UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-5005
SELAS CORPORATION OF AMERICA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1069060
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
DRESHER, PENNSYLVANIA 19025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(215) 646-6600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
(X) YES ( ) NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT AUGUST 4, 1998
COMMON SHARES, $1.00 PAR VALUE 5,226,960 (exclusive of 363,564
treasury shares)
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SELAS CORPORATION OF AMERICA
I N D E X
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 . . . . . . . . 3, 4
Consolidated Statements of Operations for
the Three Months Ended June 30, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Operations for the
Six Months Ended June 30, 1998 and 1997 . . . . . . 6
Consolidated Statements of Cash Flows
for the Six Months Ended June 30,
1998 and 1997 . . . . . . . . . . . . . . . . . . . 7
Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 1998 . . . . . 8
Notes to Consolidated Financial Statements . . . . 9,10,11,
12,13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 14,15,16,
17,18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . 19
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SELAS CORPORATION OF AMERICA
Consolidated Balance Sheets
Assets
June 30, December 31,
1998 1997
(Unaudited) (Audited)
Current assets
Cash, including cash equivalents of
$4,183,000 in 1998 and $2,579,000 in
1997 . . . . . . . . . . . . . . . . . . $ 5,336,834 $ 3,034,903
Accounts receivable (including unbilled
receivables of $4,408,000 in 1998 and
$6,574,000 in 1997 less allowance for
doubtful accounts of $1,026,000 in 1998
and $681,000 in 1997) . . . . . . . . . 28,236,367 30,931,625
Inventories . . . . . . . . . . . . . . 13,389,912 9,999,140
Deferred income taxes . . . . . . . . . . 2,275,379 2,840,423
Other current assets . . . . . . . . . . . 694,469 919,608
Total current assets . . . . . . . . . 49,932,961 47,725,699
Investment in unconsolidated affiliate . . 481,268 472,689
Property, plant and equipment
Land . . . . . . . . . . . . . . . . . . . 1,037,851 1,041,869
Buildings . . . . . . . . . . . . . . . . 10,917,955 10,839,950
Machinery and equipment . . . . . . . . . 24,629,852 22,720,633
36,585,658 34,602,452
Less: Accumulated depreciation . . . . . 18,770,921 17,284,665
Net property, plant and equipment . . . 17,814,737 17,317,787
Deferred pension cost. . . . . . . . . . . . 29,415 56,973
Excess of cost over net assets of acquired
subsidiaries, less accumulated amortization
of $1,993,000 and $1,696,000 . . . . . . . 16,128,839 15,502,201
Other assets including patents, less
amortization . . . . . . . . . . . . . . . 584,109 719,715
$84,971,329 $81,795,064
=========== ===========
(See accompanying notes to the consolidated financial statements)
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SELAS CORPORATION OF AMERICA
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
June 30, December 31,
1998 1997
(Unaudited) (Audited)
Current liabilities
Notes payable . . . . . . . . . . . . . $ 2,206,992 $ 975,804
Current maturities of long-term debt . . 3,033,896 2,618,463
Accounts payable . . . . . . . . . . . . 13,007,167 14,336,607
Federal, state and foreign income taxes . 707,263 693,240
Customers' advance payments on contracts. 2,802,573 902,592
Guarantee obligations and estimated future
costs of service . . . . . . . . . . . 2,865,406 2,705,293
Other accrued liabilities . . . . . . . . 6,437,165 6,851,846
Total current liabilities . . . . . . 31,060,462 29,083,845
Long-term debt . . . . . . . . . . . . 7,752,916 7,015,080
Pension plan obligation . . . . . . . . . 29,415 56,973
Other postretirement benefit obligations . 3,924,079 4,024,217
Deferred income taxes . . . . . . . . . . 6,779 1,215,436
Contingencies and commitments
Shareholders' equity
Common shares, $1 par; 10,000,000 shares
authorized; 5,590,524 and 5,589,324 shares
issued, respectively . . . . . . . . . 5,590,524 5,589,324
Additional paid-in capital . . . . . . 11,798,103 11,792,878
Retained earnings . . . . . . . . . . . . 24,985,006 23,130,255
Accumulated other comprehensive income . 205,982 268,993
Less: 363,564 common shares held in
treasury, at cost . . . . . . . . . . . (381,937) (381,937)
