24
Selas Corporation of America Exhibit 13
(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, France, Germany, Japan,
Portugal and Singapore, operates directly or through subsidiaries in three
business segments.
Under the SelasTM name, the Heat Technology segment designs and
manufactures specialized industrial heat processing systems for the
aluminum and glassware industries worldwide, and replacement parts for
steel, aluminum, glass and other manufacturers worldwide. The Companys
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components, systems and molded plastic parts
primarily for the hearing instrument manufacturing industry and also for
the electronics, telecommunications, computer and medical equipment
industries. The companys Tire Holders, Lifts and related Products segment
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.
In the fourth quarter of 2001, the Company initiated its plan to
dispose of the Companys primary custom-engineered furnace business,
Selas SAS (Paris), along with two other closely related subsidiaries
Selas Italiana, S.r.L. (Milan) and Selas U.K. (Derbyshire). These
subsidiaries form the Companys large custom-engineered furnaces
division used primarily in the steel and glass industries worldwide.
The furnaces engineered by this division are custom-engineered to meet
customer specific requirements. These subsidiaries generated
approximately $15.6 million and $27.3 million of revenue and a loss
from operations of $5.3 million and $69,000 in 2001 and 2000,
respectively. The Company has accounted for the plan to dispose of the
subsidiaries as a discontinued operation and, accordingly, has
reclassified the historical financial data of these subsidiaries. See
further information in note 2 to the consolidated financial statements.
Financial Highlights
Years ended December 31 2001(a) 2000
Net sales . . . . . . . . . . . $ 86,310,000 $ 89,304,000
Income from continuing operations,
Net of tax . . . . . . . . . . 658,000 3,005,000
(Loss) from discontinued
operations, net of tax (5,275,000) (69,000)
Net income (loss). . . . . . . . (4,617,000) 2,936,000
Basic earnings (loss) per share:
Continuing operations . . . . .13 .59
Discontinued operations (1.03) (.02)
Basic income (loss) per share (.90) .57
Diluted earnings (loss) per share
Continuing operations . . . . . .13 .59
Discontinued operations . . . . (1.03) (.02)
Diluted income (loss) per share (.90) .57
Working capital . . . . . . . 6,978,000 14,839,000
Total assets . . . . . . . . . 76,100,000 74,593,000
Total shareholders equity . . 38,605,000 44,098,000
(a) The Companys large custom-engineered subsidiaries generated
approximately $15.6 million and $27.3 million of revenue in 2001 and
2000, respectively, and a loss from discontinued operations of $5.3
million and $69,000 in 2001 and 2000, respectively. These sales have
been reclassified to discontinued operations.
Market and Dividend Information
2001 2000
---------------- -----------------
Market Market
Price Range Price Range
---------------- -----------------
Quarter High Low High Low
First . . . . $4.000 $3.100 $6.750 $4.875
Second . . . . 4.750 3.300 7.625 5.250
Third . . . . 4.500 2.850 7.500 4.625
Fourth . . . . 3.600 2.000 5.937 2.750
At February 7, 2002 the Company had 413 shareholders of record.
2001 2000 1999
Dividends per share:
First Quarter . . . $.045 $.045 $.045
Second Quarter. . . .045 .045 .045
Third Quarter . . . .045 .045 .045
Fourth Quarter. . . .000 .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 Companys 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.
Selas Corporation of America
Five-Year Summary of Operations
(In thousands, except for share and per share data)
Years ended December 31 2001(a) 2001(b) 1999
Sales, net $ 86,310 $ 89,304 $77,839
Cost of sales 66,974 68,384 57,640
Selling, general and
administrative expenses 17,143 15,935 15,857
Interest expense 515 574 534
Interest income (97) (51) (45)
Other (income) expense, net 144 (409) 318
Income from continuing
operations
before income taxes 1,631 4,865 3,541
Income taxes 973 1,860 1,803
Income from continuing
operations 658 3,005 1,738
Income (loss) from
discontinued
operations, net of income
taxes (5,275) (69) (9)
Net income (loss) (4,617) 2,936 1,729
Basic earnings (loss) per
share:
Continuing operations .13 .59 .33
Discontinued operations (1.03) .(02)
Net income (loss) (.90) .57 .33
Diluted earnings (loss) per
share:
Continuing operations .13 .59 .33
Discontinued operations (1.03) .(02)
Net income (loss) (.90) .57 .33
Comprehensive income (loss) (4,802) 1,746 1,672
Weighted average number of
Shares outstanding during
year
Basic 5,119,214 5,121,513 5,196,072
Diluted 5,134,084 5,134,494 5,208,090
Selas Corporation of America
Five-Year Summary of Operations
(In thousands, except for share and per share data)
Years ended December 31 1998(c) 1997(d)
Sales, net . . . . . . . . . . $ 81,488 $ 71,912
.
Cost of sales . . . . . . . . 59,455 52,470
.
Selling, general and
administrative expenses . . . 14,559 13,380
Interest expense . . . . . . . . 634 660
Interest income . . . . . . . (73) (63)
Other (income) expense, net . . (47) (502)
Income from continuing
operations 6,960 5,967
before income taxes . . . .
.
Income taxes . . . . . . . . . . 1,680 1,777
Income from continuing 5.280 4,190
operations
Income (loss) from discontinued
operations, net of income (1,670) 197
taxes
Net income (loss) . . . . . . . 3,610 4,387
Basic earnings (loss) per share:
Continuing operations . . . . . 1.01 .80
Discontinued operations . . . . (.32) .04
Net income (loss). . . . . . . .69 .84
Diluted earnings (loss) per
share:
Continuing operations . . . . 1.00 .78
.
Discontinued operations. . . . (.32) .04
.
Net income (loss) .68 .82
Comprehensive income (loss) . 3,665 4,802
Weighted average number of
shares outstanding during year
Basic . . . . . . . . . . . . 5,233,016 5,213,124
.
Diluted . . . . . . . . . . . . 5,310,354 5,354,978
.
Other Financial Highlights
(In thousands, except for share and per share data)
Years ended December 31 2001(a) 2000(b) 1999
Working capital $ 6,978 $ 14,839 $ 11,551
Total assets 76,100 74,593 67,044
Long-term debt 3,215 808 1,617
Long-term benefit 3,879 3,773 3,847
obligations
Shareholders equity:
Capital stock and
additional 17,647 17,647 17,647
paid-in capital
Retained earnings 23,298 28,607 26,593
Accumulated other
comprehensive income
(loss)
(1,075) (891) 299
Treasury stock (1,265) (1,265) (1,203)
Total shareholders 38,605 44,098 43,336
equity
Depreciation and 4,025 3,773 3,690
amortization
Dividends per share .135 .18 .18
Other Financial Highlights
(In thousands, except for share and per share data)
Years ended December 31 1998 (c) 1997 (d)
Working capital $ 13,467 $ 13,546
Total assets 70,337 61,912
Long-term debt 3,102 5,518
Long-term benefit obligations 3,770 3,711
Shareholders equity:
Capital stock and
additional 17,556 17,382
paid-in capital
Retained earnings 25,798 23,130
Accumulated other
comprehensive income
(loss)
357 302
Treasury stock (382) (382)
Total shareholders equity 43,329 40,432
Depreciation and amortization 3,539 3,221
Dividends per share .18 .178
The Companys large custom-engineered furnace subsidiaries have been
accounted for as a discontinued operation. Accordingly, the
historical financial information has been reclassified. See Note 2 to
the consolidated financial statements.
(a)On January 11, 2001, the Company acquired the stock of Lectret, a Singapore
based company.
On April 25, 2001, the Company sold a minority interest of Nippon
Selas, a Tokyo, Japan based company to three directors of Nippon Selas.
(b)On January 12, 2000, a subsidiary of the Company acquired the stock
of Ermat S.A.
On June 6, 2000, the Company acquired the remaining 50.1% interest of
Nippon Selas.
(c)On February 28, 1998, a subsidiary of the Company acquired the stock
of CFR.
On May 27, 1998, a subsidiary of the Company acquired the stock of IMB
Electronic Products, Inc.
On October 28, 1998, a subsidiary of the Company, RTI Technologies
PTE LTD, acquired certain assets and liabilities of Lectret.
(d)February 21, 1997, a subsidiary of the Company acquired the assets of
RII Electronics, Inc.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
2001 compared with 2000
In the fourth quarter of 2001, the Company initiated its plan to
dispose of the Companys primary custom-engineered furnace business,
Selas SAS Paris, along with two other closely related subsidiaries
Selas Italiana, S.r.L. (Milan) and Selas U.K. (Derbyshire). These
subsidiaries form the Companys large custom-engineered furnaces
division used primarily in the steel and glass industries worldwide.
The furnaces engineered by this division are custom-engineered to meet
customer specific requirements. These subsidiaries generated
approximately $15.6 million and $27.3 million of revenue and a loss
from operations of $5.3 million and $69,000 in 2001 and 2000,
respectively. The Company has accounted for the plan to dispose of the
subsidiaries as a discontinued operation and, accordingly, has
reclassified the historical financial data of these subsidiaries. See
further information in note 2 to the consolidated financial statements.
Consolidated net sales decreased 3.3% to $86.3 million in 2001 from
$89.3 million in 2000. Net sales for the heat technology segment
increased to $33.5 million in 2001 compared to $31.8 million in 2000.
The increase in sales in 2001 is attributable to a contract in backlog
at the beginning of the year along with higher sales of replacement
parts and burners partially offset by lower sales of smaller heat
treating furnaces produced by the Companys CFR and Ermat subsidiaries.
CFR and Ermat manufacture small heat treating furnaces utilized in the
aluminum and glassware industries worldwide. Sales and earnings of heat
treating 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 $16.8
million as of December 31, 2001 compared to $20.4 million as of
December 31, 2000.
The Company's precision miniature medical and electronic products
segment net sales decreased to $37.8 million in 2001 from $39.7 million
in 2000. Revenue decreased in the current year compared to 2000
because of lower sales of thermistor and capacitor parts to the
electronics and telecommunications industries and lower shipments of
component parts to the hearing health industry. These decreases were
partially offset by the inclusion in the current year of the sales of
approximately $3 million of Lectret, a Singapore manufacturer of
microphone capsules acquired in January, 2001. The Companys sales in
this segment are affected by the telecommunications industry which
continues its ongoing slump and the hearing health markets which have
been flat for the last several years.
Net sales for the tire holders, lifts and related products segment
decreased to $15.0 million in 2001 compared to $17.8 million in 2000.
The decline in revenue is due to lower sales of tire lift products to
the Companys automotive customers, reflecting the conditions within
this industry and the loss of a contract at the beginning of the year
to supply tire lifts for one of its customers new car models.
