UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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 office) (Zip Code)
Registrant's telephone number, including area code (215) 646-6600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares, $1 par value American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act: None
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. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
The aggregate market value, as of March 9, 2000, of the voting stock held
by non-affiliates of the registrant was approximately $26,906,324
(Aggregate market value is estimated solely for the purposes of this
report and shall not be construed as an admission for the purposes of
determining affiliate status.)
At March 9, 2000, there were 5,125,014 of the Company's common shares
outstanding (exclusive of 509,954 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1999 annual report to shareholders are
incorporated by reference into Part II of this report. Portions of the
Company's proxy statement for the 2000 annual meeting of shareholders are
incorporated by reference into Part III of this report. Except for the
parts of such documents that have been specifically incorporated herein
by reference, such documents shall not be deemed "filed" for the
purposes of this report.
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PART I
ITEM 1. Business
Selas Corporation of America (together with its subsidiaries, unless the
context otherwise requires, referred to herein as the "Company",) was
incorporated in Pennsylvania in 1930. The Company is a diversified firm
with international operations and sales that engages in the design,
development, engineering and manufacturing of a range of products. The
Company, headquartered in Dresher, Pennsylvania with subsidiaries in
Minnesota, Ohio, California, England, France, Germany, Italy, Portugal
and Singapore (and a 50% joint venture in Japan), operates directly or
through subsidiaries in three business segments.
Under the SelasTM name, the Heat Technology segment designs and
manufactures specialized industrial heat technology systems and equipment
for steel, glass and other manufacturers worldwide. The Company's
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components and molded plastic parts for
hearing instrument manufacturers and the medical equipment, electronics,
telecommunications and computer industries. The Company's Tire Holders,
Lifts and Related Products segment manufactures products, primarily based
on cable winch designs, for use as original equipment by the pick-up
truck and minivan segment of the automotive industry.
Financial data relating to industry segments, geographical summary of
assets and operations, export sales and major customers are set forth in
Note 4 of the Company's consolidated financial statements.
HEAT TECHNOLOGY
The Company specializes in the controlled application of heat to achieve
precise process and temperature control. The Company's principal heat
technology equipment and systems are large custom-engineered furnaces and
smaller standard-engineered systems, burners and combustion control
equipment.
CUSTOM-ENGINEERED FURNACES
Products and Industries Served. The Company designs specialized furnaces
for use primarily in the steel and glass industries worldwide. The
furnaces are engineered to subject a customer's products to carefully
controlled heating and cooling processes in order to improve the physical
characteristics of those products. Each furnace is custom-engineered by
the Company to meet the customer's specific requirements. The Company
believes that the Selas TM name, its reputation for quality and its
leadership in the design and engineering of direct gas-fired heat
processing furnaces are important factors in its business. The Company
also offers gas-fired radiant tube and electric heating technology for
heat processing furnaces.
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ITEM 1. Business - (Continued)
The Company's custom-engineered systems for the steel industry include
continuous annealing furnaces and continuous galvanizing furnaces.
Continuous annealing furnaces are used to heat-treat semi-finished steel
sheet and strip to soften it to improve the ductility of the steel,
thereby making it suitable for use in the manufacture of automobiles,
appliances and other items. Continuous galvanizing furnaces consist of
continuous annealing furnaces plus the components used to apply a zinc
coating to steel strip to improve its resistance to corrosion.
The Company's furnaces for the glass industry are used for the tempering,
bending and etching of glass. The glass tempering process toughens glass
plate through a controlled process of heating and cooling. Glass
manufacturers use the Company's glass bending furnaces to heat and bend
plate glass for automotive and architectural uses. Other furnaces are
designed to harden and etch glass and ceramic tableware.
From time to time, the Company also designs various other specialized
furnaces for use by manufacturers in a variety of industries to suit
particular process requirements. For example, over the years the Company
has engineered large barrel line furnaces used for the continuous heat
treatment of steel pipe, tube or bar.
Marketing and Competition. The Company markets its custom-engineered
furnaces on a global basis. Marketing personnel are located at the
Company's offices in Dresher, Paris, Ratingen, Derbyshire, Milan, Leiria,
Lyon, and at the offices of its 50%-owned affiliate, Nippon Selas Co.,
Ltd., in Tokyo. Over the years, the Company has installed custom-
engineered systems in Europe, North America, South America, Asia,
Australia and Africa. In a particular period, a single contract may
account for a large percentage of sales, but the Company is not dependent
on any custom-engineered systems customer on an ongoing basis.
Company engineering and marketing personnel maintain contact with
potential major steel and glass customers to determine their needs for
new furnaces, typically for expansion or new technology. The Company's
furnaces have long useful lives, and replacement business is not a major
factor in sales of custom-engineered systems. The Company has and
continues to perform modifications to older existing furnaces to improve
production quantities, along with quality of the end product.
The Company also markets its products and services through agents and
licensees located in various parts of the world. Typically, the
Company's license agreements provide that the licensee will act as the
Company's sales agent in a particular territory, is granted a license to
utilize the Company's heat processing technology in that territory, and
is granted the right to utilize technical services provided by the
Company. In exchange, the Company receives certain fees when the
licensee sells the Company's products or services in the territory.
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ITEM 1. Business - (Continued)
Over the years, Japanese steel producers have aligned themselves in semi-
exclusive relationships with furnace manufacturers. For a number of
years, the Company has licensed direct fired furnace technology to NKK
Corporation, the second largest steel producer in Japan.
Furnaces for continuous galvanizing and annealing lines generally utilize
either direct fired or radiant tube technology. The Company is the
market leader for furnaces based on direct fired technology, and also
sells furnaces of the radiant tube design utilized primarily by its
competitors. Some of the Company's competitors are larger and have
greater financial resources. In recent years, the Company has faced
increased competition from competitors supplying smaller, less
sophisticated steel lines. These competitors do not generally offer
custom engineering on a par with the Company, but have been willing to
offer a more standarized and less sophisticated furnace for a lower
price.
Operations. The Company's custom-engineered furnace business is
conducted principally by its wholly-owned subsidiaries, Selas S.A.
(Paris), CFR, S.A. (Paris), Ermat S.A. (Lyon), Selas Waermetechnik GmbH
(Ratingen), Selas Italiana, S.r.L. (Milan), Selas U.K. (Derbyshire), and
CFR Portugal (Leiria). These subsidiaries currently employ
approximately 183 persons, of whom 23 are administrative personnel, 31
are fabrication and assembly personnel, and 129 are sales, engineering
and operations personnel. A small number of engineering and marketing
management personnel located at the Company's Dresher, Pennsylvania
headquarters facility are also involved from time to time in the custom-
engineered furnace business.
On large-scale projects, such as a continuous steel strip annealing or
galvanizing line, the customer frequently contracts for the entire line
on a turnkey basis with an engineering and construction firm specializing
in line terminal equipment, and the Company acts as a subcontractor for
the design, engineering, supply of material and installation of the
furnace portion of the line, or, alternatively, as a subcontractor only
for design and engineering. When the Company provides only design and
engineering services, the prime contractor handles the fabrication and
erection of the furnace. With the exception of certain proprietary
parts, the Company does not manufacture the components used in such
systems.
The Company's custom-engineered furnace business is historically cyclical
in nature.
On January 12, 2000, the Company's wholly-owned subsidiary, Selas S.A.,
acquired the stock of Ermat S.A., a Lyon, France firm engaged in the
engineered industrial furnace business. This acquisition was made to
complement the Company's existing heat technology operations in Europe,
particularly the custom-engineered furnace business. Ermat engineers and
designs batch and continuous furnaces that are used for heat treating
both ferrous and non-ferrous metals. The Company believes that Ermat
enjoys a good reputation in the French
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ITEM 1. Business - (Continued)
market for engineered industrial furnaces. Ermat's sales have been
primarily in France, although Ermat has some sales in other European
countries. Ermat does have several European competitors for the products
offered and some of its competitors are larger and have greater financial
resources.
At its facilities in Lyon, France, Ermat employs approximately 24 full-
time employees, of whom 2 are executive and administrative personnel and
22 are sales and engineering personnel.
Certain information regarding the acquisition of the Ermat business is
set forth in note 2 to the Company's consolidated financial statements.
STANDARD-ENGINEERED SYSTEMS, BURNERS AND COMBUSTION CONTROL EQUIPMENT
Standard-Engineered Systems. At its Dresher, Pennsylvania facility, the
Company engineers and fabricates a variety of smaller furnaces and heat
processing equipment. Although these systems are based on standard
designs, the Company often adapts or re-engineers them to meet particular
customer needs. These smaller systems are
generally used by manufacturers in sophisticated applications for the
heat treatment of finished and semi-finished parts.
The Company's standard-engineered systems include atmosphere-
controlled furnaces for heat treating finished metal parts. Its
continuous heat treating systems include not only the hardening and
tempering furnaces central to the system, but also the ancillary loading,
quenching and washing equipment.
The Company also manufacturers large non-atmosphere-controlled batch-type
furnaces in a variety of designs. The Company's carbottom furnaces
enable its customers to remove the furnace hearth, running on tracks
similar to a railroad car, from the stationary furnace for loading and
unloading. With its hood furnaces, the furnace itself can be lifted from
the stationary hearth for loading and unloading. Carbottom and hood
furnaces are used to heat treat large, usually semi-finished, metal parts
of a variety of shapes and sizes. Clamshell furnaces designed by the
Company open and close around steel rolls to produce a gradation of metal
characteristics due to the differential heating of the steel roll. The
Company's standard batch furnaces are supplied to customers with a need
for the precise, accurately controlled application of heat to their
products.
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ITEM 1. Business - (Continued)
The Company's standard systems also include automatic brazing and
soldering systems used in the assembly of radiators, air conditioner
coils and electrical appliances. The precise application of heat in
these systems improves a customer's product quality and uniformity while
reducing production costs. The Company also produces the fuel mixing and
monitoring systems, burners and product handling equipment necessary for
these systems.
The Company also produces custom designed barrel furnaces used primarily
to heat treat long metal parts, and also produces specialized glass lehrs
for heating glass products.
Burners and Combustion Control Equipment. The Company designs,
manufactures and sells an array of original equipment and replacement
gas-fired industrial burners for many applications. The Company is a
producer of burners used in fluid processing furnaces serving the
petrochemical industry. One type of fluid processing burner is capable
of minimizing the emission of oxides of nitrogen as combustion products.
As many jurisdictions reduce the permissable level of emissions of these
compounds, the Company believes that the demand for "low NOx" burners
will increase. The Company also produces burners suitable for creating a
high temperature furnace environment desirable in steel and glass heat
treating furnaces. The Company's burners accommodate a wide variety of
fuel types, environmental constraints and customer production
requirements.
The Company furnishes many industries with gas combustion control
equipment sold both as component parts and as systems that have been
custom-engineered to meet a particular customer's needs. This equipment
is provided with the Company's original custom-engineered and standard
heat treating equipment, as replacement or additional components for
existing furnaces being refurbished or upgraded, and as original
components for heat treating equipment manufactured by
others. The components of the combustion control systems include mixing
valves capable of mixing gas and air and controlling the air/gas ratio,
pressure and total flow of the mixed gases. The Company also produces
its Qual-O-Rimeter TM automated monitoring and control device used in
conjunction with its mixing valves to maintain precise, uniform heat
release and flame shape, despite fluctuations in fuel mix and quality,
air temperature and humidity.
Additional combustion control products include Flo-Scope TM flow meters,
which measure the rate of flow of gases, and automatic fire checks and
automatic blowouts, which arrest flame and pressure resulting from
backfire from the burners into the pipe line.
Marketing and Competition. The Company markets its standard-engineered
systems products on a global basis through its sales and marketing
personnel located in Dresher, Pennsylvania, and also sells these products
through licensees and agents located in various parts of the world.
Although the Company competes for orders for such products with many
other manufacturers, some of which are larger and have greater financial
resources, the Company believes that its reputation and its high standard
for quality allow it to compete effectively with other manufacturers.
-7-
ITEM 1. Business - (Continued)
Operations. At its Dresher facility, the Company employs approximately
66 persons, of whom 18 are executive and administrative personnel, 16 are
sales and engineering personnel and 32 are personnel engaged in
manufacturing. The hourly personnel are represented by a union, and the
current union contract expires May 16, 2001. The Company considers its
relations with its employees to be satisfactory.
The principal components used in the Company's heat processing equipment
and other products are steel, special castings (including high-alloy
materials), electrical and electronic controls and materials handling
equipment. These items are available from a wide range of independent
suppliers.
Research and Development. The Company conducts research and development
activities at its Dresher facility to support its heat processing
services and products. The Company's research efforts are designed to
develop new products and technology as well as to improve existing
products and technology. The Company also conducts research on behalf of
particular customers in connection with customers' unusual process needs.
Research and development expenditures for heat processing aggregated
$38,000, $77,000 and $120,000 in 1999, 1998, 1997, respectively.
It is the Company's policy to apply for domestic and foreign patents on
those inventions and improvements which it considers significant and
which are likely to be incorporated in its products. It owns a number of
United States and foreign patents. It is licensed under patents owned by
others and has granted licenses to others on a fee basis. The Company
believes that, although these patents collectively are valuable, no one
patent or group of patents is of material importance to its business as a
whole.
PRECISION MINIATURE MEDICAL AND ELECTRONIC PRODUCTS
Resistance Technology, Inc. ("RTI"), a wholly-owned subsidiary,
manufactures microminiature components and molded plastic parts for
hearing instrument manufacturers and the medical equipment, electronics,
telecommunications and computer industries. RTI Electronics, Inc.
("RTIE"), formed in 1997, has expanded RTI's microminiature components
business through the manufacture of electrical resistors known as
thermistors and film capacitors.
Products and Industries Served. RTI is a leading manufacturer and
supplier of microminiature electromechanical components to hearing
instrument manufacturers. These components consist of volume controls,
trimmer potentiometers and switches. RTI also manufactures hybrid
amplifiers and integrated circuit components ("hybrid amplifiers"), along
with faceplates for in-the-ear and in-the-canal hearing instruments.
Components are offered in a variety of sizes, colors and capacities in
order to accommodate a hearing manufacturer's individualized
specifications. Sales to hearing instrument manufacturers represented
approximately 65% of 1999 annual net sales for the Company's precision
miniature medical and electronic products business.
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ITEM 1. Business - (Continued)
Hearing instruments, which fit behind or in a person's ear to amplify and
process sound for a hearing impaired person, generally are composed of
four basic parts and several supplemental components for control or
fitting purposes. The four basic parts are microphones, amplifier
circuits, miniature receivers/speakers and batteries. RTI's hybrid
amplifiers are a type of amplifier circuit. Supplemental components
include volume controls, trimmer potentiometers, which shape sound
frequencies to respond to the particular nature of a person's hearing
loss, and switches used to turn the instrument on and off and to go from
telephone to normal speech modes. Faceplates and an ear shell molded to
fit the user's ear often serve as a housing for hearing instruments.
The potential range of applications for RTI's molded plastic parts is
broad. RTI has produced intravenous flow restrictors for a medical
instruments manufacturer and cellular telephone battery sockets for a
telecommunications equipment manufacturer. Sales by RTI to industries
other than the hearing instrument industry represented approximately 15%
of 1999 annual net sales for the Company's precision miniature medical
and electronic products business.
RTI manufactures its components on a short lead-time basis in order to
supply "just-in-time" delivery to its customers. Due to the short lead-
time, the Company does not include orders from RTI's customers in its
published backlog figures.
RTIE manufactures and sells thermistors and thermistor assemblies, which
are solid state devices that produce precise changes in electrical
resistance as a function of any change in absolute body temperature.
RTIE's Surge-Gard TM product line, an inrush current limiting device used
primarily in computer power supplies, represents approximately 50% of
RTIE's sales. The balance of sales represent various industrial,
commercial and military sales for thermistor and thermistor assemblies to
domestic and international markets.
RTIE's principal raw materials are plastics, various metal oxide powders
and silver paste, for which there are multiple sources of supply.
In order to enhance its product line offering, RTI made several strategic
acquisitions in 1998. These acquisitions bolster RTI's and RTIE's
precision miniature mechanical and electronic products.
On May 27, 1998, RTI Electronics acquired the stock of IMB Electronics
Products, Inc., a manufacturer of film capacitors, which are energy
storage devices used primarily to resist changes in voltage. The film
capacitor business represents a product line addition for the power and
computer industries which RTIE serves. Effective January 1, 1999, IMB
Electronics Products, Inc. was merged into RTIE.
