600,000 above the net asset value at the time of sale. In addition, the purchaser assumed $1,356,000 of a receivable on a completed construction contract. The Company is required to reimburse the purchaser for any portion of the receivable that has not been collected by May 2003. Certain assets and liabilities associated with completed contracts and discontinued operations were retained. These are expected to be collected or paid in the normal course of 2003. In addition, the Company continues to market the building and expects to complete the sale in 2003. The consolidated condensed financial statements reflect the Company's presentation of discontinued operations. 4. Statements of Cash Flows Supplemental disclosures of cash flow information: Three Months Ended -------------------------- March 31, March 31, 2003 2002 Interest received $ 507 $ 3,198 Interest paid $ 176,357 $ 110,936 Income taxes paid $ 71,147 $ 2,203 5. Business Segment Information The Company has two operating segments. The Company is engaged in providing engineered heat technology equipment and services to industries throughout the world, and the manufacture of precision miniature medical and electronic products. The results of operations and assets of these segments are prepared on the same basis as the consolidated condensed financial statements for the three months ended March 31, 2003 and 2002 and the consolidated condensed financial statements included in the Company's 2002 Annual Report on Form 10-K. The Company's reportable segments reflect separately managed, strategic business units that provide different products and services, and for which financial information is separately prepared and monitored. Precision For The Miniature Three Months Medical and General Ended Electronic Heat Corporate Discontinued March 31, 2003 Products Technology Expenses Operations Total Sales, net $ 8,993,038 $ 5,642,978 $ -- $ -- $14,636,016 Net income (loss) 309,576 (431,119) (307,301) 192,582 (236,262) Depreciation and amortiza- tion 604,865 84,640 -- -- 689,505 Property, plant and equipment additions 457,810 10,746 -- -- 468,556 Total assets $30,427,741 $20,300,996 $ -- $ 13,226,625 $63,955,362 Precision For The Miniature Three Months Medical and General Ended Electronic Heat Corporate Discontinued March 31, 2002 Products Technology Expenses Operations Total Sales, net $ 8,818,358 $ 7,876,392 $ -- $ -- $ 16,694,750 Net income(loss) before change in accounting pinciple 166,130 90,453 (237,604) (157,377) (138,398) Cumulative effect of change in accounting principle (9,428,354) (1,123,572) -- -- (10,551,926) Net income (loss) (9,262,224) (1,033,119) (237,604) (157,377) (10,690,324) Depreciation and amortiza- tion 627,485 128,756 -- -- 756,241 Property, plant and equipment additions 437,575 54,662 -- -- 492,237 Total assets $31,623,256 $21,051,453 $ -- $22,987,857 $ 75,662,566 6. Accounts Receivable At March 31, 2003, the Company had $3,460,000 of trade accounts receivable due from hearing health manufacturers and $3,753,000 in currently billed and unbilled receivables from Heat Technology customers in the aluminum and glassware industry. The following analysis provides the detail of revenue recognition methodology by segment for the three months ended March 31, 2003: Precision Miniature Medical and Electronic Heat Products Technology Total Upon Shipment $ 8,993,038 $ 2,610,931 $11,603,969 Percentage of completion -- 3,032,047 3,032,047 Total Revenue $ 8,993,038 $ 5,642,978 $14,636,016 7. Business Combinations and Goodwill and Other Intangible Assets As of January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations entered into after September 2001 to be accounted for under the purchase method. SFAS No. 142 set forth new financial and reporting standards for the acquisition of intangible assets, other than those acquired in a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized but tested for impairment on a periodic basis. The Company discontinued the amortization of goodwill effective January 1, 2002. The provisions of SFAS No. 142 also required the completion of a transitional impairment test (with any impairment identified) accounted for as a cumulative effect of a change in accounting principle. As of the date of adoption, the Company had unamortized goodwill in the amount of $15,632,000. The Company determined the goodwill associated with the following operations had been impaired an wrote off: $1,528,000 remaining goodwill pertaining to its European Heat Technology operations; $404,000 of negative goodwill pertaining to its Asian Heat Technology operations, and The Company also recognized an impairment of, and wrote off $9,428,000 of goodwill associated with its Precision Miniature Medical and Electronics Products business. The net charge totaling $10,552,000 was recognized as a cumulative change in accounting principle in the 2002 consolidated statement of operations. The corresponding deferred tax asset of $743,000 was offset by a valuation allowance. Changes in the estimated future cash flows from these businesses could have a significant impact on the amount of any future impairment, if any. In accordance with SFAS No. 142, the Company's remaining unamortized goodwill will be tested for impairment on an annual basis. 