The Company's gross profit margin as a percentage of sales decreased to
22.4% in 2001 from 23.4% in 2000. Gross profit margins for the heat
technology segment increased to 21.0% for 2001 compared to 17.1% for
2000. Heat technology gross profit margins vary markedly from contract
to contract, depending on customer specifications and other conditions
related to the contract. Revised costs may be affected by changes in
material purchase price estimates, labor and subcontractor completion
estimates and other factors related to the contract. The gross profit
margins for 2001 were higher because of the increased revenue generated
by sales of replacement parts and burners, which typically have better
profit margins than heat treating contracts. This improvement was
partially offset by cost overruns on some of the smaller furnace orders
at the Companys CFR subsidiary. Heat technology reserves for guarantee
obligations and estimated future costs of services increased to $.9
million in 2001 from $.5 million in 2000 due to the completion or
near-completion of several contracts during the year. Guarantee
obligations and estimated future service costs on contracts extend for
up to one year from completion.
Gross profit margins for the precision miniature medical and electronic
products segment decreased to 26.1% in 2001 from 29.1% in 2000. The
lower margins in the current year are attributable to the mix of
product sales between the periods as hearing health component parts,
whose sales have been declining, have higher profit margins compared to
some of the segments other products, particularly hearing health
system parts, whose sales have been increasing.
Gross profit margins for the tire holders, lifts and related products
segment decreased to 16.2% in 2001 from 22.1% in 2000. The lower
margins in the current year are due to a loss of efficiencies in the
tire lift production process resulting from the decline in sales to the
automotive industry.
Selling, general and administrative expenses (SG&A) increased 7.6% to
$17.1 million in 2001 compared to $15.9 million in 2000. The higher
selling, general and administrative expenses in the current year are
due primarily to the January 2001 acquisition of Lectret, a Singapore
microphone capsule manufacturer and the inclusion of Nippon Selas
results for a full year. The remaining equity investment in Nippon
Selas was acquired in June, 2000.
Research and development costs increased to $1.5 million in 2001
compared to $1.2 million in 2000 due to increased activity at the
precision miniature medical segment. Interest expense was basically
unchanged at $.5 million in 2001 compared to $.6 million in 2000.
Interest income increased to $97,000 in 2001 compared to $45,000 in
2000 due mainly to interest imputed on a trade note receivable.
Other (income) expense includes gains on foreign exchange of $46,000
and $38,000 in 2001 and 2000, respectively. Other income in 2000 also
includes investment income of approximately $247,000.
The effective tax rate in 2001 and 2000 on income before income taxes
was 59.7% and 38.2%, respectively. See note 12 to the consolidated
financial statements regarding the reconciliation of the statutory
income tax rate to the effective tax rate. In 2001, the Company
recognized an increase to the valuation allowance related to certain
foreign net operating losses which the Company believes are not more
than likely to be realized in the coming years.
Consolidated net (loss) of $4.6 million in 2001 decreased from an
income of $2.9 million in 2000. The Company's heat technology segment
had income of $.5 million in 2001 compared to $.5 million in 2000. The
precision miniature medical and electronic products segment's income
decreased to $.3 million in 2001 compared to $1.8 million in 2000 due
to the decline in sales of parts to the electronics and hearing health
industries and higher SG&A expenses related to the acquisition of
Lectret. The Company's tire holders, lifts and related products
segment decreased its net income to $.7 million in 2001 compared to
$1.4 million in 2000 because of lower tire lift sales to the automotive
industry and a loss of production efficiencies in the manufacturing
process. General corporate expenses, net, increased to $852,000 in
2001 from $679,000 in 2000.
Discontinued operations generated a $5.3 million loss in 2001 compared
to a loss of $69,000 in 2000. The increase in the loss is due to the
delay in the receipt of a large engineered contract and lower gross
profit margins on certain orders completed in 2001 and cost overruns on
contracts started in 2000. In the fourth quarter of 2001, the Company
determined that the realizability of the deferred tax assets associated
with their European discontinued operations were not recoverable. The
Company recognized a valuation allowance of approximately $2.7 million.
Liquidity and Capital Resources
Consolidated net working capital decreased to $7.0 million at December
31, 2001 from $14.8 million at December 31, 2000. The decrease is due
primarily to the purchases of property and equipment, paydown of
long-term debt and payment of dividends offset by net assets acquired
through acquisitions. The major changes in components of working
capital for the year were lower accounts receivable of $5.5 million,
higher inventories of $2.4 million, higher notes payable of $3.1
million, lower income taxes payable of $.7 million, and higher current
maturities of long-term debt of $.7 million. These changes relate
mainly to the ongoing operations of the Company and to a lesser extent,
the acquisition of Lectret in January, 2001. As part of the ongoing
operations of the Company, management periodically performs a strategic
analysis of all assets of the Company to ensure that an appropriate
rate of return is achieved from the invested capital.
The Companys long-term debt at December 31, 2001 was $3.2 million. The
increase in long-term debt is due to the refinancing in January, 2001
of the Companys credit facilities referred to above partially offset
by repayments. The increase in notes payable relates to the same
credit facility refinancing and repayments during the year.
At September 30, 2001, the Company did not meet the tangible
capital funds covenant of its existing loan and revolving credit
facilities. The Company has obtained waivers from the bank through
April 15, 2002. The Company has been negotiating with the bank to
obtain new domestic revolving credit facilities, new domestic long-term
financing and a new European working capital credit arrangement that is
used for working capital or guarantees for customer advance payments on
contracts.
On April 15, 2002, the Company entered into a second waiver and amendment
agreement for its domestic and foreign revolving credit and term loan
facilities and obtained a new domestic supplemental credit facility in the
amount of $5,000,000 to be used for additional domestic borrowing and for
the issuance of advance payment guarantees. Borrowings under the amended
credit facilities bear interest at LIBOR plus 1.5% to 2.5% until the sale of
the discontinued operations at which time the remaining credit facilities
after paydown with proceeds, if any, from the sale bear interest at LIBOR
plus 1.5% to 2.0% for the remaining term of the loan and a commitment fee of
.25% per annum is payable on the unborrowed portion. In addition the company
has agreed to pay a nonrefundable commitment fee of $150,000 plus an amount
equal to 2% of that portion of the gross price of the sale of the European
discontinued operation in excess of 7,000,000 Euros.
The Companys domestic revolving credit loan facilities of $2,977,526 mature
on January 31, 2003. The European term loan and credit facilities of
$1,499,311 and $5,328,390 respectively, mature on the earlier of
January 31, 2003 or the date of sale of the discontinued operations. The
domestic term loan credit facilities of $2,465,833 continue to expire during
the period from July 1,2004 and February 1,2006. The Companys guarantee
customer advance payments of $1,960,418 expire on the earlier of January 31,
2003 or the date of sale of the discontinued operations. The new domestic
supplemental credit facility of $5,000,000 matures on the earlier of January 31,
2003 or the date of the sale of the discontinued operations.
In connection with the second waiver and amendment agreement, the Company has
pledged as collateral substantially all of the assets of the Companys domestic
and foreign subsidiaries except for those assets that are impractical to pledge
under local law. The credit facilities contain restrictive covenants regarding
the payment of cash dividends, capital expenditures, acquisitions, maintenance
of working capital, net worth and shareholders equity, along with the
maintenance of certain financial ratios.
As of December 31, 2001, the Company was not required to maintain any financial
covenants due to the receipt of a waiver from the financial institution. The
impact of the amended credit facilities is expected to be an increase in
interest expense of approximately $200,000. Management believes that the
Company will be able to maintain the amended covenants through January 1, 2003.
We believe that the amended credit facility combined with
funds expected to be generated from operations, the available borrowing
capacity through its revolving credit loan facilities, the potential
sale of the European subsidiaries, curtailment of the dividend payment
and control of capital spending will be sufficient to meet its
anticipated cash requirements for operating needs.
Contractual Obligations
The following tables represent the Companys contractual obligations
and commercial commitments as of December 31, 2001.
Payments Due by
Period
Contractual After
Obligations Total Current 2-3 Years 4-5 5 Years
Years
Long-term debt $4,711.000 $1,496,000 $2,458,000 757,000
Operating leases 9,754,000 1,441,000 2,787,000 2,358,000 3,168,000
Other long-term
Obligations 2,572,000 718,000 1,854,000
Total
contractual
Cash
obligations 17,037,000 3,655,000 7,099,000 3,115,000 3,168,000
Amount of Commitment Expiration By
Period
Other Total
Commercial Amounts 4-5 Over
Commitments Committed Current 2-3 Years Years 5 Years
Lines of credit $9,422,000 $9,422,000
Guarantees 2,553,000 2,390,000 163,000
Total commercial
commitments 11,975,000 11,812,000 163,000
A significant portion of the heat technology segment sales and the
discontinued operations 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 14 to the consolidated financial statements.
The Company is a defendant along with a number of other parties in
approximately 253 lawsuits as of December 31, 2001 (approximately 100
as of December 31, 2000) 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 Companys 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 Companys 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
Companys consolidated financial position, liquidity, or results of
operations.
Beginning in January 2002,new Euro-denominated bills and coins were issued,
and legacy currencies have been 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 2001. No issues have arisen in 2002 that
impact the Companys ability to operate.
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
1999 and 2000. As of December 31, 2001, the Company has repurchased a
total of 152,190 shares of its common stock at a cost of $883,141.
New Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations". Statement 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase
method. The Company had no significant acquisitions after June 30,
2001.
Also in July, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which replaces the requirement to amortize
intangible assets with indefinite lives and goodwill with a requirement
for a transitional impairment test. Statement 142 requires an
evaluation of intangible assets and their useful lives. After
transition, the impairment tests will be performed annually in
accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Intangible assets with definite useful lives are required to be
amortized over their respective estimated useful lives and also
reviewed for impairment in accordance with SFAS No. 121.
As of the date of adoption, the Company has unamortized goodwill in the
amount of $15,632,000, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to
goodwill was approximately $664,036 and $733,000 for the year ended
December 31, 2001 and 2000, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practical to reasonably estimate the impact of adopting these
Statements on the Company's financial statements at the date of this
report.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations with the retirement of long-lived
assets that result from the acquisition, construction, development and
(or) normal use of the asset. Adoption is required for fiscal years
beginning after June 15, 2002, with earlier adoption encouraged. The
Company is in the process of analyzing the implications of SFAS 143 and
does not believe that the adoption of this statement will have a
material impact on the net earnings of the Company.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS Statement 144 supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions
of that Statement. SFAS Statement 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held
for sale. SFAS Statement 144 is effective for fiscal years beginning
after December 15, 2001. The Company is in the process of analyzing
the implications of this statement and does not expect the guidance to
have a material impact on the net earnings of the Company.