Total shareholders' equity . . . . . 42,197,678 40,399,513
$84,971,329 $81,795,064
=========== ===========
(See accompanying notes to the consolidated financial statements)
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SELAS CORPORATION OF AMERICA
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30, June 30,
1998 1997
Sales, net $25,221,639 $27,101,464
Operating costs and expenses
Cost of sales 18,734,335 20,618,366
Selling, general and
administrative expenses 4,698,080 3,855,716
Operating income 1,789,224 2,627,382
Interest (expense) (304,731) (286,489)
Interest income 12,396 77,097
Other income (expense), net (126,563) 46,441
Income before income taxes 1,370,326 2,464,431
Income taxes (benefits) (395,590) 1,085,541
Net income $ 1,765,916 $ 1,378,890
=========== ===========
Basic earnings per share $0.34 $0.26
=========== ===========
Weighted average common shares
outstanding 5,226,960 5,212,560
Diluted earnings per share $0.33 $0.26
=========== ===========
Weighted average common shares
outstanding 5,324,949 5,344,703
Comprehensive income $ 1,903,693 $ 1,185,952
=========== ===========
(See accompanying notes to the consolidated financial statements)
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SELAS CORPORATION OF AMERICA
Consolidated Statements of Operations
(Unaudited)
Six Months Ended
June 30, June 30,
1998 1997
Sales, net $47,088,362 $58,006,474
Operating costs and expenses
Cost of sales 35,345,252 45,078,616
Selling, general and
administrative expenses 8,932,092 7,897,675
Operating income 2,811,018 5,030,183
Interest (expense) (542,241) (517,611)
Interest income 47,677 135,488
Other income (expense), net (55,596) (303,536)
Income before income taxes 2,260,858 4,344,524
Income taxes (benefits) (64,268) 1,803,341
Net income $ 2,325,126 $ 2,541,183
=========== ===========
Basic earnings per share $0.44 $0.49
=========== ===========
Weighted average common shares
outstanding 5,226,403 5,211,581
Diluted earnings per share $0.44 $0.48
=========== ===========
Weighted average common shares
outstanding 5,287,022 5,281,791
Comprehensive income $ 2,262,115 $ 1,827,229
=========== ===========
(See accompanying notes to the consolidated financial statements)
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SELAS CORPORATION OF AMERICA
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30, June 30,
1998 1997
Cash flows from operating activities:
Net income $ 2,325,126 $ 2,541,183
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 1,848,561 1,659,995
Equity in (income) of unconsolidated
affiliate (8,579) (1,747)
(Gain) loss on sale of property and
equipment (905) 6,105
Deferred taxes (624,508) (216,114)
Changes in operating assets and liabilities:
Decrease in accounts receivable 7,797,760 10,608,915
(Increase) in inventories (1,910,507) (983,935)
(Increase) decrease in other assets 589,309 (193,731)
(Decrease) in accounts payable (5,829,954) (162,679)
(Decrease) in accrued expenses (1,630,170) (4,266,659)
Increase (decrease) in customer advances 913,265 (2,115,392)
Increase in other liabilities 1,231 272,523
Net cash provided by
operating activities 3,470,629 7,148,464
Cash flows from investing activities:
Purchases of property, plant and equipment (1,382,785) (1,622,160)
Proceeds from sale of property and equipment 5,900 8,052
Acquisition of subsidiary companies, net
of cash acquired (1,726,764) (5,151,620)
Net cash (used) by investing
activities (3,103,649) (6,765,728)
Cash flows from financing activities:
Proceeds from short-term bank borrowings 1,239,240 --
Proceeds from borrowings to acquire
subsidiary company 2,475,248 3,500,000
Repayments of short-term bank borrowings -- (146,525)
Repayments of long-term debt (1,307,976) (1,456,716)
Proceeds from exercise of stock options 6,425 84,843
Payment of dividends (470,375) (460,445)
Net cash provided by
financing activities 1,942,562 1,521,157
Effect of exchange rate changes on cash (7,611) (710,216)
Net increase in cash and cash equivalents 2,301,931 1,193,677
Cash and cash equivalents, beginning of
period 3,034,903 8,343,820
Cash and cash equivalents, end of period $ 5,336,834 $ 9,537,497
========== ==========
(See accompanying notes to the consolidated financial statements)
-8-
SELAS CORPORATION OF AMERICA
Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 1998
(Unaudited)
Common Stock
Additional