8. Inventories consist of the following at: March 31, December 31, 2003 2002 Raw material $ 2,638,650 $ 2,958,909 Work-in-process 2,741,359 2,874,125 Finished products and components 3,552,684 3,560,768 $ 8,932,693 $ 9,393,802 9. Notes Payable and Long Term Debt Notes payable at March 31, 2003 and December 31, 2002 are summarized below: March 31, December 31, 2003 2002 Notes payable: Short term borrowings, Europe $ 6,768,646 $ 6,427,529 Short term borrowings, 4,613,253 3,982,137 domestic Short term borrowings, Asia 424,639 511,318 Total notes payable $11,806,538 $10,920,984 During the first quarter of 2003 the Company did not meet certain covenants, pertaining to its consolidated total liabilities to consolidated tangible capital funds ratio, and its fixed coverage ratio, as set forth in its credit facilities. The Company has obtained waivers from the bank for these covenants. The Company and its domestic subsidiaries entered into a revolving credit loan facility and a supplemental facility for which borrowings of $6,500,000 could be outstanding at any one time. The revolving credit loan facility, which had a maximum limit of $4,500,000, had borrowings of $3,253,253 as of March 31, 2003 bearing an interest rate of 3.80% (LIBOR plus 2.5%). The loan carries a commitment fee of .25% per annum, payable on the unborrowed portion of the line. The domestic revolving credit loan facilities have been extended to April 1, 2004. In March 2003, the Company amended its agreement for its domestic and foreign revolving credit and term loan facilities and obtained a new facility in the amount of 1,000,000 euros (approximately $1,067,000) for the issuance of advance payment guarantees (APG's). The new facility can be expanded to 1,750,000 euros (approximately $1,867,000) after the sale of discontinued operations and the payoff of the French Overdraft and Domestic Supplemental Facilities. APG's bear an interest rate of 3% per annum. The supplemental facility, which had a maximum limit of $2,000,000, had borrowings of $1,360,000 as of March 31, 2003 bearing interest at a rate of 5.05% (LIBOR plus 3.75%). The loan carries a commitment fee of .25% per annum, payable on the unborrowed portion of the line. The domestic supplemental loan credit facility has been extended to the earlier of January 1, 2004 or the sale of assets from discontinued operations in 2003. Long-term debt at March 31, 2003 and December 31, 2002 is summarized below: March 31, December 31, 2003 2002 Term loans, Europe $ 1,358,155 $ 1,581,889 Term loans, domestic 2,514,483 2,722,247 Other borrowings 5,002 5,816 3,877,640 4,309,952 Less: current maturities 1,343,336 1,573,716 $ 2,534,304 $ 2,736,236 The terms of the domestic loan agreements require monthly principal payments of approximately $64,000 through April 2004, with a balloon payment due at the end of the loans. At March 31, 2003, the borrowings under the credit agreement bore interest, payable monthly, at an interest rate of 3.80% (LIBOR plus 2.50%). The credit agreement is subject to a prepayment penalty of 3%. The Company's French subsidiary, Selas (SAS), financed its premises outside of Paris with bank borrowings maturing August 31, 2006, which require quarterly installments of principal of approximately $47,000 (44,000 Euros). The loan accrues interest payable quarterly. The interest rate on March 31, 2003 was 3.28% (the Euro Interbank Offered Rate (EURIBOR) plus .7%). The loan balance as of March 31, 2003 was $636,000 (597,000 Euros). The loan is subject to a prepayment penalty of 3%. The debt is secured by the land and building of Selas S.A. The land and building are for sale and the expected proceeds will be used to pay down liabilities. Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by general economic conditions and by financial, competitive, political, business and other factors. Many of these factors are beyond our control. We believe that funds expected to be generated from operations, the available borrowing capacity through our revolving credit loan facilities as amended, the potential sale of certain assets, and the control of capital spending will be sufficient to meet our anticipated cash requirements for operating needs. If, however, we do not generate sufficient cash or complete such financings on a timely basis, we may be required to seek additional financing or sell equity on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. 10.Income Taxes Income tax expense for the three months ended March 31, 2003 was $3,000 compared with a tax benefit of $63,000 for the three months ended March 31, 2002, which results in effective tax rates of minus .8% and a benefit of 142.7%, respectively. The effective rate of benefit in relation to pre-tax loss in 2003 is low because tax benefits from certain foreign net operating losses, were fully reserved by a valuation allowance. The rate of tax benefit in relation to pre-tax loss in 2002 is high because tax benefits from certain foreign net operating losses, that were previously fully reserved by a valuation reserve, were utilized for income tax purposes. 