2000 Compared with 1999
Consolidated net sales increased 14.7% to $89.3 million in 2000 from
$77.8 million in 1999. Net sales for the heat technology segment
increased to $31.8 million in 2000 compared to $23.8 million in 1999.
The increase in sales in 2000 is attributable to higher sales generated
by CFR and sales from Ermat S.A., the French small furnace manufacturer
acquired in January, 2000. Sales and earnings of 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 $20.4 million as of
December 31, 2000 compared to $8.9 million as of December 31, 1999.
The Companys precision miniature medical and electronic products
segment net sales increased to $39.7 million in 2000 from $35.5 million
in 1999. Revenue increased compared to 1999 due to higher sales to the
hearing health, medical infusion and electronic products industries,
reflecting the improved conditions in those markets during the current
year.
Net sales for the tire holders, lifts and related products segment
decreased to $17.8 million in 2000 compared to $18.6 million in 1999.
The decrease in revenue results from lower unit sales of tire lifts to
the automotive industry due to a downturn in that market toward the end
of the year. The downturn in the market continued through 2001.
The Companys gross profit margin as a percentage of sales decreased to
23.4% in 2000 from 26% in 1999. Gross profit margins for the heat
technology segment decreased to 17.1% for 2000 compared to 24% for
1999. 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 2000 were
impacted by revenue recognized on contracts that had higher than
expected costs, partially offset by higher sales of spare and
replacement parts, which generally have higher profit margins. Heat
technology reserves for guarantee obligations and estimated future
costs of services were unchanged at $.5 million in 2000 and $.5 million
in 1999. Guarantee obligations and estimated future service costs on
contracts extend for up to one year from completion.
Gross profit margins for the precision miniature medical and electronic
products segment decreased to 29.1% in 2000 from 30.2% in 1999. The
reduction in margins in 2000 is partially attributable to the mix of
product sales between the years as precision miniature systems, medical
infusion parts and electronic products have varying profit margins.
Partially offsetting the lower margins due to product mix in 2000 were
lower costs resulting from the consolidation of the production
facilities of RTI Electronics into one location, which was completed in
1999.
Gross profit margins for the tire holders, lifts and related products
segment improved to 22.1% in 2000 from 20.9% in 1999. The improvement
in 2000 is due to efficiencies from higher production through most of
the period partially offset by the decrease in sales over the last
several months of the year.
Selling, general and administrative expenses were unchanged at $15.9
million in 2000 and $15.9 million in 1999.
Research and development costs decreased to $1.2 million in 2000
compared to $1.3 million in 1999. Interest expense increased slightly
to $.6 million in 2000 compared to $.5 million in 1999 due to higher
average borrowings of notes payable and higher interest rates offset by
repayments of long-term debt. Interest income decreased to $45,000 in
2000 compared to $51,000 in 1999, due to lower average funds available
for investment in 2000.
Other (income) expense includes gains on foreign exchange of $38,000
and losses of $191,000 in 2000 and 1999, respectively. Other income in
2000 also includes investment income of approximately $247,000.
The effective tax rate in 2000 and 1999 on income before income taxes
was 38.2% and 50.9%, respectively. See note 12 to the consolidated
financial statements regarding the reconciliation of the statutory
income tax rate to the effective tax rate.
Consolidated net income of $2.9 million in 2000 increased 70.5% from
$1.7 million in 1999. The Company's heat technology segment had income
of $.5 million compared to a loss of $.3 million in 1999 due to higher
sales partially offset by several contracts that had higher than
expected costs. The precision miniature medical and electronic
products segment's income increased to $1.8 million in 2000 compared to
$1.3 million in 1999 as a result of higher sales and lower costs due to
the consolidation of RTI Electronics production facilities. The
Company's tire holders, lifts and related products segment increased
its net income to $1.4 million in 2000 compared to $1.3 million in 1999
despite lower sales because of increased efficiencies in its tire lift
production through most of the year. General corporate expenses, net
of tax, increased to $679,000 in 2000 from $613,000 in 1999.
Discontinued operations increased its net loss in 2000 to $69,000 from
$9,000 in 1999. The marginal increase in the loss was due to higher
SG&A expenses partially offset by improved gross profit margins.
In 1999, the Company was informed by an automotive customer that the
Company will not supply the tire lift for a 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 2001.
Significant Accounting Policies
The significant accounting policies of the Company are described in
note 1 to the consolidated financial statements. The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expense during the reporting period.
Certain accounting estimates and assumptions are particularly
sensitive because of their significance to the consolidated financial
statements and possibility that future events affecting them may
differ markedly. The accounting policies of the Company with
significant estimates and assumptions are described below.
Revenue Recognition
A portion of the Companys net sales from its heat technology segment
is generated pursuant to contracts that require substantial time to
complete and are accordingly accounted for on a
percentage-of-completion basis. Under this method of accounting, the
sales recognized on each contract during a particular accounting
period are determined by multiplying the total contract amount by the
ratio of costs incurred to estimated total costs and deducting sales
recognized in prior accounting periods. Such contract costs and
expenses incurred on a progress basis at the time the sales value is
recorded are charged to cost of sales. Under percentage-of-completion
accounting, 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 the final cost. Revised costs
may be affected by changes in material purchase price estimates, labor
and subcontractor completion estimates and other factors related to
the contract. In addition, the Company provides reserves for
guarantee obligations and estimated future costs of service under
these contracts based on its past experience with similar projects and
provides currently for any anticipated or known contract losses.
The Companys custom-engineered systems business is cyclical in
nature. While customers for the Companys custom-engineered systems
are located throughout the world, there is a finite market for the
Companys custom-engineered furnaces. These furnaces have long useful
lives, and replacement business is not a significant factor in sales
of such installations.
Discontinued Operations
The Company continuously assesses the return on their business
segments. When management with the appropriate level of authority
determines that a plan is in place to restructure the operations of a
business or discontinue an operation, contractural commitments and
obligations are recorded. See a discussion in note 2 to the
consolidated financial statements.
Deferred Taxes
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, 2001.
Litigation
The Company is involved in lawsuits arising in the normal cost 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 offset
the Companys consolidated financial position, liquidity or results of
operations.
Risk Factors
The Company has experienced and expects to continue to experience
fluctuations in its results of operations. Factors that affect the
Companys results of operations include the volume and timing of orders
received, changes in the global economy and financial markets, changes
in the mix of products sold, market acceptance of the Companys and its
customers products, competitive pricing pressures, global currency
valuations, the availability of electronic components that the Company
purchases from suppliers, the Companys ability to meet increasing
demand, the Companys ability to introduce new products on a timely
basis, the timing of new product announcements and introductions by the
Company or its competitors, changing customer requirements, delays in
new product qualifications, and the timing and extent of research and
development expenses. As a result of the foregoing or other factors,
there can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual
basis, which would materially and adversely affect the Companys
business, financial condition and results of operations.
Our ability to pay the principal and interest on our indebtedness as it
comes due will depend upon our current and future performance. Our
performance is affected by general economic conditions and by
financial, competitive, political, business and other factors. Many of
these factors are beyond our control. We believe that the amended credit
facility combined with funds expected to be generated from operations, the
available borrowing capacity through its revolving credit loan facilities,
the potential sale of the European subsidiaries, curtailment of the
dividend payment and control of capital spending will be sufficient to meet
its anticipated cash requirements for operating needs. If, however, we do not
generate sufficient cash or complete such financings on a timely basis, we
may be required to seek additional financing or sell equity on terms which
may not be as favorable as we could have otherwise obtained. No assurance
can be given that any refinancing, additional borrowing or sale of equity will
be possible when needed or that we will be able to negotiate acceptable
terms. In addition, our access to capital is affected by prevailing
conditions in the financial and equity capital markets, as well as our
own financial condition.
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 Companys actual
results, performance or achievements to differ materially from the
results, performance and achievements expressed or implied in the
Companys forward-looking statements. These risks, uncertainties and
factors include competition by competitors with more resources than
the Company, foreign currency risks arising from the Companys foreign
operations, and the cyclical nature of the market for large heat
technology contracts. Reference is made to the Companys 2001 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 2001 2000 1999
Sales, net $ 86,309,803 $ 89,304,452 $ 77,838,926
Operating costs and expenses
Costs of sales 66,973,503 68,384,514 57,639,610
Selling, general and
administrative expenses 17,143,105 15,934,687 15,856,986
Operating income 2,193,195 4,985,251 4,342,330
Interest expense 515,347 573,893 534,196
Interest income (97,401) (44,572) (50,872)
Other (income) expense, net 143,873 (408,910) 317,915
Income from continuing
operations 1,631,376 4,864,840 3,541,091
before income taxes
Income taxes 973,761 1,860,305 1,802,649
Income from continuing 657,615 3,004,535 1,738,442
operations
(Loss) from discontinued
operations, net
of income taxes (5,274,930) (68,749) (9,282)
Net income (loss) (4,617,315) 2,935,786 1,729,160
Basic earnings (loss) per
share:
Continuing operations .13 .59 .33
Discontinued operations (1.03) (.02) .00
Net income (loss) (.90) .57 .33
Diluted earnings (loss) per
share:
Continuing operations .13 .59 .33
Discontinued operations (1.03) (.02) .00
Net income (loss) (.90) .57 .33
Comprehensive income (loss) (4,802,477) 1,746,209 1,671,549
See accompanying notes to the consolidated financial statements.
Consolidated Balance Sheets
Assets 2001 2000
Current assets
Cash, including cash equivalents of $391,000 $ 3,636,673 $ 3,782,359
2001 and $428,000 in 2000
Accounts and notes receivable (includingunbilled
receivables of $1,857,000 in 2001 and$3,775,000
in 2000), less allowance for doubtfulaccounts of
$456,000 in 2001 and $453,000 in 2000 17,376,784 22,837,518
Inventories 13,810,209 11,376,744
Deferred income taxes 1,521,809 1,457,385
Other current assets 1,033,689 1,298,897
Total current assets 37,379,164 40,752,903
Property, plant and equipment
Land 554,943 554,943
Buildings 7,143,408 7,161,309
Machinery and equipment 32,502,680 30,436,805
40,201,031 38,153,057
Less: Accumulated depreciation 25,621,190 22,701,389
Net property, plant and equipment 14,579,841 15,451,668
Net assets of discontinued operations 6,636,127 1,676,929
Excess of cost over net assets of acquired
subsidiaries, less accumulated amortization of
$4,562,000 and $3,898,000 15,631,502 15,599,884
Deferred income taxes 350,014 264,776
Other assets, less amortization 1,523,320 846,607
76,099,968 74,592,767
See accompanying notes to the consolidated financial statements.
