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 SEPTEMBER 30, 1999
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 OCTOBER 28, 1999
COMMON SHARES, $1.00 PAR VALUE 5,140,914 (exclusive of 494,054
treasury shares)
-2-
SELAS CORPORATION OF AMERICA
I N D E X
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 . . . . . 3, 4
Consolidated Statements of Operations for the
Three Months Ended September 30, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Operations for the
Nine Months Ended September 30, 1999 and 1998. . . 6
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30,
1999 and 1998 . . . . . . . . . . . . . . . . . . 7
Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 1999 . . . 8
Notes to Consolidated Financial Statements . . . 9, 10, 11,
12,13, 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 15,16,17,
18,19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . 20
-3-
SELAS CORPORATION OF AMERICA
Consolidated Balance Sheets
Assets
September 30, December 31,
1999 1998
(Unaudited) (Audited)
Current assets
Cash, including cash equivalents of
$2,383,000 in 1999 and $313,000
in 1998 . . . . . . . . . . . . . . $ 3,487,329 $ 2,784,284
Accounts receivable (including unbilled
receivables of $9,772,000 in 1999
and $3,898,000 in 1998, less allowance
for doubtful accounts of $1,198,000 in
1999 and $1,994,000 in 1998) . . . . 28,804,350 30,494,933
Inventories . . . . . . . . . . . . . 12,544,618 12,628,623
Deferred income taxes . . . . . . . . 2,643,775 3,603,701
Other current assets . . . . . . . . . 2,369,661 1,332,135
Total current assets . . . . . . . 49,849,733 50,843,676
Investment in unconsolidated affiliate . 505,276 538,913
Property, plant and equipment
Land . . . . . . . . . . . . . . . . 1,032,307 1,077,522
Buildings . . . . . . . . . . . . . . 11,688,743 12,129,811
Machinery and equipment . . . . . . . 28,744,146 25,788,736
41,465,196 38,996,069
Less: Accumulated depreciation . . . 22,038,425 20,038,177
Net property, plant and equipment . 19,426,771 18,957,892
Excess of cost over net assets of acquired
subsidiaries less accumulated amortization
of $2,982,000 and $2,452,000 . . . . . 16,325,801 16,813,073
Other assets including patents, less
amortization . . . . . . . . . . . . . 718,071 627,009
$86,825,652 $87,780,563
=========== ===========
See accompanying notes to the consolidated financial statements.
-4-
SELAS CORPORATION OF AMERICA
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
September 30, December 31,
1999 1998
(Unaudited) (Audited)
Current liabilities
Notes payable . . . . . . . . . . . . . . $ 8,619,044 $ 4,701,279
Current maturities of long-term debt . . 2,428,930 3,178,241
Accounts payable . . . . . . . . . . . . 12,562,015 15,410,642
Federal, state and foreign income taxes . 717,596 838,634
Customers' advance payments on contracts 3,720,536 697,270
Guarantee obligations and estimated
costs of service . . . . . . . . . . . 1,439,704 2,294,889
Other accrued liabilities . . . . . . . 6,315,987 6,512,016
Total current liabilities . . . . 35,803,812 33,632,971
Long-term debt . . . . . . . . . . . . 4,203,877 6,265,720
Other postretirement benefit obligations 4,142,740 4,096,057
Deferred income taxes. . . . . . . . . . 61,755 157,575
Contingencies and commitments
Shareholders' equity
Common shares, $1 par; 10,000,000 shares
authorized; 5,634,968 and 5,615,081
shares issued, respectively. . . . . . 5,634,968 5,615,081
Additional paid-in capital . . . . . . 12,012,541 11,941,498
Retained earnings . . . . . . . . . . . 25,914,241 25,797,823
Accumulated other comprehensive income 139,965 655,775
Less: 482,504 and 363,564 common shares,
respectively, held in treasury,
at cost (1,088,247) (381,937)
Total shareholders' equity . . . 42,613,468 43,628,240
$86,825,652 $87,780,563
=========== ===========
See accompanying notes to the consolidated financial statements.