11. Accounting for Stock Options The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Therefore, no compensation expense has been recognized for the stock option plans. SFAS No. 123 "Accounting for Stock-Based Compensation", amended by SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure", requires the Company to disclose pro forma net income and pro forma earnings per share amounts as if compensation expense was recognized for options granted after 1995. Using this approach, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table: Three Months Ended March 31, 2003 2002 Net income (loss) as reported $(236,262) $(10,690,324) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (21,711) (44,963) Pro forma net income $(257,973) $(10,735,287) Earnings per share: Basic-as reported $(.04) $(2.09) Basic-pro forma $(.05) $(2.10) The aggregate fair value was calculated by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions for the plan: Three Months Ended March 31, 2003 2002 Risk-free interest rates 3.11% - 4.16 4.46% - 4.99% Volatility 55% 46% Expected lives (months) 74 78 12. Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings per share: For the Three Months Ended March 31, 2003 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount Basic Earnings Per Share Loss from continuing operations $ (428,844) 5,119,214 $(.08) Income from discontinued operations 192,582 5,119,214 .04 Loss available to common shareholders $ (236,262) 5,119,214 $ (.04) Effect of Dilutive -- -- -- Securities Stock options -- -- -- Diluted Earnings Per Share $ (236,262) 5,119,214 $(.04) For the Three Months Ended March 31, 2002 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount Basic Earnings Per Share Income from continuing operations $ 18,979 5,119,214 -- Loss from discontinued operations (157,377) 5,119,214 (.03) Effect of accounting change (10,551,926) 5,119,214 ( 2.06) Loss available to common shareholders $(10,690,324) 5,119,214 $(2.09) Effect of Dilutive -- -- -- Securities Stock options -- -- -- Diluted Earnings Per Share $(10,690,324) 5,119,214 $(2.09) Excluded from the computation of diluted earnings per share were options to purchase approximately 466,000 common shares whose effect would have been anti-dilutive. 13. Legal Proceedings The Company is a defendant along with a number of other parties in approximately 108 lawsuits as of December 31, 2002-(approximately 87 lawsuits as of December 31, 2001) 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.- There has been no significant changes in either the number of cases settled or pending since December 31,2002. 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. 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. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking and Cautionary Statements Certain statements included in this Quarterly Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission, which are not historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include, without limitation, statements as to the Company's expected future results of operations and growth, the Company's business strategy, the expected benefits of reduction in employee headcount, the expected sale of the Company's Tire Holders, Lifts and Related Products segment and use of proceeds, the expected increases in operating efficiencies, anticipated trends in the hearing health market related to the Company's Precision Miniature Medical and Electronic Products segment, estimates of goodwill impairments and amortization expense of other intangible assets, the effects of changes in accounting pronouncements and statements as to trends or the Company's or management's beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this annual report to shareholders, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including, without limitation, the following: o the ability to implement the Company's business strategy; o the volume and timing of orders received by the Company; o foreign currency movements in markets the Company services; o changes in global economy and financial markets; o changes in the mix of products sold; o acceptance of the Company's products; o competitive pricing pressures; o availability of electronic components for the Company's products; o ability to create and market products in a timely manner; o ability to pay debt when it comes due; o ability to sell businesses marked for sale; and o the risks associated with terrorist attacks, war and threats of attacks and wars. For a description of other risks see "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 or in other filings the Company makes from time to time with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. 2003 compared with 2002 The Company has embarked on a strategy to focus on its Precision Miniature Medical and Electronics Products markets for future growth. As part of this strategy, in December 2002, the Company initiated its plan to sell its Tire Holders, Lifts and Related Products segment. This segment consists of one wholly-owned subsidiary, Deuer Manufacturing, Inc., that operates on a stand alone basis. Deuer generated approximately $3.8 million and $4.0 million of revenue and $171,000 and $259,000 of net income for the three months ended March 31, 2003 and 2002, respectively. The Company has accounted for the plan to sell the subsidiary as a discontinued operation. See note 3 to the consolidated financial statements included herein. Consolidated net sales for the three months ended March 31, were as follows (in thousands): 2003 2002 Change Precision Miniature Medical and Electronic Products $8,993 $8,818 $175 Heat Technology 5,643 7,877 (2,234) Total $14,636 $16,695 $(2,059) Precision Miniature Medical and Electronic Products segment sales for the quarter ended March 31, 2003 were up over the same year-ago period, primarily