Number of Paid-In
Shares Amount Capital
Balance, January 1, 1998 5,589,324 $ 5,589,324 $11,792,878
Net income
Exercise of stock options 1,200 1,200 5,225
Cash dividends paid
($.09 per share)
Foreign currency translation
(loss)
Comprehensive income
Balance, June 30, 1998 5,590,524 $ 5,590,524 $11,798,103
============ =========== ===========
Accumulated
Other
Retained Comprehensive Comprehensive
Earnings Income Income
Balance, January 1, 1998 $23,130,255 $ 268,993 $
Net income 2,325,126 2,325,126
Exercise of stock options
Cash dividends paid
($.09 per share) (470,375)
Foreign currency translation
(loss) (63,011) (63,011)
Comprehensive income $2,262,115
==========
Balance, June 30, 1998 $24,985,006 $ 205,982
=========== ===========
Total
Treasury Shareholders'
Stock Equity
Balance, January 1, 1998 $ (381,937) $40,399,513
Net income 2,325,126
Exercise of stock options 6,425
Cash dividends paid
($.09 per share) (470,375)
Foreign currency
translation (loss) (63,011)
Comprehensive income --
Balance, June 30, 1998 $ (381,937) $42,197,678
=========== ===========
(See accompanying notes to the consolidated financial statements)
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SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
(Continued)
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, 1998 and December 31, 1997, and the consolidated results of its
operations for the three and six months ended June 30, 1998 and
1997 and consolidated statements of shareholders' equity and cash
flows for the six months then ended.
2. The accounting policies followed by the Company are set forth in
note 1 to the Company's financial statements in the 1997 Selas
Corporation of America Annual Report on Form 10-K.
3. Acquisitions
In February, 1998, the Company acquired the stock of CFR, a Paris,
France firm in the engineered industrial furnace business. The
principal market served by CFR is engineered batch and continuous
furnaces for heat treating both ferrous and non-ferrous metals,
along with supplying furnaces for the hardening and etching of
glass and ceramic tableware. CFR had sales for the year ended
December 31, 1997 of 107.5 million French francs (FF) or
approximately $18.3 million. The purchase price was 15 million FF
or approximately $2.5 million which was paid for by additional bank
borrowings of 15 million FF at a fixed rate of 5.65% which requires
quarterly payments of FF 750,000 for 5 years. During the second
quarter of 1998, the Company also acquired the remaining minority
interest in SEER, a Givry, France firm which specializes in
automating, controlling and monitoring industrial processes. The
majority interest in SEER was acquired by the Company with the
purchase of CFR.
In May, 1998, a subsidiary of the Company acquired the stock of IMB
Electronic Products, Inc., a Santa Fe Springs, CA firm that
produces precision electro-mechanical parts for the
telecommunications and audio industries. IMB manufactures film
capacitors which are energy storage devices used primarily to
resist changes in voltage. IMB had sales for fiscal 1997 of $2.9
million. The purchase price was $1.3 million which was paid in
cash.
These acquisitions have been accounted for as purchases and the
results of CFR, SEER and IMB have been included in the
accompanying consolidated financial statements since the date of
the acquisition. The purchase price was allocated to assets and
liabilities based on the estimated fair value as of the date of the
acquisition. Such allocations have been based on preliminary
estimates of fair value which may be revised at a later date.
In February 1997, the Company acquired the assets and certain
liabilities of the Rodan Division of Ketema, Inc. Under the
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SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
3. Acquisitions (Continued)
Purchase Agreement, the Company agreed to deliver to Ketema
additional purchase price, payable in the Company's Common Shares,
based upon the performance of the acquired business during a one
year period ending in February 1998. In April 1998, the Company
tendered 10,202 Common Shares to Ketema in satisfaction of this
requirement, but Ketema has asserted that it is entitled to a
higher number of shares. The parties are submitting the dispute to
neutral accountants in an attempt to resolve the matter.
