10-Q 1 selas033508_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2003 ----------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ------------------------------------------------ COMMISSION FILE NUMBER 1-5005 ------------------------------------------------------- SELAS CORPORATION OF AMERICA ------------------------------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-1069060 ------------------------------- ---------------------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO) INCORPORATION OR ORGANIZATION) 1260 RED FOX ROAD, ARDEN HILLS, MINNESOTA 55112 ------------------------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (651) 636-9770 ------------------------------------------------------------------------------ (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) N/A ------------------------------------------------------------------------------ (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. (X) YES ( ) NO INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED BY RULE 12B-2 OF THE EXCHANGE ACT) ( ) YES (X ) NO INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. COMMON SHARES, $1.00 PAR VALUE 5,124,214 (exclusive of 515,754 ------------------------------ ------------------------------- CLASS treasury shares) --------------- OUTSTANDING AT JULY 22, 2003 SELAS CORPORATION OF AMERICA I N D E X --------- Page Number ------ PART I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed (Unaudited) Balance Sheets as of June 30, 2003 and December 31, 2002 3, 4 Consolidated Condensed (Unaudited) Statements of Operations for the Three Months Ended June 30, 2003 and 2002 5 Consolidated Condensed (Unaudited) Statements of Operations for the Six Months Ended June 30, 2003 and 2002 6 Consolidated Condensed(Unaudited)Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 7 Notes to Consolidated Financial Statements 8-19 Item 2. Management's Discussion and Analysis 20-25 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 25 About Market Risk Item 4. Controls and Procedures 25 PART II: OTHER INFORMATION Item 1. Legal Proceedings 26 Item 4. Submission of Matters to a vote of 26 security holders Item 6. Exhibits and Reports on Form 8-K 26 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SELAS CORPORATION OF AMERICA CONSOLIDATED CONDENSED BALANCE SHEETS ------------------------------------- ASSETS ------ June 30, December 31, 2003 2002 (Unaudited) (Audited) ----------- ------------ Current assets Cash, including cash equivalents of $415,000 in 2003 and $418,000 in 2002 and $ 1,293,127 $ 2,039,044 restricted cash of $415,000 in 2003 and $418,000 in 2002 Accounts receivable (including unbilled receivables of $2,404,000 in 2003 and $1,447,000 in 2002,less allowance for doubtful accounts of $1,066,000 in 2003 and $1,109,000 in 2002) 16,740,672 15,627,864 Inventories 9,332,828 9,393,802 Refundable income tax -- 336,758 Deferred income taxes 2,160,830 1,818,384 Other current assets 1,767,746 1,064,829 Assets of discontinued operations 12,146,281 13,610,601 ----------- ----------- Total current assets 43,441,484 43,891,282 Property, plant and equipment Land 231,943 231,943 Buildings 5,149,415 5,149,415 Machinery and equipment 32,128,149 29,903,795 ----------- ----------- 37,509,507 35,285,153 Less: Accumulated depreciation 25,324,378 22,921,608 ----------- ----------- Net property, plant and equipment 12,185,129 12,363,545 Goodwill 5,376,317 5,376,317 Deferred income taxes 373,601 348,712 Other assets, less amortization 1,706,172 1,575,539 ----------- ----------- $63,082,703 $63,555,395 =========== =========== (See accompanying notes to the consolidated financial statements) 3 SELAS CORPORATION OF AMERICA CONSOLIDATED CONDENSED BALANCE SHEETS ------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ June 30, December 31, 2003 2002 Current liabilities (Unaudited) (Audited) ----------- ------------ Notes payable $12,404,543 $10,920,984 Current maturities of long-term debt 3,246,692 1,573,716 Accounts payable 11,686,286 11,046,373 Customers' advance payments on contracts 2,686,761 2,457,499 Guarantee obligations and estimated costs of service 1,281,242 1,188,361 Other accrued liabilities 8,051,112 6,194,679 Liabilities of discontinued operations 4,982,840 6,955,654 ----------- ----------- Total current liabilities 44,339,476 40,337,266 Long-term debt 382,406 2,736,236 Other postretirement benefit obligations 4,068,787 3,866,154 Contingencies and commitments Shareholders' equity Common shares, $1 par; 10,000,000 shares authorized; 5,634,968 shares issued 5,634,968 5,634,968 Additional paid-in capital 12,008,915 12,012,541 Retained earnings 179,442 1,743,256 Accumulated other comprehensive loss (2,266,213) (1,509,948) Less: 515,754 common shares held in treasury, at cost (1,265,078) (1,265,078) ----------- ----------- Total shareholders' equity 14,292,034 16,615,739 ----------- ---------- $63,082,703 $63,555,395 =========== =========== (See accompanying notes to the consolidated financial statements) 4 SELAS CORPORATION OF AMERICA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS ----------------------------------------------- (UNAUDITED) Three Months Ended ------------------------------ June 30, June 30, 2003 2002 ------------ ------------ Sales, net $ 17,244,911 $ 17,983,975 Operating costs and expenses Cost of sales 13,841,161 14,118,475 ------------ ------------ Gross Margin 3,403,750 3,865,500 Selling, general and administrative Expenses 4,129,269 3,891,738 ------------ ------------ Operating loss (725,519) (26,238) Interest expense (215,273) (117,256) Interest income 6,714 7,902 Other income, net 165,329 159,093 ------------ ------------ Income (Loss) from continuing operations before income taxes (768,749) 23,501 Income tax (benefit) (119,838) (50,861) ------------ ------------ Income (loss) from continuing operations (648,911) 74,362 Income (loss) from discontinued operations, net of income taxes (benefit) (682,268) 156,853 ------------ ------------ Net income (loss) $ (1,331,179) $ 231,215 ============ ============ Income (loss) per share Basic Continuing operations $ (.13) $ .01 Discontinued operations (.13) .03 ------------ ------------ $ (.26) $ .04 ============ ============ Diluted Continuing operations $ (.13) $ .01 Discontinued operations (.13) .03 ------------ ------------ $ (.26) $ .04 ============ ============ Average shares outstanding Basic 5,124,214 5,119,214 Diluted 5,124,214 5,119,214 (See accompanying notes to the consolidated financial statements) 5 SELAS CORPORATION OF AMERICA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Ended ------------------------------ June 30, June 30, 2003 2002 ------------ ------------ Sales, net $ 31,880,927 $ 34,678,725 Operating costs and expenses Cost of sales 24,577,292 27,200,264 ------------ ------------ Gross Margin 7,303,635 7,478,461 Selling, general and administrative