<PAGE> 1
CONFORMED
---------
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 September 30, 1995
------------------
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
-----------------------------
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 November 2, 1995.
Page 1 of 14
<PAGE> 2
SALEM CORPORATION AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
And Retained Earnings for the
three months and nine months ended
September 30, 1995 and 1994 (Unaudited) 3
Consolidated Balance Sheets as of
September 30, 1995 (Unaudited) and
December 31, 1994 4
Consolidated Statements of Cash Flows
for the nine months ended September 30,
1995 and 1994 (Unaudited) 5
Notes to Consolidated Financial
Statements for the nine months
ended September 30, 1995 (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 10-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
Page 2 of 14
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1995 1994 1995 1994
-------- -------- -------- --------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross Revenues $40,913 $34,785 $110,108 $89,736
Cost of Revenues 34,925 29,008 91,915 73,731
------- ------- -------- -------
Gross Income 5,988 5,777 18,193 16,005
Selling, general and
administrative expenses 4,656 4,275 14,773 12,609
Non-recurring charges 341 - 1,653 675
------- ------- -------- -------
Operating income 991 1,502 1,767 2,721
------- ------- -------- -------
Other income (expense):
Interest income 431 273 1,045 682
Interest expense (194) (90) (332) (269)
Equity in (losses) earnings
of affiliates (124) (9) 28 101
Other, net 10 78 241 234
------- ------- -------- -------
Total other income 123 252 982 748
------- ------- -------- -------
Income before minority interest
and income taxes 1,114 1,754 2,749 3,469
Minority interest 45 (22) 72 (116)
Provision for income taxes (534) (724) (1,303) (1,447)
------- ------- -------- -------
Net income 625 1,008 1,518 1,906
Retained earnings, beginning
of period 30,196 27,301 29,677 26,777
Cash dividends (187) (187) (561) (561)
------- ------- -------- -------
Retained earnings, end of period $30,634 $28,122 $ 30,634 $28,122
======= ======= ======== =======
Net income per common share $ .33 $ .54 $ .81 $1.02
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 14
<PAGE> 4
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
A S S E T S
-----------
CURRENT ASSETS:
Cash and cash equivalents (including
restricted cash of $5,790 and $5,373) $17,201 $20,524
Restricted short-term investments 4,001 4,315
Receivables 21,617 22,259
Indebtedness of related parties, current 97 97
Contracts-in-progress 7,771 7,407
Inventories 5,519 5,147
Income tax benefit 3,642 2,857
Prepaid expenses 2,339 2,232
------- -------
Total current assets 62,187 64,838
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost 25,838 25,456
Less- Accumulated depreciation 16,229 16,085
------- -------
Net property, plant and equipment 9,609 9,371
OTHER ASSETS:
Investments in affiliated companies (at equity) 2,210 2,344
Other restricted investments 500 600
Income tax benefit 2,464 1,792
Other assets 3,679 3,609
------- -------
Total assets $80,649 $82,554
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Dividends payable $ 187 $ 187
Current maturities of long-term debt 778 608
Accounts payable (including outstanding
checks of $2,621 and $1,975) 13,610 12,597
Advance billings on contracts 9,138 14,096
Accrued income taxes 962 758
Accrued payroll and employee benefits 4,663 4,367
Accrued loss reserve 3,178 2,595
Other accrued liabilities 1,124 1,038
Reserves for warranty expense 3,598 3,625
------- -------
Total current liabilities 37,238 39,871
LONG-TERM DEBT 1,921 2,095
OTHER NONCURRENT LIABILITIES 3,294 3,128
DEFERRED INCOME TAXES 30 -
MINORITY INTEREST 333 405
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
Retained earnings 30,634 29,677
Cumulative translation adjustment (250) (71)
Treasury stock, at cost (825,442 shares) (3,197) (3,197)
------- -------
Total shareholders' equity 37,833 37,055
------- -------
Total liabilities and shareholders'
equity $80,649 $82,554
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 14
<PAGE> 5
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1995 1994
-------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,518 $ 1,906
Adjustments for noncash items-
Depreciation and amortization 1,222 1,133
Deferred income taxes (1,424) 274
Other noncurrent liabilities 166 430
Allowance for doubtful accounts (12) (6)
Equity of affiliates, net (36) (101)
Reserves for warranty expense (27) 884
Cumulative translation adjustments (73) (194)
Changes in certain assets and liabilities-
Receivables 1,244 (2,271)
Contracts-in-progress, net (5,322) 2,743
Inventories (371) 272
Prepaid expenses (27) 520
Accounts payable 1,042 183
Accrued income taxes 230 666
Accrued liabilities 960 (369)
Minority interest (72) 161
------- -------