4. Inventories consist of the following:
June 30, December 31,
1998 1997
Raw material $ 3,762,917 $ 3,054,544
Work-in-process 5,077,312 2,721,964
Finished products and
components 4,549,683 4,222,632
Total $13,389,912 $ 9,999,140
=========== ===========
5. Income Taxes
Consolidated income taxes for the six month periods ended June 30,
1998 and 1997 are $(64,000) and $1,803,000 which result in
effective tax rates of ($2.8)% and 41.5%, respectively. The rate
of tax in relation to pre-tax income in 1998 is lower because in
the second quarter, the Company reduced the valuation allowance
applied against deferred tax benefits associated with domestic
postretirement benefit obligations by $724,512 and against certain
domestic employee pension plan obligations by $33,694. The
reduction in the valuation allowance was based on several factors
including: recent acquistions, past earnings history and trends,
reasonable and prudent tax planning strategies, and the expiration
dates of carryforwards. The Company has determined that it is more
likely than not that the $758,206 of deferred tax assets will be
realized. The remaining valuation allowance of approximately
$925,055 is maintained against deferred tax assets which the
Company has determined are not more than likely to be realized.
6. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 215 lawsuits as of December 31, 1997 (155 as of
December 31, 1996) 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
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SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
(Continued)
6. Legal Proceedings (continued)
the complaints, the Company does not know whether any of the
complaints state valid claims against the Company. The Company is
also one of approximately 500 defendants in a class action on
behalf of approximately 2,700 present or former employees of a
Texas steel mill alleging that products supplied by the defendants
created a poisonous atmosphere that caused unspecified physical
harm. These cases are being defended by one or more of the
Company's insurance carriers presently known to be "at risk." The
lead carrier has settled approximately 11 and 17 claims in 1997
and 1996, respectively, with no request for the Company to
participate in any settlement. The lead carrier has informed the
Company that the primary policy for the period July 1, 1972 - July
1, 1975 has been exhausted and that the lead carrier will no longer
provide a defense under that policy. The Company has requested
that the lead carrier substantiate this situation. The Company has
contacted representatives of the Company's excess insurance carrier
for some or all of this period. The Company does not believe that
the asserted exhaustion of the primary insurance coverage for this
period will have a material adverse effect on the financial
condition, liquidity, or results of operations of the Company.
Management is of the opinion that the number of insurance carriers
involved in the defense of the suits and the significant number of
policy years and policy limits to which these insurance carriers
are insuring the Company make the ultimate disposition of these
lawsuits not material to the Company's consolidated financial
position or results of operations.
In 1995, a dispute which was submitted to arbitration, arose under
a contract between a customer and a subsidiary of the Company.
Substantial claims were asserted against the subsidiary Company
under the terms of the contract. The Company recorded revenue of
approximately $1,400,000 in 1994 and has an uncollected receivable
of $140,000. The Company believes that the disposition of this
claim will not materially affect the Company's consolidated
financial position or results of operations.
7. Statements of Cash Flows
Supplemental disclosures of cash flow information:
Six Months Ended
June 30, June 30,
1998 1997
Interest received . . . . . . . $ 50,950 $ 121,974
Interest paid . . . . . . . . . $ 448,079 $ 433,791
Income taxes paid . . . . . . . $ 928,238 $ 867,942
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SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
(Continued)
8. Accounts Receivable
At June 30, 1998, the Company had $1,889,971 of trade accounts
receivable due from the major U.S. automotive manufacturers and
$2,930,362 of trade accounts receivable due from hearing aid
manufacturers. The Company also had $14,084,774 in receivables
from long-term contracts for customers in the steel industry in
North America, Europe and Asia.