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ITEM 1. Business - (Continued)
On October 28, 1998, a newly formed subsidiary of RTI, RTI Technologies
PTE LTD acquired certain assets and liabilities of Lectret, a
manufacturer of microphone capsules. The acquisition expands RTI's
product capability in the hearing health market by adding a microphone
product line.
Certain information regarding the acquisition of the IMB and RTI
Technologies PTE LTD businesses is set forth in note 2 to the Company's
Consolidated Financial Statements.
Marketing and Competition. RTI sells its hearing instrument components
directly to domestic hearing instrument manufacturers through an internal
sales force. Sales of molded plastic parts to industries other than
hearing instrument manufacturers are made through a combination of
independent sales representatives and internal sales force. In recent
years, three companies have accounted for a substantial portion of the
U.S. hearing instrument sales. In 1999, these three customers accounted
for approximately 28% of RTI's net sales.
Internationally, sales representatives employed by Resistance Technology,
GmbH ("RT, GmbH"), a German company 90% of whose capital stock is owned
by RTI, solicit sales from European hearing instrument manufacturers and
facilitate sales with Japanese and Australian hearing instrument markets.
RTI believes that it is the largest supplier worldwide of microminiature
electromechanical components to hearing instrument manufacturers and that
its full product line and automated manufacturing process allow it to
compete effectively with other manufacturers with respect to these
products.
In the market of hybrid amplifiers and molded plastic faceplates, RTI's
primary competition is from the hearing instrument manufacturers
themselves. The hearing instrument manufacturers produce a substantial
portion of their internal needs for these components.
RTIE sells its thermistors and film capacitors through a combination of
independent sales representatives and internal sales force.
RTIE has many competitors, both domestic and foreign, that sell various
thermistor and film capacitors and some of these competitors are larger
and have greater financial resources. In addition, RTIE holds a
relatively small market share in the world-market of thermistor and film
capacitor products.
Operations. RTI currently employs 240 people, of whom 47 are executive
and administrative personnel and 193 are sales, engineering and
operations personnel at RTI's two facilities near Minneapolis, Minnesota.
A small number of sales personnel employed by RT, GmbH are located in
Munich, Germany and RTI Technologies employs 42 people at its Singapore
location.
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ITEM 1. Business - (Continued)
At its facilities in Anaheim, California, RTIE employs 103 full-time
employees, of which 7 are administrative and 96 are sales and operations
personnel.
As a supplier of parts for consumer and medical products, RTI is subject
to claims for personal injuries allegedly caused by its products. The
Company maintains what it believes to be adequate insurance coverage.
Research and Development. RTI and RTIE conduct research and development
activities primarily to improve its existing products and technology.
Their research and development expenditures were $964,000, $1,290,000 and
$1,154,000 in 1999, 1998 and 1997, respectively.
RTI owns a number of United States patents which cover a number of
product designs and processes. The Company believes that, although these
patents collectively add some value to the Company, no one patent or
group of patents is of material importance to its business as a whole.
TIRE HOLDERS, LIFTS AND RELATED PRODUCTS
Deuer Manufacturing, Inc. ("Deuer"), a wholly-owned subsidiary,
manufactures tire holders, lifts, and other related products based
principally on cable winch designs.
Products and Industries Served. Deuer is a leading supplier of spare
tire holders used on light trucks and mini-vans manufactured by the major
domestic automotive manufacturers. Deuer's spare tire holder holds the
spare tire to the underbody of the vehicle by means of a steel cable
running to the underside of the vehicle's frame. One end of the steel
cable is attached to a hub placed through the center of the spare tire's
rim, and the other end is attached to a hand-operated winch mounted at an
accessible location on the vehicle. The spare tire holding system
permits the spare tire to be stored in a remote location and to be easily
removed without the need to crawl under the vehicle. During 1999, sales
of spare tire holders accounted for approximately 92% of Deuer's net
sales.
Deuer also produces a variety of hand-operated hoist-pullers, using
primarily a cable winch design, sold under the Mini-Mule TM brand name.
These products, which retail from $30 to $60, are portable hand winches
designed for a variety of uses, such as pulling objects, rigging loads
and installing fencing. Deuer furnishes these hoist-pullers in a variety
of sizes and capacities. It also manufactures accessories for use with
the products, including slings, clamps, blocks and gantries.
Deuer manufactures products on a short lead time basis in order to
furnish "just-in-time" delivery to its automotive customers. Because of
the substantial variances between manufacturers' estimated and actual
requirements, the Company does not include blanket order commitments from
automotive manufacturers in its published backlog figures.
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ITEM 1. Business - (Continued)
Marketing and Competition. Deuer sells its spare tire holders directly
to domestic automotive manufacturers. Deuer's spare tire holders are
sold to Chrysler Corporation, General Motors, Toyota, Ford Motor Company,
New United Motor Manufacturing, Inc. and Mobile Home Manufacturers. The
design and quality of Deuer's spare tire holders have been recognized by
its major customers. The Company sells its hoist-pullers through a
network of distributors as well as directly to some large retail outlets.
Deuer is one of several suppliers of spare tire holders to domestic mini-
van and light truck manufacturers. Some of Deuer's competitors are
larger and have greater financial resources. The Company believes that
price and Deuer's reputation for quality and reliability of delivery are
important factors in competition for business from the domestic
automotive manufacturers. A number of other domestic and foreign
manufacturers sell hoist-pullers to the retail market, and Deuer's share
of this market is relatively small.
Operations. At its Dayton facility, Deuer employs 36 executive and
administrative personnel and approximately 154 manufacturing employees.
Some of the manufacturing employees are represented by a union, and the
current union contract expires in October 2002. Deuer considers its
relations with its employees to be satisfactory.
Deuer's principal raw material is coil rolled steel and metal cable which
is widely available. Deuer also conducts research and development
activities which consist of the development of new products and
technology and the modification of existing products. Deuer's research
and development expenditures aggregated $258,000, $239,000 and $253,000
in 1999, 1998 and 1997, respectively.
As a consumer products manufacturer, Deuer is subject to claims for
personal injuries allegedly caused by its products. The Company
maintains what it believes to be adequate insurance coverage.
ITEM 2. Properties
The Company owns the manufacturing facility in Dresher, Pennsylvania in
which its standard-engineered systems, burners and combustion control
equipment are produced. The Company's headquarters are located on the
same 17 acre site. The 136,000 square foot Dresher facility has more
space than is currently needed for the Company's operations and
headquarters, and the Company is seeking to lease all or a portion of the
excess office and manufacturing space to a suitable tenant. This
property is subject to a mortgage. See note 8 of the Company's
consolidated financial statements.
RTI leases a 47,000 sq. ft. manufacturing facility in Arden Hills,
Minnesota from a partnership consisting of two former officers of RTI and
Mark S. Gorder who serves as an officer of RTI and on the Company's Board
of Directors. At this facility, RTI manufactures all of its products
other than plastic component parts. The lease expires in October, 2003,
with two successive 5-year renewal
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ITEM 2. Properties - (Continued)
options. In addition, RTI owns, subject to a mortgage from a third party
lender, a 34,000 sq. ft. building in Vadnais Heights, Minnesota at which
RTI produces plastic component parts. (See notes 8, 17, and 18 of the
Company's consolidated financial statements.)
RTIE leases a building in Anaheim, California, which contains its
manufacturing facilities and offices and consists of a total of 50,000
square feet. The lease expires September, 2008.
Deuer owns its 92,000 square foot manufacturing facility located on 6.5
acres in Dayton, Ohio, where it produces its spare tire holders and
hoist-pullers. The facility is furnished with a variety of steel
fabrication equipment, including punch presses, drill presses, screw
machines, grinders, borers, lathes and welders. This property is subject
to a mortgage. See note 8 of the Company's consolidated financial
statements.
Selas S.A. owns the land and building which houses its engineering, sales
and administrative operations in Gennevilliers, France (outside of
Paris). The land under the building is owned by Selas S.A. and the
property outside of the building is jointly owned by the building owners
in the office complex. The building has 22,000 square feet. This
property is subject to a mortgage. See note 8 of the Company's
consolidated financial statements.
Selas Italiana S.r.L., the Company's Italian subsidiary, Selas
Waermetechnik GmbH, the Company's German subsidiary and Selas UK, the
Company's United Kingdom subsidiary, lease facilities in Milan, Italy,
Ratingen, Germany, and Derbyshire, UK, respectively. The Milan and
Derbyshire facilities are comprised of engineering, sales and
administrative offices with the leases expiring in October 2001 and a
month to month basis, respectively. The Ratingen facilities are used for
sales, administrative and engineering activities and assembly of small
furnaces and furnace components, with the lease expiring February, 2001.
Resistance Technology, GmbH, leases office space in Munich, Germany, on a
year-to-year basis, for its sales personnel. Management expects to be
able to extend these leases.
RTI Technologies PTE LTD leases a building in Singapore which houses its
production facilities and administrative offices. The building contains
6,000 square feet and its lease expires June, 2001.
CFR leases facilities in Paris and Maisse, both in France. The
facilities in Paris house engineering, sales and administrative
operations and has 10,000 square feet. The Maisse facility is 40,000
square feet and houses CFR's fabrication and assembly operations. The
Paris lease expires January, 2003 and the Maisse lease expires February,
2001, each with two three-year optional renewal terms. Management
expects to be able to extend these leases. CFR Portugal leases a
building in Leiria, Portugal which houses its fabrication facilities and
administrative offices.
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ITEM 3. Legal Proceedings
The Company is a defendant along with a number of other parties in
approximately 200 lawsuits as of December 31, 1999 (150 as of December
31, 1998) 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. 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.
The Company is also involved in other lawsuits arising in the normal
course of business. While it is not possible to predict with certainty
the outcome of these matters, management is of the opinion that the
disposition of these lawsuits and claims will not materially affect the
Company's consolidated financial position, liquidity, or results of
operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
-14-
ITEM 4A. Executive Officers of the Company
The names, ages and offices (as of February 25, 2000) of the Company's
officers were as follows:
Name Age Office
Stephen F. Ryan 64 Chairman, President and
Chief Executive Officer;
Director of the Company
Christian Bailliart 51 Vice President and Chairman-
Director Generale of Selas S.A.
James C. Deuer 71 Vice President and President
of Deuer Manufacturing, Inc.
Mark S. Gorder 53 Vice President and President
of Resistance Technology, Inc.;
Director of the Company
Robert W. Ross 51 Vice President and Secretary and
President Heat Technology Group
Francis A. Toczylowski 49 Vice President and Treasurer
Mr. Ryan joined the Company in May 1988, as President and Chief Executive
Officer. In December, 1998, he was elected Chairman of the Board of
Directors. Mr. Bailliart joined Selas S.A. in 1974 and in 1989 he was
promoted to Chairman-Director Generale of Selas S.A. from Vice President,
Treasurer. On January 1, 1993 he was elected Vice President of the
Company. Mr. Deuer joined the Company as President of Deuer
Manufacturing when it was acquired in May, 1986 and was promoted to Vice
President of the Company and President of Deuer Manufacturing in
December, 1990. From 1965 to 1986 he was President of Deuer
Manufacturing. Mr. Gorder joined the Company October 20, 1993 when
Resistance Technology, Inc. (RTI) was acquired. Prior to the
acquisition, Mr. Gorder was President and one of the founders of RTI,
which began operations in 1977. Mr. Gorder was promoted to Vice
President of the Company and elected to the Board of Directors in 1996.
Mr. Ross joined the Company in October 1990 as Vice President -
Treasurer, was appointed Chief Financial Officer January 1, 1994 and
elected Secretary February 21, 1995. In December, 1998, he was appointed
President of the Heat Technology Group of the Company. Mr. Toczylowski
joined the Company in 1981 and has held several positions in the
accounting and finance area, most recently serving as Corporate
Controller. In December, 1998, he was elected Vice President and
Treasurer.
-15-
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common shares are listed on the American Stock Exchange.
The high and low sale prices during each quarterly period during the
past two years were as follows:
MARKET AND DIVIDEND INFORMATION
1999 1998
Market Market
Price Range Price Range
QUARTER HIGH LOW HIGH LOW
First . . . . . . . . . . .8-3/8 4-7/8 12-5/8 9-1/8
Second . . . . . . . . . . .7 5-1/8 9-7/8 8-3/4
Third . . . . . . . . . . .7 4-1/2 9 6-7/16
Fourth . . . . . . . . . . .6-11/16 4-1/4 8-7/16 6-5/8
At February 8, 2000, the Company had 455 shareholders of record.
1999 1998 1997
Dividends per share:
First Quarter $.045 $.045 $.043
Second Quarter .045 .045 .045
Third Quarter .045 .045 .045
Fourth Quarter .045 .045 .045
The payment of any future dividends is subject to the discretion of the
Board of Directors and is dependent on a number of factors, including the
Company's capital requirements, financial condition, financial covenants
and cash availability.
ITEM 6. Selected Financial Data
Certain selected financial data is incorporated by reference to "Selas
Corporation of America Five-Year Summary of Operations", page 4, and
"Other Financial Highlights", page 5, of the Company's 1999 annual report
to shareholders.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis is incorporated by reference to page
6 through 10 of the Company's 1999 annual report to shareholders.
Forward-Looking and Cautionary Statements. Certain statements herein
that include forward-looking terminology such as "may", "will", "should",
"expect", "anticipate", "estimate", "plan" or "continue" or the negative
thereof or other variations thereon are, or could be deemed to be,
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These
-16-
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - (Continued)
forward-looking statements are affected by known and unknown risks,
uncertainties and other factors that may cause the Company's actual
results, performance or achievements to differ materially from the
results, performance and achievements expressed or implied in the
Company's forward-looking statements. These risks, uncertainties and
factors include competition by competitors with more resources than the
Company, foreign currency risks arising from the Company's foreign
operations, and the cyclical nature of the market for large heat
technology contracts.
The Company's heat technology business, which has contributed
substantially to the Company's consolidated results, is affected by,
among other things, the capital expenditures of steel and glass
manufacturers and processors, industries that are highly cyclical in
nature. It is difficult to predict demand for the Company's heat
technology products, and the financial results of the Company's heat
technology business have fluctuated, and may continue to fluctuate,
materially from year to year.
Several of the Company's competitors have been able to offer more
standardized and less technologically advanced heat technology systems
and equipment at lower prices. Although the Company believes that it has
produced higher quality systems and equipment than these lower priced
competitors, in certain instances price competition has had an adverse
effect on the Company's sales and margins. There can be no assurance
that the Company will be able to maintain or enhance its technical
capabilities or compete successfully with its existing and future
competitors.
There can be no assurance that the Company will remain a competitive
supplier to the automobile and truck industry in view of, among other
things, the general trend in recent years in that industry toward a
reduction in the number of third-party suppliers and toward more
integrated component suppliers.
The Company's precision miniature medical and electronics business has
benefitted from its ability to automate and keep costs and prices low.
There can be no assurance that the Company will be able to continue to
achieve such automation and its historical profit margins particularly as
the technology of hearing instruments changes and as the business expands
into other product lines. The precision miniature medical and
electronics business has also been affected by unfavorable conditions in
the hearing health market and the impact of the Asian economic situation.
The Company is unable to predict with any certainty when these conditions
will improve.
The Company has international operations, as a result, the Company's
performance may be materially affected by foreign economies and currency
movements.
The Company cautions that the foregoing list of important factors is not
intended to be, and is not, exhaustive. 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.
-17-
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's consolidated cash flows and earnings are subject to
fluctuations due to changes in foreign currency exchange rates. The
Company attempts to limit its exposure to changing foreign currency
exchange rates through operational and financial market actions. The
Company does not hold derivatives for trading purposes.
The Company manufactures and sells its products in a number of locations
around the world, resulting in a diversified revenue and cost base that
is exposed to fluctuations in European and Asian currencies. This
diverse base of foreign currency revenues and costs serves to create a
hedge that limits the Company's net exposure to fluctuations in these
foreign currencies.
Short-term exposures to changing foreign currency exchange rates are
occasionally managed by financial market transactions, principally
through the purchase of forward foreign exchange contracts (with
maturities of six months or less) to offset the earnings and cash flow
impact of the nonfunctional currency denominated receivables and payables
relating to select custom engineered heat technology segment contracts.