Expenses 8,349,720 7,575,704 ------------ ------------ Operating loss (1,046,085) (97,243) Interest expense (406,184) (199,894) Interest income 9,136 23,183 Other income, net 248,915 253,029 ------------ ------------ Loss from continuing operations before income taxes (1,194,218) (20,925) Income tax (benefit) (116,463) (114,266) ------------ ------------ Income (loss) from continuing operations (1,077,755) 93,341 Loss from discontinued operations, net of income tax (benefit) (489,686) (524) ------------ ------------ Net income (loss) before change in Accounting principle (1,567,441) 92,817 Cumulative effect of change in Accounting principle -- (10,551,926) ------------ ------------ Net loss $ (1,567,441) $(10,459,109) ============ ============ Income(loss) per share Basic Continuing operations $ (.21) $ .02 Discontinued operations (.10) (.00) Accounting principle change -- (2.06) ------------ ------------ $ (.31) $ (2.04) ============ ============ Diluted Continuing operations $ (.21) $ .02 Discontinued operations (.10) (.00) Accounting principle change -- (2.06) ------------ ------------ $ (.31) $ (2.04) ============ ============ Average shares outstanding Basic 5,124,214 5,119,214 Diluted 5,124,214 5,119,214 (See accompanying notes to the consolidated financial statements) 6 SELAS CORPORATION OF AMERICA CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS ----------------------------------------------- (UNAUDITED)
Six Months Ended ------------------------------ June 30, June 30, 2003 2002 ------------ ------------ Cash flows from operating activities: Net loss $ (1,567,441) $(10,459,109) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Loss from discontinued operations 489,686 524 Cumulative effect of accounting principle change -- 10,551,926 Depreciation and amortization 1,375,525 1,514,911 (Gain)on sale of property and equipment (7,334) (3,322) Provision for deferred taxes (195,445) (1,448) Changes in operating assets and liabilities: Accounts receivable 1,025,067 (3,489,842) Inventories 141,104 47,677 Other assets (531,969) (179,859) Accounts payable (2,603,142) 128,234 Accrued expenses 1,055,098 807,465 Customer advances (105,491) (985,449) Other liabilities 100,588 (60,963) ------------ ------------ Net cash (used) by continuing operations (823,754) (2,129,255) Net cash provided by discontinued operations 985,970 863,924 ------------ ------------ Net cash used by operating activities 162,216 (1,265,331) Cash flows from investing activities: Purchases of property, plant and equipment (838,335) (1,050,962) Proceeds from sale of property, plant and equipment 22,676 12,311 Patents and intangibles (127,967) -- ------------ ------------ Net cash used by investing activities (943,626) (1,038,651) Net cash used by discontinued operations (92,329) (120,440) ------------ ------------ Net cash used by investing activities (1,035,955) (1,159,091) Cash flows from financing activities: Proceeds from short-term bank borrowings 1,068,781 1,683,901 Proceeds from borrowings to acquire subsidiary company -- 136,173 Repayments of short-term bank borrowings (205,922) (376,034) Repayments of long-term debt (811,408) (809,120) ------------ ------------ Net cash provided by financing activities 51,451 634,920 Effect of exchange rate changes on cash 76,371 134,067 ------------ ------------ Net(decrease) in cash and cash equivalents (745,917) (1,655,435) Cash and cash equivalents, beginning of period 2,039,044 3,636,173 ------------ ------------ Cash and cash equivalents, end of period $ 1,293,127 $ 1,980,738 ============ ============
(See accompanying notes to the consolidated financial statements) 7 SELAS CORPORATION OF AMERICA Notes to Consolidated Condensed Financial Statements (Unaudited) ---------------------------------------------------------------- 1. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly Selas Corporation of America's consolidated financial position as of June 30, 2003 and December 31, 2002, and the consolidated results of its operations for the three and six months ended June 30, 2003 and 2002. Certain reclassifications have been made to the June 30, 2003 balance sheet related to discontinued operations at December 31, 2002. These reclassifications have no impact on the income statement. 2. New Accounting Standards The Company adopted the following new Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) accounting pronouncements: In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company was required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Company's financial statements. In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses the accounting for costs associated with disposal activities covered by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and with exit (restructuring) activities previously covered by Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." This Statement nullifies EITF Issue No. 94-3 in its entirety and requires that a liability for all costs be recognized when the liability is incurred. Generally, the ability to accrue for the cost of a workforce reduction plan at the communication date will be limited. The cost of the plan will be recognized over the future service period of the employees. This Statement will be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on the Company's financial statements In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The 8 disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002, and did not have a material effect on the Company's financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation will not have an effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. 3. Discontinued Operations In the fourth quarter of 2002, the Company initiated its plan to dispose of the Company's Tire Holders, Lifts and Related Products segment. This segment consisted of one wholly-owned subsidiary, Deuer Manufacturing, Inc. (Deuer), operating on a stand alone basis that sold tire holders, lifts and related products to automotive customers. The Company accounted for the plan to dispose of this subsidiary as a discontinued operation and reclassified the historical financial data. The subsidiary generated sales of $7.9 million, and $8.8 million and net income of $257,000, and $550,000 for the six months ended June 30, 2003 and 2002, respectively. On July 22, 2003 the Company sold 100 percent of the shares of Deuer for a purchase price of approximately $7.0 million, subject to a working capital adjustment. The purchase price was determined by negotiations between the parties. In the fourth quarter of 2002, the Company disposed of the majority of the Company's primary custom-engineered furnace business, Selas SAS (Paris), along with a closely related subsidiary, Selas U.K. (Derbyshire). These subsidiaries formed the Company's large custom-engineered furnaces division used