-5-
SELAS CORPORATION OF AMERICA
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
September 30, September 30,
1999 1998
Sales, net $26,165,501 $25,202,822
Operating costs and expenses
Cost of sales 20,163,995 19,420,092
Selling, general and
administrative expenses 3,963,309 4,382,623
Operating income 2,038,197 1,400,107
Interest (expense) (254,155) (298,873)
Interest income 2,083 34,477
Other income (expense), net 90,701 314,575
Income before income taxes 1,876,826 1,450,286
Income taxes 734,721 532,503
Net income $ 1,142,105 $ 917,783
=========== ===========
Earnings per share
Basic $.22 $.18
Diluted $.22 $.17
Average shares outstanding
Basic 5,175,000 5,228,000
Diluted 5,184,000 5,308,000
Comprehensive income $ 1,268,526 $ 1,538,995
=========== ===========
See accompanying notes to the consolidated financial statements.
-6-
SELAS CORPORATION OF AMERICA
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended
September 30, September 30,
1999 1998
Sales, net $75,609,713 $72,291,184
Operating costs and expenses
Cost of sales 60,124,069 54,765,344
Selling, general and
administrative expenses 12,908,906 13,314,715
Operating income 2,576,738 4,211,125
Interest (expense) (749,343) (841,114)
Interest income 42,758 82,154
Other income (expense), net (242,637) 258,979
Income before income taxes 1,627,516 3,711,144
Income taxes 807,935 468,235
Net income $ 819,581 $ 3,242,909
=========== ===========
Earnings per share
Basic $.16 $.62
Diluted $.16 $.61
Average shares outstanding
Basic 5,215,000 5,227,000
Diluted 5,227,000 5,315,000
Comprehensive income $ 303,771 $ 3,801,110
=========== ===========
See accompanying notes to the consolidated financial statements.
-7-
SELAS CORPORATION OF AMERICA
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30, September 30,
1999 1998
Cash flows from operating activities:
Net income . . . . . . . . . . . . . $ 819,581 $ 3,242,909
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization . . . 3,033,964 2,794,372
Equity in (income) loss of uncon-
solidated affiliate . . . . . . . 19,161 (946)
(Gain) on sale of property and
equipment . . . . . . . . . . . (3,417) (905)
Deferred taxes . . . . . . . . . . 741,526 (576,420)
Changes in operating assets and liabilities:
Decrease in accounts receivable . 1,057,013 2,001,507
(Increase) in inventories . . . . . (108,097) (2,658,561)
(Increase) decrease in other assets (1,014,424) 6,199
(Decrease) in accounts payable . . (1,408,697) (1,248,454)
(Decrease) in accrued expenses . . (1,616,577) (1,838,257)
Increase in customer advances . . 3,095,021 23,033
Increase (decrease) in other
liabilities . . (14,287) 3,042
Net cash provided by
operating activities . . . . . 4,600,767 1,747,519
Cash flows from investing activities:
Purchases of property, plant and
equipment . . . . . . . . . . . . . (3,321,098) (2,680,254)
Proceeds from sale of property, plant
and equipment . . . . . . . . . . . 3,417 5,900
Acquisition of subsidiary companies,
net of cash acquired . . . . . . . . (5,388) (1,748,568)
Receipt of dividend from uncon-
solidated affiliate 14,476 --
Net cash (used) by investing
activities . . . . . . . . . (3,308,593) (4,422,922)
Cash flows from financing activities:
Proceeds from short-term bank
borrowings 3,464,274 3,956,107
Proceeds from long-term borrowings 1,015,251 --
Proceeds from borrowings to acquire
subsidiary company . . . . . . . . . -- 2,495,840
Repayments of short-term bank
borrowings . . . . . . . . . . . . . (10,774) --
Repayments of long-term debt . . . . (3,548,206) (2,201,731)
Proceeds from exercise of stock
options . . . . . . . . . . . . . . 83,541 10,196
Payment of dividends . . . . . . . . (703,163) (705,634)
Purchase of treasury stock . . . . . (706,310) --
Net cash provided (used) by
financing facilities . . . . . (405,387) 3,554,778
Effect of exchange rate changes on
cash . . . . . . . . . . . . . . . . (183,740) 263,402
Net increase in cash and cash
equivalents . . . . . . . . . . . . . 703,047 1,142,777
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . 2,784,282 3,034,903
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . . $ 3,487,329 $ 4,177,680
=========== ===========
See accompanying notes to the consolidated financial statements.