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SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
(Continued)
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months
Ended June 30, 1998
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $ 1,765,916 5,226,960 $ .34
=========
Effect Of Dilutive Securities
Stock options 87,787
Earnings contingency 10,202
Diluted Earnings Per Share
Income available to common
shareholders plus assumed
conversions $1,765,916 5,324,949 $ .33
=====================================
For the Six Months
Ended June 30, 1998
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $2,325,126 5,226,403 $ .44
=========
Effect Of Dilutive Securities
Stock options 50,417
Earnings contingency 10,202
Diluted Earnings Per Share
Income available to common
shareholders plus assumed
conversions $2,325,126 5,287,022 $ .44
=====================================
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SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Consolidated net sales decreased to $25.2 million and $47.1 million for
the three and six months ended June 30, 1998 compared to $27.1 million
and $58 million for the same periods ended June 30, 1997. Net sales for
the heat processing segment decreased to $12 million and $20.8 million
for the three and six months ended June 30, 1998 compared to $15 million
and $34.6 million for the same periods in 1997. The decline in sales
for the three and six months periods is due to declines in the backlog
of large engineered contracts as of the beginning of fiscal 1998 as
compared to the beginning of fiscal 1997, and, to a lesser degree,
delays in obtaining new large engineered contracts. The February, 1998
acquisition of CFR, a French Company, generated sales of $2.6 million
and $4.4 million for the quarter and year-to-date for the Company's heat
processing segment which partially offset some of the sales decline for
the periods. Sales and earnings of large engineered contracts are
recognized on the percentage-of-completion method and generally require
more than twelve months to complete. Consolidated backlog for the heat
processing segment was up to $32.2 million at June 30, 1998 compared to
$28.5 million for the same period in 1997. Sales for the Company's
precision electromechanical and plastics components segment increased to
$9.2 million and $17.9 million for the three and six months ended June
30, 1998 compared to $8.4 million and $16 million for the same periods
in 1997. The increase in sales is partially attributed to the February,
1997 acquisition of RTI Electronics, Inc. and, to a lesser degree, the
May, 1998 acquisition of IMB Electronic Products Inc. (IMB). This
segment also had higher plastic component sales for the quarter. Net
sales of tire holders, lifts and related products segment increased for
the three and six months ended June 30, 1998 to $3.9 million and $8.4
million compared to $3.6 million and $7.4 million for the same periods
in 1997. The higher sales are due to increased sales of tire lifts to
the automotive industry which are slightly reduced by the impact of the
GM strike in the second quarter.
The Company's gross profit margin as a percentage-of-sales increased to
25.8% and 25% for the three and six month periods ended June 30, 1998
compared to 24.1% and 22.4% for the same periods in 1997. Gross profit
margins for the heat processing segment decreased to 17.4% for the three
months ended June 30, 1998 compared to 20% for the second quarter of
1997 and increased to 21.3% for the six months ended June 30, 1998
compared to 17.5% for the same period in 1997. Gross profit margins in
the heat processing segment vary markedly from contract to contract,
depending on customer specifications and other conditions related to the
contract. Lower sales levels helped contribute to the lower gross
profit margins for the current quarter. Gross profit margins for the
precision electromechanical and plastics segment decreased to 32.1% and
31.6% for the three and six month periods ended June 30, 1998 compared
to 34% and 35.8% for the same periods in 1997. The lower gross profit
margins are partially attributable to the acquisition of RTI Electronics
in February, 1997 and IMB in May, 1998 as their products, while
profitable, do not achieve the historical gross profit margins of this
business segment. Also impacting the lower gross profit margins, but to
a lesser degree, is the mix of product sales between the periods as
microminiature components,
-15-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
microminiature systems and plastic components have varying gross profit
margins. Gross profit margins for the tire holders, lifts and related
products segment increased to 24.9% and 20.3% for the three and six
month periods ended June 30, 1998 compared to 18.2% and 16.7% for the
same periods in 1997. The higher gross profit margins are due to
increased units sold, improved manufacturing efficiencies and, for the
current quarter, lower workers compensation insurance resulting from a
return of prior years' excess premiums.
Selling, general and administrative expenses increased to $4.7 million
and $8.9 million for the three and six months ended June 30, 1998
compared to $3.9 million and $7.9 million for the same periods in 1997.
The increase is due in part to higher selling and administrative
expenses for the acquisition of CFR in February, 1998 and IMB in May,
1998.