primarily in the steel and glass industries worldwide. The furnaces engineered by this division are custom-engineered to meet customer specific requirements. The sale of the large custom-engineered furnace division was completed in December 2002. A building located outside of Paris, France and Selas Italiana, S.r.L. were excluded from the sale. The purchase price was approximately $600,000 above the net asset value at the time of sale. In addition, the purchaser assumed $1,356,000 of a receivable on a completed construction contract. The Company is required to reimburse the purchaser for any portion of the receivable that has not been collected by May 2003, although it has not yet done so. Certain assets and liabilities associated with completed contracts and discontinued operations were retained. These are expected to be collected or paid in the normal course of 2003. In July, 2003, Selas SAS filed in solvency in France. See Note 14 for further explanation. The consolidated condensed financial statements reflect the Company's presentation of discontinued operations. 9 4. Statements of Cash Flows Supplemental disclosures of cash flow information: Six Months Ended ----------------------------- June 30, June 30, 2003 2002 --------- ---------- Interest received $ 3,422 $ 5,891 Interest paid $ 366,886 $ 176,050 Income taxes paid $ 40,510 $ 18,652 5. Business Segment Information The Company has two operating segments. The Company is engaged in the manufacture of precision miniature medical and electronic products, and providing engineered heat technology equipment and services to industries throughout the world. The results of operations and assets of these segments are prepared on the same basis as the consolidated condensed financial statements for the three and six months ended June 30, 2003 and 2002 and the consolidated condensed financial statements included in the Company's 2002 Annual Report on Form 10-K. The Company's reportable segments reflect separately managed, strategic business units that provide different products and services, and for which financial information is separately prepared and monitored.
Precision For The Miniature Six Months Medical and General Ended Electronic Heat Corporate Discontinued June 30, 2003 Products Technology Expenses Operations Total ------------- ------------ ---------- ----------- ------------ ----------- Sales, net $ 18,667,896 $13,213,031 $ -- $ -- $31,880,927 ============ =========== =========== ============ =========== Net income (loss) 625,649 (1,035,221) (668,183) (489,686) (1,567,441) ============ =========== ========== ============ =========== Depreciation and amortiza- tion 1,258,769 116,756 -- -- 1,375,525 ============ =========== ========== ============ =========== Property, plant and equipment additions 818,344 19,991 -- -- 838,335 ============ ============ ========== ============ =========== Total assets $ 29,940,134 $20,996,288 $ -- $ 12,146,281 $63,082,703 ============ =========== ========== ============ ===========
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Precision For The Miniature Six Months Medical and General Ended Electronic Heat Corporate Discontinued June 30, 2002 Products Technology Expenses Operations Total ------------- ------------ ---------- ----------- ------------ ----------- Sales, net $ 17,545,826 $17,132,899 $ -- $ -- $34,678,725 ============ =========== =========== =========== =========== Net income(loss) Before change in Accounting Principle 432,007 198,778 (537,444) (524) 92,817 =========== =========== =========== =========== =========== Cumulative effect of change in accounting principle (9,428,354) (1,123,572) -- -- (10,551,926) =========== =========== =========== =========== =========== Net income (loss) (8,996,347) (924,794) (537,444) (524) (10,459,109) =========== =========== =========== =========== =========== Depreciation and amortiza- tion 1,255,202 259,709 -- -- 1,514,911 =========== =========== =========== =========== =========== Property, plant and equipment additions 984,772 66,190 -- -- 1,050,962 ============ ============ =========== =========== =========== Total assets $41,749,133 $24,471,610 $ -- $28,116,060 $94,418,847 =========== =========== =========== =========== ===========
6. Accounts Receivable At June 30, 2003, the Company had $3,338,000 of trade accounts receivable due from hearing health manufacturers and $7,295,000 in currently billed and unbilled receivables from Heat Technology customers in the aluminum and glassware industry. The following analysis provides the detail of revenue recognition methodology by segment for the six months ended June 30, 2003: Precision Miniature Medical and Electronic Heat Products Technology Total ------------ ------------ ----------- Upon Shipment $ 18,667,896 $ 5,620,430 $24,288,326 Percentage of completion -- 7,592,601 7,592,601 ------------ ------------ ----------- Total Revenue $ 18,667,896 $ 13,213,031 $31,880,927 ============ ============ =========== 11 7. Business Combinations and Goodwill and Other Intangible Assets As of January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations entered into after September 2001 to be accounted for under the purchase method. SFAS No. 142 set forth new financial and reporting standards for the acquisition of intangible assets, other than those acquired in a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized but tested for impairment on a periodic basis. The Company discontinued the amortization of goodwill effective January 1, 2002. The provisions of SFAS No. 142 also required the completion of a transitional impairment test (with any impairment identified) accounted for as a cumulative effect of a change in accounting principle. As of the date of adoption, the Company had unamortized goodwill in the amount of $15,632,000. The Company determined the goodwill associated with the following operations had been impaired and wrote off: $1,528,000 remaining goodwill pertaining to its European Heat Technology operations; $404,000 of negative goodwill pertaining to its Asian Heat Technology operations, and the Company also recognized an impairment of, and wrote off $9,428,000 of goodwill associated with its Precision Miniature Medical and Electronics Products business. The net charge totaling $10,552,000 was recognized as a cumulative change in accounting principle in the 2002 consolidated statement of operations. The corresponding deferred tax asset of $743,000 was offset by a valuation allowance. Changes in the estimated future cash flows from these businesses could have a significant impact on the amount of any future impairment, if any. In accordance with SFAS No. 142, the Company's remaining unamortized goodwill will be tested for impairment on an annual basis. 