-8-
SELAS CORPORATION OF AMERICA
Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 1999
(Unaudited)
Common Stock Additional
Number of Paid-In
Shares Amount Capital
Balance, January 1, 1999 5,615,081 $5,615,081 $11,941,498
Net income
Exercise of stock options 19,887 19,887 71,043
Cash dividends paid
($.135 per share)
Foreign currency translation
(loss)
Comprehensive income
Purchase of 118,940
treasury shares
Balance, September 30, 1999 5,634,968 $5,634,968 $12,012,541
========= ========== ===========
Accumulated
Other
Retained Comprehensive Comprehensive
Earnings Income Income
Balance, January 1, 1999 $25,797,823 $ 655,775
Net income 819,581 $ 819,581
Exercise of stock options
Cash dividends paid
($.135 per share) (703,163)
Foreign currency translation
(loss) (515,810) (515,810)
Comprehensive income $ 303,771
==========
Purchase of 118,940
treasury shares
Balance, September 30, 1999 $25,914,241 $ 139,965
=========== ==========
Total
Treasury Shareholders'
Stock Equity
Balance, January 1, 1999 $ (381,937) $43,628,240
Net income 819,581
Exercise of stock options 90,930
Cash dividends paid
($.135 per share) (703,163)
Foreign currency translation
(loss) (515,810)
Comprehensive income
Purchase of 118,940
treasury shares (706,310) (706,310)
Balance, September 30, 1999 $(1,088,247) $42,613,468
=========== ===========
See accompanying notes to the consolidated financial statements.
-9-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
1. In the opinion of management, the accompanying consolidated condensed
financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly Selas Corporation of
America's consolidated financial position as of September 30, 1999 and
December 31, 1998, and the consolidated results of its operations for
the three and nine months ended September 30, 1999 and 1998 and
consolidated statements of shareholders' equity and cash flows for the
nine months then ended. The interim operating results are not
necessarily indicative of the results to be expected for an entire
year.
2. The accounting policies followed by the Company are set forth in note 1
to the Company's financial statements in the 1998 Selas Corporation of
America Annual Report.
3. Inventories consist of the following:
September 30, December 31,
1999 1998
Raw material $ 3,330,726 $ 3,418,891
Work-in-process 5,023,182 4,286,566
Finished products and
components 4,190,710 4,923,166
Total $12,544,618 $12,628,623
=========== ===========
4. Income Taxes
Consolidated income taxes for the nine month periods ended September
30, 1999 and 1998 are $808,000 and $468,000 which result in effective
tax rates of 49.6% and 12.6%, respectively. The rate of tax in
relation to pre-tax income in 1999 is high because tax benefits from
certain foreign net operating losses could not be utilized for income
tax purposes. The rate of tax in relation to pre-tax income in 1998
is low because 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 Company had determined that
it is more likely than not that the $758,206 of deferred tax assets
will be realized.
-10-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited) (Continued)
5. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 147 lawsuits as of December 31, 1998 (215 as of December
31, 1997) alleging that plaintiffs have or may have contracted
asbestos-related diseases as a result of exposure to asbestos products
or equipment containing asbestos sold by one or more named defendants.