Interest expense for the three months and six months ended June 30, 1998
was $305,000 and $542,000 compared to $287,000 and $518,000 for the same
periods in 1997. The increase in expense is due to an increase in
outside borrowings in the current year. Interest income decreased to
$12,000 and $47,000 for the three and six months ended June 30, 1998
compared to $77,000 and $135,000 for the same periods in 1997 due to
lower balances available for investment.
Other income (expense) includes a loss on foreign exchange of $49,000
for the three months ended June 30, 1998 and a gain of $7,000 for the
six months ended June 30, 1998 compared to losses of $57,000 and
$229,000 for the same periods in 1997.
Consolidated income taxes for the six month periods ended June 30, 1998
and 1997 are $(64,000) and $1,803,000 which result in effective tax
rates of (2.8)% and 41.5%, respectively. The rate of tax in relation to
pre-tax income in 1998 is lower because in the second quarter, the
Company reduced the valuation allowance applied against domestic
postretirement benefit obligations by $724,512 and against certain
domestic employee pension plan obligations by $33,694. The reduction in
the valuation allowance was based on several factors including: recent
acquistions, past earnings history and trends, reasonable and prudent
tax planning strategies, and the expiration dates of carryforwards. The
Company has determined that it is more likely than not that the $758,206
of deferred tax assets will be realized. The remaining valuation
allowance of approximately $925,055 is maintained against deferred tax
assets which the Company has determined are not more than likely to be
realized.
Consolidated net income for the three and six month periods ended June
30, 1998 is $1,766,000 and $2,325,000 compared to $1,379,000 and
$2,541,000 for the same periods in 1997. The earning for the current
year are favorably impacted by a reduction in the valuation allowance of
deferred income tax assets which resulted in a tax benefit for the
-16-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
quarter and year-to-date of approximately $750,000. Net income for the
current year is also impacted by lower sales for the quarter and year-
to-date, partially offset by higher gross profit margins in the current
year.
Liquidity and Capital Resources
Consolidated net working capital increased to $18.9 million at June 30,
1998 compared to $18.6 million at December 31, 1997. The increase is
due primarily to net earnings for the year-to-date, partially offset by
the acquisitions of CFR and IMB Electronics and dividend payments. The
major changes in components of working capital were higher inventories
of $3.4 million, higher cash balances of $2.3 million, higher current
liabilities of $2 million and lower receivables of $2.7 million.
In May, 1998, a subsidiary of the Company acquired the stock of IMB
Electronic Products Inc. (IMB) of Santa Fe Springs, California for
approximately $1.3 million in cash. IMB is a manufacturer of film
capacitors, energy storage devices used primarily to resist changes in
voltage. The Company's sales for the year ended December 31, 1997 were
approximately $3 million.
In February, 1998, the Company acquired the stock of CFR, a Paris,
France firm in the engineered industrial furnace business. The
principal market served by CFR is engineered batch and continuous
furnaces for heat treating both ferrous and non-ferrous metals, glass
and ceramic tableware. CFR had sales for the year ended December 31,
1997 of 107.5 million French francs (FF) or approximately $18.3 million.
The purchase price was 15 million FF or approximately $2.5 million and
the assumption of certain liabilities which was paid for by additional
bank borrowings of 15 million FF which will be paid off over five years
at a fixed annual interest rate of 5.65%.
The Company is in the process of conducting a comprehensive review of
its information technology and non-information technology systems to
identify the systems that could be affected by the "Year 2000" issue and
is developing an implementation plan to resolve the issue. The Company
presently believes that, with modifications to existing software,
converting to new software, or acquiring new non-information technology
systems, the Year 2000 problem will not pose significant operational
problems for the Company's information technology and non-information
technology systems as so modified and converted. However, if such
modifications and conversions are not completed timely, the Year 2000
issue may have a material impact on the operations of the Company. The
costs of the modifications are not expected to have a material effect on
the results of operations of the Company.
-17-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
A significant portion of the heat processing segment sales are
denominated in foreign currencies, primarily the French franc.