Net cash flows (used for) from
operating activities $ (982) $ 6,231
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments $ 314 $(2,936)
Restricted investments 100 -
Purchases of property, plant, & equipment, net (1,273) (1,068)
Dividends received from equity affiliates 245 81
Investment in affiliated companies (738) -
------- -------
Net cash flows (used for) from
investing activities $(1,352) $(3,923)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (561) $ (561)
Principal payments under financing arrangements (44) (274)
Payments on debt (426) (288)
Proceeds from debt 207 -
------- -------
Net cash flows (used for)
financing activities $ (824) $(1,123)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ (165) $ 338
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $(3,323) $ 1,523
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,524 22,204
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,201 $23,727
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 307 $ 274
Income taxes paid, net 2,220 273
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 14
<PAGE> 6
SALEM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(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, 1994.
2. NON-RECURRING CHARGES
---------------------
In the third quarter of 1995, the Company recorded $341,000 of
additional non-recurring charges as a result of legal, accounting, consulting
and directors fees incurred in efforts to maximize shareholder value, including
a possible sale of the Company. For the nine months ended September 30, 1995
these non-recurring charges amounted to $1.7 million as compared to a
non-recurring charge of $675,000 for legal fees for the nine months ended
September 30, 1994 resulting from a court ordered settlement of a shareholder
derivative suit.
3. INCOME TAXES
------------
The Company's effective income tax rates for the three and nine months
ended September 30, 1995 were 47.9% and 47.4%, respectively. Tax benefits for
losses incurred by the Company's United Kingdom subsidiaries were recorded at a
rate below a combined federal and state rate of approximately 40% and resulted
in the above effective income tax rates. The Company's effective income tax
rates for the three and nine months ended September 30, 1994 were 41.3% and
41.7%, respectively. These rates did not materially differ from a combined
federal and state rate of approximately 41%.
4. TRANSACTIONS WITH AFFILIATES
----------------------------
Effective July 1, 1995 the Company renewed its coverage for domestic
workers compensation, general liability and automobile insurance. This program
provides a $2.0 million primary and a $10.0 million umbrella coverage with
deductibles of $250,000 for automobile and workers compensation claims and
$350,000 for general liability claims. Additionally, there is a combined
aggregate $3.0 million cap on deductibles. This deductible program results in
a discontinuance of Essex Insurance Co. Ltd., the Company's 65% owned
Page 6 of 14
<PAGE> 7
Bermuda insurance corporation, as a reinsurer. Essex will continue to provide
reinsurance coverage for claims incurred prior to July 1, 1995.
5. INCOME PER SHARE
----------------
Per share amounts have been computed using the weighted average number
of common shares outstanding during the period (1,864,882 in 1995 and 1994).
Page 7 of 14
<PAGE> 8
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
The consolidated financial statements for the nine month period ended
September 30, 1995 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 14
<PAGE> 9
Arthur Andersen LLP
2100 One PPG Place
Pittsburgh, PA 15222-5498
412 232-0600
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 September 30, 1995, and the
related consolidated statement of income and retained earnings for the
three-month and nine-month period ended September 30, 1995, and the
consolidated statement of cash flows for the nine-month period ended September
30, 1995. 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, 1994, and, in our report dated March 10, 1995, 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, 1994, is fairly
stated, in all material respects, in relation to the balance sheet from which
it has been derived.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
October 20, 1995
Page 9 of 14
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
- - --------
The Company's net income for the three and nine months ended September
30, 1995 was primarily affected by significant increases at the Company's
domestic furnace and metal processing equipment subsidiaries. Such increases
were offset by a significant loss on a contract in the United Kingdom and
reduced profitability at the Company's United Kingdom furnace and automation
control subsidiaries. All anticipated losses related to this contract in the
United Kingdom are recognized in the financial statements at September 30,
1995.