Due to the noninformative nature of the complaints, the Company does
not know whether any of the complaints state valid claims against the
Company. The lead insurance carrier has informed the Company that
the primary policy for the period July 1, 1972 - July 1, 1975 has been
exhausted and that the lead carrier will no longer provide a defense
under that policy. The Company has requested that the lead carrier
substantiate this situation. The Company has contacted
representatives of the Company's excess insurance carrier for some or
all of this period. The Company does not believe that the asserted
exhaustion of the primary insurance coverage for this period will have
a material adverse effect on the financial condition, liquidity, or
results of operations of the Company. Management is of the opinion
that the number of insurance carriers involved in the defense of the
suits and the significant number of policy years and policy limits to
which these insurance carriers are insuring the Company make the
ultimate disposition of these lawsuits not material to the Company's
consolidated financial position or results of operations.
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. In June, 1998, the arbitrator found in favor of the
customer. The Company has refused to recognize the validity of the
arbitration proceedings and decision and believes it is entitled to a
new hearing before an international or French tribunal. The Company
believes that the disposition of this claim will not materially affect
the Company's consolidated financial position or results of
operations.
6. Statements of Cash Flows
Supplemental disclosures of cash flow information:
Nine Months Ended
September 30, September 30,
1999 1998
Interest received . . . . . . . $ 42,897 $ 121,974
Interest paid . . . . . . . . . $ 652,030 $ 433,791
Income taxes paid . . . . . . . $ 942,920 $ 867,942
-11-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)-
(Continued)
7. Accounts Receivable
At September 30, 1999, the Company had $2,588,955 of trade accounts
receivable due from major U.S. automotive manufacturers and $3,814,649
of trade accounts receivable due from hearing aid manufacturers. The
Company also had $10,240,527 in receivables from long-term contracts for
customers in the steel industry in North America, Europe and Asia.
-12-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 1. Notes to Consolidated Financial Statements (Unaudited)
(Continued)
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months
Ended September 30, 1999
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $ 1,142,105 5,174,987 $.22
=========
Effect Of Dilutive Securities
Stock options 8,931
Diluted Earnings Per Share $ 1,142,105 5,183,918 $.22
=====================================
For the Nine Months
Ended September 30, 1999
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $ 819,581 5,215,084 $.16
=========
Effect Of Dilutive Securities
Stock options 12,018
Diluted Earnings Per Share $ 819,581 5,227,102 $.16
=====================================
-13-
SELAS CORPORATION OF AMERICA
9. Business Segment Information
The company has three operating segments. The Company is engaged in
providing engineered heat technology equipment and services to
industries throughout the world, the manufacture of precision medical
and electronic products and the manufacture of original equipment for
light trucks and vans. The results of operations and assets of these
segments are prepared on the same basis as the condensed consolidated
financial statements for the nine months ended September 30, 1999 and
1998 and the consolidated financial statements included in the 1998
Form 10-K.
The Company's reportable segments reflect separately managed, strategic
business units that provide different products and services, and for
which financial information is separately prepared and monitored.
Segments
Tire
Holders, Precision
For The Nine Months Lifts and Medical and
Ended September 30, Heat Related Electronic
1999 Technology Products Products Total
Sales, net $34,918,251 $14,057,631 $26,633,831 $75,609,713
==================================================
Net income (loss) $(1,101,841) $ 931,241 $ 990,181 $ 819,581
==================================================
Depreciation and
amortization $ 559,012 $ 158,508 $ 2,316,444 $ 3,033,964
==================================================
Property, plant and
equipment additions $ 675,808 $ 86,066 $ 2,559,224 $ 3,321,098
==================================================
Total assets $41,936,567 $ 7,029,533 $37,859,552 $86,825,652
==================================================
-14-
SELAS CORPORATION OF AMERICA
9. Business Segment Information (Continued)
Segments
Tire
Holders, Precision
For the Nine Months Lifts and Medical and
Ended September 30, Heat Related Electronic
1998 Technology Products Products Total
Sales, net $32,929,852 $11,966,672 $27,394,660 $72,291,184
==================================================
Net income $ 1,298,639 $ 648,483 $ 1,295,787 $ 3,242,909
==================================================
Depreciation and
amortization $ 462,555 $ 162,648 $ 2,169,169 $ 2,794,372
==================================================
Property, plant and
equipment additions $ 225,003 $ 149,133 $ 2,306,118 $ 2,680,254
==================================================
Total assets $45,755,366 $ 7,442,207 $35,698,310 $88,895,883
==================================================
-15-
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 increased to $26.1 million and $75.6 million for the
three and nine months ended September 30, 1999 compared to $25.2 million
and $72.3 million for the same periods ended September 30, 1998. Net sales
for the heat technology segment increased to $12.6 million and $34.9
million for the three and nine month periods ended September 30, 1999
compared to $12.1 million and $32.9 million for the same periods in 1998.