due to stronger sales in its medical markets, partially offset by lower sales in the hearing health market. Heat Technology segment sales continue to be impacted by the poor worldwide economy for capital goods and the war in the Middle East where the Company has several customers. Gross margin for the three months ended March 31 was as follows (in thousands): 2003 2002 Change Precision Miniature Medical and Electronic Products $2,606 $2,149 $ 457 Heat Technology 1,294 1,464 (170) Total $3,900 $3,613 $ 287 Gross margin, as a percent of segment sales for the quarter ended March 31, was as follows: 2003 2002 Change Precision Miniature Medical and Electronic Products 29.0 24.4 4.6 Heat Technology 22.9 18.6 4.3 Total 26.6 21.6 5.0 The Precision Miniature Medical and Electronic Products segment benefited from stronger sales in its medical market which is typically a higher margin business than either the hearing health or electronics markets. The Heat Technology segment gross profit margins vary markedly from contract to contract, depending on customer specifications and other conditions related to the project. The dollar gross margin was lower due to the substantially lower sales volume in the quarter ended March 31, 2003. As a percent of sales, the gross profit margins for the first quarter of 2003 were positively impacted by reduced estimated costs to complete on a job in northern Europe that is substantially complete and no other jobs incurring any large unexpected increases in their estimates to complete. Selling, general and administrative expenses (SG&A): 2003 2002 Change Dollars (in thousands) $4,220 $3,684 $536 Percent of Sales 28.8% 22.1% 6.7% The higher SG&A expenses in the three-months ended March 31, 2003, compared to the same year-ago period are due to higher selling and administrative costs in Europe. The Company has retained certain operations within Europe that were included in discontinued operations in the prior year. Additionally, the Company incurred higher research and development costs in its Precision Miniature Medical and Electronic Products business as it strives to introduce more products into the hearing health market. Interest expense for the three months ended March 31, 2003 was $191,000 compared to $83,000 for the same period in 2002. The increase over last year's first quarter was due to interest expense on certain European debt that was classified as discontinued operations in 2002. Interest income for the quarter ended March 31, 2003 decreased to $2,000 compared to $15,000 for the same period in 2002. The decrease is due to lower average cash balances available for investing in the current year. Other income (expense) includes realized and unrealized gains (loss) on foreign exchange. The quarter ended March 31, 2003 includes a gain of $27,000 compared to a loss of $73,000 for the three months ended March 31, 2002 due to a weaker U.S. dollar compared to the Euro. The loss in the first quarter of 2002 was offset by other income of approximately $95,000 in proceeds received from the demutualization of the Company' life insurance carrier. Income tax expense for the three months ended March 31, 2003 was $3,000 compared with a benefit of $63,000 for the three months ended March 31, 2002, which resulted in effective tax rates of minus .8% and 142.7%, respectively. The effective rate of tax benefit in relation to the pre-tax loss in 2003 was low because tax benefits from certain foreign net operating losses, were fully reserved by a valuation allowance. The rate of tax benefit in relation to the pre-tax loss in 2002 was high because tax benefits from certain foreign net operating losses, which were previously fully reserved by a valuation reserve, were utilized for income tax purposes. For the three months ended March 31, 2003, the net loss from continuing operations was $429,000 compared with income of $19,000 in last year's first quarter. The loss, compared to net income in the prior year, was primarily due to increased SG&A expenses due to higher overhead in our European operations compared to last year, higher research and development costs, and a decreased income tax benefit due to uncertainty as to the utilization of foreign net operating loss carry forwards. Discontinued operations generated net income of $193,000 for the three months ended March 31, 2003 compared to net losses of $157,000 in last year's first quarter. The net income in the current year is from the Company's wholly owned subsidiary, Deuer manufacturing, Inc. Deuer generated net income of $259,000 the first quarter of 2002, partially offset by losses of $416,000 from the Company's large furnace business which was sold in December 2002. Liquidity and Capital Resources Consolidated net working capital decreased to $2.8 million at March 31, 2003 from $3.5 million at December 31, 2002. The decrease was primarily from decreased liabilities due to payments made, the purchase of property and equipment, and pay down of long-term debt. The Company's cash flows from operating, investing and financing activities, as reflected in the statement of cash flows, are summarized as follows (in thousands): Three Months Three Months Ended Ended March 31, March 31, 2003 2002 Cash provided (used) by: Continuing operations $ 366 $ 125 Discontinued operations 464 (368) Investing activities (533) (492) Financing activities 259 116 Effect of exchange rate