8. Inventories consist of the following at: June 30, December 31, 2003 2002 ----------- ------------ Raw material $ 2,704,625 $ 2,958,909 Work-in-process 3,170,018 2,874,125 Finished products and components 3,458,185 3,560,768 ----------- ----------- $ 9,332,828 $ 9,393,802 =========== =========== 9. Notes Payable and Long Term Debt Notes payable at June 30, 2003 and December 31, 2002 are summarized below: June 30, December 31, 2003 2002 ----------- ----------- Notes payable: Short term borrowings, Europe $ 7,354,534 $ 6,427,529 Short term borrowings, domestic 4,749,253 3,982,137 Short term borrowings, Asia 300,756 511,318 ----------- ----------- Total notes payable $12,404,543 $10,920,984 =========== =========== At June 30, 2003 the Company was not in compliance with certain financial covenants contained in its credit facility. These covenants pertained to the company's consolidated tangible capital funds, consolidated total liabilities to consolidated tangible capital funds ratio, consolidated current ratio and its fixed coverage ratio. The Company has obtained waivers of these covenants from the bank. 12 The Company and its domestic subsidiaries entered into a revolving credit loan facility and a supplemental facility for which borrowings of $6,500,000 could be outstanding at any one time. The revolving credit loan facility, which had a maximum limit of $4,500,000, had borrowings of $3,389,253 as of June 30, 2003 bearing an interest rate of 3.60% (LIBOR plus 2.5%). The loan carries a commitment fee of .25% per annum, payable on the unborrowed portion of the line. The domestic revolving credit loan facilities have been extended to April 1, 2004. In March 2003, the Company amended its agreement for its domestic and foreign revolving credit and term loan facilities and obtained a new facility in the amount of 1,000,000 euros (approximately $1,067,000) for the issuance of advance payment guarantees (APG's) by the Company's wholly owned subsidiary, Selas SAS. At June 30, 2003 APG's totaling $257,000 were outstanding. APG's bear an interest rate of 3% per annum. The supplemental facility, which had a maximum limit of $2,000,000, had borrowings of $1,360,000 as of June 30, 2003 bearing interest at a rate of 4.85% (LIBOR plus 3.75%). The loan carries a commitment fee of .25% per annum, payable on the unborrowed portion of the line. The domestic supplemental loan credit facility has been extended to the earlier of January 1, 2004 or the sale of assets from discontinued operations in 2003. In July, 2003, Selas SAS filed insolvency in France. See Note 14 for further explanation. Long-term debt at June 30, 2003 and December 31, 2002 is summarized below: June 30, Dec 31, 2003 2002 ----------- ----------- Long Term Debt: Term loans, Europe $ 1,298,086 $ 1,581,889 Term loans, domestic 2,326,857 2,722,247 Other borrowings 4,155 5,816 ----------- ----------- 3,629,098 4,309,952 Less: current maturities 3,246,692 1,573,716 ----------- ----------- $ 382,406 $ 2,736,236 =========== =========== The terms of the domestic loan agreements require monthly principal payments of approximately $64,000 through April 2004, with a balloon payment due at the end of the loans. At June 30, 2003, the borrowings under the credit agreement bore interest, payable monthly, at an interest rate of 3.60% (LIBOR plus 2.50%). The credit agreement is subject to a prepayment penalty of 3%. The Company's French subsidiary, Selas SAS, financed its premises outside of Paris with bank borrowings maturing August 31, 2006, which require quarterly installments of principal of approximately $49,000 (44,000 Euros). The loan accrues interest payable quarterly. The interest rate on June 30, 2003 was 2.85% (the Euro Interbank Offered Rate (EURIBOR) plus .7%). The loan balance as of June 30, 2003 was $617,000 (553,000 Euros). The loan is subject to a prepayment penalty of 3%. The debt is secured by the land and building of Selas SAS. In July, 2003, Selas SAS filed insolvency in France. See Note 14 for further explanation. Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by general economic conditions and by financial, competitive, political, business and other factors. Many of these factors are beyond our control. We believe that funds expected to be generated from operations, the available borrowing capacity through our revolving credit loan facilities as amended, the potential sale of certain assets, and the control of capital spending will be sufficient to meet our anticipated cash requirements for operating needs. If, however, we do not generate 13 sufficient cash or complete such financings on a timely basis, we may be required to seek additional financing or sell equity on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. 10. Income Taxes Income taxes reflected a benefit for the six months ended June 30, 2003 of $116,000 compared with a benefit $114,000 for the six months ended June 30, 2002, which results in effective tax benefit rates of 9.75% and 546.1%, respectively. The effective rate of benefit in relation to pre-tax loss in 2003 is low because tax benefits from certain foreign net operating losses, were fully reserved by a valuation allowance. The rate of tax benefit in relation to pre-tax loss in 2002 is high because tax benefits from certain foreign net operating losses, that were previously fully reserved by a valuation reserve, were utilized for income tax purposes. 11. Accounting for Stock Options The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Therefore, no compensation expense has been recognized for the stock option plans. SFAS No. 123 "Accounting for Stock-Based Compensation", amended by SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure", requires the Company to disclose pro forma net income and pro forma earnings per share amounts as if compensation expense was recognized for options granted after 1995. The pro forma amounts are as follows: Three Months Ended June 30, --------------------------- 2003 2002 ----------- ------------ Net income (loss) as reported $(1,331,179) $ 231,215 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (21,711) (44,963) ----------- ------------ Pro forma net income (loss) $(1,352,890) $ 186,252 =========== ============ Earnings (loss) per share: Basic and diluted - as reported $ (.26) $ .04 Basic and diluted - pro forma $ (.26) $ .04 Six Months Ended June 30, --------------------------- 2003 2002 ----------- ------------ Net (loss) as reported $(1,567,441) $(10,459,109) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (43,422) (89,926) ----------- ------------ Pro forma net loss $(1,610,863) $(10,548,035) =========== ============ Loss per share: Basic and diluted - as reported $ (.31) $ (2.04) Basic and diluted - pro forma $ (.31) $ (2.06) 14 The aggregate fair value was calculated by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions for the plan: Six Months Ended June 30, -------- 2003 2002 ---- ---- Risk-free interest rates 3.11% - 4.16% 4.46% - 4.99% Volatility 55% 46% Expected lives (months) 74 78 12. Income (Loss) Per Share The following table sets forth the computation of basic and diluted loss per share:
For the Three Months Ended June 30, 2003 ------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ------------ ------------ ------------ Basic Loss Per Share Loss from continuing Operations $ (648,911) 5,124,214 $ (.13) Loss from discontinued operations (682,268) 5,124,214 (.13) ------------ ------------ Loss available to common shareholders $ (1,331,179) 5,124,214 $ (.26) Effect of Dilutive Securities -- -- -- Stock options -- -- -- ------------ ------------ ------------ Diluted Loss Per Share $ (1,331,179) 5,124,214 $ (.26) ============ ============ ============ For the Six Months Ended June 30, 2003 ------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ------------ ------------ ------------ Basic Loss Per Share Loss from continuing operations $ (1,077,755) 5,124,214 $ (.21) Loss from discontinued Operations (489,686) 5,124,214 (.10) ------------ ------------ Loss available to common shareholders $ (1,567,441) 5,124,214 $ (.31) Effect of Dilutive Securities -- -- -- Stock options -- -- -- ------------ ------------ ------------ Diluted Loss Per Share $ (1,567,441) 5,124,214 $ (.31) ============ ============ ============
15
For the Three Months Ended June 30, 2003 ------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ------------ ------------ ------------ Basic Earnings Per Share Income from continuing operations $ 74,362 5,119,214 $ .01 Income from discontinued operations 156,853 5,119,214 .03 ------------ ------------ Income available to Common shareholders $ 231,215 5,119,214 $ .04 Effect of Dilutive Securities -- -- -- Stock options -- -- -- ------------ ------------ ------------ Diluted Earnings Per Share $ 231,215 5,119,214 $ .04 ============ ============ ============ For the Six Months Ended June 30, 2003 ------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ------------ ------------ ------------ Basic Earnings (Loss) Per Share Income from continuing operations $ 93,341 5,119,214 $ .02 Loss from discontinued operations (524) 5,119,214 -- Effect of accounting change (10,551,926) 5,119,214 (2.06) ------------ ------------ Loss available to common shareholders $(10,459,109) 5,119,214 $ (2.04) Effect of Dilutive Securities -- -- -- Stock options -- -- -- ------------ ------------ ------------ Diluted Loss Per Share $(10,459,109) 5,119,214 $ (2.04) ============ ============ ============
Excluded from the computation of diluted earnings per share were options to purchase approximately 466,000 common shares whose effect would have been anti-dilutive. 13. Legal Proceedings The Company is a defendant along with a number of other parties in approximately 130 lawsuits as of June 30, 2003(approximately 108 lawsuits as of December 31, 2002)alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. Due to the noninformative nature of the complaints, the Company does not know whether any of the complaints state valid claims against the Company. The lead insurance carrier has informed the Company that the primary policy for the period July 1, 1972 - July 1, 1975 has 16 been exhausted and that the lead carrier will no longer provide a defense under that policy. The Company has requested that the lead carrier substantiate this situation. The Company has contacted representatives of the Company's excess insurance carrier for some or all of this period. The Company does not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on the financial condition, liquidity, or results of operations of the Company. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits to which these insurance carriers are insuring the Company make the ultimate disposition of these lawsuits not material to the Company's consolidated financial position or results of operations. In July 2003, Selas SAS received notice of an unfavorable French court ruling on a subcontractor claim. The award was (euro)968,000 ($1,113,000) in principal plus (euro)217,000 ($250,000) interest for a total judgement of (euro)1,185,000 ($1,363,000). At June 30, 2003, the Company increased its accrual to the full amount taking a charge of $649,000 in the quarter ended June 30, 2003. This accrual was a part of the large furnace business sold in December 2002 and, consequently, the charge taken in the quarter ended June 30, 2003 is reflected in discontinued operations. In July, 2003, Selas SAS filed insolvency in France. See Note 14 for further explanation. The Company is also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect the Company's consolidated financial position, liquidity, or results of operations. 14. Subsequent Events On August 4, 2003 the Company's wholly owned subsidiary, Selas SAS, filed insolvency in the Commercial Court of Nanterre, France and is being managed through a court appointed judiciary administrator. At June 30, 2003, Selas SAS had total assets of $18.5 million and $29.0 million of liabilities. A portion of the liabilities, including approximately $7.5 million in bank debt and approximately $3 million of other liabilities, are either guaranteed by the Company or are a joint liability with the Company. The Company expects to take a minimum net charge of approximately $1.1 million in the third quarter as a result of the insolvency due primarily to the effect of the remaining translation adjustment, net of income taxes. In addition, the Company may be subject to additional litigation or liabilities as a result of the French insolvency. The insolvency filing by Selas SAS represented a default under the Company's banking agreement. The Company obtained a waiver from the bank of this default. Pro forma financial statements are provided below. The Proforma financial statements eliminate Selas SAS and its subsidiaries from the consolidated balance sheet excluding amounts representing joint liabilities with the Company or amounts guaranteed by the Company. The pro forma statement of operations eliminates Selas SAS and its subsidiaries except for interest expense on debt guaranteed by the Company. The statements of operations treat intercompany sales to one of Selas SAS's subsidiaries as third party sales. 17 Selas Corporation of America Pro Forma Balance Sheet As of June 30, 2003
