1
F O R M 1 0 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-3931
SALEM CORPORATION
- - -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 25-0923435
- - -------------------------------------------- -----------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
P.O. Box 2222, Pittsburgh, Pennsylvania 15230
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
412-276-5700
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Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
1,864,882 Shares of Common Stock were outstanding at May 1, 1996.
Page 1 of 13
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SALEM CORPORATION AND SUBSIDIARIES
I N D E X
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
and Retained Earnings for the
three months ended March 31, 1996
and 1995 (Unaudited) 3
Consolidated Balance Sheets as of
March 31, 1996 (Unaudited) and
December 31, 1995 4
Consolidated Statements of Cash Flows
for the three months ended March 31,
1996 and 1995 (Unaudited) 5
Notes to Consolidated Financial
Statements for the three months
ended March 31, 1996 (Unaudited) 6-7
Review by Independent Public Accountants 8
Review Report of Independent
Public Accountants 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
Page 2 of 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (NOTE 1)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
------- -------
(In Thousands Except
Per Share Amounts)
Gross revenues $29,496 $31,856
Cost of revenues 23,752 26,332
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Gross income 5,744 5,524
Unusual charges 44 808
Selling, general & administrative expenses 4,613 4,367
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Operating income 1,087 349
------- -------
Other income (expense):
Interest income 311 346
Interest expense (76) (66)
Other income (expense), net 115 60
(Loss) gain on foreign exchange (178) 80
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Total other income 172 420
------- -------
Income from continuing operations before
minority interest and income taxes 1,259 769
Minority interest 39 2
Provision for income taxes (550) (302)
------- -------
Income from continuing operations 748 469
Loss from discontinued operations (47) (141)
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Net income 701 328
Retained earnings, beginning of period 31,753 29,677
Cash dividends declared - (187)
------- -------
Retained earnings, end of period $32,454 $29,818
======= =======
Net income per common share:
Income from continuing operations $ .40 $ .25
Loss from discontinued operations (.02) (.07)
------- -------
$ .38 $ .18
======= =======
See accompanying notes to consolidated financial statements.
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SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(Unaudited)
A S S E T S
-----------
CURRENT ASSETS:
Cash and cash equivalents (including
restricted cash of $6,144 and $5,998) $17,263 $18,048
Restricted short-term investments 4,770 4,687
Receivables 18,633 23,890
Indebtedness of related parties, current 97 97
Contracts-in-progress 7,879 8,756
Inventories 6,527 6,018
Income tax benefit 2,898 3,078
Prepaid expenses 2,040 2,270
Investments in and advances to discontinued operations - 904
------- -------
Total current assets 60,107 67,748
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PROPERTY, PLANT AND EQUIPMENT, at cost 26,474 25,445
Less- Accumulated depreciation 16,332 16,036
------- -------
Net property, plant and equipment 10,142 9,409
OTHER ASSETS:
Investments in affiliated companies (at equity) 2,089 2,098
Income tax benefit 2,976 2,817
Other assets 3,702 3,749
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Total assets $79,016 $85,821
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Dividends payable $ - $ 280
Current maturities of long-term debt 801 680
Accounts payable (including outstanding
checks of $1,315 and $1,703) 12,247 18,288
Advance billings on contracts 8,107 8,720
Accrued income taxes 282 1,389
Accrued payroll and employee benefits 4,508 4,811
Accrued loss reserve 2,396 2,347
Other accrued liabilities 1,181 1,162
Reserves for warranty expense 3,617 3,689
Net current liabilities of discontinued operations 926 -
------- -------
Total current liabilities 34,065 41,366
LONG-TERM DEBT 1,652 1,683
OTHER NONCURRENT LIABILITIES 3,207 3,285
MINORITY INTEREST 492 531
SHAREHOLDERS' EQUITY
Preferred stock, par $25.00, authorized 112,485
shares, issued 0 shares - -
Common stock, par $.50, authorized 15,000,000
shares, issued 2,690,324 shares 1,345 1,345
Paid-in surplus 9,301 9,301
Pension adjustment (1) (1)
Retained earnings 32,454 31,753
Cumulative translation adjustment (302) (245)
Treasury stock, at cost (825,442 shares) (3,197) (3,197)
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Total shareholders' equity 39,600 38,956
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Total liabilities and shareholders'
equity $79,016 $85,821
======= =======
See accompanying notes to consolidated financial statements.