changes on cash 11 (39) Increase in cash $ 567 $ 567 The Company had the following bank arrangements (in thousands): March 31, December 31, 2003 2002 Total availability under existing facilities $20,397 $20,369 Borrowings and commitments: Notes payable 11,807 10,921 Long-term debt 3,877 4,310 Total borrowings 15,684 15,231 Advance payment guarantees (off-balance sheet) (a) 1,240 2,160 Total outstanding borrowings and commitments 16,924 17,391 Remaining availability under Existing facilities $3,473 $2,978 (a)Advance Payment Guarantees (APG's) are required by some customers in the Heat Technology segment. The APG's are a form of borrowing, providing a performance guarantee to the customer in the event of a default in delivery or a failure of the furnace being supplied. Although the guarantee period can vary widely, an APG is typically in force from six months to one year. Borrowings under the majority of the Company's credit facilities bear interest at LIBOR plus 2.5% to 3.75%. In March 2003, the Company entered into an amended agreement for its domestic and European revolving credit and term loan facilities and obtained a new facility in the amount of an additional 1,000,000 Euros (approximately $1,090,000) for the issuance of advance payment guarantees (APG's). The new facility can be expanded to 1,750,000 Euros (approximately $1,908,000) after the sale of discontinued operations and the payoff of certain existing facilities. APG's bear an interest rate of 3% per annum. In addition the agreement calls for pay downs if the sale of certain assets is consummated. These facilities expire either on January 1, 2004 or April 1, 2004. Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by general economic conditions and by financial, competitive, political, business and other factors. Many of these factors are beyond our control. We believe that funds expected to be generated from operations, the sale of assets, the available borrowing capacity through our revolving credit loan facilities as amended, the potential sale of certain assets, and the control of capital spending will be sufficient to meet our anticipated cash requirements for operating needs through March 31,2004. If, however, we do not generate sufficient cash or complete such financings on a timely basis, we may be required to seek additional financing or sell equity on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. Significant Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Certain accounting estimates and assumptions are particularly sensitive because their significance to the consolidated financial statements and the possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions include the Company's revenue recognition, discontinued operations, and deferred taxes policies. These and other significant accounting policies are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations', and Note 1 to the Company's 2002 financial statements contained in or incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk For information regarding the Company's exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Annual Report on Form 10-K for 2002. 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 Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. Within the 90 days prior to the date of this Annual Report on Form 10-Q, the Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Limitations on the Effectiveness of Controls. The Company's management, including the CEO and CFO, does not expect that its Disclosure Controls or its "internal controls and procedures for financial reporting" ("Internal Controls" ) will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, the Disclosure Controls are effective to timely alert management to material information relating to the Company during the period when its periodic reports are being prepared. In accordance with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this Annual Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings The information contained in note 6 to the Consolidated Condensed Financial Statements is incorporated by reference herein. 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. S. 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. S. 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) Date: May 14, 2003 /s/ Robert F. Gallagher Robert F. Gallagher Chief Financial Officer and Treasurer CERTIFICATIONS Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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. Date: May 14, 2003 /s/ Mark S. Gorder Mark S. Gorder Chief Executive Officer CERTIFICATIONS Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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. Date: May 14, 2003 /s/ Robert F. Gallagher Robert F. Gallagher Chief Financial Officer and Treasurer EXHIBIT INDEX 99.1 Certification of principal executive officer pursuant to U.S.C. Section 135 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of principal financial officer pursuant to U.S.C. Section 135 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 ended March 31, 2003 '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. Date: May 14, 2003 /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 ended March 31, 2003 '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. Date: May 14, 2003 /s/ Robert F. Gallagher Robert F. Gallagher Chief Financial Officer and Treasurer