The decision by management to hedge any such transaction is made on a
case-by-case basis. Foreign exchange forward contracts are denominated
in the same currency as the receivable or payable being covered, and the
term and amount of the forward foreign exchange contract substantially
mirrors the term and amount of the underlying receivable or payable. The
receivables and payables being covered arise from trade and intercompany
transactions of and among the Company's foreign subsidiaries. At
December 31, 1999 the Company did not have any forward foreign exchange
contracts outstanding.
To manage exposure to interest rate movements and to reduce its borrowing
costs, the Company's French subsidiary, Selas S.A., has entered into an
interest rate swap agreement. Selas S.A. is exposed to changes in
interest rates primarily due to its borrowing activities which are
related to long term debt used to finance its office building. The swap
agreement requires fixed interest payments based on an effective rate of
8.55% for the remaining term through May, 2006. A 100 (10% adverse
change) basis point move in interest rates would affect the Company's
floating and fixed rate instruments, including short and long-term debt
and derivative instruments, by approximately $41,000 at December 31,
1999. The fair value of the Company's variable rate debt is not
significantly different from its recorded amount.
Swap and forward foreign exchange contracts are entered into for periods
consistent with related underlying exposures. The Company does not enter
into contracts for speculative purposes and does not use leveraged
instruments.
-18-
ITEM 8. Financial Statements and Supplementary Data
The Company's consolidated balance sheets as of December 31, 1999 and
1998, and the related consolidated statements of operations, cash flows
and shareholders' equity for each of the three years in the period ended
December 31, 1999, and the report of independent auditors thereon and the
quarterly results of operations (unaudited) for the two year period ended
December 31, 1999 are incorporated by reference to pages 11 to 39 of the
Company's 1999 annual report to shareholders.
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None
-19-
PART III
The information called for by Items 10, 11, 12 and 13 (except the
information concerning executive officers included in Item 4A) is
incorporated by reference to the Company's definitive proxy statement
relating to its 2000 Annual Meeting of Shareholders which the Company
filed on March 13, 2000. However, the portions of such proxy statement
constituting the report of the Compensation Committee of the Board of
Directors and the graph showing performance of the Company's common
shares and certain share indices shall not be deemed to be incorporated
herein or filed for purposes of the Securities Exchange Act of 1934.
-20-
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents are filed as a part of this
report:
1. Financial Statements - The Company's consolidated financial
statements, as described below, are incorporated by reference to
pages 11 through 39 of the Company's 1999 annual report to
shareholders.
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
Financial statements for 50% or less owned companies which are
accounted for by the equity method have been omitted because they do
not, considered individually or in the aggregate, constitute
significant subsidiaries.
2. Financial Statement Schedules
Page
Report of Independent Auditors on the
Consolidated Financial Statement Schedules 24
Schedule I - Condensed Financial Information
of Registrant (Parent only) 25,26,27,28
Schedule II - Valuation and Qualifying
Accounts 29,30
All other schedules are omitted because they are
not applicable, or because the required information
is included in the consolidated financial statements or notes
thereto.
-21-
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K - (Continued)
3. Exhibits
3A. The Company's Articles of Incorporation as amended May 18,
1984 and April 25, 1991. Exhibit 3A to the Company's report on Form
10-K for the year ended December 31, 1984 and Exhibit 3A1 to the
Company's report on Form 10-K for the year ended December 31, 1991
are hereby incorporated herein by reference.
3B. The Company's By-Laws as amended. Exhibit 3B to the Company's
Report on Form 10-K for the year ended December 31, 1995 is hereby
incorporated by reference.
4A. 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. Exhibit 4A to the Company's
report on Form 10-Q for the nine months ended September 30, 1999 is
hereby incorporated by reference.
4B. Amendment to Amended and Restated Credit Agreement dated June 30,
1999 among the Company, Deuer Manufacturing, Inc., Resistance
Technology, Inc., RTI Export, Inc. and RTI Electronics, Inc. The
Exhibit to the Company's report on Form 10-Q for the six months
ended June 30, 1999 is hereby incorporated by reference.
4C. Amended and Restated Revolving Credit Note, dated July 31, 1998, of
the Company in favor of First Union National Bank. Exhibit 4B to
the Company's report on Form 10-Q for the nine months ended
September 30, 1999 is hereby incorporated by reference.
4D. Guaranty dated February, 1998 of the Company in favor of First
Union/First Fidelity, N.A. Pennsylvania. Exhibit 4H to the
Company's report on Form 10-K for the year ended December 31, 1997
is hereby incorporated by reference.
10A. Form of termination agreement between the Company and Messrs. Ryan,
Deuer, Gorder, Ross and Toczylowski. Exhibit 10A to the Company's
Report on Form 10-K for the year ended December 31, 1996 is hereby
incorporated by reference.
10B. 1985 Stock Option Plan, as amended. Exhibit 10C to the Company's
Registration Statement on Form S-2 filed on June 15, 1990 (No. 33-
35443) is hereby incorporated herein by reference.
10C. Form of Stock Option Agreements granted under the 1985 Stock Option
Plan. Exhibit 10D to the Company's Registration Statement on Form
S-2 filed on June 15, 1990 (No. 33-35443) is hereby incorporated
herein by reference.
10D. Form of Amendments to Stock Option Agreements granted under the 1985
Stock Option Plan. Exhibit 10D to the Company's Registration
Statement on Form S-2 filed on June 15, 1990 (No. 33-35443) is
hereby incorporated herein by reference.
10E. Amended and Restated 1994 Stock Option Plan. Exhibit 10E to the
Company's report on Form 10-K for the year ended December 31, 1997
is hereby incorporated by reference.
-22-
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K - (Continued)
10F. Form of Stock Option Agreements granted under the Amended and
Restated 1994 Stock Option Plan. Exhibit 10F to the Company's
report on Form 10-K for the year ended December 31, 1995 is hereby
incorporated by reference.
10H. Supplemental Retirement Plan (amended and restated effective January
1, 1995). Exhibit 10I to the Company's report on Form 10-K for the
year ended December 31, 1995 is hereby incorporated by reference.
10I. Management Employment Agreement dated October 20, 1993 between
Resistance Technology, Inc. and Mark S. Gorder. Exhibit 10I to the
Company's report on Form 10-K for the year ended December 31, 1995
is hereby incorporated by reference.
10J. Amended and Restated Office/Warehouse Lease, between Resistance
Technology, Inc. and Arden Partners I, L.L.P. (of which Mark S.
Gorder is one of the principal owners) dated November 1, 1996.
Exhibit 10J to the Company's report on Form 10-K for the year ended
December 31, 1996 is hereby incorporated by reference.
10K. Non-Employee Directors' Stock Option Plan and Form of Stock Option
Agreements under such Plan. Exhibit 10K to the Company's
Registration Statement on Form S-8 filed on October 30, 1998 is
hereby incorporated herein by reference.
13. "Selas Corporation of America Five-Year Summary of Operations"
contained on page 4 of the Company's 1999 annual report to
shareholders; "Other Financial Highlights" contained on page 5 of
the Company's 1999 annual report to shareholders; "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 6-10 of the Company's 1999 annual
report to shareholders; and the Company's consolidated financial
statements, including the "Notes to Consolidated Financial
Statements" and the "Report of Independent Auditors" contained on
pages 11-39 of the Company's 1999 annual report to shareholders.
-23-
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K - (Continued)
21. List of significant subsidiaries of the Company.
23. Consent of Independent Auditors.
24. Powers of Attorney.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
during the three months ended December 31, 1999.
-24-
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Shareholders
Selas Corporation of America:
Under date of February 21, 2000, we reported on the consolidated balance
sheets of Selas Corporation of America and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1999, as contained in the 1999 annual
report to shareholders. These consolidated financial statements and our
reports thereon are incorporated by reference in the annual report on
Form 10-K for the year 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related financial statement schedules as listed in the accompanying index
(Item 14). These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects, the information set forth
herein.
/s/ KPMG LLP
KPMG LLP
Philadelphia, Pennsylvania
February 21, 2000
-25-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of Registrant
Balance Sheets
December 31, 1999 and 1998
ASSETS 1999 1998
Current assets:
Cash $ 138,392 $ 70,837
Accounts receivable (including
$4,450,272 and $5,862,697 due from
subsidiaries in 1999 and 1998,
respectively, eliminated in con-
solidation), less allowance for doubt-
ful accounts of $10,000 in both years 5,572,399 8,892,207
Inventories, at cost 2,838,870 3,509,970
Prepaid expenses and other current
assets 843,583 1,592,723
Total current assets 9,393,244 14,065,737
Investment in wholly-owned subsidiaries 56,453,522 53,697,350
Property and equipment, at cost 5,895,517 5,897,016
Less: accumulated depreciation (4,861,481) (4,713,782)
1,034,036 1,183,234
Other assets and investment in
unconsolidated affiliate 2,633,198 2,394,617
Total Assets $69,514,000 $71,340,938
=========== ===========
-26-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of Registrant
Balance Sheets
December 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
Current liabilities:
Notes payable and current maturities
of long-term debt $ 5,119,933 $ 4,441,554
Accounts payable (including $14,478,429
and $13,503,551 due to subsidiaries
in 1999 and 1998, respectively,
eliminated in consolidation) 15,216,623 14,531,749
Accrued expenses 1,596,112 2,806,974
Total current liabilities 21,932,668 21,780,277
Long-term debt 816,667 2,170,024
Other postretirement benefit obligations 3,561,574 3,535,050
Deferred income taxes 180,167 227,347
Contingencies and commitments
Shareholders' equity
Common stock 5,634,968 5,615,081
Retained earnings and other equity 38,590,726 38,395,096
Less: 504,854 and 363,564 common shares
held in treasury, at cost (1,202,770) (381,937)
Total shareholders' equity 43,022,924 43,628,240
Total Liabilities and
Shareholders' Equity $69,514,000 $71,340,938
=========== ===========
See accompanying notes to the consolidated financial statements.
-27-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of Registrant
Statements of Operations
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Sales, net $ 7,640,167 $13,431,912 $24,187,052
Add back: license fees and
corporate charges paid by
subsidiaries, eliminated in
consolidation 1,013,208 805,796 618,366
8,653,375 14,237,708 24,805,418
Costs and expenses:
Cost of goods sold 4,805,422 9,582,358 19,344,767
Selling, general and adminis-
trative expenses 4,413,178 3,761,810 4,458,784
Rent and depreciation 372,942 360,801 375,156
9,591,542 13,704,969 24,178,707
Income (loss) before income taxes
(benefits) and equity in
net income of subsidiaries (938,167) 532,739 626,711
Provision for income taxes
(benefits) (241,315) (753,789) 45,295
Income (loss) before equity in
net income of subsidiaries (696,852) 1,286,528 581,416
Equity in net income of
subsidiaries 2,426,012 2,322,994 3,805,793
Net income $ 1,729,160 $ 3,609,522 $ 4,387,209
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
-28-
SCHEDULE I
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Condensed Financial Information of the Registrant
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
OPERATING ACTIVITIES
Net income $ 1,729,160 $ 3,609,522 $ 4,387,209
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 228,979 259,716 251,733
Other adjustments (1,900,383) (3,050,628) (4,405,561)
Net changes in operating
assets and liabilities 3,479,413 57,727 2,507,566
Net cash provided by operating
activities 3,537,169 876,337 2,740,947
INVESTING ACTIVITIES
Dividend from unconsolidated
affiliate 14,476 -- --
Acquisition of subsidiary
company -- -- (5,152,840)
Purchase of property, plant and
equipment (70,377) (93,415) (259,787)
Additional investment in
subsidiary company (1,067,140) -- --
Net cash (used) by investing
activities (1,123,041) (93,415) (5,412,627)
FINANCING ACTIVITIES
Proceeds from borrowings used
to acquire subsidiary -- -- 3,500,000
Proceeds from exercise of
stock options 83,540 10,196 155,519
Proceeds from short term
borrowings 1,901,446 2,091,554 --
Payment of dividends (934,302) (941,954) (929,685)
Repayments of long term debt (2,576,424) (2,350,000) (2,521,645)
Purchase of treasury stock (820,833) -- --
Net cash provided (used) by
financing activities (2,346,573) (1,190,204) 204,189
Increase (decrease) in cash
and cash equivalents 67,555 (407,282) (2,467,491)
Cash and cash equivalents,
beginning of year 70,837 478,119 2,945,610
Cash and cash equivalents, end
of year $ 138,392 $ 70,837 $ 478,119
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
-29-
SCHEDULE II
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998 and 1997
Column A Column B Column C
Additions
Balance at Charged to
Beginning Costs and
Classification of Period Expenses Other
Year ended December 31, 1999:
Reserve deducted in the balance
sheet from the asset to which
it applies:
Allowance for doubtful
accounts $1,993,733 $ 800,812 $(217,768) (a)
========== ========== ==========
Deferred tax asset valuation
allowance $1,620,162 $ (155,255)
========== ========== ==========
Reserve not shown elsewhere:
Reserve for estimated future
costs of service and
guarantees $2,294,889 $ (22,498) $(131,001) (a)
========== ========== ==========
Year ended December 31, 1998:
Reserves deducted in the balance
sheet from the asset to which
they apply:
Allowance for doubtful
accounts $ 681,356 $1,324,093 $106,973 (a)
========== ========== =========
Deferred tax asset valuation
allowance $1,696,824 $ (76,662)
========== ========== =========
Reserve not shown elsewhere:
Reserve for estimated future
costs of service and
guarantees $2,705,293 $ 355,013 $51,393 (a)
========== ========== ==========
Year ended December 31, 1997:
Reserve deducted in the balance
sheet from the asset to which
they apply:
Allowance for doubtful
accounts $ 787,121 $ 15,833 $(93,153) (a)
========== ========== ==========
Deferred tax asset valuation
allowance $2,315,437 $ (618,613)
========== ========== ==========
Reserve not shown elsewhere:
Reserve for estimated future
costs of service and
guarantees $1,725,690 $1,287,940 $(118,806) (a)
========== ========== ==========
(Continued)
-30-
SCHEDULE II
SELAS CORPORATION OF AMERICA AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998 and 1997
Column A Column D Column E
Balance at
End of
Classification Deductions Period
Year ended December 31, 1999:
Reserve deducted in the balance sheet
from the asset to which it applies:
Allowance for doubtful accounts $1,599,220 (b) $ 977,557
========== ==========
Deferred tax asset valuation allowance $1,464,907
========== ==========
Reserve not shown elsewhere:
Reserve for estimated future costs
of service and guarantees $ 657,766 (c) $1,483,624
========== ==========
Year ended December 31, 1998:
Reserves deducted in the balance sheet
from the asset to which they apply:
Allowance for doubtful accounts $ 118,689 (b) $1,993,733
========== ==========
Deferred tax asset valuation allowance $1,620,162
========== ==========
Reserve not shown elsewhere:
Reserve for estimated future costs of
service and guarantees $ 816,810 (c) $2,294,889
========== ==========
Year ended December 31, 1997:
Reserve deducted in the balance sheet
from the asset to which they apply:
Allowance for doubtful accounts $ 28,445 (b) $ 681,356
========== ==========
Deferred tax asset valuation allowance $1,696,824
========== ==========
Reserve not shown elsewhere:
Reserve for estimated future costs
of service and guarantees $ 189,531 (c) $2,705,293
========== ==========
(a) Represents difference between translation rates of foreign currency
at beginning and end of year and average rate during year.
(b) Uncollectible accounts charged off.
(c) "After job" costs charged to reserve.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By:
Francis A. Toczylowski
Vice President and
Treasurer
Dated: March 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons (including a
majority of members of the Board of Directors) on behalf of the
registrant and in the capacities and on the dates indicated.
*By:
Stephen F. Ryan Stephen F. Ryan
Attorney-In-Fact Chairman, President, Chief
March 22, 2000 Executive Officer and Director
March 22, 2000
*
John H. Austin, Jr. Francis A. Toczylowski
Director Vice President and Treasurer
March 22, 2000 March 22, 2000
*
Frederick L. Bissinger
Director
March 22, 2000
*
Roy C. Carriker
Director
March 22, 2000
*
Mark S. Gorder
Director
March 22, 1999
*
Michael J. McKenna
Director
March 22, 1999
EXHIBIT INDEX
EXHIBITS:
13. "Selas Corporation of America Five-Year Summary of Operations"
contained on page 4 of the Company's 1999 annual report to
shareholders; "Other Financial Highlights" contained on page 5 of
the company's 1999 annual report to shareholders; "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 6-10 of the Company's 1999 annual
report to shareholders; and the Company's consolidated financial
statements, including the "Notes to Consolidated Financial
Statements" and the "Report of Independent Auditors" contained on
pages 11-39 of the Company's 1999 annual report to shareholders.