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SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1996 1995
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 748 $ 469
Adjustments for noncash items-
Depreciation and amortization 430 412
Deferred income taxes 21 (121)
Other noncurrent liabilities (78) 68
Allowance for doubtful accounts (13) 10
Equity of affiliates, net (58) 24
Reserves for warranty expense (72) 16
Cumulative translation adjustments 67 (53)
Loss from discontinued operations (47) (141)
Changes in certain assets and liabilities,
net of effects from acquired business
Receivables 5,116 5,788
Contracts-in-progress, net 251 (1,505)
Inventories (510) 118
Prepaid expenses 226 89
Accounts payable (5,874) (2,196)
Accrued income taxes (1,137) (811)
Accrued liabilities (225) 942
Minority Interest (39) (2)
Investments in/advances to discontinued operations 889 -
Net assets/liabilities of discontinued operations 926 (669)
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Net cash flows from operating activities $ 621 $ 2,438
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CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments $ (83) $ (300)
Acquisition of Enviroplant International
Group Limited - (738)
Purchases of property, plant, & equipment, net (1,169) (119)
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Net cash flows used for
investing activities $(1,252) $(1,157)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (280) $ (187)
Proceeds (payments) under financing arrangements 167 (215)
Proceeds from debt 91 -
Payments on debt (57) (69)
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Net cash flows used for
financing activities $ (79) $ (471)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH $ (75) $ 84
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NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $ (785) $ 894
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,048 20,524
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,263 $21,418
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 113 $ 17
Income taxes paid, net 1,668 823
See accompanying notes to consolidated financial statements.
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SALEM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein has been prepared by Salem
Corporation (the "Company"), without audit, for filing with the Securities and
Exchange Commission pursuant to the rules and regulations of said Commission.
The financial information presented herein, while not necessarily indicative of
results to be expected for the year, reflects all adjustments, consisting of
normal recurring adjustments, which in the opinion of the Company are necessary
for a fair statement of the results for the periods indicated. This financial
information should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
Comparative consolidated financial statements have been restated where
necessary to conform with the current year's presentation.
2. NONRECURRING CHARGES
In the first quarter of 1996, the Company recorded nonrecurring legal
and consulting charges totaling $44,000 resulting from efforts to maximize
shareholder value, including the possible sale of the Company. In the first
quarter of 1995, the Company recorded nonrecurring charges of $808,000
including $658,000 related to the possible sale of the Company and $150,000 as
the result of an SEC investigation.
3. INCOME TAXES
The Company's effective income tax rate for the three months ended
March 31, 1996 was 43.7%. This rate differed from combined federal and state
statutory rates due to losses sustained at the Company's Bermuda insurance
company for which no tax benefit is recorded and, to a lesser extent, losses
sustained by United Kingdom subsidiaries which are tax affected at only 35%.
The Company's effective income tax rate for the three months ended March 31,
1995 was 39.3%. This rate was not significantly different from a combined
federal and state statutory rate.
4. DISCONTINUED OPERATIONS
In April 1996, Enviroplant International Group Limited, a wholly owned
subsidiary of Salem Automation Limited which is a United Kingdom subsidiary of
the Company, ceased trading and began voluntary liquidation proceedings. As a
result of Enviroplant's liquidation, the Company has deconsolidated
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Enviroplant's operations in the accompanying financial statements reflecting
such operations as discontinued operations. The estimated amount required to
satisfy liabilities related to Enviroplant and to complete the liquidation
process is reflected as a net liability of discontinued operations in the
accompanying balance sheets.