December 31, 2001 and 2000
Liabilities and Shareholders Equity 2001 2000
Current liabilities
Notes payable $ 9,422,202 $ 6,264,415
Current maturities of long-term debt 1,496,033 818,460
Accounts payable 10,232,880 9,908,141
Federal, state and foreign income taxes 461,393 1,201,720
Customers advance payments on contracts 2,809,988 2,624,038
Guarantee obligations and estimated future 878,952 506,102
costs of
service
Other accrued liabilities 5,100,021 4,590,936
Total current liabilities 30,401,469 25,913,812
Long-term debt 3,214,934 807,936
Other postretirement benefit obligations 3,878,948 3,772,574
Contingencies and commitments
Shareholders equity
Common shares, $1 par; 10,000,000 shares
authorized; 5,634,968 shares issued 5,634,968 5,634,968
Additional paid-in capital 2,012,541 12,012,541
Retained earnings 23,297,747 28,606,413
Accumulated other comprehensive loss (1,075,561) (890,399)
39,869,695 45,363,523
Less: 515,754 common shares, respectively,
held (1,265,078) (1,265,078)
in treasury, at cost
Total shareholders equity 38,604,617 44,098,445
76,099,968 74,592,767
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
Years ended December, 31 2001 2000
Cash flows from operating activities:
Net income (loss) $(4,617,315)$ 2,935,786
Adjustments to reconcile net income
(loss) to
net cash provided by operating
activities:
Depreciation and amortization 4,025,394 3,772,752
Equity in loss of unconsolidated
Affiliate 9,341
(Gains) losses on sale of property and
equipment (1,982) (9,247)
Deferred taxes (62,571) (327,733)
Changes in operating assets and
liabilities:
(Increase) decrease in accounts 3,873,518
receivable (4,796,697)
(Increase) decrease in inventories (2,235,897) (867,358)
(Increase) decrease in other assets (1,203,959) 204,559
Increase (decrease) in accounts (313,580) 4,028,946
payable
Increase (decrease) in accrued 405,504 247,679
expenses
Increase in customer advances 286,611 1,788,403
Increase (decrease) in other 160,889 (512,764)
liabilities
Net cash provided by operating 316,612 6,473,667
activities
Net cash provided (used) by
discontinued operations 3,071,679 (158,226)
Cash flows from investing activities:
Purchases of property, plant and (2,332,113) (3,675,930)
equipment
Proceeds from sales of property and 11,847 24,260
equipment
Dividend from unconsolidated affiliate
Acquisition of subsidiary companies,
net of cash acquired (65,155) 365,357
Net cash (used) by investing
Activities (2,385,421) (3,286,313)
Cash flows from financing activities:
Proceeds from short-term borrowings 3,396,314 2,227,453
Repayments of short-term borrowings (3,942,418) (92,730)
Proceeds from borrowings used to acquire
subsidiaries 672,136
Proceeds from long-term debt 1,919,191
Repayments of long-term debt (2,250,140) (1,261,863)
Proceeds from exercise of stock options
Purchase of treasury shares (62,308)
Payment of dividends (691,351) (922,053)
Net cash (used) by financing (896,268) 111,501)
activities
Effect of exchange rate changes on cash (252,288) (271,137)
Increase (decrease) in cash and cash (145,686) 2,646,490
equivalents
Cash and cash equivalents beginning of year 3,782,359 1,135,869
Cash and cash equivalents end of year 3,636,673 3,782,359
See accompanying notes to the consolidated financial statements.
Years ended December, 31 1999
Cash flows from operating activities:
Net income (loss) $ 1,729,160
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,689,944
Equity in loss of unconsolidated
affiliate 2,181
(Gains) losses on sale of property and
equipment 20,288
Deferred taxes 549,253
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (89,376)
(Increase) decrease in inventories 687,363
(Increase) decrease in other assets (1,063,592)
Increase (decrease) in accounts payable 493,690
Increase (decrease) in accrued expenses (495,480)
Increase in customer advances 617,885
Increase (decrease) in other liabilities (25,661)
Net cash provided by operating activities. 6,115,655
Net cash provided (used) by discontinued
operations (400,150)
Cash flows from investing activities:
Purchases of property, plant and equipment (3,842,191)
Proceeds from sales of property and equipment 117,444
Dividend from unconsolidated affiliate 14,476
Acquisition of subsidiary companies,
net of cash acquired (37,895)
Net cash (used) by investing activities
(3,748,166)
Cash flows from financing activities:
Proceeds from short-term borrowings 1,914,792
Repayments of short-term borrowings (1,132)
Proceeds from borrowings used to acquire
subsidiaries
Proceeds from long-term debt 1,014,186
Repayments of long-term debt (3,665,315)
Proceeds from exercise of stock options 83,540
Purchase of treasury shares (820,833)
Payment of dividends (934,303)
Net cash (used) by financing activities (2,409,065)
Effect of exchange rate changes on cash (147,880)
Increase (decrease) in cash and cash equivalents (589,606)
Cash and cash equivalents beginning of year 1,725,475
Cash and cash equivalents end of year 1,135,869
Consolidated Statements of Shareholders Equity
Years ended December 31, 2001, 2000 and 1999
Common Stock Additional
Number of Paid-in
Shares Amount Capital
Balance January 1, 1999 5,615,081 $5,615,081 $11,941,498
Net income
Translation (loss)
Exercise of 19,887 stock
Options 19,887 19,887 71,043
Purchase of 141,290
treasury shares
Cash dividends paid
($.18 per share)
Comprehensive income
Balance December 31,
1999 5,634,968 5,634,968 12,012,541
Net income
Translation (loss)
Purchase of 10,900
treasury shares
Cash dividends paid
($.18 per share)
Comprehensive income
Balance December 31,
2000 5,634,968 5,634,968 12,012,541
Net (loss)
Translation (loss)
Derivative financial
instrument fair value
adjustment
Cash dividends paid
($.135 per share)
Comprehensive (loss)
Balance December 31, 5,634,968 5,634,968 12,012,541
2001
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders Equity
Years ended December 31, 2001, 2000 and 1999
Accumulated
Other
Comprehensive
Retained Income Comprehensive
Earnings (Loss) Income (Loss)
Balance January 1, 1999 25,797,823 356,789
Net income 1,729,160 1,729,160
Translation (loss) (57,611) (57,611)
Exercise of 19,887 stock
Options
Purchase of 141,290
treasury shares
Cash dividends paid
($.18 per share) (934,303)
Comprehensive income 1,671,549
Balance December 31,
1999 26,592,680 299,178
Net income 2,935,786 2,935,786
Translation (loss) (1,189,577) (1,189,577)
Purchase of 10,900
treasury shares
Cash dividends paid
($.18 per share)
(922,053)
Comprehensive income 1,746,209
Balance December 31,2000 28,606,413 (890,399)
Net (loss) (4,617,315) (4,617,315)
Translation (loss) (222,013) (222,013)
Derivative financial
instrument fair value
adjustment 36,851 36,851
Cash dividends paid
($.135 per share) (691,351)
Comprehensive (loss) (4,802,477)
Balance December 31, 23,297,747 (1,075,561)
2001
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Shareholders Equity
Years ended December 31, 2001, 2000 and 1999
Total
Treasury Shareholders
Stock Equity
Balance January 1, 1999 $ (381,937) $43,329,254
Net income 1,729,160
Translation (loss) (57,611)
Exercise of 19,887 stock
Options 90,930
Purchase of 141,290
treasury shares (820,833)
(820,833)
Cash dividends paid
($.18 per share) (934,303)
Comprehensive income
Balance December 31,
1999 (1,202,770) 43,336,597
Net income 2,935,786
Translation (loss) (1,189,577)
Purchase of 10,900
treasury shares (62,308)
(62,308)
Cash dividends paid
($.18 per share) (922,053)
Comprehensive income
Balance December 31,
2000 (1,265,078) 44,098,445
Net (loss) (4,617,315)
Translation (loss) (222,013)
Derivative financial
instrument fair value 36,851
adjustment
Cash dividends paid
($.135 per share) (691,351)
Comprehensive (loss)
Balance December 31, (1,265,078) 38,604,617
2001
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, France, Germany, Japan, Portugal and Singapore,
operates directly or through subsidiaries in three business segments.
Under the SelasTM name, the Heat Technology segment designs and
manufactures specialized industrial heat processing systems for the
aluminum and glassware industries worldwide, and replacement parts for
steel, aluminum, glass and other manufacturers worldwide. The Companys
Precision Miniature Medical and Electronic Products segment designs and
manufactures microminiature components, systems and molded plastic parts
primarily for the hearing instrument manufacturing industry and also for
the electronics, telecommunications, computer and medical equipment
industries. The Companys 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.
Basis of Presentation In the fourth quarter of 2001, the Company
initiated its plan to dispose of the Companys primary
custom-engineered furnace business, Selas SAS (Paris), along with two
other closely related subsidiaries Selas Italiana, S.r.L. (Milan) and
Selas U.K. Derbyshire. These subsidiaries form the Companys large
custom-engineered furnaces division used primarily in the steel and
glass industries worldwide. The furnaces engineered by this division
are custom-engineered to meet customer specific requirements. The
Company has accounted for the plan to dispose of the subsidiaries as a
discontinued operation and, accordingly, has reclassified the
historical financial data of these subsidiaries. See further
information in note 2 to the consolidated financial statements.
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 majority interest in
Nippon Selas Company 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.
Revised costs may be affected by changes in material purchase price
estimates, labor and subcontractor completion estimates and other
factors related to the contract. 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 engineered contracts are based on past
experience of similar projects. Due to the nature of engineered
contracts, the guarantee obligations and estimated future costs will
vary significantly 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.
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
Companys 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
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 $1,523,000 in 2001,
$1,182,000 in 2000 and $1,260,000 in 1999. 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 accounting principles
generally accepted in the United States of America. Actual results
could differ from those estimates.
Comprehensive Income (Loss) Comprehensive income (loss) consists of
net income (loss), foreign currency translation adjustments, and
derivative financial instrument gains and is presented in the
consolidated statements of shareholders equity.
Segment Disclosures The Companys 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.
New Accounting Standards Adopted The Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of SFAS No. 133 as of January 1,
2001. These Statements establish accounting and reporting standards
for derivative instruments. The cumulative effect of the adoption of
these statements was a decrease to other comprehensive (loss) of less
than $45,000.
New Accounting Pronouncements - In July, 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 141, "Business Combinations". Statement 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. The Company had no
significant acquisitions after June 30, 2001.