21. List of significant subsidiaries of the Company.
23. Consent of Independent Auditors.
24. Powers of Attorney.
March 23, 2000
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Reference: Selas Corporation of America;
Commission File #1-5005
Gentlemen:
The Company's 1999 Annual Report on Form 10-K has been filed
electronically, via Edgar.
The financial statements for the year ended December 31, 1999 do not
reflect any changes in accounting principles or practices, or the method
of applying any such principles or practices from the preceding year.
Very truly yours,
Francis A. Toczylowski
Vice President and Treasurer
FAT:jc
Enclosures
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Selas Corporation of America:
We have audited the accompanying consolidated balance sheets of Selas
Corporation of America and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Selas
Corporation of America and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Philadelphia, Pennsylvania
February 21, 2000
EXHIBIT 21
Significant Subsidiaries of
Selas Corporation of America
SUBSIDIARY PLACE OF INCORPORATION
CFR, S.A. France
CFR Portugal Portugal
Deuer Manufacturing, Inc. Ohio
Ermat S.A. France
Resistance Technology GmbH Germany
Vertrieb von Elecktronikteilen
Resistance Technology, Inc. Minnesota
RTI Electronics, Inc. Delaware
RTI Technologies PTE LTD Singapore
SEER France
Selas S.A. France
Selas Italiana, S.A. Italy
Selas Engineering UK Ltd. England
Selas Waermetechnik, GmbH Germany
EXHIBIT 23
SELAS CORPORATION OF AMERICA
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Selas Corporation of America:
We consent to the incorporation by reference in the Registration
Statements No. 33-33712 on Form S-3, No. 33-35802 on Form S-8, No. 333-
16377 on Form S-8, and No. 333-66433 on Form S-8 of Selas Corporation of
America and subsidiaries of our reports dated February 21, 2000 relating
to the consolidated balance sheets of Selas Corporation of America and
subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity, and cash
flows and related financial statement schedules for each of the years in
the three-year period ended December 31, 1999, which reports are included
in or incorporated by reference in the December 31, 1999 annual report on
Form 10-K of Selas Corporation of America.
/s/ KPMG LLP
KPMG LLP
Philadelphia, Pennsylvania
March 27, 2000
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned does hereby
consent and appoint Stephen F. Ryan and Francis A. Toczylowski, or either
of them, his attorney to do any and all acts, including the execution of
documents, which said attorneys, or either of them, may deem necessary or
advisable to enable Selas Corporation of America (the "Company") to
comply with the Securities Exchange Act of 1934, as amended, and the
rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the filing under said Act of an annual
report of the Company on Form 10-K for the year ended December 31, 1999,
including the power and authority to sign in the name and on behalf of
the undersigned, in any and all capacities in which the signature of the
undersigned would be appropriate, such annual report and any and all
amendments thereto and generally to do and perform all things necessary
to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and seal this 22rd day of March, 2000.
/s/ John H. Austin Jr.
John H. Austin, Jr.
/s/ Frederick L. Bissinger
Frederick L. Bissinger
/s/ Roy C. Carriker
Roy C. Carriker
/s/ Mark S. Gorder
Mark S. Gorder
/s/ Michael J. McKenna
Michael J. McKenna
EXHIBIT 13
SELAS CORPORATION OF AMERICA
is a diversified firm with international operations and sales that
engages in the design, development, engineering and manufacturing of a
range of products. The Company, headquartered in Dresher, Pennsylvania
with subsidiaries in Minnesota, Ohio, California, England, France,
Germany, Italy, Portugal, and Singapore (and a 50% joint venture in
Japan), operates directly or through subsidiaries in three business
segments.
Under the Selas TM name, the Heat Technology segment designs and
manufactures specialized industrial heat technology systems and equipment
for steel, glass and other manufacturers worldwide. The Company's
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components and molded plastic parts primarily
for the hearing instrument manufacturing industry and also for the
electronics, telecommunications, computer and medical equipment
industries. The Company's Tire Holders, Lifts and Related Products
segment manufactures products, primarily based on cable winch designs,
for use as original equipment by the pick-up truck and minivan segment of
the automotive industry.
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31 1999 1998
Net sales . . . . . . . . . . . . $102,753,000 $ 99,555,000
Operating income . . . . . . . . $ 4,077,000 $ 4,858,000
Net income . . . . . . . . . . . $ 1,729,000 $ 3,610,000
Earnings per share:
Basic . . . . . . . . . . . $.33 $.69
Diluted . . . . . . . . . . . $.33 $.68
Working capital . . . . . . . . . $ 13,729,000 $ 16,490,000
Total assets . . . . . . . . . . $ 85,050,000 $ 87,623,000
Total shareholders' equity . . . $ 43,023,000 $ 43,628,000
MARKET AND DIVIDEND INFORMATION
1999 1998
Market Market
Price Range Price Range
QUARTER HIGH LOW HIGH LOW
First . . . . . . . . . . . 8-3/8 4-7/8 12-5/8 9-1/8
Second . . . . . . . . . . . 7 5-1/8 9-7/8 8-3/4
Third . . . . . . . . . . . 7 4-1/2 9 6-7/16
Fourth . . . . . . . . . . . 6-11/16 4-1/4 8-7/16 6-5/8
At February 8, 2000, the Company had 455 shareholders of record.
1999 1998 1997
Dividends per share:
First Quarter $.045 $.045 $.043
Second Quarter .045 .045 .045
Third Quarter .045 .045 .045
Fourth Quarter .045 .045 .045
The payment of any future dividends is subject to the discretion of the
Board of Directors and is dependent on a number of factors, including the
Company's capital requirements, financial condition, financial covenants
and cash availability.
Selas is an equal opportunity employer.
THE COMMON STOCK OF SELAS CORPORATION OF AMERICA IS LISTED ON THE
AMERICAN STOCK EXCHANGE UNDER THE SYMBOL SLS.
ABOUT THE COVER: This year's annual report cover communicates the global
reach of Selas Corporation of America.
SELAS CORPORATION OF AMERICA
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except for share and per share data)
Years ended December 31 1999 1998 (a) 1997 (b)
Sales, net $ 102,753 $ 99,555 $ 111,165
Cost of sales 81,231 76,832 87,704
Selling, general and
administrative expenses 17,445 17,864 16,289
Interest expense 1,063 1,139 1,040
Interest (income) (78) (145) (237)
Other (income) expense, net 400 (85) 8
Income before income taxes 2,692 3,950 6,361
Income taxes 963 340 1,974
Net income $ 1,729 $ 3,610 $ 4,387
======== ========= =========
Earnings per share:
Basic $.33 $.69 $.84
==== ==== ====
Diluted $.33 $.68 $.82
==== ==== ====
Comprehensive income $ 1,059 $ 3,996 $ 3,520
========= ========= =========
Weighted average number of
shares outstanding during
year
Basic 5,196,072 5,233,016 5,213,124
========= ========= =========
Diluted 5,208,090 5,310,354 5,354,978
========= ========= =========
SELAS CORPORATION OF AMERICA
FIVE-YEAR SUMMARY OF OPERATIONS (CONTINUED)
(In thousands, except for share and per share data)
Years ended December 31 1996 1995
Sales, net $ 103,426 $ 71,215
Cost of sales 80,870 52,060
Selling, general and
administrative expenses 15,034 14,397
Interest expense 1,212 1,336
Interest (income) (298) (340)
Other (income) expense, net 83 36
Income before income taxes 6,525 3,726
Income taxes 2,395 1,426
Net income $ 4,130 $ 2,300
======== ==========
Earnings per share:
Basic $.80 $.44
==== ====
Diluted $.78 $.44
==== =====
Comprehensive income $ 3,833 $ 2,322
========== =========
Weighted average number of
shares outstanding during
year
Basic 5,190,075 5,189,048
========= =========
Diluted 5,271,959 5,202,411
========== ==========
(a) On February 28, 1998, the Company acquired the stock of CFR, a
Paris, France based company.
On May 27, 1998, a subsidiary of the Company acquired the stock of
IMB Electronic Products, Inc.
On October 28, 1998, a newly formed subsidiary of the Company, RTI
Technologies PTE LTD acquired certain assets and liabilities of
Lectret.
(b) On February 21, 1997, the Company acquired the assets of RTI
Electronics, Inc.
OTHER FINANCIAL HIGHLIGHTS
Years ended December 31 1999 1998 (a) 1997
(b)
(In thousands, except for share and per share data)
Working capital $13,729 $16,490 $18,642
Total assets $85,050 $87,623 $81,795
Long-term debt $ 3,695 $ 6,266 $ 7,015
Long-term benefit obligations $ 4,130 $ 4,096 $ 4,081
Shareholders' equity:
Capital stock and additional
paid-in capital $17,647 $17,556 $17,382
Retained earnings 26,593 25,798 23,130
Accumulated other
comprehensive income (loss) (14) 656 269
Treasury stock (1,203) (382) (382)
Total shareholders' equity $43,023 $43,628 $40,399
Depreciation and amortization $ 3,956 $ 3,809 $ 3,469
Dividends per share $ .18 $ .18 $.178
OTHER FINANCIAL HIGHLIGHTS
Years ended December 31 1996 1995
(In thousands, except for share and per share data)
Working capital $19,822 $15,751
Total assets $91,162 $67,960
Long-term debt $ 6,837 $ 9,100
Long-term benefit obligations $ 4,310 $ 4,409
Shareholders' equity:
Capital stock and additional
paid-in capital $17,214 $17,214
Retained earnings 19,673 16,390
Accumulated other
comprehensive income (loss) 1,136 1,434
Treasury stock (382) (382)
Total shareholders' equity $37,641 $34,656
Depreciation and amortization $ 2,826 $ 2,771
Dividends per share $.163 $.154
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
Consolidated net sales increased 3.2% to $102.8 million in 1999 from
$99.5 million in 1998. Net sales from the heat technology segment
increased to $48.9 million in 1999 compared to $46.4 million in 1998.
The increase in sales in 1999 is attributable to several large engineered
contracts completed during the year and higher revenues generated by CFR,
the French subsidiary acquired in February, 1998, partially offset by
decreased spare and replacement part sales. Sales and earnings of large
custom engineered contracts are recognized on the percentage-of-
completion method and generally require more than twelve months to
complete. The Company is not dependent on any one heat technology
customer on an ongoing basis. Backlog for the heat technology segment
was $46.2 million as of December 31, 1999 compared to $24.8 million as of
December 31, 1998.
The Company's precision miniature medical and electronic products segment
net sales decreased to $35.3 million in 1999 from $37 million in 1998.
Sales decreased compared to 1998 due to the unfavorable conditions in the
hearing health market, offset by increased revenue from RTI Technologies
PTE LTD, the Singapore company acquired in October, 1998. Sales of
electronic products were also 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 for the tire holders, lifts and related products segment
increased to $18.5 million in 1999 compared to $16.1 million in 1998.
The increase in revenue is due to higher unit sales of tire lifts to the
automotive industry.
The Company's gross profit margin as a percentage of sales decreased to
20.9% in 1999 from 22.8% in 1998. Gross profit margins for the heat
technology segment decreased to 14.3% for 1999 compared to 18.7% in 1998.
Heat technology gross profit margins vary markedly from contract to
contract, depending on customer specifications and other conditions
related to the contract. 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 by several
other contracts that had higher than expected costs. Also affecting the
results were reduced sales of spare and replacement parts, which
generally have higher profit margins. Heat technology reserves for
guarantee obligations and estimated future costs of services decreased to
$1.5 million in 1999 from $2.3 million in 1998 due to the completion of
the warranty period of several contracts during the year. Guarantee
obligations and estimated future service costs on these contracts extend
for up to one year from completion.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Gross profit margins for the precision miniature medical and electronic
products segment increased slightly to 30.2% in 1999 from 29.3% in 1998.
The improvement in 1999 results partially from 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 Electronics and IMB Electronic Products operations
into one facility and the mix of sales between 1999 and 1998 as hearing
health and electronic products have varying profit margins.
Gross profit margins for the tire holders, lifts and related products
segment improved to 20.9% in 1999 from 19.8% in 1998. The improvement in
1999 is due to efficiencies from higher production through the increased
sale of tire lifts.
Selling, general and administrative expenses decreased 2.3% to $17.4
million in 1999 as compared to $17.9 million in expenses in 1998. The
decrease results from cost reductions in various areas of the Company's
operations.
Research and development costs decreased to $1.3 million in 1999 compared
to $1.6 million in 1998. Interest expense, which amounted to $1.1
million in both 1999 and 1998, was impacted in 1999 by higher average
borrowings of notes payable offset by increased repayments of long-term
debt and slightly lower average interest rates. Interest income
decreased to $78,000 in 1999 compared to $145,000 in 1998, due to lower
average funds available for investment in 1999.
Other (income) expense includes losses on foreign exchange of $297,000 in
1999 and gains on foreign exchange of $176,000 in 1998.
The effective tax rate in 1999 and 1998 on income before income taxes was
35.8% and 8.6%, respectively. 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.
Consolidated net income of $1.7 million in 1999 decreased 52.1% from $3.6
million in 1998. The Company's heat technology segment had a loss of $.3
million in 1999 compared to earnings of $1.8 million in 1998 due to the
lower margins on several contracts completed in 1999 and some contracts
with higher than expected costs. The precision miniature medical and
electronic products segment's income decreased to $1.3 million in 1999
from $1.6 million in 1998 as a result of the lower sales and the change
in the product mix of those sales. The Company's tire holders, lifts and
related products segment increased its net income in 1999 to $1.3 million
compared to $.9 million in 1998 as a result of its increased efficiency
of tire lift production due to increased sales. General corporate
expenses, net of tax, decreased to $574,000 in 1999 from $632,000 in
1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In 1999, the Company was informed by an automotive customer that the
Company will not supply the tire lift for the 2001 model year vehicle.
The Company will continue to supply the tire lift for the current vehicle
model on a declining volume basis through 2002. The Company continues to
pursue tire lift orders for other vehicles with this customer as well as
other customers during the year 2000.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated net working capital decreased to $13.7 million at December
31, 1999 from $16.5 million at December 31, 1998. The lower working
capital was due in part to capital expenditures, repayment of long-term
debt obligations, payment of dividends and repurchase of common stock,
partially offset by the earnings for the year. The major changes in the
components of working capital were a decrease in cash of $1 million, a
decrease in accounts receivable of $1.7 million, decreased accounts
payable of $2.2 million, increased notes payable of $4.7 million and
decreased current maturities of long-term debt of $1.2 million. These
changes relate to the ongoing operations of the Company for the year.
The Company's long-term debt at December 31, 1999 was $3.7 million. The
decrease in long-term debt is due to repayments during the year. The
increase in notes payable results from additional borrowings during 1999
due to the decrease in funds generated from operations and the Company's
capital requirements. Under the terms of Selas' credit facility, there
are covenants that may restrict the payment of future dividends. The
credit facility required the Company to maintain consolidated tangible
capital funds of approximately $24.8 million through December 31, 1999
consisting of shareholders' equity, plus subordinated debt, less
intangible assets increased annually by 60% of net income and 60% of the
aggregate amount of contributions to capital. At December 31, 1999 the
Company exceeded the amount required to satisfy this covenant in the
credit facility by $1.8 million.
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's French subsidiary, Selas S.A., has an interest rate swap
agreement for the purpose of managing interest rate expense. The total
notional amount of $1.5 million will decrease consistent with the terms
of the related long-term debt agreement. The swap agreement requires
fixed interest payments based on an effective rate of 8.55% for the
remaining term through May 2006. Additional
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
interest incurred during 1999 and 1998 in connection with the swap
arrangement amounted to $69,293 and $81,512, respectively.
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.
A significant portion of the heat technology 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. From time to
time the impact of fluctuations in foreign currencies may have a material
effect on the financial results of the Company. See note 13 to the
consolidated financial statements.