As Pro Forma Pro Forma Presented Adjustment Results Assets Cash and cash equivalents $ 1,293,127 $ (575,921)(1) $ 717,206 Accounts receivable 16,740,672 (9,011,100)(1) 7,729,572 Inventories 9,332,828 (625,356)(1) 8,707,472 Prepaid expenses and other current assets 3,928,576 (958,641)(1) 2,969,935 Assets of discontinued operations 12,146,281 (5,348,541)(1) 6,797,740 ------------ ------------ ------------ Total current assets 43,441,484 (16,519,559) 26,921,925 Property plant and equipment 37,509,507 (3,653,845)(1) 33,855,662 Less: accumulated depreciation 25,324,378 2,575,571(1) (22,748,807) ------------ ------------ ------------ Net property plant and equipment 12,185,129 (1,078,274)(1) 11,106,855 Excess of cost over net assets acquired, less amortization 5,376,317 --(1) 5,376,317 Other assets 2,079,773 154,624(1) 2,234,397 ------------ ------------ ------------ Total assets 63,082,703 (17,443,209) 45,639,494 ============ ============ ============ Liabilities and equity Bank Debt 15,651,235 (995,718)(2) 14,655,517 Accounts payable 11,686,286 (8,208,760)(3) 3,477,526 Other liabilities 3,968,003 (2,298,198)(3) 1,669,805 Liabilities of discontinued operations 4,982,840 (3,415,570)(4) 1,567,270 Other accrued liabilities 8,051,112 (2,810,194)(3) 5,240,918 ------------ ------------ ------------ Total current liabilities 44,339,476 (17,728,440) 26,611,036 Other long term liabilities 4,451,193 (541,336)(3) 3,909,857 Shareholders' equity Common Stock 5,634,968 -- 5,634,968 Other stockholder's equity 8,657,066 826,567(5) 9,483,633 ------------ ------------ ------------ Total liabilities and stockholders' equity $ 63,082,703 $(17,443,209) $ 45,639,494 ============ ============ ============
(1) Eliminate all assets of Selas SAS and its subsidiaries from the consolidation. (2) Eliminate bank debt of Selas SAS and its subsidiaries not guaranteed by the Company. (3) Eliminate all liabilities of Selas SAS and its subsidiaries. (4) Eliminate liabilities of discontinued operations of Selas SAS that are not a joint obligation of Selas SAS and the Company. (5) Net equity impact from elimination of liabilities and assets of Selas SAS and its subsidiaries from the consolidation. 18 Selas Corporation of America Pro Forma Statement of Operations For the Six Months Ended June 30, 2003
As Pro Forma Pro Forma Presented Adjustment Results Sales, net $ 31,880,927 $ 9,087,633(1) $ 22,793,294 Operating cost and expenses 24,577,292 8,082,494(1) 16,494,798 ------------ ------------ ------------ Gross Margin 7,303,635 1,005,139 6,298,496 Selling, general and administrative expenses 8,349,720 1,822,957(1) 6,526,763 ------------ ------------ ------------ Operating loss (1,046,085) (817,818) (228,267) Interest expense (406,184) (83,994)(2) (322,190) Other income 258,051 88,393(1) 169,658 ------------ ------------ ------------ (Loss) before income taxes (1,194,218) (813,419) (380,799) Income tax benefit (116,463) (25,489)(1) (90,974) ------------ ------------ ------------ (Loss) from continuing operations $ (1,077,755) $ (787,930) $ (289,825) ============ ============ ============ (Loss) per share from continuing operations: Basis $ (.21) $ (.15) $ (.06) Diluted (.21) (.15) (.06) Average shares outstanding Basic 5,124,214 5,124,214 Diluted 5,124,214 5,124,214
(1) Eliminate third party sales, cost of sales, selling general and administrative expenses, other income, and income tax benefit of Selas SAS and its subsidiaries. (2) Eliminate interest expense from Selas SAS and its subsidiaries debt not guaranteed by the Company. 19 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- Forward-Looking and Cautionary Statements ----------------------------------------- Certain statements included in this Quarterly Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission, which are not historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include, without limitation, statements as to the Company's expected future results of operations and growth, the Company's business strategy, the expected benefits of reduction in employee headcount, the planned sale of the Company's remaining discontinued operations, and use of proceeds, the expected increases in operating efficiencies, anticipated trends in the hearing health market related to the Company's Precision Miniature Medical and Electronic Products segment, estimates of goodwill impairments and amortization expense of other intangible assets, the effects of changes in accounting pronouncements and statements as to trends or the Company's or management's beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Report on Form 10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including, without limitation, the following: o the ability to implement the Company's business strategy; o risks arising in connection with the insolvency of Selas SAS and potential liabilities and actions arising in connection therewith; o the volume and timing of orders received by the Company; o foreign currency movements in markets the Company services; o changes in global economy and financial markets; o changes in the mix of products sold; o acceptance of the Company's products; o pending and potential future litigation; o competitive pricing pressures; o availability of electronic components for the Company's products; o ability to create and market products in a timely manner; o ability to pay debt when it comes due; o ability to sell businesses marked for sale; and o the risks associated with terrorist attacks, war and threats of attacks and wars. For a description of other risks see "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 or in other filings the Company makes from time to time with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. 20 2003 compared with 2002 ----------------------- The Company has embarked on a strategy to focus on its Precision Miniature Medical and Electronics Products markets for future growth. As part of this strategy, in December 2002, the Company initiated its plan to sell its Tire Holders, Lifts and Related Products segment. This segment consisted of one wholly-owned subsidiary, Deuer Manufacturing, Inc., that operated on a stand alone basis. Deuer generated approximately $7.9 million and $8.8 million of revenue and $257,000 and $550,000 of net income for the six months ended June 30, 2003 and 2002, respectively. The Company accounted for the plan to sell the subsidiary as a discontinued operation. See note 3 to the consolidated financial statements included herein. Consolidated net sales for the three months ended June 30, were as follows (in thousands): 2003 2002 Change -------- -------- ------- Precision Miniature Medical and Electronic Products $ 9,675 $ 8,727 $ 948 Heat Technology 7,570 9,257 (1,687) -------- -------- ------- Total $ 17,245 $ 17,984 $ (739) ======== ======== ======= Consolidated net sales for the six months ended June 30, were as follows (in thousands): 2003 2002 Change -------- -------- ------- Precision Miniature Medical and Electronic Products $ 18,668 $ 17,546 $ 1,122 Heat Technology 13,213 17,133 (3,920) -------- -------- ------- Total $ 31,881 $ 34,679 $(2,798) ======== ======== ======= Precision Miniature Medical and Electronic Products segment sales for both the three and six months ended June 30, 2003 were up over the same year-ago period, primarily due to stronger sales in its medical markets, partially offset by lower sales in the hearing health