Also in July, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which replaces the requirement to amortize
intangible assets with indefinite lives and goodwill with a requirement
for a transitional impairment test. Statement 142 requires an
evaluation of intangible assets and their useful lives. After
transition, the impairment tests will be performed annually in
accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Intangible assets with definite useful lives are required to be
amortized over their respective estimated useful lives and also
reviewed for impairment in accordance with SFAS No. 121.
As of the date of adoption, the Company has unamortized goodwill in the
amount of $15,632,000, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to
goodwill was approximately $664,036 and $733,000 for the year ended
December 31, 2001 and 2000, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practical to reasonably estimate the impact of adopting these
Statements on the Company's financial statements at the date of this
report.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations with the retirement of long-lived
assets that result from the acquisition, construction, development and
(or) normal use of the asset. Adoption is required for fiscal years
beginning after June 15, 2002, with earlier adoption encouraged. The
Company is in the process of analyzing the implications of SFAS 143 and
does not believe that the adoption of this statement will have a
material impact on the net earnings of the Company.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS Statement 144 supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions
of that Statement. SFAS Statement 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held
for sale. SFAS Statement 144 is effective for fiscal years beginning
after December 15, 2001. The Company is in the process of analyzing
the implications of this statement and does not expect the guidance to
have a material impact on the net earnings of the Company.
2. DISCONTINUED OPERATIONS
In the fourth quarter of 2001, the Company initiated its plan to
dispose of the Companys primary custom-engineered furnace business,
Selas SAS (Paris), along with two other closely related subsidiaries
Selas Italiana, S.r.L. (Milan) and Selas U.K. (Derbyshire). These
subsidiaries form the Companys large custom-engineered furnaces
division used primarily in the steel and glass industries worldwide.
The furnaces engineered by this division are custom-engineered to meet
customer specific requirements. These subsidiaries generated
approximately $15.6 million and $27.3 million of revenue and a loss
from discontinued operations of $5.3 million and $69,000 in 2001 and
2000, respectively. The Company has accounted for the plan to dispose
of the subsidiaries as a discontinued operation and, accordingly, has
reclassified the historical financial data of these subsidiaries.
The following table shows the results of operations of the Companys
large custom engineering business.
Years ended December 31
2001 2000 1999
(000 s Omitted)
Sales, net $ 15,624 $ 27,322 $ 25,249
Costs and expenses 19,057 26,754 25,514
Operating income (loss) from
operations (3,433) 568 (265)
Other income (expense), net (453) (670) (584)
(Loss) from operations before tax
(benefit) (3,886) (102) (849)
Income tax (benefit) 1,389 (33) (840)
Net (loss) from discontinued
operations (5,275) (69) (9)
The following table shows the component assets and liabilities of the
Companys net assets of the discontinued operations.
December 31,
2001 2000
(000s Omitted)
Current assets $ 13,692 $ 19,296
Property plant and equipment, net 3,316 3,657
Other assets 8 462
Current liabilities (9,755) (18,713)
Other liabilities (625) (3,025)
Net assets of the discontinued 6,636 1,677
operations
The Company anticipates paying the discontinued operations long-term debt
of $2,273,216 and notes payable of $5,940,979 and therefore has reclassified
these amounts into continuing operations as of December 31, 2001.
Certain notes to these consolidated financial statements have been
restated to reflect the Companys presentation of discontinued
operations.
3. ACQUISITIONS
On January 11, 2001, the Company acquired the stock of Lectret, a
Singapore manufacturer of microphone capsules. The purchase price was
approximately $1.1 million with provision for contingent consideration
that could increase the total purchase price to approximately $1.7
million. The purchase price was funded by additional bank borrowings
of approximately $.4 million and notes payable to previous shareholders
of approximately $.6 million. In October, 1998, the Company acquired a
product manufacturing line from Lectret which was newly formed as RTI
Technologies PTE LTD.
On April 25, 2001, a minority interest in Nippon Selas was sold to
three directors of Nippon Selas for approximately $15,000.
On June 6, 2000, the Company acquired the remaining 50.1% equity
interest in Nippon Selas, a Japanese sales and engineering firm
previously accounted for on the equity method. The purchase price was
$50,000 and the acquisition was accounted for as a purchase.
On January 12, 2000, the Company acquired the stock of Ermat S.A., 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 acquisitions were 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. The pro forma results of operations
as if the acquisitions had occurred in the beginning of 2001 and 2000
have not been presented as the impact is not material.
4. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Years ended December 31
2001 2000 1999
Interest received $ 22,507 $ 59,922 $ 50,875
Interest paid 543,243 540,965 541,240
Income taxes paid 1,520,975 1,422,539 1,121,582
5. BUSINESS SEGMENT INFORMATION
The Company has three operating segments. The Company is engaged in
providing engineered heat technology equipment, replacement parts 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 manufacturers of original equipment
for light trucks and vans. The results of operations and assets of
these segments for the years ended December 31, 2001, 2000 and 1999 are
prepared on the same basis as the consolidated financial statements.
The accounting policies for each segment are described in the Companys
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, general
and administrative expenses. (Losses) from discontinued operations
have not been allocated to any one of the business segments.
For the year ended
December 31, 2001 Segments
Tire Holders,
Lifts and
Heat Related
Technology Products
(a)
Sales, net $ 33,515,080 $15,007,961
Operating costs and expenses 1,967,080 13,964,608
General corporate expenses, net
Operating income 1,548,000 1,043,353
Interest expense 144,446 --
Interest expense corporate -- --
Interest (income) (17,046) --
Other (income) expense, net 69,301 (12,636)
Income from continuing operations
before 1,351,299 1,055,989
income taxes
Income taxes 820,219 376,535
Income taxes (benefits) general
corporate expenses, net -- --
Income from continuing operations 531,080 679,454
(Loss) from discontinued
operations, net of income tax -- --
Net income (loss) 531,080 679,454
Depreciation and amortization 471,439 199,204
Property, plant and equipment additions 193,629 19,571
Total assets continuing operations 22,275,232 6,289,412
Total assets discontinued operations -- --
Total assets 22,275,232 6,289,412
(a)The Companys large custom-engineered subsidiaries generated
approximately $15.6 million, $27.3 million and $25.2 million of revenue in
2001, 2000 and 1999, respectively, and a loss from discontinued operations
of $5.3 million, $69,000 and $9,000 in 2001, 2000 and 1999 respectively.
These sales have been reclassified to discontinued operations.
For the year ended
December 31, 2001 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales, net $37,786,762 $ 86,309,803
Operating costs and expenses 36,924,326 82,856,014
General corporate expenses, net 1,260,594
Operating income 862,436 2,193,195
Interest expense 211,625 356,071
Interest expense corporate -- 159,276
Interest (income) (80,355) (97,401)
Other (income) expense, net 87,208 143,873
Income from continuing operations before
income taxes 643,958 1,631,376
Income taxes 344,955 1,541,709
Income taxes (benefits) general
corporate expenses, net -- (567,948)
Income from continuing operations 299,003 657,615
(Loss) from discontinued
operations, net of income tax -- (5,274,930)
Net income (loss) 299,003 (4,617,315)
Depreciation and amortization 3,354,751 4,025,394
Property, plant and equipment additions 2,118,913 2,332,113
Total assets continuing operations 40,899,197 69,463,841
Total assets discontinued operations -- 6,636,127
Total assets 40,899,197 76,099,968
For the year ended
December 31, 2000 Segments
Tire Holders,
lifts and
Heat Related
Technology Products
(a)
Sales, net $31,857,192 $17,784,697
Operating costs and expenses 31,405,853 15,624,462
General corporate expenses, net
Operating income 451,339 2,160,235
Interest expense 115,392 --
Interest expense corporate
Interest (income) (20,009) --
Loss of affiliate 9,341 --
Other (income) expense, net (415,283) (9,611)
Income from continuing operations
before 761,898 2,169,846
income taxes
Income taxes 295,498 801,342
Income taxes (benefits) general
corporate expenses, net -- --
Income from continuing operations 466,400 1,368,504
(Loss) from discontinued
operations, net of income tax -- --
Net income 466,400 1,368,504
Depreciation and amortization 548,463 210,548
Property, plant and equipment 339,083 244,486
additions
Total assets continuing operations 26,628,396 6,160,277
Total assets discontinued -- --
operations
Total assets 26,628,396 6,160,277
For the year ended
December 31, 2000 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales, net $39,662,563 $ 89,304,452
Operating costs and expenses 36,308,306 83,338,621
General corporate expenses, net 980,580
Operating income 3,354,257 4,985,251
Interest expense 307,080 422,472
Interest expense corporate 151,421
Interest (income) (24,563) (44,572)
Loss of affiliate 9,341
Other (income) expense, net 6,643 (418,251)
Income from continuing operations before 3,065,097 4,864,840
income taxes
Income taxes 1,216,265 2,313,105
Income taxes (benefits) general
corporate expenses, net -- (452,800)
Income from continuing operations 1,848,832 3,004,535
(Loss) from discontinued
operations, net of income tax -- (68,749)
Net income 1,848,832 2,935,786
Depreciation and amortization 3,013,741 3,772,752
Property, plant and equipment additions 3,092,361 3,675,930
Total assets continuing operations 40,127,165 72,915,838
Total assets discontinued operations -- 1,676,929
Total assets 40,127,165 74,592,767
For the year ended
December 31, 1999 Segments
Tire Holders,
Lifts and
Heat Related
Technology Products
(a)
Sales, net $ 23,772,918 $18,565,455
Operating costs and expenses 22,987,265 16,444,340
General corporate expenses, net
Operating income 785,653 2,121,115
Interest expense 48,547 --
Interest expense corporate
Interest (income) (17,309) --
Loss of affiliate 2,181 --
Other (income) expense, net 214,424 (1,575)
Income from continuing operations
before income taxes 537,810 2,122,690
Income taxes 824,400 774,212
Income taxes (benefits) general
corporate expenses, net -- --
Income (loss) from continuing (286,590) 1, 348,478
operations
(Loss) from discontinued
operations, net of income tax -- --
Net income (loss) (286,590) 1,348,478
Depreciation and amortization 442,696 210,848
Property, plant and equipment 768,627 147,614
additions
Total assets continuing operations 19,115,220 6,291,998
Total assets discontinued -- --
operations
Total assets 19,115,220 6,291,998
For the year ended
December 31, 1999 Segments
Precision
Miniature
Medical and
Electronic
Products Total
Sales, net $35,500,553 $ 77,838,926
Operating costs and expenses 33,108,532 72,540,137
General corporate expenses, net 956,459
Operating income 2,392,021 4,342,330
Interest expense 419,813 468,360
Interest expense corporate 65,836
Interest (income) (33,563) (50,872)
Loss of affiliate -- 2,181
Other (income) expense, net 102,885 315,734
Income from continuing operations
before income taxes 1,902,886 3,541,091
Income taxes 612,955 2,211,567
Income taxes (benefits) general
corporate expenses, net -- (408,918)
Income (loss) from continuing 1,289,931 1,738,442
operations
(Loss) from discontinued
operations, net of income tax -- (9,282)
Net income (loss) 1,289,931 1,729,160
Depreciation and amortization 3,036,400 3,689,944
Property, plant and equipment additions 2,925,950 3,842,191
Total assets continuing operations 37,072,946 62,480,164
Total assets discontinued operations -- 4,563,551
Total assets 37,072,946 67,043,715
The geographical distribution of identifiable assets and net sales to
geographical areas for the years ended December 31, 2001, 2000 and 1999
are set forth below:
Identifiable Assets
2001 2000 1999
United States $ 58,343,853 $ 58,700,344 $ 54,083,677
Other 11,119,988 14,215,494 8,396,487
Discontinued operations 6,636,127 1,676,929 4,563,551
Consolidated 76,099,968 74,592,767 67,043,715
Discontinued operations are primarily located in France.