The Company recorded non-recurring charges totaling $341,000 and
$1,653,000 for the three and nine months ended September 30, 1995,
respectively. These non-recurring charges were comprised of investment
banking, legal, accounting, consulting and directors fees incurred in
connection with the possible sale of the Company.
THIRD QUARTER OF 1995 COMPARED TO THIRD QUARTER OF 1994
- - -------------------------------------------------------
Gross revenues of $40.9 million in the current quarter increased $6.1
million or 17.5% from the $34.8 million revenues during the comparable quarter
of 1994. This increase is attributable to higher levels of backlog at the
beginning of 1995 at the industrial furnaces and metal processing equipment
segments offset in part by a 23.3% decline in revenues at the Company's United
Kingdom automation control subsidiary. Gross income as a percentage of gross
revenues declined to 14.6% for the third quarter of 1995 from 16.6% for the
same period of 1994 due primarily to the loss recognized on a contract acquired
as part of a recent acquisition by one of the Company's United Kingdom
subsidiaries.
In the third quarter of 1995, the Company recorded non-recurring
charges of $341,000 for legal, accounting, consulting and directors fees
relating to efforts to maximize shareholder value, including a possible sale of
the Company. The Company did not incur such costs in the third quarter of
1994.
Selling, general and administrative expenses of $4.7 million in the
third quarter of 1995 were $381,000 greater than those in the comparable
quarter of 1994. This increase resulted from the hiring of additional
personnel; travel and other expenses associated with an increased sales effort;
selling, general and administrative costs associated with a February 1995
acquisition and an additional discretionary Company contribution to salaried
employees' 401(k) accounts whereas such costs were not incurred in the
comparable period of 1994.
Page 10 of 14
<PAGE> 11
Other income of $123,000 in the third quarter of 1995 was slightly
less than that of $252,000 for the third quarter of 1994 and was primarily the
result of losses recorded by the Company's equity affiliates.
The provision for income taxes was approximately $534,000 in the third
quarter of 1995 as compared to $724,000 in the third quarter of 1994. This
decrease in income taxes is due primarily to the decreased level of pre-tax
income.
NINE MONTHS 1995 COMPARED TO NINE MONTHS 1994
- - ---------------------------------------------
Gross revenues of $110.1 million for the first nine months of 1995 were
$20.4 million or 22.8% greater than the $89.7 million for the same period of
1994. This increase is attributable to increased revenue recognition in the
industrial furnaces and metal finishing equipment segments made possible by the
high levels of backlog at the beginning of 1995. Gross income as a percentage
of gross revenues declined to 16.5% for the first nine months of 1995 from
17.8% for the same period of a year ago. This decline can be primarily
attributed to losses at a United Kingdom subsidiary acquired in February 1995.
During the first nine months of 1995, the Company recorded
non-recurring legal, accounting, consulting and directors fees totaling $1.7
million relating to efforts to maximize shareholder value, including the
possible sale of the Company and to a lesser extent legal fees associated with
a previously reported SEC investigation. In the first nine months of 1994, the
Company recorded a non-recurring charge of $675,000 for legal fees resulting
from a court ordered settlement of a shareholder derivative suit.
Selling, general and administrative expenses of $14.8 million for the
nine months ended September 30, 1995 were $2.2 million greater than the
comparable period of 1994 primarily the result of increased personnel, travel
costs, legal fees for ordinary litigation incidental to the Company's business
and an additional Company contribution to salaried employees' 401(k) accounts.
Other income of $982,000 for the first nine months of 1995 is greater
than that of $748,000 for the same period of a year ago. This increase is
primarily the result of increases in interest rates relative to the prior
period.