The increase in sales in 1999 is due to several large engineered contracts
nearing completion and higher revenues generated by CFR, the French
subsidiary acquired in 1998, partially offset by decreased spare and
replacement part sales. 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
technology segment increased to $39.8 million at September 30, 1999
compared to $26.4 million for the same period in 1998. Sales for the
Company's precision medical and electronic products segment decreased to
$8.9 million and $26.6 million for the three and nine month periods ended
September 30, 1999 compared to $9.5 million and $27.4 million for the same
periods in 1998. Sales to hearing health customers decreased compared to
1998 due to the unfavorable conditions in this market, offset by increased
revenue from RTI Technologies PTE LTD, the Singapore company acquired in
October, 1998. Sales of RTI Electronics were lower in 1999 compared to 1998
due to increased price competition and the Asian economic situation,
slightly offset by sales related to IMB Electronic Products, which was
acquired in May, 1998 and merged with RTI Electronics as of the beginning of
1999. Net sales of the tire holders, lifts and related products segment
increased for the three and nine months ended September 30, 1999 to $4.6
million and $14.1 million compared to $3.6 and $12 million for the same
periods in 1998. The increase in revenue is due to higher tire lift sales
to the Company's automotive customers.
The Company's gross profit margin as a percentage of sales remained
constant at 23% for the three month periods ended September 30, 1999 and
1998 and decreased to 20.6% from 24.3% for the nine month periods then
ended. Gross profit margins for the heat technology segment decreased to
17.3% and 13.2% for the three and nine month periods ended September 30,
1999 compared to 20% and 20.9% for the same periods in 1998. Heat
technology gross profit margins vary markedly from contract to contract,
depending on customer specifications and other conditions related to the
project. The gross profit margins for 1999 were impacted by revenue
recognized on several large engineered contracts whose margins were not as
profitable as contracts completed in 1998, and reduced sales of spare and
replacement parts, which generally have higher profit margins. Gross
profit margins for the precision medical and electronic products
-16-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
segment increased to 31.9% from 28.5% for the three months ended September
30, 1999 and 1998, while margins remained essentially the same at 30.4% and
30.5% for the nine month periods then ended. The change in margins for the
three and nine month periods in 1999 compared to 1998 are partially
attributable to the implementation of cost reduction programs within the
segment offset by the decrease in sales in 1999. Also impacting the
margins in 1999 are costs relating to the combination of the RTI Electronic
and IMB Electronics Products operations into one facility, and the mix of
sales between the periods as precision components, precision systems,
plastic and electronic products have varying profit margins. Gross profit
margins for the tire holders, lifts and related products segment increased
to 21.2% and 20% for the three and nine months ended September 30, 1999
compared to 18.7% and 19.8% for the same periods in 1998. The improved
gross profit margins are due to increased units sold and improved
manufacturing efficiencies.
Selling, general and administrative expenses (SG&A) decreased to $4 million
and $12.9 million for the three and nine months ended September 30, 1999
compared to expenses of $4.4 million and $13.3 million for the same periods
in 1998. The decrease results from cost reductions in certain areas of the
Company's operations.