The Company is a defendant along with a number of other parties in
approximately 200 lawsuits as of December 31, 1999 (150 as of December
31, 1998) 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. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The Company assessed computer systems for year 2000 readiness, and
replaced all systems and software found to be not compliant. These
replacements were generally part of a regular upgrade program. The
Company then tested all systems and software, and also obtained
verifications from vendors that any systems that they supplied are year
2000 ready. The Company has a contingency plan to provide for disaster
recovery and continuation of critical computer and communications in case
of a power loss. The Company has not incurred any material extraordinary
expense in connection with the year 2000 program. The Company believes
that any year 2000 problem is unlikely to arise in the future, and that
if any problem does arise, it will be able to fix the problem without
material expenses.
To date, the Company has not experienced any disruptions of operations
due to year 2000 problems.
Actual costs associated with implementation of the Company's Year 2000
program were approximately $200,000, primarily for software and outside
services.
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 developed 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 believes that all
issues have been resolved during 1999.
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 December 31, 1999, the Company has repurchased a total of 141,290
shares of its common stock at a cost of $820,833.
In 1999, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133, Accounting for Derivative Instrument and Hedging
Activities." 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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. Management has not yet determined the impact that
the adoption of this statement may have on earnings, financial condition
and liquidity of the Company. The Company plans to adopt SFAS No. 133 by
January 1, 2001 as permitted by this standard.
1998 COMPARED WITH 1997
Consolidated net sales decreased 10.4% to $99.5 million in 1998 from
$111.2 million in 1997. Net sales from the heat technology segment
decreased to $46.4 million in 1998 compared to $63 million in 1997. The
decline in sales in 1998 is attributable in part to lower sales backlog
of large custom engineered contracts as of the beginning of 1998 compared
to the beginning of 1997. The February, 1998 acquisition of CFR
generated sales of $14.5 million for the year which partially offset some
of the decrease for the period. Sales and earnings of large custom
engineered contracts are recognized on the percentage-of-completion
method and generally require more than twelve months to complete. The
Company is not dependent on any one heat technology customer on an
ongoing basis. Backlog for the heat technology segment was $24.8 million
as of December 31, 1998 compared to $12.2 million at December 31, 1997.
The Company's precision miniature medical and electronic products segment
net sales increased to $37 million in 1998 from $33.3 million in 1997.
The increase in sales is partially attributable to the acquisition of IMB
Electronic Products, Inc. (IMB) in May, 1998 and RTI Technologies PTE LTD
(RTIT) in October, 1998. Also impacting this segment's increased revenue
were higher sales of hybrid electromechanical systems and plastic
component sales to its hearing health customers, which were partially
offset by lower sales in the electronic products segment due to the Asian
economic situation.
Net sales for the tire holders, lifts and related products segment
increased to $16.1 million in 1998 compared to sales of $14.9 million in
1997. The increase in revenue is primarily due to higher unit sales of
tire lifts to the domestic automotive industry.
The Company's gross profit margin as a percentage of sales increased
slightly to 22.8% in 1998 from 21.1% in 1997. Gross profit margins for
the heat technology segment increased to 18.7% for 1998 compared to 14.7%
in 1997. Heat technology gross profit margins vary markedly from
contract to contract, depending on customer specifications and other
conditions related to the contract. The gross profit margins in 1998 and
1997 were impacted by several contracts that had higher than expected
costs. Heat
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
technology reserves for guarantee obligations and estimated future costs
of services decreased to $2.3 million in 1998 from $2.7 million in 1997
due to the completion of several contracts during the year.
Gross profit margins for the precision miniature medical and electronic
products segment declined to 29.3% in 1998 from 35.1% in 1997. The lower
gross profit margins are partially attributable to the acquisition of IMB
in May, 1998 and RTIT in October, 1998 as their products, while
profitable, do not achieve the historical gross profit margins of this
business segment. To a lesser degree, the gross profit margins are
impacted by the mix of sales between 1998 and 1997 as electromechanical
systems and plastic component parts have varying profit margins. Further
affecting the gross profit margins of the electronic products line is the
severe price competition from competitors and the Asian economic
situation.
Gross profit margins for the tire holders, lifts and related products
segment improved to 19.8% in 1998 from 17% in 1997. The improvement in
1998 is due to efficiencies from higher production through the increased
sale of tire lifts.
Selling, general and administrative expenses increased 9.7% to $17.9
million as compared to 1997 expenses of $16.3 million. Approximately
$1.5 million of the increase is due to the acquisitions of CFR and IMB
during the year.
Research and development costs amounted to $1.6 million in 1998 compared
to $1.5 million in 1997. Interest expense increased in 1998 to $1.1
million compared to $1 million in 1997, due to increased borrowings
partially offset by lower average interest rates. Interest income
decreased to $.1 million in 1998 compared to $.2 million in 1997, due to
lower average funds available for investment in 1998.
Other (income) expense included gains on foreign currency transactions of
$176,000 and $14,000 in 1998 and 1997, respectively.
The effective tax rate in 1998 and 1997 on income before income taxes was
8.6% and 31%, respectively. The lower rate in 1998 is due principally to
the reduction of the valuation allowance on deferred tax assets.
In the second quarter of 1998, 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
acquisitions, past earnings history and trends, reasonable and prudent
tax planning strategies, and the expiration dates of carryforwards.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Realization of future tax benefits related to deferred tax assets is
dependent on many factors, including acquisitions, past earnings history
and trends, reasonable and prudent tax planning strategies, the
expiration dates of carryforwards, the Company's ability to generate
taxable income within the foreign subsidiary's net operating loss period
and the timing of the reversal of the postretirement benefit and pension
plan obligations in the future. Management has considered these factors
in reaching its conclusion as to the adequacy of the valuation allowance
for financial reporting purposes. The Company continually reviews the
adequacy of the valuation allowance and recognizes benefits only as
reassessment indicates that it is more likely than not benefits will be
realized.
Consolidated net income of $3.6 million in 1998 decreased 17.7% from $4.4
million in 1997. The Company's heat technology segment had lower
earnings of $1.8 million in 1998 compared to $2.5 million in 1997 due to
lower sales and several contracts that had higher costs. The precision
miniature medical and electronic products segment's income decreased to
$1.6 million in 1998 from $2.1 million in 1997, as a result of the
change in the product mix of sales and increased competition. The
Company's tire holders, lifts and related products segment increased its
net income in 1998 to $.9 million compared to $.5 million in 1997 as a
result of its increased tire lift production and sales. Net income was
also impacted by the reduction of the valuation allowance applied against
deferred tax benefits of $.8 million. General corporate expenses, net of
tax, decreased to $632,000 in 1998 from $729,000 in 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements herein that include forward-looking terminology such
as "may", "will", "should", "expect", "anticipate", "estimate", "plan" or
"continue" or the negative thereof or other variations thereon are, or
could be deemed to be, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These forward-looking
statements are affected by known and unknown risks, uncertainties and
other factors that may cause the Company's actual results, performance or
achievements to differ materially from the results, performance and
achievements expressed or implied in the Company's forward-looking
statements. These risks, uncertainties and factors include competition
by competitors with more resources than the Company, foreign currency
risks arising from the Company's foreign operations, and the cyclical
nature of the market for large heat technology contracts. Reference is
made to the Company's 1999 Annual Report on Form 10-K regarding other
important factors that could cause the actual results, performance or
achievement of the Company to differ materially from those contained in
or implied by any forward-looking statement made by or on behalf of the
Company, including forward-looking statements contained herein.
SELAS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 1999 1998 1997
Sales, net . . . . . . . . $102,753,059 $ 99,554,554 $111,164,563
Operating costs and expenses
Cost of sales . . . . . 81,231,316 76,832,570 87,703,693
Selling, general and
administrative expenses 17,444,755 17,863,587 16,289,388
Operating income . . . . . 4,076,988 4,858,397 7,171,482
Interest expense . . . . . 1,062,821 1,139,274 1,039,524
Interest (income). . . . . (77,899) (145,047) (237,592)
Other (income) expense, net 399,831 (85,677) 8,385
Income before income taxes 2,692,235 3,949,847 6,361,165
Income taxes . . . . . . 963,075 340,325 1,973,956
Net income . . . . . . . . $ 1,729,160 $ 3,609,522 $ 4,387,209
============ ============ ============
Earnings per share
Basic . . . . . . . . . $.33 $.69 $.84
==== ==== ====
Diluted . . . . . . . . $.33 $.68 $.82
==== ==== ====
Comprehensive income . . . $ 1,058,889 $ 3,996,304 $ 3,519,950
============ ============ ============
See accompanying notes to the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
ASSETS 1999 1998
Current assets
Cash, including cash equivalents
of $151,000 in 1999 and
$313,000 in 1998 . . . . . . . . . . . . $ 1,756,008 $ 2,784,284
Accounts and notes receivable, (including
unbilled receivables of $6,043,000 in
1999 and $3,898,000 in 1998) less
allowance for doubtful accounts of
$978,000 in 1999 and $1,994,000 in 1998 28,795,466 30,494,933
Inventories . . . . . . . . . . . . . . . 12,769,618 12,628,623
Deferred income taxes . . . . . . . . . . 2,428,243 2,882,961
Other current assets . . . . . . . . . . . 2,181,281 1,332,135
Total current assets . . . . . . . . . 47,930,616 50,122,936
Investment in unconsolidated affiliate . . . 588,965 538,913
Property, plant and equipment
Land . . . . . . . . . . . . . . . . . . 1,005,537 1,077,522
Buildings . . . . . . . . . . . . . . . . 11,435,428 12,129,811
Machinery and equipment . . . . . . . . . 28,794,569 25,788,736
41,235,534 38,996,069
Less: Accumulated depreciation . . . . . 22,441,750 20,038,177
Net property, plant and equipment. . . 18,793,784 18,957,892
Excess of cost over net assets of acquired
subsidiaries, less accumulated
amortization of $3,165,000 and $2,452,000 16,214,999 16,813,073
Deferred income taxes . . . . . . . . . . . 562,243 563,165
Other assets, less amortization . . . . . . 959,093 627,009
$85,049,700 $87,622,988
=========== ===========
See accompanying notes to the consolidated financial statements.
December 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
Current liabilities
Notes payable . . . . . . . . . . . . . . . $ 9,417,666 $ 4,701,279
Current maturities of long-term debt . . . 1,958,951 3,178,241
Accounts payable . . . . . . . . . . . . . 13,191,213 15,410,642
Federal, state and foreign income taxes . . 679,997 838,634
Customers' advance payments on contracts . 1,221,946 697,270
Guarantee obligations and estimated future
costs of service . . . . . . . . . . . . 1,483,624 2,294,889
Other accrued liabilities . . . . . . . . . 6,247,938 6,512,016
Total current liabilities . . . . . . . 34,201,335 33,632,971
Long-term debt . . . . . . . . . . . . . . . 3,695,181 6,265,720
Other postretirement benefit obligations . . 4,130,261 4,096,057
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 . . . . . . . . . . . . . 26,592,680 25,797,823
Accumulated other comprehensive income
(loss) . . . . . . . . . . . . . . . . . (14,496) 655,775
44,225,693 44,010,177
Less: 504,854 and 363,564 common shares,
respectively, held in treasury, at cost . 1,202,770 381,937
Total shareholders' equity . . . . . . 43,022,923 43,628,240
$85,049,700 $87,622,988
=========== ===========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,1999
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . $ 1,729,160
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization . . . . . 3,955,979
Equity in (income) loss of unconsolidated
affiliate . . . . . . . . . . . . . 2,181
Losses on sale of property and equipment . . . 22,299
Deferred taxes . . . . . . . . . . . . . . . . 234,461
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . (2,254,436)
(Increase) in inventories . . . . . . . . . (516,097)
(Increase) decrease in other assets . . . . (1,682,801)
Increase (decrease) in accounts payable . . 1,186,263
Increase (decrease) in accrued expenses . . 130,183
Increase (decrease) in customer advances . 653,658
Increase (decrease) in other liabilities . (25,661)
Net cash provided by operating
activities . . . . . . . . . . . . . . 3,435,189
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . . (3,894,165)
Proceeds from sales of property and equipment. . . . 120,815
Dividend from unconsolidated affiliate . . . . . . . 14,476
Acquisition of subsidiary companies, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . (37,895)
Net cash (used) by investing activities . (3,796,769)
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . . 4,644,595
Repayments of short-term borrowings . . . . . . . . --
Proceeds from borrowings used to acquire subsidiaries --
Proceeds from long-term debt . . . . . . . . . . . . 1,014,186
Repayments of long-term debt . . . . . . . . . . . . (4,354,037)
Proceeds from exercise of stock options . . . . . .. 83,540
Purchase of treasury shares . . . . . . . . . . . . (820,833)
Payment of dividends . . . . . . . . . . . . . . . (934,303)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . (366,852)
Effect of exchange rate changes on cash . . . . . . . (299,844)
(Decrease) in cash and cash equivalents . . . . . . . (1,028,276)
Cash and cash equivalents beginning of year. . . . . . 2,784,284
Cash and cash equivalents end of year. . . . . . . . . $ 1,756,008
===========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 3,609,522
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . 3,809,245
Equity in (income) loss of unconsolidated
affiliate . . . . . . . . . . . . . . . . . . (2,924)
Losses on sale of property and equipment . . . . 999
Deferred taxes . . . . . . . . . . . . . . . . . (2,013,714)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable . 2,036,197
(Increase) in inventories . . . . . . . . . (609,863)
(Increase) decrease in other assets . . . . 47,134
Increase (decrease) in accounts payable . . 280,579
Increase (decrease) in accrued expenses . . (2,513,121)
Increase (decrease) in customer advances . (1,108,010)
Increase (decrease) in other liabilities . 115,049
Net cash provided by operating
activities . . . . . . . . . . . . . . . 3,651,093
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . . (3,554,540)
Proceeds from sales of property and equipment. . . . 18,837
Dividend from unconsolidated affiliate . . . . . . . --
Acquisition of subsidiary companies, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . (2,776,230)
Net cash (used) by investing activities . (6,311,933)
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . . 4,095,199
Repayments of short-term borrowings . . . . . . . --
Proceeds from borrowings used to acquire subsidiaries 2,542,373
Proceeds from long-term debt . . . . . . . . . . . . --
Repayments of long-term debt . . . . . . . . . . . . (3,483,296)
Proceeds from exercise of stock options . . . . . 10,196
Purchase of treasury shares . . . . . . . . . . . --
Payment of dividends . . . . . . . . . . . . . . (941,954)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . 2,222,518
Effect of exchange rate changes on cash . . . . . . 187,703
(Decrease) in cash and cash equivalents . . . . . . (250,619)
Cash and cash equivalents beginning of year. . . . . 3,034,903
Cash and cash equivalents end of year. . . . . . . . . $ 2,784,284
===========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,1997
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 4,387,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . 3,468,498
Equity in (income) loss of unconsolidated
affiliate . . . . . . . . . . . . . . . . . 4,715
Losses on sale of property and equipment . . . 3,965
Deferred taxes . . . . . . . . . . . . . . . . (683,615)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 5,900,924
(Increase) in inventories . . . . . . . . (1,296,090)
(Increase) decrease in other assets . . . (651,087)
Increase (decrease) in accounts payable . (2,788,173)
Increase (decrease) in accrued expenses . (1,334,874)
Increase (decrease) in customer advances (3,373,838)
Increase (decrease) in other liabilities (29,709)
Net cash provided by operating activities 3,607,925
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . (3,662,783)
Proceeds from sales of property and equipment. . . 12,052
Dividend from unconsolidated affiliate . . . . . --
Acquisition of subsidiary companies, net of cash
acquired . . . . . . . . . . . . . . . . . . . (5,151,620)
Net cash (used) by investing activities (8,802,351)
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . 1,000,725
Repayments of short-term borrowings . . . . . . . (513,448)
Proceeds from borrowings used to acquire subsidiaries 3,500,000
Proceeds from long-term debt . . . . . . . . . . . 176,793
Repayments of long-term debt . . . . . . . . . . . (2,846,487)
Proceeds from exercise of stock options . . . . .. 155,518
Purchase of treasury shares . . . . . . . . . . . . --
Payment of dividends . . . . . . . . . . . . . . . (929,684)
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . 543,417
Effect of exchange rate changes on cash . . . . . . . (657,908)
(Decrease) in cash and cash equivalents . . . . . . . (5,308,917)
Cash and cash equivalents beginning of year. . . . . . 8,343,820
Cash and cash equivalents end of year. . . . . . . . . $ 3,034,903
===========
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
Common Stock Additional
Number of Paid-In
Shares Amount Capital
Balance, January 1, 1997 5,553,639 $5,553,639 $11,660,792
Net income
Translation (loss)
Exercise of 35,685 stock
options 35,685 35,685 132,086
Cash dividends paid
($.178 per share)
Comprehensive income
Balance, December 31, 1997 5,589,324 5,589,324 11,792,878
Net income
Translation gain
Exercise of 2,200 stock
options 2,200 2,200 8,505
Issuance of 23,557 shares for
acquisition 23,557 23,557 140,115
Cash dividends paid
($.18 per share)
Comprehensive income
Balance, December 31, 1998 5,615,081 5,615,081 11,941,498
Net income
Translation (loss)
Exercise of 19,887 stock
options 19,887 19,887 71,043
Purchase of 141,290
treasury shares
Cash dividends paid
($.18 per share)
Comprehensive income
Balance, December 31, 1999 5,634,968 $5,634,968 $12,012,541
========== ========== ===========
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
Accumulated
Other
Comprehensive
Retained Income Comprehensive
Earnings (Loss) Income
Balance, January 1, 1997 $19,672,730 $1,136,252
Net income 4,387,209 $ 4,387,209
Translation (loss) (867,259) (867,259)
Exercise of 35,685 stock
options
Cash dividends paid
($.178 per share) (929,684)
Comprehensive income $ 3,519,950
===========
Balance, December 31, 1997 23,130,255 268,993
Net income 3,609,522 $ 3,609,522
Translation gain 386,782 386,782
Exercise of 2,200 stock
options
Issuance of 23,557 shares for
acquisition
Cash dividends paid
($.18 per share) (941,954)
Comprehensive income $ 3,996,304
===========
Balance, December 31, 1998 25,797,823 655,775
Net income 1,729,160 $ 1,729,160
Translation (loss) (670,271) (670,271)
Exercise of 19,887 stock
options
Purchase of 141,290
treasury shares
Cash dividends paid
($.18 per share) (934,303)
Comprehensive income $ 1,058,889
===========
Balance, December 31, 1999 $26,592,680 $ (14,496)
========== ==========
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
Total
Treasury Shareholders'
Stock Equity
Balance, January 1, 1997 $ (381,937) $37,641,476
Net income 4,387,209
Translation (loss) (867,259)
Exercise of 35,685 stock
options 167,771
Cash dividends paid
($.178 per share) (929,684)
Comprehensive income
Balance, December 31, 1997 (381,937) 40,399,513
Net income 3,609,522
Translation gain 386,782
Exercise of 2,200 stock
options 10,705
Issuance of 23,557 shares for
acquisition 163,672
Cash dividends paid
($.18 per share) (941,954)
Comprehensive income
Balance, December 31, 1998 (381,937) 43,628,240
Net income 1,729,160
Translation (loss) (670,271)
Exercise of 19,887 stock
options 90,930
Purchase of 141,290
treasury shares (820,833) (820,833)
Cash dividends paid
($.18 per share) (934,303)
Comprehensive income
Balance, December 31, 1999 $(1,202,770) $43,022,923
=========== ===========
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Selas Corporation of America is a diversified firm with international
operations and sales that engages in the design, development, engineering
and manufacturing of a range of products. The Company, headquartered in
Dresher, Pennsylvania with subsidiaries in Minnesota, Ohio, California,
England, France, Germany, Italy, Portugal and Singapore (and a 50% joint
venture in Japan), operates directly or through subsidiaries in three
business segments.