Generally, the income statement effect of changes in foreign currencies
is partially or wholly offset by the European subsidiaries' ability to
make corresponding price changes in the local currency.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement
standardizes the accounting for derivative instruments, including
derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement
of financial position and measure them at fair value. The statement is
effective for fiscal year beginning after June 15, 1999. Management has
not yet determined the impact that the adoption of this statement may
have on earnings, financial condition or liquidity of the Company. The
Company plans to adopt SFAS No. 133 as permitted by this accounting
standard by January 1, 2000.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers.
In February, 1998, the FASB issued SFAS No. 132 "Employers' Disclosure
about Pensions and Other Postretirement Benefits." This Statement
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of
those plans.
The Company plans to adopt these accounting standards in connection with
the preparation of the December 31, 1998 consolidated financial
statements as permitted by SFAS No. 131 and No. 132. The adoption of
these standards is not expected to have a material impact on
consolidated results, financial condition, or long-term liquidity.
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1 "Accounting For the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is
effective for financial statements for fiscal years beginning after
December 15, 1998.
-18-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-5, "Reporting as the costs of
Start-Up Activities." This SOP provides guidance on the financial
reporting of start-up costs and organization costs. The SOP requires
costs related to start-up activities and organization costs be expensed
as incurred. The statement is effective for financial statements for
fiscal year beginning after December 15, 1998.
The Company plans to adopt these SOP's in connection with the
preparations of the December 31, 1999 consolidated financial statements
as permitted by SOP 98-1 and 98-5. The adoption of these standards will
not have a material impact on consolidated results, financial
conditions, or long-term liquidity.
The Company believes that its present working capital position, combined
with funds expected to be generated from operations and the available
borrowing capacity through its revolving credit loan facilities, will be
sufficient to meet its anticipated cash requirements for operating needs
and capital expenditures for 1998.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written
or oral forward-looking statements, including those contained in the
foregoing Management's Discussion and Analysis. In order to take
advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company has identified in its Annual
Report on Form 10-K for the year ending December 31, 1997, certain
important factors which could cause the Company's actual results,
performance or achievement to differ materially from those that may be
contained in or implied by any forward-looking statement made by or on
behalf of the Company. All such forward-looking statements are
qualified by reference to the cautionary statements herein and in such
Report on Form 10-K.
-19-
SELAS CORPORATION OF AMERICA
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Shareholders of the Company was held on April
21, 1998.
At the 1998 Annual Meeting:
(i) Messrs. Mark M. Gorder and Stephen F. Ryan were re-elected to
the Board of Directors of the Company for terms expiring at the 2001
Annual Meeting. In such election, 4,656,506 votes were cast for Mr.
Gorder and 4,656,506 votes were cast for Mr. Ryan. Under Pennsylvania
law, votes cannot be cast against a candidate. Proxies filed at the
1998 Annual Meeting by the holders of 13,125 shares withheld authority
to vote for Mr. Gorder and those filed by the holders of 13,125 shares
withheld authority to vote for Mr. Ryan. No "broker nonvotes" were
received at the 1997 Annual Meeting with respect to the election of
directors;
(ii) 4,656,900 shares were voted in favor of ratifying the
appointment of KPMG Peat Marwick LLP as the Company's auditors for 1998
and 3,750 shares were voted against such proposal. Proxies filed at the
1998 Annual Meeting by the holders of 8,981 shares instructed the proxy
holders to abstain from voting on such proposal. No "broker nonvotes"
were received at the 1998 Annual Meeting with respect to this proposal.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K - There were no reports on Form 8-K filed
for the six months ended June 30, 1998.
-20-
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 12, 1998
Robert W. Ross
Vice President and
Chief Financial Officer
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This schedule contains summary financial information extracted from the
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<RECEIVABLES> 29,262,826
<ALLOWANCES> 1,026,459
<INVENTORY> 13,389,912
<CURRENT-ASSETS> 49,932,961
<PP&E> 36,585,658
<DEPRECIATION> 18,770,921
<TOTAL-ASSETS> 84,971,329
<CURRENT-LIABILITIES> 31,060,462
<BONDS> 7,752,916
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<COMMON> 5,590,524
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<TOTAL-LIABILITY-AND-EQUITY> 84,971,329
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<EPS-DILUTED> .44
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This schedule contains summary financial information extracted from the
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
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