Interest expense for the three and nine months ended September 30, 1999 was
$254,000 and $749,000 compared to $299,000 and $841,000 for the same
periods in 1998. The decrease in expense is due to lower average
borrowings during the current year. Interest income for the three and nine
month periods ended September 30, 1999 decreased to $2,000 and $43,000
compared to $34,000 and $82,000 for the same periods in 1998. The decline
in income is due to lower balances available for investment.
Other income (expense) includes exchange gains of $114,000 for the third
quarter and exchange losses of $182,000 for the nine months ended September
30, 1999 compared to exchange gains of $215,000 and $222,000 for those
respective periods in 1998.
Consolidated income taxes for the nine month periods ended September 30,
1999 and 1998 are $808,000 and $468,000 which result in effective tax rates
of 49.6% and 12.6%, respectively. The rate of tax in relation to pre-tax
income in 1999 is high because tax benefits from certain foreign net
operating losses could not be utilized for income tax purposes. The rate
of tax in relation to pre-tax income in 1998 is low because 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
Company had determined that it is more likely than not that the $758,206 of
deferred tax assets will be realized.
-17-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Consolidated operations for the three and nine months ended September 30,
1999 produced net income of $1,142,000 and $820,000, respectively, compared
with net income of $918,000 and $3,243,000 for the same periods in 1998.
The increase in net income for the third quarter 1999 is attributable in
part to higher sales and lower SG&A expenses. The decrease in net income
for 1999 year-to-date results from lower profit margins on certain
contracts and products, losses on foreign currency exchange and lower tax
benefits on operating losses not available for utilization. The earnings
for 1998 were favorably impacted by a reduction in the valuation allowance
of deferred income tax assets which resulted in a tax benefit of
approximately $750,000.
Liquidity and Capital Resources
Consolidated net working capital decreased to $14 million at September 30,
1999 from $17.2 million at December 31, 1998. The decrease is primarily
due to purchases of property and equipment, paydown of long-term debt,
payment of dividends and purchase of treasury stock. The major changes in
the components of working capital for the nine months were increased cash
of $.7 million, decreased accounts receivable of $1.7 million, increased
notes payable of $3.9 million, lower accounts payable of $2.8 million and
higher customer advances of $3 million. These changes relate to the
ongoing operations of the Company year-to-date.
In June, 1999, the Company refinanced existing mortgage debt of $900,000
with a commercial bank. The original mortgage was assumed at the date of
acquisition of Resistance Technology, Inc. (RTI) and was secured by certain
land and building of RTI. The refinanced debt is payable in monthly
installments of $7,500, excluding interest, and is set to mature on July 1,
2004. The mortgage carries an interest rate at the Market Index London
Interbank Offered Rate (LIBOR) plus 1.25%. The agreement is subject to the
same financial reporting requirements and maintenance of certain financial
ratios as the Company's other term loan agreements with the commercial
bank.
The Company has completed a program during the second quarter of 1999
designed to remediate all of the Company's significant computer systems
that were not Year 2000 compliant. The program was divided into three
major components: (1) identification of all information technology systems
("IT Systems") and non-information technology systems ("Non-IT Systems")
that were not Year 2000 compliant; (2) repair or replacement of the
identified non-compliant systems; and (3) testing of the repaired or
replaced systems. All three parts have been completed for both in-house
and commercially developed IT Systems. However, the Company will continue
to monitor and evaluate the impact of any other Year 2000 issues on its
operations.
-18-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The Company has been inquiring of certain key suppliers and business
partners about their Year 2000 readiness. While no assurances can be given
that key suppliers and business partners will remedy their own Year 2000
issues, the Company to date has not identified any material impact on its
ability to continue normal business operations with suppliers or other
third parties who fail to address the Year 2000 issue.
Actual costs associated with implementation of the Company's Year 2000
program are expected to be insignificant to the Company's operations and
financial condition. Costs of $200,000, primarily for software and outside
services, have been or are expected to be incurred. As of September 30,
1999, $170,000 of costs have been expended.