Page 11 of 14
<PAGE> 12
FINANCIAL CONDITION AND LIQUIDITY
- - ---------------------------------
Cash and cash equivalents of approximately $17.2 million at September
30, 1995 decreased from the $20.5 million at December 31, 1994. This $3.3
million decrease is primarily the result of the use of $1.0 million cash for
operations including non-recurring charges, $738,000 for the acquisition of
Enviroplant International Group Limited in the United Kingdom and $1.3 million
for the purchase of property, plant and equipment.
The Company has two separate surety facilities, each for the issuance
of up to $10 million of surety bonds. In connection with such facilities, the
Company is required to maintain $2.5 million of standby letters of credit in
favor of the issuers of such bonds. These standby letters of credit are fully
collateralized by certificates of deposit. At September 30, 1995,
approximately $2.5 million of such surety facilities were utilized.
The Company's United Kingdom subsidiaries have two separate credit
facilities at one major bank: a facility for the insurance of bank guarantees
up to $2.8 million and an overdraft and loan facility of up to $1.6 million.
At September 30, 1995, $2.6 million of the bank guarantee facility and none of
the overdraft and loan facility were utilized. At November 7, 1995,
approximately $812,000 of the overdraft and loan facility was fully 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 ability to attain and sustain sufficient cash flows from operations.
Page 12 of 14
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 19, 1995 a Formal Order of Private Investigation was issued
by the Securities and Exchange Commission ("SEC") concerning the Company. The
Order and the investigation were intended to be confidential. All of the
Company's directors have been deposed by the SEC and were required to produce
documents concerning, among other things, their activities as directors of the
Company and communications with Victor Posner, if any. The Order states that
members of the staff of the SEC have reported information to the SEC tending to
show that the Company, its officers, directors, employees and affiliates had
violated Sections 10(b), 13(a) and 14(e) of the Exchange Act and Rules 10b-5,
13a-1 and 13a-13 thereunder by failing to adequately disclose the role of
Victor Posner in the management of the Company and by conspiring to hold down
the price of the Company's common stock in order ultimately to enable Victor
Posner to take the Company private in a less expensive buyout. The Company is
unaware of evidence that any of the alleged violations has occurred but
believes the investigation is ongoing.
The Company is also engaged in other ordinary litigation incidental to
its business. The Company does not believe that this litigation will have a
material adverse effect upon its financial condition.
Page 13 of 14
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27 Financial Data Schedule
(b) No reports on Form 8-K have been filed by the
Registrant during the quarter for which this report
is filed.
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: November 9, 1995 SALEM CORPORATION
--------------------------------
(Registrant)
BY: /S/ A.A. Fornataro
--------------------------------
A. A. Fornataro
President and Chief
Operating Officer
BY: /S/ George A. Douglas
--------------------------------
George A. Douglas
Treasurer and Corporate
Controller
Page 14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000086358
<NAME> SALEM CORP.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JUL-01-1995 JAN-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 21,202 21,202
<SECURITIES> 0 0
<RECEIVABLES> 21,937 21,937
<ALLOWANCES> 223 223
<INVENTORY> 13,290 13,290
<CURRENT-ASSETS> 62,187 62,187
<PP&E> 25,838 25,838
<DEPRECIATION> 16,229 16,229
<TOTAL-ASSETS> 80,649 80,649
<CURRENT-LIABILITIES> 37,238 37,238
<BONDS> 0 0
<COMMON> 1,345 1,345
0 0
0 0
<OTHER-SE> 36,488 36,488
<TOTAL-LIABILITY-AND-EQUITY> 80,649 80,649
<SALES> 40,913 110,108
<TOTAL-REVENUES> 40,913 110,108
<CGS> 34,925 91,915
<TOTAL-COSTS> 34,925 91,915
<OTHER-EXPENSES> 4,997 16,426
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 194 332
<INCOME-PRETAX> 1,114 2,749
<INCOME-TAX> 534 1,303
<INCOME-CONTINUING> 580 1,446
<DISCONTINUED> 0 0
<EXTRAORDINARY> 45 72
<CHANGES> 0 0
<NET-INCOME> 625 1,518
<EPS-PRIMARY> .33 .81
<EPS-DILUTED> .33 .81
</TABLE>