market. Heat Technology segment sales for both the three and six months ended June 30, 2003 continue to be impacted by the poor worldwide economy for capital goods and hostilities in the Middle East where the Company has several customers. Weak sales of the Company's small furnace line and an unfavorable French court ruling on a dispute with a subcontractor forced the Company's wholly-owned subsidiary, Selas SAS, to file insolvency on August 4,2003. See note 14 to the financial statements. Gross margin for the three months ended June 30 was as follows (in thousands): 2003 2002 Change ------ ------ ------ Precision Miniature Medical and Electronic Products $2,643 $2,301 $ 342 Heat Technology 761 1,563 (802) ------ ------ ------ Total $3,404 $3,864 $ (460) ====== ====== ====== 21 Gross margin for the six months ended June 30 was as follows (in thousands): 2003 2002 Change ------ ------ ------ Precision Miniature Medical and Electronic Products $5,249 $4,451 $ 798 Heat Technology 2,055 3,028 (973) ------ ------ ------ Total $7,304 $7,479 $ (175) ====== ====== ======= Gross margin, as a percent of segment sales for the three and six months ended June 30, was as follows:
2003 2002 Change ------ ------ ------ Quarter YTD Quarter YTD Quarter YTD ------- ------- ------- ------- ------- ------- Precision Miniature Medical and Electronic Products 27.3 28.1 26.4 25.4 .9 2.7 Heat Technology 10.0 15.6 16.9 17.7 (6.9) (2.1) Total 19.7 22.9 21.5 21.6 (1.8) 1.3
During the three and six month period ended June 30, 2003, the Precision Miniature Medical and Electronic Products segments gross profit margins benefited from stronger sales in its medical market which is typically a higher margin business than either the hearing health or electronics markets. The Heat Technology segment gross profit margins vary markedly from contract to contract, depending on customer specifications and other conditions related to the project. The gross margin was lower due to the substantially lower sales volume in the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002. Selling, general and administrative expenses (SG&A) were as follows:
2003 2002 Change ------ ------ ------ Quarter YTD Quarter YTD Quarter YTD ------- ------- ------- ------- ------- ------- Dollars (thousands) $ 4,129 $ 8,350 $ 3,892 $ 7,576 $ 237 $ 774 Percent of Sales 23.9% 26.2% 21.6% 21.8% 2.3% 4.4%
The higher SG&A expenses in both the three and six months ended June 30, 2003, compared to the same year-ago period were due to higher selling and administrative costs in Europe. The Company has retained certain employees within Europe who were included in discontinued operations in the prior year. Additionally, the Company incurred higher research and development costs in its Precision Miniature Medical and Electronic Products business as it strives to introduce more products into the hearing health market. Interest expense for the three and six months ended June 30, 2003 was $215,000 and $406,000 compared to $117,000 and $200,000 for the same periods in 2002. The increase over last year's first quarter was due to interest expense on certain European debt that was classified as discontinued operations in 2002. Interest income for the six months ended June 30,2003 was $9,000 compared to $23,000 for the same period in 2002, the decrease is attributable to interest on a trade receivable in 2002. Other income (expense) includes realized and unrealized gains (loss) on foreign exchange. The six months ended June 30, 2003 includes a gain of $163,000 compared to a gain of $165,000 for the six months ended June 30, 2002. Income taxes reflected a benefit for the six months ended June 30, 2003 of $116,000 compared with a benefit $114,000 for the six months ended June 30, 2002, which results in effective tax benefit rates 9.75% and 546.1%, 22 respectively. The effective rate of benefit in relation to pre-tax loss in 2003 is low because tax benefits from certain foreign net operating losses, were fully reserved by a valuation allowance. The rate of tax benefit in relation to pre-tax loss in 2002 is high because tax benefits from certain foreign net operating losses, which were previously fully reserved by a valuation reserve, were utilized for income tax purposes. For the three and six months ended June 30, 2003, the net loss from continuing operations was $649,000 and $1,078,000 compared with income of $74,000 and $93,000 for the same periods last year. The loss, compared to net income in the prior year, was primarily due to decreased sales, increased SG&A expenses due to higher overhead in our European operations compared to last year, and higher research and development costs. Discontinued operations generated a net loss of $682,000 and $489,000 for the three and six months ended June 30, 2003, compared to net income of $157,000 and $0 for the same three and six-month periods last year. The net loss in the current year is a result of additional accruals related to an unfavorable French court ruling affecting the Company's large furnace business, which was sold in December 2002. The loss was partially offset by net income generated from the Company's wholly owned subsidiary, Deuer Manufacturing Inc. Deuer generated income of $126,000 and $297,000 for the three and six month period ended June 30, 2003. Liquidity and Capital Resources ------------------------------- Consolidated net working capital decreased to a negative $898,000 at June 30, 2003 from $3.5 million at December 31, 2002. The decrease was primarily from the reclassification of long term debt that is due April 1,2004. The Company's cash flows from operating, investing and financing activities, as reflected in the statement of cash flows, are summarized as follows (in thousands): Six Months Six Months Ended Ended June 30, June 30, 2003 2002 ------- ------- Cash provided (used) by: Continuing operations $ (824) $(2,129) Discontinued operations 893 744 Investing activities (943) (1,038) Financing activities 52 635 Effect of exchange rate changes on cash 76 134 ------- ------- Decrease in cash $ (746) $(1,655) ======= ======= The Company had the following bank arrangements (in thousands): June 30, December 31, 2003 2002 ------- ------- Total availability under existing facilities $20,918 $20,369 ------- ------- Borrowings and commitments: Notes payable 12,404 10,921 Long-term debt 3,629 4,310 ------- ------- Total borrowings 16,034 15,231 Advance payment guarantees (off-balance sheet)(a) 1,770 2,160 ------- ------- Total outstanding borrowings and commitments 17,805 17,391 ------- ------- Remaining availability under Existing facilities $ 3,113 $ 2,978 ======= ======= 23 (a) Advance Payment Guarantees (APG's) are required by some customers in the Heat Technology segment. The APG's provide a performance guarantee to the customer in the event of a default in delivery or a failure of the