Net Sales to Geographical
Areas
United States $ 42,348,803 $ 55,145,248 $ 47,338,457
France 11,690,565 9,699,839 9,830,126
Germany 3,018,314 1,893,345 2,088,390
All other countries 29,252,121 22,566,020 18,581,953
Consolidated 86,309,803 89,304,452 77,838,926
Due to the nature of the Companys 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, Singapore and Canada.
Consolidated net sales in 2001 do not result from sales to any one
individual customer in excess of 10% of total sales. Consolidated net
sales in 2001 include approximately $22,167,000 attributable to
customers in the steel industry.
Consolidated net sales in 2000 do not result from sales to any one
individual customer in excess of 10% of total sales. Approximately
$1,855,000 of consolidated net sales were attributable to customers in
the steel industry.
Consolidated net sales in 1999 include approximately $7,983,000 or
10.3% from one customer executed by the Companys tire holders and
lifts group. Approximately $957,000 of consolidated net sales were
attributable to customers in the steel industry.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Companys financial instruments at December 31, 2001 and
2000. The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between
willing parties.
2001
Carrying Fair
Amount Value
Financial assets
Cash, including cash equivalent $ 3,636,673 $ 3,636,673
Accounts and notes receivables 17,376,784 17,376,784
Financial liabilities
Notes payable 9,422,202 9,422,202
Trade accounts payables 10,232,880 10,232,880
Customers advance payments
on contracts 2,809,988 2,809,988
Other accrued liabilities 5,100,021 5,100,021
Long-term debt 3,214,934 3,335,292
2000
Carrying Fair
Amount Value
Financial assets
Cash, including cash equivalents $ 3,782,359 $ 3,782,359
Accounts and notes receivables 22,837,518 22,837,518
Financial liabilities
Notes payable 6,264,415 6,264,415
Trade accounts payables 9,908,141 9,908,141
Customers advance payments
on contracts 2,624,038 2,624,038
Other accrued liabilities 4,590,936 4,590,936
Long-term debt 807,936 773,456
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.
Long-term debt: The fair value of the Companys 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 Companys bankers.
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.
7. INVENTORIES
Inventories consist of the following:
Finished
Raw Work-in products and
December 31 materials process components Total
2001
Domestic $4,042,514 $3,584,804 $4,122,735 $11,750,053
Foreign 551,315 1,270,233 238,608 2,060,156
Total 4,593,829 4,855,037 4,361,343 13,810,209
2000
Domestic 3,282,829 2,461,074 4,444,169 10,188,072
Foreign 455,365 533,196 200,111 1,188,672
Total 3,738,194 2,994,270 4,644,280 11,376,744
8. LONG-TERM CONTRACTS AND RECEIVABLES
Accounts and notes receivable at December 31, 2001 and 2000 include the
following elements from long-term contracts:
2001 2000
Amounts billed $ 686,150 $ 2,277,383
Retainage, due upon completion 69,146
Unbilled receivables 1,118,641 738,034
Total 1,804,791 3,084,563
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 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, 2001 will be billed in 2002.
Inventories include $145,616 relating to long-term sales contracts at
December 31, 2001 and $11,897 at December 31, 2000.
At December 31, 2001 and 2000, the Company had $1,689,816 and
$1,457,509, respectively, of trade accounts receivable due from major
U.S. automotive manufacturers. At December 31, 2001 and 2000, the
Company had $4,041,653 and $5,315,136, respectively, of trade accounts
receivable due from hearing aid manufacturers. The Company also had
$505,064 and $2,057,770 at December 31, 2001 and 2000, respectively, in
currently billed and unbilled receivables from long-term contracts for
customers in the aluminum and glassware industry in North America and
Europe.
The following analysis provides a detail of revenue recognition
methodology by segment for the year ended December 31, 2001.
Precision
Tile Holders Miniature Medical
Heat Lifts and and Electronic
Technology Related Products Products Total
Upon shipment $ 9,853,850 $15,007,961 $37,786,762 $ 62,648,573
Percentage of
completion 23,661,230 23,661,230
Total revenue 33,515,080 15,007,961 37,786,762 86,309,803
9. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable
Notes payable at December 31, 2001 and 2000 are summarized below:
2001 2000
Notes payable:
Short term borrowings, European banks $6,140,731 $ 882,415
Short-term borrowings, domestic banks 2,977,526 5,382,000
Short-term borrowings, Asian banks 303,945 --
Total notes payable 9,422,202 6,264,415
Consolidated European subsidiaries have working capital credit
arrangements with European banks aggregating $8,694,000. Of this
amount, $6,141,000 may be used to borrow funds for working capital or
guarantee customer advance payments on contracts. The remaining
$2,553,000 may be used only for guaranteeing customer advance payments,
of which $2,553,000 was utilized at December 31, 2001 at interest rates
ranging from .5% to .75%. At December 31, 2001 the Companys European
subsidiaries had borrowings of $6,141,000, which bear interest at
annual rates ranging from 5.5% to 9.05%. Certain of these credit
arrangements have no expiration dates and are guaranteed by the
Company. The European working capital credit arrangements were scheduled
to expire April 15, 2002.
The maximum amounts of short-term borrowings and bank guarantees at any
month end were $10,055,000 in 2001, $3,439,000 in 2000, and $2,327,000
in 1999. The average short-term borrowings and bank guarantees
outstanding during 2001, 2000 and 1999 amounted to $8,264,000,
$2,665,000 and $1,395,000, respectively. The average short-term
interest rates in 2001, 2000 and 1999 for outstanding borrowings were
5.0%, 7.9% and 8.3%, respectively.
The Company and its domestic subsidiaries, entered into revolving
credit loan facilities under which borrowings or letters of credit
aggregating $4,500,000 and a Singapore dollar denominated term loan in
the amount of $934,066 (S$1,700,000) could be outstanding at any one
time. Borrowings of $2,978,000 as of December 31, 2001 under the
facility bear interest at a rate of 1.5% above LIBOR (3.37375% at
December 31, 2001) and a commitment fee of .25% per annum is payable on
the unborrowed portion of the line. The domestic revolving loan credit
facilities were scheduled to expire April 15, 2002.
The maximum amounts of short-term borrowings at any month end 2001 were
$4,112,000. The average short-term borrowings outstanding during 2001
were $2,897,000. The average short-term interest rate in 2001 was 5.3%.
A subsidiary of the Company located in Singapore has a credit facility
in the amount of $659,341 (S$1,200,000) of which $304,000 was
outstanding at December 31, 2001. Maximum borrowings were $433,000 and
average borrowings were $321,000. Borrowings under the facility bear
interest at 6%, payable monthly. The Singapore credit facility was
scheduled to expire April 15, 2002.
Long-Term Debt
Long-term debt at December 31, 2001 and 2000 is summarized below:
2001 2000
Long-term debt:
Term loans, domestic banks $1,783,333 $ 816,667
Term loans, European banks 2,236,365 25,938
Mortgage note 682,500 772,500
Other borrowings 8,769 11,291
4,710,967 1,626,396
Less: current maturities 1,496,033 818,460
3,214,934 807,936
The terms of the domestic loan agreements require monthly principal
payments of approximately $33,333 through February, 2006 and $58,333 to
February 2002. Additional payments of principal are required depending
upon the annual earnings of the Companys domestic operations and as a
result of this requirement, no payment is due in 2002. At December 31,
2001, the borrowings under the credit agreement bore interest, payable
monthly, at an interest rate of 1.5% above LIBOR (3.37375% at December
31, 2001). The credit agreement is subject to a prepayment penalty of
3%, to the extent the loan is paid off with additional borrowings.
The Companys French subsidiary, Selas (SAS), financed its premises
outside of Paris with bank borrowings maturing August 31, 2006 with
required quarterly installments of principal of $40,773 (FF 300,000).
The loan carries interest payable quarterly at the Euro Interbank
Offered Rate (EURIBOR) plus .7% (4.03% at December 31, 2001). The loan
balance as of December 31, 2001 was $773,905 (FF 5,400,000). 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 mortgage note is payable monthly at $7,500 per month and carries a
variable interest rate of LIBOR plus 1.25%. At December 31, 2001 the
principal balance was $682,500 and the interest rate was 3.12375%. The
aggregate maturities of long-term debt for the five years ending
December 31, 2006 and thereafter are as follows:
Years ending December 31 Aggregate Maturity
2002 $ 1,496,033
2003 1,074,077
2004 1,383,546
2005 644,247
2006 113,064
2007 and thereafter
4,710,967
The domestic loan and the revolving credit loan facilities are secured
by the Companys domestic assets, and the Companys 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 $26.6 million through December 31, 2001
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 September 30, 2001, the Company did not meet the
tangible capital funds covenant of its existing loan and revolving credit
facilities. The Company has obtained waivers from the bank through
April 15, 2002. The Company has been negotiating with the bank to
obtain new domestic revolving credit facilities, new domestic long-term
financing and a new European working capital credit arrangement that is
used for working capital or guarantee customer advance payments on
contracts.
On April 15, 2002, the Company entered into a second waiver and amendment
agreement for its domestic and foreign revolving credit and term loan
facilities, and obtained a new domestic supplemental credit facility in the
amount of $5,000,000 to be used for additional domestic borrowings and for
the issuance of advance payment guarantees. Borrowings under the amended
credit facilities bear interest at LIBOR plus 1.5% to 2.5% until the sale
of the discontinued operations at which time the remaining credit facilities
after paydown with proceeds, if any, from the sale bear interest at LIBOR
plus 1.5% to 2.0% for the remaining term of the loan and a commitment fee
of .25% per annum is payable on the unborrowed portion. In addition, the
Company has agreed to pay a nonrefundable commitment fee of $150,000 plus
an amount equal to 2% of that portion of the gross price of the sale of the
European discontinued operation in excess of 7,000,000 Euros.