Under the Selas TM name, the Heat Technology segment designs and
manufactures specialized industrial heat technology systems and equipment
for steel, glass and other manufacturers worldwide. The Company's
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components and molded plastic parts primarily
for the hearing instrument manufacturing industry and also for the
electronics, telecommunications, computer and medical equipment
industries. The Company's Tire Holders, Lifts and Related Products
segment manufactures products, primarily based on cable winch designs,
for use as original equipment by the pick-up truck and minivan segment of
the automotive industry.
CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany transactions have been eliminated in consolidation.
AFFILIATED COMPANY - The Company accounts for its investment in a 50%
interest in Nippon Selas Co. Ltd., Tokyo, Japan on the equity method.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
INVENTORIES - Inventories, other than inventoried costs relating to long-
term contracts, are stated at the lower of cost or market. The cost of
the inventories was determined by the average cost and first in, first
out method. Inventoried costs relating to long-term contracts are stated
at the production and engineering cost, including overhead as well as
actual costs incurred from sub-contractors, which are not in excess of
estimated realizable value.
REVENUE RECOGNITION - As long-term contracts progress, the Company
records sales and cost of sales based on the percentage-of-completion
method, whereby the sales value is determined by multiplying the total
contract amount by the percent of costs incurred to estimated total
costs. Such contract costs and expenses incurred on a progress basis at
the time the sales value is recorded are charged to cost of sales.
General and administrative costs are expensed as incurred. The Company
provides currently for anticipated and known contract losses. Guarantee
obligations and estimated future contract costs of services on large
custom-engineered contracts are based on past experience of similar
projects. Due to the nature of large custom-engineered contracts, the
guarantee obligations and estimated future costs will vary significantly
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
from contract to contract. Revisions in cost estimates during the
progress of the work under the contracts have the effect of including in
the current accounting period adjustments necessary to reflect the
results indicated by the revised estimates of final cost. Sales of
manufactured products not sold under long-term contracts are recorded
upon shipment to the customer.
License fees under agreements not requiring substantial services are
recognized at time of effectiveness of the license agreement.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried
at cost. Depreciation is computed by straight line and accelerated
methods using estimated useful lives of 5 to 50 years for buildings and
improvements, and 3 to 12 years for machinery and equipment.
Improvements are capitalized and expenditures for
maintenance, repairs and minor renewals are charged to expense when
incurred. At the time assets are retired or sold, the costs and
accumulated depreciation are eliminated and the resulting gain or loss,
if any, is reflected in the consolidated statement of operations.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED SUBSIDIARIES - Goodwill
represents the excess of purchase price over fair value of net assets
acquired and is amortized on a straight-line basis over the expected
periods to be benefited, which currently is between fifteen and forty
years.
Patents and other intangible assets are valued at the lower of amortized
cost or fair market value and are amortized on a straight-line basis over
the expected periods to be benefited, which currently is 5 to 20 years.
Costs related to start-up activities and organization costs are expensed
as incurred.
The Company assesses the recoverability of intangible assets by
determining whether the amortization of the balance over its remaining
life can be recovered through projected undiscounted future cash flows of
the business for which the intangible assets arose. The amount of the
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds or fair value of the asset, where appropriate. The
assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
INCOME TAXES - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company has only limited
involvement with derivative financial instruments and does not use them
for trading purposes. They are used to manage well-defined interest rate
and foreign currency risks. The differential to be paid or
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
received on interest rate swap agreements is accrued as interest rates
change and recognized as an adjustment to interest expense. The gains
and losses on foreign currency exchange contracts are deferred and
recognized when the offsetting gains and losses are recognized on the
related hedged items.
EMPLOYEE BENEFIT OBLIGATIONS - The Company provides health care insurance
for certain domestic retirees and employees. The Company also provides
retirement related benefits for certain foreign employees. The Company
measures the costs of its obligation based on its best estimate. The net
periodic costs are recognized as employees render the services necessary
to earn the postretirement benefit.
Deferred pension costs are actuarially determined and are amortized on a
straight-line basis over the expected periods to be benefited, which
currently is 15 years.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs,
including supporting services, amounted to $1,260,000 in 1999, $1,606,000
in 1998 and $1,527,000 in 1997. Such costs are charged to expense when
incurred.
EARNINGS PER SHARE - Basic earnings per share are computed by dividing
net income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share reflects
the potential dilution of securities that could share in the earnings.
RECLASSIFICATIONS - Certain prior year balances have been reclassified to
be consistent with the current year presentation.
USE OF ESTIMATES - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, the recording of reported amounts of revenues and expenses
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
COMPREHENSIVE INCOME - Comprehensive income consists of net income and
foreign currency translation adjustments and is presented in the
Consolidated Statement of Shareholders' Equity.
SEGMENT DISCLOSURES - The Company's reporting segments reflect separately
managed, strategic business units that provide different products and
services, and for which financial information is separately prepared and
monitored. The segment disclosure is consistent with the management
decision making process that determines the allocation of resources to a
segment and the measuring of their performance.
2. ACQUISITIONS
On February 28, 1998, the Company acquired the stock of CFR, a French
furnace manufacturer. 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. The purchase price was 15
million French francs (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% for 5 years. The acquisition was accounted for as a purchase and
the excess of the fair value of the assets (goodwill) is being
amortized on a straight line basis over 20 years.
On May 27, 1998, a subsidiary of the Company acquired the stock of IMB
Electronic Products, Inc., (IMB) a manufacturer of film capacitors,
which are energy storage devices used primarily to resist changes in
voltage. The purchase price of $1.3 million was funded through the
domestic line of credit. The acquisition was accounted for as a purchase
and the excess of the fair value of the assets (goodwill) is being
amortized on a straight line basis over 20 years.
On October 28, 1998, a newly formed subsidiary of the Company, RTI
Technologies PTE LTD, acquired certain assets and liabilities of Lectret,
a manufacturer of microphone capsules. The purchase price of $1.1
million was financed through the domestic line of credit. The
acquisition was accounted for as a purchase and the excess of the fair
value of the assets (goodwill) is being amortized on a straight line
basis over 15 years.
The following table presents the unaudited proforma results of operations
as if the acquisition of CFR, IMB and RTIT had occurred at the beginning
of 1998 presented after giving effect to certain adjustments, including
amortization of goodwill, increased interest expense on acquisition debt
and related income tax effects. These proforma results have been
prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made as
of those dates or results which may occur in the future.
Year Ended December 31
1998
Net sales $103,636,000
============
Net income $ 3,872,000
============
Earnings per share:
Basic $.74
====
Diluted $.73
====
2. ACQUISITIONS - (Continued)
On January 12, 2000, the Company acquired the stock of Ermat SA, a French
furnace manufacturer. Ermat produces furnaces for heat treating both
ferrous and non-ferrous metals. The purchase price was 11.5 million
French francs (FF) or approximately $1.8 million. The total purchase
price was funded by additional bank borrowings. This borrowing carries
interest at a variable rate which is 4.82% from January to April of 2000.
The acquisition was accounted for as a purchase and the excess of the
fair value of the assets (goodwill) will be amortized on a straight line
basis over 20 years.
3. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Years ended December 31
1999 1998 1997
Interest received $ 77,732 $ 156,968 $ 218,061
Interest paid $ 975,572 $1,078,324 $ 913,312
Income taxes paid $1,235,279 $2,011,520 $2,311,305
During 1998, the Company issued 23,557 shares of the Company's common
stock with a value of $163,672 as additional consideration related to the
1997 acquisition of the Rodan Division of Ketema, Inc. The number of
shares was tied to the operation's earnings for the twelve months ended
February 28, 1998.
4. BUSINESS SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". The Company has three
operating segments. The Company is engaged in providing engineered heat
technology equipment and services to industries throughout the world, the
manufacture of precision miniature medical and electronic products and
the manufacture of spare tire holders and lifts for U.S. manufacturers of
original equipment for light trucks and vans. The results of operations
and assets of these segments for the years ended December 31, 1999, 1998
and 1997 are prepared on the same basis as the consolidated financial
statements. The accounting policies for each segment are described in
the Company's summary of significant accounting policies. See note 1 for
further information. Interest expense has been allocated to the segments
based on the specific loan balance outstanding during the year. The
corporate component of operating income represents corporate selling,
general and administrative expenses.
For the year ended
December 31, 1999 Segments
Tire Holders
Lifts
Heat and Related
Technology Products
Sales, net $ 48,933,698 $ 18,527,089
Operating costs and
expenses 48,413,387 16,405,974
General corporate
expenses, net -- --
Operating income 520,311 2,121,115
Interest expense 643,008 --
Interest (income) (44,336) --
Losses of affiliate 2,181 --
Other (income) expense, net 296,340 (1,575)
Income (loss) before income
taxes (benefits) (376,882) 2,122,690
Income taxes (benefits) (41,508) 774,212
Income taxes (benefits)
general corporate
expenses, net -- --
Net income (loss) $ (335,374) $ 1,348,478
============ ============
Depreciation and
amortization $ 708,731 $ 210,848
============ ============
Property, plant and
equipment additions $ 820,601 $ 147,614
============ ============
Total assets $ 41,684,756 $ 6,291,998
============ ============
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1999 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales, net $ 35,292,272 $102,753,059
Operating costs and
expenses 32,900,251 97,719,612
General corporate
expenses, net -- 956,459
Operating income 2,392,021 4,076,988
Interest expense 419,813 1,062,821
Interest (income) (33,563) (77,899)
Losses of affiliate -- 2,181
Other (income) expense, net 102,885 397,650
Income (loss) before income
taxes (benefits) 1,902,886 2,692,235
Income taxes (benefits) 612,955 1,345,659
Income taxes (benefits)
general corporate
expenses, net -- (382,584)
Net income (loss) $ 1,289,931 $ 1,729,160
============ ============
Depreciation and
amortization $ 3,036,400 $ 3,955,979
============ ============
Property, plant and
equipment additions $ 2,925,950 $ 3,894,165
============ ============
Total assets $ 37,072,946 $ 85,049,700
============ ============
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1998 Segments
Tire Holders,
Lifts
Heat and Related
Technology Products
Sales, net $46,404,713 $16,155,730
Operating costs and
expenses 45,001,082 14,782,644
General corporate expenses,
net -- --
Operating income 1,403,631 1,373,086
Interest expense 628,362 313
Interest (income) (122,948) --
(Earnings) of affiliate (2,924) --
Other (income) expense, net (69,325) (27,409)
Income before income
taxes (benefits) 970,466 1,400,182
Income taxes (benefits) (816,400) 523,799
Income taxes (benefits)
general corporate
expenses, net -- --
Net income $ 1,786,866 $ 876,383
=========== ===========
Depreciation and
amortization $ 636,323 $ 221,320
=========== ===========
Property, plant and
equipment additions $ 298,274 $ 157,928
=========== ===========
Total assets $43,949,158 $ 6,481,758
=========== ===========
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1998 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales, net $36,994,111 $99,554,554
Operating costs and
expenses 33,858,895 93,642,621
General corporate expenses,
net -- 1,053,536
Operating income 3,135,216 4,858,397
Interest expense 510,599 1,139,274
Interest (income) (22,099) (145,047)
(Earnings) of affiliate -- (2,924)
Other (income) expense, net 13,981 (82,753)
Income before income
taxes (benefits) 2,632,735 3,949,847
Income taxes (benefits) 1,054,340 761,739
Income taxes (benefits)
general corporate
expenses, net -- (421,414)
Net income $ 1,578,395 $ 3,609,522
=========== ===========
Depreciation and
amortization $ 2,951,602 $ 3,809,245
=========== ===========
Property, plant and
equipment additions $ 3,098,338 $ 3,554,540
=========== ===========
Total assets $37,192,072 $87,622,988
=========== ===========
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1997 Segments
Tire Holders, Lifts
Heat and Related
Technology Products
Sales, net $62,971,797 $14,938,301
Operating costs and
expenses 59,255,515 14,114,362
General corporate
expenses, net -- --
Operating income 3,716,282 823,939
Interest expense 396,578 1,174
Interest (income) (236,353) --
Losses of affiliate 4,715 --
Other (income) expense, net 113,357 (35,500)
Income before income
taxes (benefits) 3,437,985 858,265
Income taxes 962,417 318,601
Income taxes (benefits)
general corporate
expenses, net -- --
Net income $ 2,475,568 $ 539,664
=========== ===========
Depreciation and
amortization $ 511,014 $ 241,708
=========== ===========
Property, plant and
equipment additions $ 370,235 $ 342,649
=========== ===========
Total assets $42,487,156 $ 5,922,281
=========== ===========
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
FOR THE YEAR ENDED
December 31, 1997 Segments
Precision Miniature
Medical and
Electronic
Products Total
Sales, net $33,254,465 $111,164,563
Operating costs and
expenses 29,407,506 102,777,383
General corporate
expenses, net -- 1,215,698
Operating income 3,846,959 7,171,482
Interest expense 641,772 1,039,524
Interest (income) (1,239) (237,592)
Losses of affiliate -- 4,715
Other (income) expense, net (74,187) 3,670
Income before income
taxes (benefits) 3,280,613 6,361,165
Income taxes 1,179,217 2,460,235
Income taxes (benefits)
general corporate
expenses, net -- (486,279)
Net income $ 2,101,396 $ 4,387,209
=========== ============
Depreciation and
amortization $ 2,715,776 $ 3,468,498
=========== ============
Property, plant and
equipment additions $ 2,949,899 $ 3,662,783
=========== ============
Total assets $33,385,627 $ 81,795,064
=========== ============
4. BUSINESS SEGMENT INFORMATION - (Continued)
The geographical distribution of identifiable assets and net sales to
geographical areas for the years ended December 31, 1999, 1998, and 1997
are set forth below:
Identifiable Assets
1999 1998 1997
United States $ 54,083,677 $58,806,813 $58,660,565
France 30,588,181 31,066,873 25,311,908
Other 5,880,803 2,815,754 3,432,986
Eliminations (5,502,961) (5,066,452) (5,610,395)
Consolidated $ 85,049,700 $87,622,988 $81,795,064
============ =========== ===========
Net Sales to Geographical Areas
United States $ 47,338,457 $46,037,182 $ 55,833,866
Austria 184,303 1,336,418 21,033,610
France 9,830,126 9,911,425 571,618
Germany 14,787,167 8,660,921 2,132,966
All other countries 30,613,006 33,608,608 31,592,503
Consolidated $102,753,059 $99,554,554 $111,164,563
============ ============ ============
Due to the nature of the Company's heat technology products, one contract
may account for a large percentage of sales in a particular period;
however, the Company is not dependent on any one heat technology customer
on an ongoing basis.