5. POSSIBLE CHANGE IN CONTROL
On April 11, 1996, the Company announced that the Board of Directors
was not prepared to recommend to the Company's shareholders the offer made by
Mr. Victor Posner on April 3, 1996 to acquire the entire equity ownership of
the Company in a transaction in which shareholders would be paid $20 per share.
Because the offer made by Mr. Posner was deemed by the Board to be a serious
offer, Mr. Posner was invited to commence any necessary due diligence and has
signed a confidentiality agreement. The Board also requested that Mr. Posner
refine certain terms of his merger proposal to assure that a fair and open
bidding process for the Company's stock will be permitted to occur.
On May 9, 1996, the Company received an offer from a senior management
group lead by A.A. Fornataro, the Company's President and Chief Operating
Officer and Donald L. Hoylman, its Group Vice President, to acquire all of the
Company's stock for $22 per share through a merger. The offer was subject to
obtaining financing upon satisfactory terms and conditions and was accompanied
by a letter from NatCity Investments, Inc., financial advisors to the management
group, expressing confidence that financing can be arranged within 30 days. The
management offer is to remain open for a period of 30 days after the financing
contingency is removed. The Board of Directors is studying the terms of
management's offer and will respond as promptly as possible after concluding its
study.
Although the Company has ceased the active solicitation of offers to
acquire the Company, it is continuing to engage in discussions with other
parties who have expressed an interest in the Company.
6. INCOME PER COMMON SHARE
Per share amounts have been computed using the weighted average number
of common shares outstanding during the period (1,864,882 in 1996 and 1995).
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REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements for the three month period ended
March 31, 1996 have been reviewed prior to filing, by the Company's independent
public accountants, Arthur Andersen LLP, whose report covering their review of
the financial statements is presented on Page 9.
Page 8 of 13
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Salem Corporation:
We have reviewed the accompanying consolidated balance sheet of Salem
Corporation (a Pennsylvania corporation) as of March 31, 1996, and the related
consolidated statement of income, retained earnings and cash flows for the
three-month period ended March 31, 1996. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above in order for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Salem Corporation as of December
31, 1995, and, in our report dated March 5, 1996, we expressed an unqualified
opinion on that statement. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1995, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
Pittsburgh, Pennsylvania,
April 24, 1996
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER OF 1996 COMPARED TO FIRST QUARTER OF 1995
Gross revenues of $29.5 million in the current quarter decreased 7.5%
from the $31.9 million in the first quarter of 1995. This decrease is
primarily attributable to lower volume in the Company's mineral processing
equipment segment resulting from lower levels of orders due to market
conditions. Despite this decline in gross revenues, gross income in the
current quarter increased to $5.7 million or 3.6% from the $5.5 million gross
income in 1995. Gross income as a percent of revenues was 19.5% in the first
quarter of 1996 as compared to 17.3% in the comparable quarter of 1995. This
increase can be attributed to improved profitability on sales at virtually all
of the Company's subsidiaries.
Operating income of $1.1 million in the first quarter of 1996 is
significantly greater than the $349,000 in the first quarter of 1995, due to
the significant reduction of nonrecurring charges related to the possible sale
of the Company of $44,000 in the current quarter as opposed to $808,000 in the
first quarter of the prior year of which $658,000 was related to the possible
sale of the Company and $150,000 related to an SEC investigation. This
increase in operating income is also attributable to the achievement of a
breakeven operating position in 1996 as opposed to a $600,000 loss in 1995 at
the Company's Salem Automation Limited subsidiary in the United Kingdom. The
Company announced in April that its United Kingdom subsidiary Enviroplant
International Group Limited has commenced liquidation proceedings. It is
anticipated, based on advice from counsel, that the liquidation of Enviroplant
will not result in any further significant losses or liability to Salem
Corporation beyond that recorded in 1995.
Interest income decreased to $311,000 in the current quarter from
$346,000 in 1995. This decrease is primarily attributable to a decrease in
investable funds.