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency -- the Euro. The Euro trades
on currency exchanges and may be used in business transactions. The
conversion to the Euro will eliminate currency exchange risk between the
member countries. Beginning in January 2002, new Euro-denominated bills
and coins will be issued, and legacy currencies will be withdrawn from
circulation. The Company has recognized this situation and has been
developing a plan to address any issue being raised by the currency
conversion. Possible issues include, but are not limited to, the need to
adapt computer and financial systems to recognize Euro-denominated
transactions, as well as the impact of one common European currency on
pricing. The Company anticipates that any unaddressed issues will be
resolved during 1999.
The Financial Accounting Standards Board (FASB) has issued Statements of
Financial Accounting Standard (SFAS) No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and SFAS No. 135, "Recision of FASB Statement No. 75
and Technical Corrections." SFAS No. 137 delays the effective date of SFAS
No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 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. SFAS No. 135 provides technical corrections to some 29
accounting pronouncements. It is effective for fiscal years ending after
February 15, 1999. Management has not yet determined the impact that the
adoption of these statements may have on earnings, financial condition and
liquidity of the Company. The Company plans to adopt SFAS No. 133 by
January 1, 2001 and SFAS No. 135 by December 31, 1999, respectively, as
permitted by these accounting standards.
-19-
SELAS CORPORATION OF AMERICA
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
During the first quarter of 1999, the Company implemented a program to
repurchase up to 250,000 shares of its common stock, which at the time
represented approximately 5% of its total shares outstanding. The shares
have been purchased from time to time on the open market during the year.
As of September 30, 1999, the Company has repurchased a total of 118,940
shares of its common stock.
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 1999.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding the Company's exposure to certain market risks,
see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in
the Annual Report on Form 10-K for 1998. There have been no significant
changes in the Company's portfolio of financial instruments or market risk
exposures which have occurred since year-end.
Forward-Looking and Cautionary Statements
The Company may from time to time make written or oral forward-looking
statements, including those contained in the foregoing Management's
Discussion and Analysis. In order to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the
Company has identified in its Annual Report on Form 10-K for the year
ending December 31, 1998, 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.
-20-
SELAS CORPORATION OF AMERICA
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K - The Company did not file any reports on
Form 8-K during the quarter for which this report is filed.
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: November 12, 1999
Francis A. Toczylowski
Vice President and Treasurer
EXHIBIT INDEX
EXHIBITS:
4A. Amended and Restated Revolving Credit Note, dated July 31,
1998, of the Company in favor of First Union National Bank.
4B. Amended and Restated Credit Agreement dated July 31, 1998
among the Company, Deuer Manufacturing, Inc., Resistance
Technology, Inc., RTI Export, Inc. and RTI Electronics, Inc.
10A. Supplemental Retirement Plan (Amended and Restated effective
June 1, 1998.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SELAS CORPORATION OF AMERICA FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,487,329
<SECURITIES> 0
<RECEIVABLES> 30,002,240
<ALLOWANCES> 1,197,890
<INVENTORY> 12,544,618
<CURRENT-ASSETS> 49,849,733
<PP&E> 41,465,196
<DEPRECIATION> 22,038,425
<TOTAL-ASSETS> 86,825,652
<CURRENT-LIABILITIES> 35,803,812
<BONDS> 4,203,877
0
0
<COMMON> 5,634,968
<OTHER-SE> 36,978,500
<TOTAL-LIABILITY-AND-EQUITY> 86,825,652
<SALES> 75,609,713
<TOTAL-REVENUES> 75,609,713
<CGS> 60,124,069
<TOTAL-COSTS> 60,124,069
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 35,055
<INTEREST-EXPENSE> 749,343
<INCOME-PRETAX> 1,627,516
<INCOME-TAX> 807,935
<INCOME-CONTINUING> 819,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 819,581
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