Geographic net sales are allocated based on the location of the customer.
All other countries include net sales primarily to the United Kingdom,
Holland, Saudi Arabia and Mexico.
Consolidated net sales in 1999 include approximately $11,211,000 or 10.9%
from a contract with one customer executed by the Company's heat
technology group. Approximately $22,412,000 of consolidated net sales
were attributable to customers in the steel industry.
Consolidated net sales in 1998 do not result from sales to any one
individual customer in excess of 10% of total sales. Consolidated net
sales in 1998 include approximately $21,176,000 attributable to customers
in the steel industry.
Consolidated net sales in 1997 include approximately $34,719,000 or 31%
from contracts with two customers executed by the Company's heat
technology group. Approximately $51,780,000 of consolidated net sales
were attributable to customers in the steel industry.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1999 and
1998. The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between
willing parties.
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash, including cash
equivalents . . . $ 1,756,008 $ 1,756,008 $ 2,784,284 $ 2,784,284
Accounts and notes
receivables . . 28,795,466 28,795,466 30,494,933 30,494,933
Financial liabilities
Notes payable . . 9,417,666 9,417,666 4,701,279 4,701,279
Trade accounts
payables. . . . 13,191,213 13,191,213 15,410,642 15,410,642
Customer advance
payments on
contracts . . . 1,221,946 1,221,946 697,270 697,270
Other accrued
liabilities . . 6,247,938 6,247,938 6,512,016 6,512,016
Long-term debt. . . . 5,654,132 5,612,851 9,443,961 9,184,268
The carrying amounts shown in the table are included in the statement of
financial position under the indicated captions.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash, including cash equivalents, short-term accounts and notes
receivables, other current assets, notes payable to banks, trade accounts
payables, and other accrued expenses: The carrying amounts approximate
fair value because of the short maturity of those instruments.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
Long-term debt: The fair value of the Company's long-term debt is
estimated by discounting the future cash flows of each instrument at
rates currently offered to the Company for similar debt instruments of
comparable maturities by the Company's bankers.
See note 9 regarding the fair value of derivative financial instruments.
The estimated fair value of financial instruments has been determined
based on available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company might realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value.
6. INVENTORIES
Inventories consist of the following:
Finished
Raw Work-in- products and
December 31 materials process components Total
1999
Domestic . . . . . $2,516,829 $2,501,805 $3,904,974 $ 8,923,608
Foreign . . . . . 341,367 3,018,902 485,741 3,846,010
Total . . . . . $2,858,196 $5,520,707 $4,390,715 $12,769,618
========== ========== ========== ===========
1998
Domestic . . . . . $3,226,583 $2,514,280 $4,657,729 $10,398,592
Foreign . . . . . 192,308 1,772,286 265,437 2,230,031
Total . . . . . $3,418,891 $4,286,566 $4,923,166 $12,628,623
========== ========== ========== ===========
7. LONG-TERM CONTRACTS AND RECEIVABLES
Accounts and notes receivable at December 31, 1999 and 1998 include the
following elements from long-term contracts:
1999 1998
Amounts billed . . . . . . . . . . . . $ 5,093,792 $ 8,443,357
Retainage, due upon completion . . . . 788,155 398,664
Unbilled receivables . . . . . . . . . 6,043,273 3,897,965
Total . . . . . . . . . . . . . . . $11,925,220 $12,739,986
=========== ===========
The balances billed but not paid by customers, pursuant to retainage
provisions included in long-term contracts, will be due upon completion
of the contracts and acceptance by the customer. The retainage balances
at December 31, 1999 are anticipated to be collected in 2000.
The unbilled receivables are comprised principally of amounts of revenue
recognized on contracts (on the percentage-of-completion method) for
which billings had not been presented to the customers because the
amounts were not billable under the contract terms at the balance sheet
date. In accordance with the contract terms the unbilled receivables at
December 31, 1999 will be billed in 2000.
Inventories include no costs relating to long-term sales contracts in
1999, however, $203,132 was included at December 31, 1998.
At December 31, 1999 and 1998, the Company had $1,947,307 and $1,793,489,
respectively, of trade accounts receivable due from major U.S. automotive
manufacturers. At December 31, 1999 and 1998, the Company had $3,577,992
and $4,218,009, respectively, of trade accounts receivable due from
hearing aid manufacturers. The Company also had $9,006,413 and
$11,886,926 at December 31, 1999 and 1998, respectively, in currently
billed and unbilled receivables from long-term contracts for customers in
the steel industry in North America and Europe.
8. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE
Notes payable at December 31, 1999 and 1998 are summarized below:
1999 1998
Notes payable:
Short term borrowings, European banks $5,424,666 $2,609,725
Short term borrowings, domestic banks 3,993,000 2,091,554
Total notes payable $9,417,666 $4,701,279
========== ==========
Consolidated European subsidiaries have working capital credit
arrangements with European banks aggregating $17,878,000. Of this
amount, $6,484,000 may be used to borrow funds for working capital or
guarantee customer advance payments on contracts. The remaining
$11,394,000 may be used only for guaranteeing customer advance payments,
of which $6,716,000 was utilized at December 31, 1999 at interest rates
ranging from .6% to .75%. At December 31, 1999 the Company's European
subsidiaries had borrowings of $5,424,666, which bear interest at annual
rates ranging from 4.98% to 8.5%. These credit arrangements have no
expiration dates and are guaranteed by the Company.
The maximum amounts of short-term borrowings and bank guarantees at any
month end were $12,141,000 in 1999, $7,447,000 in 1998 and $15,002,000 in
1997. The average short-term borrowings and bank guarantees outstanding
during 1999, 1998 and 1997 amounted to $7,281,000, $4,865,000 and
$8,498,000, respectively. The average short-term interest rates in 1999,
1998 and 1997 for outstanding borrowings were 5.5%, 6% and 9%,
respectively.
The Company and its domestic subsidiaries entered into revolving credit
loan facilities under which borrowings or letters of credit aggregating
$4,000,000 could be outstanding at any one time. At December 31, 1999,
the borrowings on $1,100,000 bear a 60 day London Interbank Offered Rate
(LIBOR) plus 1.25% variable rate. At December 31, 1999, the rate was
7.45%. Borrowings under the facility, excluding the $1,100,000 portion,
bear interest at a rate of 1.25% above LIBOR (7.0725% at December 31,
1999) and a commitment fee of 1/4% per annum is payable on the unborrowed
portion of the line. The credit facility expires in January, 2001.
The maximum amounts of short term borrowings at any month end 1999 were
$3,993,000. The average short term borrowings outstanding during 1999
were $3,278,000. The average short term interest rate in 1999 was 6.5%.
8. NOTES PAYABLE AND LONG-TERM DEBT - (Continued)
LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 is summarized below:
1999 1998
Long-term debt:
Term loans, domestic banks $ 1,943,600 $ 4,520,024
Term loans, European banks 2,817,114 3,926,376
Mortgage notes 862,500 906,584
Other borrowings 30,918 90,977
5,654,132 9,443,961
Less: current maturities 1,958,951 3,178,241
$ 3,695,181 $ 6,265,720
=========== ===========
The terms of the domestic loan agreement require monthly principal
payments of approximately $196,000 through March, 2000 when the principal
payments are reduced to $58,000 for the remaining term of the loan
through February, 2002. Additional payments of principal are required
depending upon the annual earnings of the Company's domestic operations
and as a result of this requirement, the Company had an additional
principal payment of approximately $226,000 in 1999. At December 31,
1999, the borrowings under the credit agreement bore interest, payable
monthly, at an interest rate ranging from of 6-3/4% to a rate of 1.5%
above LIBOR (7.9625% at December 31, 1999). The credit agreement is
subject to a prepayment penalty of 3%, to the extent the loan is paid off
with additional borrowings.
The domestic loan and the revolving credit loan facilities are secured by
the Company's domestic assets, and the Company's domestic subsidiaries'
stock. The agreements contain restrictive covenants regarding the
payment of cash dividends, maintenance of working capital, net worth, and
shareholders' equity, along with the maintenance of certain financial
ratios. The Company and its domestic subsidiaries are required to
maintain consolidated tangible capital funds of approximately $24.8
million through December 31, 1999 consisting of shareholders' equity,
plus subordinated debt, less intangible assets, increased annually after
December 31, 1999 by 60% of net income and contributions to capital. At
December 31, 1999, the Company exceeded the amount required to satisfy
this covenant in the loan agreement by $1.8 million.
8. NOTES PAYABLE AND LONG-TERM DEBT - (Continued)
The Company's French subsidiary, Selas S.A., financed its premises
outside of Paris with bank borrowings maturing August 31, 2006 with
required quarterly installments of principal of $46,192 (FF 300,000).
The loan carries interest payable quarterly at the Paris Interbank
Offered Rate (PIBOR) plus .7% (4.04% at December 31, 1999). The loan
balances as of December 31, 1999 and 1998 were $1,200,998 (FF 7,800,000)
and $1,607,143 (FF 9,000,000), respectively. This loan can be prepaid,
subject to a premium of 3% of the amount prepaid. The debt is secured by
the land and building of Selas S.A.
The Company assumed a mortgage at the date of acquisition of RTI. This
borrowing was repaid on July 1, 1999 with additional borrowings of
$900,000 payable monthly at $7,500 per month and carries a variable
interest rate of LIBOR plus 1.25%. At December 31, 1999 the principal
balance was $862,500 and the interest rate was 7.7212%.
In February, 1998 the Company's French subsidiary utilized the proceeds
of a loan to purchase the assets of CFR. See note 2 regarding the
acquisition. Under the terms of the loan agreement, principal amounts
are repayable over the next four years on a quarterly basis of $115,481
(FF 750,000). The loan carries interest at a fixed rate of 5.65%. The
loan balance at December 31, 1999 was $1,501,247 (FF 9,750,000).
The aggregate maturities of long-term debt for the five years ending
December 31, 2004 and thereafter are as follows:
Years ending December 31 Aggregate Maturity
2000 . . . . . . . . . . . . . . . . . $ 1,958,951
2001 . . . . . . . . . . . . . . . . . 1,471,297
2002 . . . . . . . . . . . . . . . . . 856,768
2003 . . . . . . . . . . . . . . . . . 393,659
2004 . . . . . . . . . . . . . . . . . 278,179
2005 and thereafter . . . . . . . . . 695,278
$ 5,654,132
==============
9. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements are used to reduce the potential impact of
increases in interest rates on floating-rate long-term debt. At December
31, 1999, the Company's French subsidiary was a party to one interest
rate swap agreement. The interest rate swap agreement is with major
European financial institutions having a total notional amount of $1.5
million at December 31, 1999. The notional amount will decrease
consistent with the terms of the related long-term debt agreement. The
swap agreement requires fixed interest payments based on an effective
rate of 8.55% for the remaining term through May, 2006. The subsidiary
continually monitors its position and the credit ratings of its
counterparties and does not anticipate nonperformance by the
counterparties. Additional interest incurred during 1999, 1998 and 1997
in connection with the swap agreement amounted to $69,293, $81,512 and
$95,584, respectively.
9. DERIVATIVE FINANCIAL INSTRUMENTS - (Continued)
The fair value of the interest rate swap agreement was $1.4 million at
December 31, 1999. The fair value of this financial instrument (used for
hedging purposes) represents the aggregate replacement cost based on
financial institution quotes. The Company is exposed to market risks
from changes in interest rates and fluctuations in foreign exchange
rates.
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1999 and 1998 are as follows:
1999 1998
Salaries, wages and commissions . . . $ 2,025,608 $ 2,652,296
Taxes, including payroll withholdings
and VAT, excluding income taxes . . 1,722,761 1,696,040
Accrued pension costs . . . . . . . . 829,238 611,794
Accrued professional fees . . . . . . 436,015 748,464
Accrued insurance . . . . . . . . . . 324,943 306,585
Other . . . . . . . . . . . . . . . . 909,373 496,837
$ 6,247,938 $ 6,512,016
=========== ===========
11. DOMESTIC AND FOREIGN INCOME TAXES
Domestic and foreign income taxes (benefits) are comprised as follows:
Years ended December 31
1999 1998 1997
Current
Federal . . . . . . . . . $ 501,519 $ 1,296,209 $ 2,222,160
State . . . . . . . . . 7,194 246,035 197,799
Foreign . . . . . . . . . 219,901 811,795 237,612
728,614 2,354,039 2,657,571
Deferred
Federal . . . . . . . . . 496,490 (476,590) (543,436)
State . . . . . . . . . 125,358 (220,237) (130,176)
Foreign . . . . . . . . . (387,387) (1,316,887) (10,003)
234,461 (2,013,714) (683,615)
Income taxes . . . . . . . . $ 963,075 $ 340,325 $ 1,973,956
=========== =========== ===========
Income (loss) before income taxes is as follows:
Foreign . . . . . . . . . $ (194,731) $ (758,980) $ 938,388
Domestic . . . . . . . . . 2,886,966 4,708,827 5,422,777
$ 2,692,235 $ 3,949,847 $ 6,361,165
=========== =========== ===========
11. DOMESTIC AND FOREIGN INCOME TAXES - (Continued)
The following is a reconciliation of the statutory federal income tax
rate to the effective tax rate based on income (loss):
Years ended December 31
1999 1998 1997
Tax provision at statutory
rate . . . . . . . . . . . 34.0% 34.0% 34.0%
Net foreign operating loss
carryforwards . . . . . . . 2.6 (1.3) (1.5)
Effect of foreign tax rates . (6.4) (5.0) --
Change in domestic valuation
allowance -- (19.2) --
Goodwill amortization 5.2 3.2 1.8
State taxes net of federal
benefit . . . . . . . . . 3.2 0.4 0.7
Tax benefits related to
export sales . . . . . . . (5.0) (3.6) (3.2)
Other . . . . . . . . . . . . 2.2 0.1 (0.8)
Domestic and foreign income
tax rate . . . . . . . . . 35.8% 8.6% 31.0%
====== ==== ====
The significant components of deferred income taxes (benefits) for the
years
ended December 31, 1999, 1998 and 1997 are as follows:
Years ended December 31
1999 1998 1997
Deferred income tax (benefit) $ 610,893 $(1,894,475) $(38,853)
(Decrease) in beginning-of-the-
year balance of the
valuation allowance for
deferred tax assets (155,255) (76,664) (618,613)
Currency translation adjustment (221,177) (42,575) (26,149)
$ 234,461 $(2,013,714) $(683,615)
=========== =========== =========
11. DOMESTIC AND FOREIGN INCOME TAXES - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
Deferred tax assets: 1999 1998
Postretirement benefit obligations $1,339,778 $1,353,770
Net operating loss carryforwards 2,648,520 2,613,379
State income taxes 353,014 432,762
Guarantee obligations and estimated future
costs of service accruals 504,872 749,147
Employee pension plan obligations 325,337 208,011
Compensated absences, principally due to
accrual for financial reporting purposes 270,787 285,780
Other 527,022 1,021,777
Total gross deferred tax assets 5,969,330 6,664,626
Less: valuation allowance 1,464,907 1,620,162
Net deferred tax assets 4,504,423 5,044,464
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation and
capitalized interest 1,338,333 1,389,500
Other 175,604 208,838
Total gross deferred tax liabilities 1,513,937 1,598,338
Net deferred tax assets $2,990,486 $3,446,126
========== ==========
Domestic and foreign deferred taxes are comprised as follows:
December 31, 1999 Federal State Foreign Total
Current deferred
asset (liability) $ 983,825 $ (8,535) $1,452,953 $2,428,243
Non-current deferred
asset 117,641 283,343 161,259 562,243
Net deferred tax
asset $1,101,466 $ 274,808 $1,614,212 $2,990,486
========== ========== ========== ==========
December 31, 1998 Federal State Foreign Total
Current deferred
asset $1,573,791 $ 78,192 $1,230,978 $2,882,961
Non-current deferred
asset 66,841 279,298 217,026 563,165
Net deferred tax
asset $1,640,632 $ 357,490 $1,448,004 $3,446,126
========== ========== ========== ==========
11. DOMESTIC AND FOREIGN INCOME TAXES - (Continued)
At December 31, 1999, the Company had $557,046 of income tax receivable
included in accounts and notes receivable.