The provision for income taxes was approximately $550,000 in the first
quarter of 1996 as compared to $302,000 in the first quarter of 1995. This
increase in income taxes is due primarily to the increased level of pre-tax
U.S. income.
The Company's backlog at March 31, 1996 was $70.7 million compared to
$86.8 million at March 31, 1995 and $73.9 million at December 31, 1995.
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FINANCIAL CONDITION AND LIQUIDITY
Cash and cash equivalents of approximately $17.3 million at March 31,
1996 decreased from the $18.0 million at December 31, 1995. This decrease
reflects the generation of $600,000 cash from operations and was offset by the
use of $1.3 million cash for investing activities. Such funds were used
primarily for the purchase of equipment in the Company's metal processing
equipment segment.
The Company has two separate bonding facilities, each for the issuance
of up to $10 million of surety bonds. In connection with such facilities, the
Company has obtained $2.5 million of standby letters of credit in favor of the
issuers of such bonds. The standby letters of credit are fully collateralized
by certificates of deposit. At March 31, 1996, approximately $7.6 million of
such facilities were currently utilized.
In addition, the Company, in April 1996, has entered into an agreement
with a bank which provides, for the Company's domestic operations, a $10
million line of credit, a $5 million term loan and a $3 million lease line.
The Company's United Kingdom subsidiaries have two separate credit
facilities at one major bank: a facility for the issuance of bank guarantees
up to $2.8 million and an overdraft and loan facility of up to $1.5 million.
At May 1, 1996, $2.3 million of the bank guarantee facility and $1.4 million of
the overdraft and loan facility were utilized.
The Company believes that cash flows from operations and existing cash
assets will be sufficient to enable it to meet near-term cash requirements.
The Company's ability to meet its long-term cash requirements is dependent upon
its credit line and its ability to attain and sustain sufficient cash flows
from operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 9, 1996, a derivative action was filed in the
Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida by
Harry Lewis, individually and on behalf of others similarly situated, against
Victor Posner. The Company is named as a nominal defendant in this action.
The complaint alleges, among other things, that Mr. Posner has breached his
fiduciary duties by failing to offer an adequate price for the Company's stock
and by causing the Company to waste its corporate assets. The complaint seeks
an injunction against the consummation of Mr. Posner's offer, damages and
attorneys' and experts' fees.
A class action was filed in the Court of Common Pleas of Allegheny
County, Pennsylvania on or about May 3, 1996 by Cranston Capital Partners
against the Company's directors. The plaintiff seeks an injunction against the
consummation of Victor Posner's offer to acquire the Company's outstanding
stock for $20 per share, damages and attorneys' fees. The complaint alleges
that the Company's directors have engaged in or aided and abetted a fraudulent
plan or scheme to assure that Victor Posner can wrongfully acquire the Company
for inadequate consideration. The complaint further alleges that the Company's
directors have breached their fiduciary duties in not exercising independent
business judgment and acting to the detriment of the plaintiff and others
similarly situated in order to benefit themselves and/or their colleagues. It
is also alleged that the Company's directors failed to comply with their
fiduciary duty of candor by omitting material information concerning Mr.
Posner's offer and other offers to acquire the Company from the Company's proxy
statement issued in connection with the Annual Meeting of Shareholders held May
9, 1996. The complaint was filed prior to the receipt on May 9, 1996 of
management's offer to acquire the Company's stock for $22 per share.
The Company is engaged in ordinary litigation incidental to its
business. The Company does not believe that this litigation will have a
material adverse effect upon its financial condition.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Nonqualified Deferred Compensation Plan filed herewith as
Exhibit 10.1.
(b) No reports on Form 8-K have been filed by the Registrant
during the quarter for which this report is filed.
(c) Exhibit 27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DATE: MAY 15, 1996 SALEM CORPORATION
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(Registrant)
BY: /S/ A. A. FORNATARO
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A. A. Fornataro
President and Chief
Operating Officer
BY: /S/ GEORGE A. DOUGLAS
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George A. Douglas
Treasurer and Corporate
Controller
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