The Companys domestic revolving credit loan facilities of $2,977,526 mature
on January 31,2003. The European term loan and credit facilities of $1,499,311
and $5,328,390,respectively, mature on the earlier of January 31, 2003 or the
date of sale of the discontinued operations. The domestic term loan credit
facilities of $2,465,833 continue to expire during the period from
July 1, 2004 and February 1, 2006. The Companys guarantee customer advance
payments of $1,960,418 expire on the earlier of January 31, 2003 or the date
of sale of the discontinued operations. The new domestic supplemental credit
facility of $5,000,000 matures on the earlier of January 31, 2003 or the
date of the sale of the discontinued operations.
In connection with the second waiver and amendment agreement, the Company has
pledged as collateral substantially all of the assets of the Companys domestic
and foreign subsidiaries except for those assets that are impractical to
pledge under local law. The credit facilities contain restrictive covenants
regarding the payment of cash dividends, capital expenditures, acquisitions,
maintenance of working capital, net worth and shareholders equity, along
with the maintenance of certain financial ratios.
As of December 31, 2001, the Company was not required to maintain any
financial covenants due to the receipt of a waiver from the financial
institution. Management believes that the Company will be able to
maintain the amended covenants through January 1, 2003.
Our ability to pay the principal and interest on our indebtedness as it comes
due will depend upon our current and future performance. Our performance is
affected by general economic conditions and by financial, competitive,
political, business and other factors. Many of these factors are beyond our
control. We believe that the amended credit facility combined with funds
expected to be generated from operations, the available borrowing capacity
through its revolving credit loan facilities, the potential sale of the
European subsidiaries, curtailment of the dividend payment and control of
capital spending will be sufficient to meet its anticipated cash requirements
for operating needs. If, however, we do not generate sufficient cash or
complete such financing on a timely basis, we may be required to seek
additional financing or sell equity on terms which may not be as favorable
as we could have otherwise obtained. No assurance can be given that any
refinancing, additional borrrowing or sale of equity will be possible when
needed or that we will be able to negotiate acceptable terms. In addition,
our access to capital is affected by prevailing conditions in the financial
and equity capital markets, as well as our own financial condition.
10. 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, 2001, the Companys French subsidiary was a
party to one interest rate swap agreement. The interest rate swap
agreement is with major European financial institutions and has a
total notional amount of $.9 million at December 31, 2001. 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 2001, 2000 and 1999 in
connection with the swap agreement amounted to $32,943, $47,648 and
$69,293, respectively.
The fair value of the interest rate swap agreement was $.8 million
at December 31, 2001. 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.
The Companys policy is to minimize its cash flow exposure to
adverse changes in interest rates. This is accomplished through a
controlled program of risk management that includes the use of
derivative financial instruments. The Companys objective is to
maintain economically balanced interest risk management strategies
that provide adequate protection from significant fluctuations in
the interest markets.
Hedge uneffectiveness and the portions of derivative gains and
losses excluded from assessments of hedge effectiveness related to
the Companys outstanding cash flow hedges and which were recorded
to earnings for the year ended December 31, 2001, were less than
$0.1 million. Changes in fair value of derivatives qualifying as
cash flow hedges are recorded in accumulated other comprehensive
income (loss). The cumulative effect of the adoption of these
statements was a decrease to other comprehensive (loss) of less than
$45,000. At December 31, 2001, the net deferred after-tax hedging
gain in accumulated other comprehensive income was $36,851 all of
which is expected to be realized in earnings over the next twelve months
ending December 31, 2002, at the time the underlying hedging transactions
are realized. At various times subsequent to December 31, 2002, the
Company expects gains from cash flow hedge transactions to total in
the aggregate, approximately $100,000. The Company recognized its
derivative gains and losses in the interest expense line of the
consolidated statement of operations.
Fair values relating to derivative financial instruments reflect the
estimated amounts that the Company would receive or pay to terminate
the contracts at the reporting date based on quoted market prices of
comparable contracts as of December 31, 2001 and 2000. At December
31, 2001 and 2000, derivative financial instruments consisted
primarily of interest rate swap contracts.
11. OTHER ACCRUED LIABILITIES:
Other accrued liabilities at December 31, 2001 and 2000 are as
follows:
2001 2000
Salaries, wages and commissions $ 1,803,782 $ 1,834,511
Taxes, including payroll withholdings
And VAT, excluding income taxes 992,733 681,551
Accrued pension costs 951,923 964,958
Accrued professional fees 579,200 330,955
Accrued insurance 101,463 202,534
Other 670,920 576,427
5,100,021 4,590,936
12. DOMESTIC AND FOREIGN INCOME TAXES
Domestic and foreign income taxes (benefits) are comprised as follows:
Years ended December 31
2001 2000 1999
Current
Federal $ 765,897 $1,596,045 $ 501,519
State 57,858 322,603 7,194
Foreign 212,577 269,390 744,683
1,036,332 2,188,038 1,253,396
Deferred
Federal (63,773) (67,999) 496,490
State (16,575) (5,942) 125,358
Foreign 17,777 (253,792) (72,595)
(62,571) (327,733) 549,253
Income taxes 973,761 1,860,305 1,802,649
Income (loss) before income taxes is as follows:
Foreign (284,348) 162,322 654,125
Domestic 1,915,724 4,702,518 2,886,966
1,631,376 4,864,840 3,541,091
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
2001 2000 1999
Tax provision at statutory rate 34.0% 34.0% 34.0%
Valuation allowances-
foreign losses 17.7 1.2 .1
Effect of foreign tax rates 2.4 (.9) 12.6
Goodwill amortization 8.5 1.9 3.9
State taxes net of federal benefit 1.7 4.4 2.5
Tax benefits related to export sales (7.4) (2.7) (3.9)
Other 2.8 .3 1.7
Domestic and foreign income tax rate 59.7% 38.2% 50.9%
The significant components of deferred income taxes (benefits) for the
years ended December 31, 2001, 2000 and 1999 are as follows:
Years ended December 31
2001 2000 1999
Deferred income tax (benefit) $ (66,747) $ (320,747) $ 712,953
Increase (decrease) in
beginning-of-the
year balance of the valuation
allowance for deferred tax assets . 20,154 (15,661) (176,524)
Currency translation adjustment (15,978) 8,675 12,824
(62,571) (327,733) 549,253
Continuing operations income tax 973,761 1,860,305 1,802,649
Discontinued operations income tax
(benefit) 1,388,738 (32,927) (839,574)
Total income tax 2,362,499 1,827,378 963,075
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below:
2001 2000
Deferred tax assets:
Postretirement benefit obligations $1,197,427 $1,234,452
Net operating loss carryforwards 1,386,218 1,387,575
State income taxes 464,332 356,371
Guarantee obligations and estimated future
costs of 167,595 90,748
service accruals
Employee pension plan obligations 323,654 328,086
Compensated absences, principally due to
accrual
for financial
reporting purposes 204,508 191,541
Other 274,370 373,760
Total gross deferred tax assets 4,018,104 3,962,533
Less: valuation allowance 1,105,870 1,085,716
Net deferred tax assets 2,912,234 2,876,817
Deferred tax liabilities:
Plant and equipment, principally due to
differences 899,624 980,238
in depreciation and capitalized interest
Other 140,787 174,418
Total gross deferred tax liabilities 1,040,411 1,154,656
Net deferred tax assets 1,871,823 1,722,161
Domestic and foreign deferred taxes are comprised as follows:
December 31, 2001 Federal State Foreign Total
Current deferred asset $ 1,068,263 $ 122,150 $ 331,396 $1,521,809
Non-current deferred asset
(liability) 149,066 271,454 (70,506) 350,014
Net deferred tax asset 1,217,329 393,604 260,890 1,871,823
December 31, 2000 Federal State Foreign Total
Current deferred asset $ 1,081,603 $ 7,050 $ 368,732 $1,457,385
Non-current deferred asset
(liability) 89,883 271,679 (96,786) 264,776
Net deferred tax asset 1,171,486 278,729 271,946 1,722,161
The valuation allowance for deferred tax assets as of January 1, 2001
was $1,085,716. The net change in the total valuation allowance for
the year ended December 31, 2001 was an increase of $20,154. The
remaining valuation allowance of $1,105,870 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 statements 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, 2001.
At December 31, 2001 the Company has net operating loss carryforwards
for foreign income tax purposes of $3,995,486 of which $617,277 expire
in 2005, $914,065 expire in 2006 and $2,464,144 have no expiration date
and are available to offset future foreign taxable income. The Company
has recognized a valuation allowance for certain net operating loss
carryforwards at foreign operations where utilization will not be
realized.
No provision has been made for United States income tax which may be
payable on undistributed income of the Companys foreign subsidiaries
since it is the Companys 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, 2001 the Company has not
recognized a deferred tax liability of approximately $57,000 on
undistributed retained earnings of such subsidiaries of $169,000.
13 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
Companys statements of financial position at December 31, 2001 and
2000:
December 31
2001 2000
Change in Projected Benefit Obligation
Projected benefit obligation at January 1 $ 5,185,872 $ 4,996,028
Service cost (excluding administrative 157,664 188,700
expenses)
Interest cost 358,074 347,668
Actuarial (gain) loss 74,144 (19,148)
Benefits paid (353,435) (327,376)
Projected benefit obligation at December 31 5,422,319 5,185,872
Change in Fair Value of Plan Assets
Fair value of plan assets at January 1 5,345,128 5,450,575
Actual return on plan assets (387,451) 262,929
Employer contributions 93,069
Expenses (33,014) (41,000)
Benefits paid (353,435) (327,376)
Fair value of plan assets at December 31 4,664,297 5,345,128
Funded status 159,256
(758,022)
Unrecognized net actuarial (gain)
(196,216) 1,127,997)
Unrecognized prior service cost 2,315 3,783
(Accrued) pension cost at December 31 (951,923) (964,958)
Net periodic pension cost for these plans for the years 2001, 2000 and
1999 included the following components:
Years ended December 31
2001 2000 1999
Service cost benefits earned during
the period $ 185,465 $ 217,458 $ 240,928
Interest cost on projected benefit
obligation 358,074 347,668 330,527
Expected return on assets (410,366) (421,230) (376,931)
Amortization of net obligation 55,124 55,121
Amortization of prior service cost 1,468 2,146 10,427
Recognized net actuarial (gain) (54,607) (65,446) (2,628)
Net periodic pension cost 80,034 135,720 257,444
The discount rate used to determine the projected benefit obligation
for both the salaried and union plans was 7% for 2001 and 7.25% for
2000 and 1999.