furnace being supplied. Although the guarantee period can vary widely, an APG is typically in force from six months to one year. Borrowings under the majority of the Company's credit facilities bear interest at LIBOR plus 2.5% to 3.75%. The Company and its domestic subsidiaries entered into a revolving credit loan facility and a supplemental facility for which borrowings of $6,500,000 could be outstanding at any one time. The revolving credit loan facility, which had a maximum limit of $4,500,000, had borrowings of $3,389,253 as of June 30, 2003 bearing an interest rate of 3.60% (LIBOR plus 2.5%). The loan carries a commitment fee of .25% per annum, payable on the unborrowed portion of the line. The domestic revolving credit loan facilities have been extended to April 1, 2004. In March 2003, the Company amended its agreement for its domestic and foreign revolving credit and term loan facilities and obtained a new facility in the amount of 1,000,000 euros (approximately $1,067,000) for the issuance of advance payment guarantees (APG's) by the Company's wholly owned subsidiary, Selas SAS. At June 30, 2003 APG's totaling $257,000 were outstanding. APG's bear an interest rate of 3% per annum. The supplemental facility, which had a maximum limit of $2,000,000, had borrowings of $1,360,000 as of June 30, 2003 bearing interest at a rate of 4.85% (LIBOR plus 3.75%). The loan carries a commitment fee of .25% per annum, payable on the unborrowed portion of the line. The domestic supplemental loan credit facility has been extended to the earlier of January 1, 2004 or the sale of assets from discontinued operations in 2003.In July, 2003, Selas SAS filed insolvency in France. See Note 14 of the financial statements for further explanation. Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by general economic conditions and by financial, competitive, political, business and other factors. Many of these factors are beyond our control. We believe that funds expected to be generated from operations, the sale of assets, the available borrowing capacity through our revolving credit loan facilities as amended, the potential sale of certain assets, and the control of capital spending will be sufficient to meet our anticipated cash requirements for operating needs through March 31,2004. If, however, we do not generate sufficient cash or complete such financings on a timely basis, or if we incur additional liabilities as a result of the Selas SAS insolvency, we may be required to seek additional financing or sell equity on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. Significant Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. 24 Certain accounting estimates and assumptions are particularly sensitive because their significance to the consolidated financial statements and the possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions include the Company's revenue recognition, discontinued operations, and deferred taxes policies. These and other significant accounting policies are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 1 to the Company's 2002 financial statements contained in or incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- For information regarding the Company's exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. There have been no material changes in the Company's portfolio of financial instruments or market risk exposures which have occurred since December 31, 2002. ITEM 4. Controls and Procedures ----------------------- Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. The Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls") as of the end of the period covered by this Form 10-Q and any change in material controls over financial reporting that occurred during the period covered by this Form 10-Q. This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Limitations on the Effectiveness of Controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance where necessary its procedures and controls. Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded that, the Disclosure Controls are effective in reaching a reasonable level of assurance that management is timely alerted to material information relating to the Company during the period when its periodic reports are being prepared. In accordance with SEC requirements, the CEO and CFO conducted an evaluation of internal controls over financial reporting ("Internal Controls") to determine whether there have been changes in Internal Controls that have occurred during the period that have material affected or which are reasonably likely to material affect Internal Controls. Based on this evaluation, there has been no such change during the period covered by this report. 25 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- The information contained in note 13 to the Consolidated Condensed Financial Statements in part 1 of this quarterly report is incorporated by reference herein. ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The 2003 Annual Meeting of Shareholders of the Company was held on April 23, 2003. At the 2003 Annual Meeting: Messrs. Frederick L. Bissinger and Nicholas A. Giordano were elected to the Board of Directors of the Company for terms expiring at the 2006 Annual Meeting. In such elections, 3,305,687 votes were cast for Mr. Bissinger and 3,308,687 were cast for Mr. Giordano. Under Pennsylvania law, votes cannot be cast against a candidate. Proxies filed at the 2003 Annual Meeting by the holders of 356,628 shares withheld authority to vote for Mr. Bissinger and those filed by the holders of 353,628 shares withheld authority to vote for Mr. Giordano. The terms of the following directors continued after the Annual Meeting: Mark S. Gorder, Michael J. McKenna and Robert N. Masucci. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of principal executive officer pursuant to U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of principal financial officer pursuant to U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K Form 8-K filed on July 23, 2003 to report sale of its subsidiary Deuer Manufacturing Inc. Form 8-K filed on August 5,2003 to report its French Subsidiary's insolvency filing. 26 SELAS CORPORATION OF AMERICA SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SELAS CORPORATION OF AMERICA (Registrant) Date: August 14, 2003 By: /s/ Mark S. Gorder ------------------------------------- Mark S. Gorder President and Chief Executive Officer Date: August 14, 2003 By: /s/ Robert F. Gallagher ------------------------------------- Robert F. Gallagher Chief Financial Officer and Treasurer 27 EXHIBIT INDEX 31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of principal executive officer pursuant to U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of principal financial officer pursuant to U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 28