The valuation allowance for deferred tax assets as of January 1, 1999 was
$1,620,162. The net change in the total valuation allowance for the year
ended December 31, 1999 was a decrease of $155,255. The remaining
valuation allowance of $1,464,907 is maintained against deferred tax
assets which the Company has determined are not more than likely to be
realized. Subsequently recognized tax benefits, if any, relating to the
valuation allowance for deferred tax assets will be reported in the
consolidated statement of operations.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, along with reasonable and prudent tax planning
strategies and the expiration dates of carryforwards, management
believes it is more likely than not the Company will realize the benefits
of these deductible differences, net of the existing valuation
allowances, at December 31, 1999.
At December 31, 1999 the Company has net operating loss carryforwards for
foreign income tax purposes of $7,432,849 of which $301,116 expire in
2001, $430,813 expire in 2002, $2,208,227 expire in 2003, $1,159,359
expire in 2004 and $3,333,333 have no expiration date and are available
to offset future foreign taxable income.
No provision has been made for United States income tax which may be
payable on undistributed income of the Company's foreign subsidiaries
since it is the Company's intention to reinvest the unremitted earnings.
Furthermore, based on current federal income tax laws, the federal income
tax on future dividends will be offset by foreign tax credits in certain
instances. At December 31, 1999 the Company has not recognized a
deferred tax liability of approximately $1,935,000 on undistributed
retained earnings of such subsidiaries of $5,692,000.
12. EMPLOYEE BENEFIT PLANS
The Company has two defined benefit pension plans. One covers salaried
employees and the other plan covers union employees. The following table
sets forth the plans' funded status and amounts recognized in the
Company's statements of financial position at December 31, 1999 and 1998:
December 31
1999 1998
Change in Projected Benefit Obligation
Projected benefit obligation at
January 1 $ 5,298,307 $ 4,854,807
Service cost (excluding administra-
tive expenses) 205,780 190,634
Interest cost 330,527 327,160
Actuarial (gain)/loss (492,895) 246,923
Benefits paid (345,691) (321,217)
Projected benefit obligation at
December 31 4,996,028 5,298,307
Change in Fair Value of Plan Assets
Fair value of plan assets at
January 1 4,864,437 4,125,563
Actual return on plan assets 917,772 804,213
Employer contribution 40,000 289,627
Expenses (25,942) (33,749)
Benefits paid (345,692) (321,217)
Fair value of plan assets at
December 31 5,450,575 4,864,437
Funded status 454,547 (433,870)
Unrecognized net actuarial (gain)/loss (1,344,839) (304,525)
Unrecognized net obligation 55,124 110,245
Unrecognized prior service cost 5,930 16,356
(Accrued) pension cost at December 31 $ (829,238) $ (611,794)
=========== ===========
12. EMPLOYEE BENEFIT PLANS- (Continued)
Net periodic pension cost for these plans for the years 1999, 1998 and
1997 included the following components:
Years ended December 31
1999 1998 1997
Service cost - benefits
earned during the period $ 240,928 $ 220,141 $ 182,973
Interest cost on projected
benefit obligation 330,527 327,160 319,109
Expected return on assets (376,931) (323,648) (285,980)
Amortization of net obligation 55,121 55,121 55,121
Amortization of prior service
cost 10,427 10,427 10,427
Recognized net actuarial (gain) (2,628) -- --
Net periodic pension cost $ 257,444 $ 289,201 $ 281,650
========= ========= =========
The discount rate used to determine the projected benefit obligation for
both the salaried and union plans was 7.25% for 1999, 6.5% for 1998 and
7% for 1997.
The projected benefit obligation was determined by using an assumed rate
of increase in compensation levels of 5% for 1999, 1998 and 1997 for the
salaried plan. The expected long-term rate of return on assets for both
plans was 8%.
The Company's French subsidiaries, Selas S.A. and CFR, are obligated to
contribute to an employee profit sharing plan under which annual
contributions are determined on the basis of a prescribed formula using
capitalization, salaries and certain revenues. Amounts are paid into a
bank trust fund the year following the contribution calculation. Profit
sharing expense for 1999 was $110,337. No contribution was recognized
in 1998 or 1997.
The Company has defined contribution plans for most of its domestic
employees not covered by collective bargaining agreements. Under these
plans, eligible employees may contribute amounts through payroll
deductions supplemented by employer contributions for investment in
various investments specified in the plans. The Company contribution to
these plans for 1999, 1998 and 1997 was $383,015, $377,447 and $362,292,
respectively.
12. EMPLOYEE BENEFIT PLANS- (Continued)
The Company provides postretirement medical benefits to certain domestic
full-time employees who meet minimum age and service requirements. In
1999 a plan amendment was instituted which limits the liability for
postretirement benefits beginning January 1, 2000. This plan amendment
resulted in a $1.1 million unrecognized prior service cost reduction
which will be recognized as employees render the services necessary to
earn the postretirement benefit. The Company's policy is to pay the
cost of these postretirement benefits when required on a cash basis. The
Company also has provided certain foreign employees with retirement
related benefits.
The following table presents the amounts recognized in the Company's
consolidated balance sheet at December 31, 1999 and 1998 for
postretirement medical benefits:
Accumulated postretirement medical benefit obligation:
December 31
Change in Projected Benefit Obligation 1999 1998
Projected benefit obligation at January 1 $ 2,867,101 $ 2,801,051
Service cost (excluding administrative
expenses) 34,920 30,611
Interest cost 170,180 187,324
Plan amendment (1,135,426) --
Actuarial (gain)/loss (228,820) 71,387
Benefits paid (231,454) (223,272)
Projected benefit obligation at
December 31 1,476,501 2,867,101
Change in Fair Value of Plan Assets
Employer contribution 231,454 223,272
Benefits paid (231,454) (223,272)
Fair value of plan assets at December 31 -- --
Funded status 1,476,501 2,867,101
Unrecognized net actuarial gain 615,170 403,329
Unrecognized prior service cost 1,135,426 --
Accrued postretirement benefit cost $ 3,227,097 $ 3,270,430
=========== ===========
Accrued postretirement medical benefit costs are classified as other
postretirement benefit obligations as of December 31, 1999 and 1998.
12. EMPLOYEE BENEFIT PLANS - (Continued)
Net periodic postretirement medical benefit costs for 1999, 1998 and 1997
include the following components:
Years ended December 31
1999 1998 1997
Service cost $ 34,920 $ 30,611 $ 27,707
Interest cost 170,180 187,324 192,610
Amortization of unrecognized
gain (16,979) (14,970) (18,702)
Net periodic postretirement
medical benefit cost $188,121 $202,965 $201,615
======== ======== ========
For measurement purposes, a 9.5% annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 1999; the rate was assumed to decrease gradually to 6% by the
year 2007 and remain at that level thereafter. The health care cost
trend rate assumption may have a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement medical benefit obligation as of December 31, 1999 by
$2,059 and the aggregate of the service and interest cost components of
net periodic postretirement medical benefit cost for the year ended
December 31, 1999 by $11,560.
The weighted-average discount rate used in determining the accumulated
postretirement medical benefit obligation at December 31, 1999 and 1998
was 7.25% and 6.5%, respectively.
The Company provides retirement related benefits to a former employee,
and to certain foreign subsidiary employees in accordance with industry-
wide collective labor agreements. The liabilities established for these
benefits at December 31, 1999 and 1998 were $903,164 and $825,627,
respectively, and are classified as other postretirement benefit
obligations as of December 31, 1999 and 1998.
13. CURRENCY TRANSLATION ADJUSTMENTS
All assets and liabilities of foreign operations are translated into U.S.
dollars at prevailing rates of exchange in effect at the balance sheet
date. Revenues and expenses are translated using average rates of
exchange for the year. The functional currency of the Company's foreign
operations is the currency of the country in which the entity resides;
such currencies are the French franc, German mark, Italian lira, British
pound, Singapore dollar, Portugal escudo and Japanese yen. Adjustments
resulting from the process of translating the financial statements of
foreign subsidiaries into U.S. dollars are reported as a separate
component of shareholders' equity, net of tax where appropriate. Gains
and losses arising from foreign currency transactions are reflected in
the consolidated statements of operations as incurred. Foreign currency
transaction gains (losses) included in the statements of operations for
1999, 1998 and 1997 were ($296,583), $175,609 and $13,819, respectively.
14. COMMON STOCK AND STOCK OPTIONS
Under the Company's 1985 and 1994 Stock Option Plans, options to an
aggregate of 900,000 shares of common stock may be granted to certain
officers and key employees. In 1998 the Board of Directors established
a 1998 Stock Option Plan to issue up to 75,000 shares to certain non-
employee Directors, both at no less than 100% of the fair market value at
the date of grant. All options are exercisable until the earlier of
termination pursuant to the plans or ten years from date of grant.
At December 31, 1999, there were 122,800 additional shares available for
grant under the 1994 plan and 55,000 additional shares available for
grant under the 1998 plan. The per share weighted-average fair values of
stock options granted during 1998 ranged from $3.07 to $4.25 on the date
of grants using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 1.9%; risk
free interest rates ranged from 4.39% to 5.71%; expected life of 6 years
and expected volatility of the stock over the life of the options which
is based on the past 9 years of the stock's activity.
The Company applies APB Opinion No. 25 in accounting for its Plans, and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date of its stock
options under SFAS No. 123, the Company's net income would have been
reduced to the proforma amount indicated below:
1999 1998 1997
Net income as reported $1,729,160 $3,609,522 $4,387,209
Net income proforma $1,510,137 $3,297,704 $4,346,245
Basic earnings per share
as reported $.33 $.69 $.84
Basic earnings per share
proforma $.29 $.63 $.83
Options of 225,000 were granted in 1998. No options were granted in 1999
and 1997. Proforma net income reflects options granted in 1998 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the proforma net income
amounts presented above because compensation cost is reflected over the
options vesting periods of 2 to 5 years and compensation cost for options
granted prior to January 1, 1995 is not considered.
14. COMMON STOCK AND STOCK OPTIONS- (Continued)
Stock option activity during the periods indicated is as follows:
Number of Weighted-average
Shares Exercise Price
Outstanding at January 1, 1997 418,988 $ 6.99
Options exercised (35,700) 4.35
Outstanding at December 31, 1997 383,288 $ 7.24
Options granted 225,000 9.61
Options exercised (2,200) 4.63
Options forfeited (2,200) 6.10
Outstanding at December 31, 1998 603,888 $ 8.14
Options exercised (19,888) 4.20
Options forfeited (13,600) 8.40
Outstanding at December 31, 1999 570,400 $ 8.27
========
14. COMMON STOCK AND STOCK OPTIONS- (Continued)
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
Options Outstanding
Weighted-Average
Range of Number Remaining
Exercise Outstanding Contractual Weighted-Average
Prices at 12/31/99 Life Exercise Price
$5.35- 7.75 227,800 5.10 $6.35
9.06-11.42 342,600 4.54 9.79
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
Options Exercisable
Number
Exercisable Weighted-Average
at 12/31/99 Exercise Price
185,240 $6.19
216,086 9.57
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of unaudited quarterly results of
operations.
1999 First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales . . . . . .$24,053,000 $25,391,000 $26,166,000 $27,143,000
=========== =========== =========== ===========
Gross profit . . . .$ 4,521,000 $ 4,963,000 $ 6,001,000 $ 6,036,000
=========== =========== ========== ===========
Net income (loss) . .$ (354,000) $ 32,000 $ 1,142,000 $ 910,000
=========== =========== =========== ===========
Earnings (loss) per share
Basic ($.07) $.01 $.22 $.18
====== ==== ==== ====
Diluted ($.07) $.01 $.22 $.18
====== ==== ==== ====
1998 First Second Third Fourth
Quarter Quarter (1) Quarter Quarter
Net sales . . . . . .$21,867,000 $25,222,000 $25,203,000 $27,263,000
=========== =========== =========== ===========
Gross profit . . . .$ 5,256,000 $ 6,487,000 $ 5,783,000 $ 5,196,000
=========== =========== =========== ==========
Net income . . . . .$ 559,000 $ 1,766,000 $ 918,000 $ 367,000
=========== =========== =========== ===========
Earnings per share
Basic $.11 $.34 $.18 $.07
==== ==== ==== ====
Diluted $.10 $.33 $.17 $.07
==== ==== ==== ====
(1) In the second quarter 1998, the Company reduced the valuation
allowance applied against deferred tax benefits associated with
domestic postretirement benefit and employee pension plan
obligations by $758,000.
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
1999
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $1,729,160 5,196,072 $0.33
=====
Effect of Dilutive Securities
Stock options 12,018
Earnings contingency --
Diluted Earnings Per
Share $1,729,160 5,208,090 $0.33
====================================
For additional disclosures regarding the earnings contingency and stock
options, see notes 3 and 14, respectively.
16. EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
1998
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $3,609,522 5,233,016 $0.69
=====
Effect of Dilutive Securities
Stock options 77,338
Earnings contingency --
Diluted Earnings Per
Share $3,609,522 5,310,354 $0.68
====================================
For additional disclosures regarding the earnings contingency and stock
options, see notes 3 and 14, respectively.
16. EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
1997
Income Shares Per Share
Numerator Denominator Amount
Basic Earnings Per Share
Income available to
common shareholders $4,387,209 5,213,124 $0.84
=====
Effect of Dilutive Securities
Stock options 141,063
Earnings contingency 791
Diluted Earnings Per
Share $4,387,209 5,354,978 $0.82
====================================
For additional disclosures regarding the earnings contingency and stock
options, see notes 3 and 14, respectively.
17. CONTINGENCIES AND COMMITMENTS
The Company is a defendant along with a number of other parties in
approximately 200 lawsuits as of December 31, 1999 (150 as of December
31, 1998) 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. 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.
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.
17. CONTINGENCIES AND COMMITMENTS - (Continued)
Total rent expense for 1999, 1998 and 1997 under leases pertaining
primarily to engineering, manufacturing, sales and administrative
facilities, with an initial term of one year or more, aggregated
$1,384,000, $1,020,000 and $873,000, respectively. Remaining rentals
payable under such leases are as follows: 2000 - $1,299,000; 2001 -
$1,265,000; 2002 - $1,154,000; 2003 - $996,000; 2004 and thereafter -
$2,228,000.
18. RELATED-PARTY TRANSACTIONS
One of the Company's subsidiaries leases office and factory space from a
partnership consisting of three present or former officers of the
subsidiary. The subsidiary is required to pay all real estate taxes and
operating expenses. In the opinion of management, the terms of the lease
agreement are comparable to those which could be obtained from
unaffiliated third parties. The total rent expense incurred under the
lease was approximately $330,000 for 1999, 1998 and 1997. Annual lease
commitments approximate $330,000 through December, 2000.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Selas Corporation of America:
We have audited the accompanying consolidated balance sheets of Selas
Corporation of America and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Selas
Corporation of America and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
February 21, 2000