The projected benefit obligation was determined by using an assumed
rate of increase in compensation levels of 5% for the years 2001, 2002
and 1999 for the salaried plan. The expected long-term rate of return
on assets for both plans was 8%.
The Companys French subsidiary, CFR, is 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. There was no contribution to profit
sharing in 2001 or 2000, however, 1999 had expense of $110,337.
The Company has defined contribution plans for most of its domestic
employees. 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 2001, 2000 and 1999
was $377,701, $328,452, and $383,015, respectively.
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 for
certain employees who retire after that date. 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 Companys 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 Companys
consolidated balance sheet at December 31, 2001 and 2000 for
postretirement medical benefits:
Accumulated postretirement medical benefit obligation:
December 31
2001 2000
Change in Projected Benefit Obligation
Projected benefit obligation at January 1 $1,377,085 $ 1,476,501
Service cost (excluding administrative 35,802 33,382
expenses)
Interest cost 94,401 98,656
Actuarial (gain) loss 33,941 (92,154)
Benefits paid (159,621) (139,300)
Projected benefit obligation at December 31 1,381,608 1,377,085
Change in Fair Value of Plan Assets
Employer contribution 159,621 139,300
Benefits paid (159,621) (139,300)
Fair value of plan assets at December 31 0 0
Funded status 1,381,608 1,377,085
Unrecognized net actuarial gain 606,319 676,156
Unrecognized prior service cost 984,036 1,059,731
Accrued postretirement benefit cost 2,971,963 3,112,972
Accrued postretirement medical benefit costs are classified as other
postretirement benefit obligations as of December 31, 2001 and 2000.
Net periodic postretirement medical benefit costs for 2001, 2000 and
1999 include the following components:
Years ended December 31
2001 2000 1999
Service cost $ 35,802 $ 33,382 $ 34,920
Interest cost 94,401 98,656 170,180
Amortization of unrecognized prior
service (75,695) (75,695)
cost
Amortization of unrecognized gain (35,896) (31,168) (16,979)
Net periodic postretirement medical 18,612 25,175 188,121
benefit cost
For measurement purposes, a 8.5% annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 2001; the rate was assumed to decrease gradually to 5% by
the year 2009 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, 2001 by $4,183 and the aggregate of the service and interest cost
components of net periodic postretirement medical benefit cost for the
year ended December 31, 2001 by $2,145.
The weighted-average discount rate used in determining the accumulated
postretirement medical benefit obligation at December 31, 2001 was 7.0%
and 2000 and 1999 were 7.25%.
The Company provides retirement related benefits to former executive
employees, and to certain foreign subsidiary employees in accordance
with industry-wide collective labor agreements. The liabilities
established for these benefits at December 31, 2001 and 2000 were
$906,985 and $659,602, respectively, and are classified as other
postretirement benefit obligations as of December 31, 2001 and 2000.
14. 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 Companys
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 2001, 2000 and 1999 were $46,007,
$38,101 and ($191,420), respectively.
15. COMMON STOCK AND STOCK OPTIONS
Under the Companys 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.
On February 20, 2001, the Board of Directors approved the 2001 Stock
Option Plan where options of up to an aggegate of 1,000,000 common
stocks may be awarded. At December 31, 2001 there were 975,000 shares
available for grant.
At December 31, 2001, there were 40,000 additional shares available for
grant under the 1998 plan. The per share weighted-average fair values
of stock options granted in 2001 ranged from $.88 to $1.54 on the date
of the grants using the Black Scholes option-pricing model with the
following weighted average assumptions: 2001 expected dividend yield
2.2%; risk-free interest rates ranged from 4.46% to 4.99%; expected
life of 6.5 years and expected volatility of the stock over the life of
the options which is based on the past 11 years of the stocks 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 Companys net income would have
been reduced to the pro forma amount indicated below:
2001 2000 1999
Net income (loss) as reported $(4,617,315) $ 2,935,786 $ 1,729,160
Net income (loss) pro forma (4,753,476) 2,740,476 1,510,137
Basic earnings (loss) per share as
reported (.90) .57 .33
Basic earnings (loss) per share pro (.93) .54 .29
forma
Options of 40,000 were granted in 2001 and options of 131,700 were
granted in 2000. No options were granted in 1999. Pro forma net income
reflects options granted in 2001 and 2000. Therefore, the full impact
of calculating compensation cost for stock options under SFAS No. 123
is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options vesting periods
of 3 to 5 years and compensation cost for options granted prior to
January 1, 1998 is not considered.
Stock option activity during the periods indicated is as follows:
Number of Weighted-average
Shares Exercise Price
Outstanding at January 1, 1999 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
Options forfeited 26,400) 9.35
Options expired (3,750) 11.42
Options granted 131,700 3.13
Outstanding at December 31, 2000 671,950 7.20
Options forfeited (14,550) 8.04
Options expired (78,000) 9.46
Options granted 40,000 3.09
Outstanding at December 31, 2001 619,400 6.63
The following summarizes information about the Companys stock options
outstanding at December 31, 2001:
Options Outstanding
Weighted Average
Range of Number Remaining
Exercise Outstanding Contractual Weighted-Average
Prices at 12/31/01 Life Exercise Price
$2.06 15,000 10.0 $2.06
3.12-3.7 156,700 9.16 3.22
5.35-7.75 223,000 3.53 6.26
9.06-10.50 224,700 6.0 9.72
Options Excercisable
Number
Exercisable Weighted-Average
at 12/31/01 Exercise Price
15,000 $ 2.06
27,007 3.13
213,000 6.19
188,820 9.77
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of unaudited quarterly results of
operations.
2001 First Second Third Fourth
Quarter Quarter Quarter Quarter (b)
Net sales (a) $23,571,000 $24,918,000 $18,696.000 $19,125,000
Gross Profit 5,586,000 5,554,000 3,302,000 4,894,000
Income (loss) from continuing
operations net of tax 629,000 724,000 (794,000) 98,000
(Loss) from discontinued
operations net of tax (331,000) (589,000) (582,000) (3,772,000)
Net income (loss) 298,000 135,000 (1,376,000) (3,674,000)
Earnings (loss) per share
Basic income (loss) per share
Continuing operations .12 . 14 (.16) .02
Discontinued operations (.06) (.11) (.11) (.74)
Basic income (loss)
per share .06 .03 (.27) (.72)
Diluted income (loss) per share
Continuing operations .12 .14 (.16) .02
Discontinued operations (.06) (.11) (.11) (.73)
Diluted income (loss)
per share .06 .03 (.27) (.71)
(a)The Companys large custom-engineered subsidiaries generated
approximately $15.6 million and $27.3 million of revenue in 2001 and
2000, respectively, and a loss from discontinued operations of $5.3
million and $69,000 in 2001 and 2000, respectively. These sales have
been reclassified to discontinued operations.
(b) In the fourth quarter of 2001, the Company determined that the
realizability of the deferred tax assets associated with their European
discontinued operations were not recoverable. The Company recognized a
valuation allowance of approximately $2.7 million.
2000 First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales $22,411,000 $22,290,000 $22,687,000 $21,915,000
Gross Profit 5,840,000 5,446,000 4,637,000 4,997,000
Income from continuing
operations net of tax 936,000 760,000 589,000 720,000
Income (loss) from
discontinued operations
net of tax 265,000 259,000 (187,000) (406,000)
Net income 1,201,000 1,019,000 402,000 314,000
Earnings (loss) per share
Basic income (loss) per
share
Continuing operations .18 .15 .12 .14
Discontinued operations .05 .05 (.04) (.08)
Basic income per share .23 .20 .08 .06
Diluted income (loss)
per share
Continuing operations .18 .15 .12 .14
Discontinued operations .05 .05 (.04) (.08)
Diluted income per
share .23 .20 .08 .06
Note: The sum of quarterly earnings may differ from full year amounts
due to rounding.
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2001
Per
Income Shares Share
Numerator Denominator Amount
Basic Earnings
Per Share
Income (loss)
Available
To common
Shareholders $(4,617,315) 5,119,214 $ (.90)
Effect of Dilutive
Securities
Stock options 14,870
Diluted earnings
Per share (4,617,315) 5,134,084 (.90)
For additional disclosures regarding the stock options, see note 15.
2000
Per
Income Shares Share
Numerator Denominator Amount
Basic Earnings
Per Share
Income (loss)
Available
To common
Shareholders $2,935,786 5,121,513 $0.57
Effect of Dilutive
Securities
Stock options 12,981
Diluted earnings
Per share 2,935,786 5,134,494 0.57
For additional disclosures regarding the stock options, see note 15.
1999
Per
Income Shares Share
Numerator Denominator Amount
Basic Earnings
Per Share
Income (loss)
Available
to common
Shareholders $1,729,160 5,196,072 $0.33
Effect of Dilutive
Securities
Stock options 12,018
Diluted earnings
per share 1,729,160 5,208,090 0.33
For additional disclosures regarding the stock options, see note 15.
18. CONTINGENCIES AND COMMITMENTS
The Company is a defendant along with a number of other parties in
approximately 253 lawsuits as of December 31, 2001 (approximately 100
as of December 31, 2000) 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 Companys 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 Companys 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 Companys consolidated financial position, liquidity, or
results of operations.
Total rent expense for 2001, 2000, and 1999 under leases pertaining
primarily to engineering, manufacturing, sales and administrative
facilities, with an initial term of one year or more, aggregated
$1,496,000, $1,318,000 and $1,339,000, respectively. Remaining rentals
payable under such leases are as follows: 2002 - $1,441,000; 2003 -
$1,431,000; 2004 - $1,356,000; 2005 - $1,237,000; 2006 and thereafter -
$4,289,000.
One of the Companys subsidiaries has a contractual obligation with one
of its suppliers to pay minimum royalties of $450,000 and to guarantee
minimum purchases of $2,122,000 of one of the suppliers products. The
payments due the supplier are as follows: 2002 - $718,000; 2003 -
$1,333,000; 2004 - $521,000.
19. RELATED-PARTY TRANSACTIONS
One of the Companys 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 2001, 2000 and 1999. Annual lease
commitments approximate $330,000 through December, 2002.
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, 2001 and
2000, 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, 2001. 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 auditing standards
generally accepted in the United States of America. 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 as of December 31,
2001 and 2000, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments
and hedging activities in 2001.
/s/ KPMG LLP
Philadelphia, Pennsylvania`
April 15, 2002