<PAGE> 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, 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 May 1, 1995.
Page 1 of 13
<PAGE> 2
SALEM CORPORATION AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
and Retained Earnings for the
three months ended March 31, 1995
and 1994 (Unaudited) 3
Consolidated Balance Sheets as of
March 31, 1995 (Unaudited) and
December 31, 1994 4
Consolidated Statements of Cash Flows
for the three months ended March 31,
1995 and 1994 (Unaudited) 5
Notes to Consolidated Financial
Statements for the three months
ended March 31, 1995 (Unaudited) 6
Review by Independent Public Accountants 7
Review Report of Independent
Public Accountants 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11-12
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
Page 2 of 13
<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
MARCH 31,
--------------------------
1995 1994
-------- ---------
(In Thousands Except
Per Share Amounts)
<S> <C> <C>
Gross revenues $32,067 $25,405
Cost of revenues 26,676 20,509
------- -------
Gross income 5,391 4,896
Unusual charges 808 675
Selling, general & administrative expenses 4,467 4,176
------- -------
Operating income 116 45
------- -------
Other income (expense):
Interest income 346 183
Interest expense (66) (87)
Other income, net 156 92
------- -------
Total other income 436 188
------- -------
Income before minority interest and
income taxes 552 233
Minority interest 2 (37)
Provision for income taxes (226) (112)
------- -------
Net income 328 84
Retained earnings, beginning of period 29,677 26,777
Cash dividends (187) (187)
------- -------
Retained earnings, end of period $29,818 $26,674
======= =======
Net income per common share $ .18 $ .04
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 13
<PAGE> 4
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1995 1994
---------- -----------
(Unaudited)
<S> <C> <C>
A S S E T S
-----------
CURRENT ASSETS:
Cash and cash equivalents (including
restricted cash of $5,116 and $5,373) $21,503 $20,524
Restricted short-term investments 4,615 4,315
Receivables 17,353 22,259
Indebtedness of related parties, current 97 97
Contracts-in-progress 8,533 7,407
Inventories 5,033 5,147
Income tax benefit 3,368 2,857
Prepaid expenses 2,298 2,232
------- -------
Total current assets 62,800 64,838
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost 25,645 25,456
Less- Accumulated depreciation 16,343 16,085
------- -------
Net property, plant and equipment 9,302 9,371
OTHER ASSETS:
Investments in affiliated companies (at equity) 2,373 2,344
Other restricted investments 600 600
Income tax benefit 1,515 1,792
Other assets 3,774 3,609
------- -------
Total assets $80,364 $82,554
======= =======
LIABILITIES AND SHAREHOLDERS' EQUIT
-----------------------------------
CURRENT LIABILITIES:
Dividends payable $ 187 $ 187
Current maturities of long-term debt 665 608
Accounts payable (including outstanding
checks of $3,100 and $1,975) 10,624 12,597
Advance billings on contracts 13,503 14,096
Accrued income taxes (38) 758
Accrued payroll and employee benefits 4,553 4,367
Accrued loss reserve 3,328 2,595
Other accrued liabilities 1,080 1,038
Reserves for warranty expense 3,641 3,625
------- -------
Total current liabilities 37,543 39,871
LONG-TERM DEBT 2,045 2,095
OTHER NONCURRENT LIABILITIES 3,196 3,128
DEFERRED INCOME TAXES 30 -
MINORITY INTEREST 403 405
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 29,818 29,677
Cumulative translation adjustment (120) (71)
Treasury stock, at cost (825,442 shares) (3,197) (3,197)
------- -------
Total shareholders' equity 37,147 37,055
------- -------
Total liabilities and shareholders'
equity $80,364 $82,554
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 13
<PAGE> 5
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 328 $ 84
Adjustments for noncash items-
Depreciation and amortization 412 354
Deferred income taxes (193) 366
Other noncurrent liabilities 68 72
Allowance for doubtful accounts 10 -
Equity of affiliates, net 24 (51)
Reserves for warranty expense 16 (220)
Cumulative translation adjustments (53) 90
Changes in certain assets and liabilities,
net of effects from acquired business
Receivables 5,578 (1,948)
Contracts-in-progress, net (1,720) 2,816
Inventories 117 199
Prepaid expenses 18 110
Accounts payable (2,094) (950)
Accrued income taxes (811) (339)
Accrued liabilities 945 579
Minority interest (2) 36
------- -------
Net cash flows from operating activities $ 2,643 $ 1,198
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments $ (300) $(2,530)
Acquisition of Enviroplant International
Group Limited (738) -
Purchases of property, plant, & equipment, net (247) (400)
------- -------
Net cash flows used for
investing activities $(1,285) $(2,930)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (187) $ (187)
Principal payments under financing arrangements (215) (60)
Payments on debt (61) (55)
------- -------
Net cash flows used for
financing activities $ (463) $ (302)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ 84 $ (134)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 979 $(2,168)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,524 22,204
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,503 $20,036
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 17 $ 74
Income taxes paid, net 823 84
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 13
<PAGE> 6
SALEM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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. UNUSUAL CHARGES
In the first quarter of 1995, the Company recorded unusual legal and
consulting charges totaling $808,000 as a result of an SEC investigation (see
Part II, Item 1 Legal Proceedings) and legal and consulting charges resulting
from efforts to maximize shareholder value, including a possible sale of the
Company. In the first quarter of 1994, the Company recorded an unusual charge
of $675,000 as a result of a court order entered in the settlement of
plaintiffs legal fees and expenses in a shareholder derivative suit.
3. INCOME TAXES
The Company's effective income tax rate for the three months ended
March 31, 1995 was 40.9%. This rate was not significantly different from a
combined federal and state statutory rate. The Company's effective income tax
rate for the three months ended March 31, 1994 was 48.1%. This rate differed
from combined federal and state statutory rates due to losses sustained by
United Kingdom subsidiaries for which no future tax benefit could be assured
and to a lesser extent, equity income which was tax effected only to the extent
of dividends received.
4. 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 1995 and 1994).
Page 6 of 13
<PAGE> 7
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements for the three month period ended
March 31, 1995 has 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 8.
Page 7 of 13
<PAGE> 8
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO. SC
------------------------------
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 March 31, 1995, and the related
consolidated statements of income and cash flows for the three-month period
ended March 31, 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 primarily 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 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,
April 26, 1995
Page 8 of 13
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER OF 1995 COMPARED TO FIRST QUARTER OF 1994
Gross revenues of $32.1 million in the current quarter increased 26.2%
from the $25.4 million in the first quarter of 1994. Increases were recorded
in all of the Company segments and the most significant were in the Company's
minerals processing equipment and metals processing equipment segments. The
increase is attributable to the high backlog of orders entering 1995. Gross
income of $5.4 million in the current quarter increased 10.1% from the $4.9
million gross income in 1994. Gross income as a percent of revenues was 16.6%
in the first quarter of 1995 as compared to 19.3% in the comparable quarter of
1994. This decline can be attributed in part to a reduction in profitability
on sales at the Company's automation subsidiary in the United Kingdom. Also in
the prior year the minerals processing equipment segment benefitted from a
release of reserves that were held pending successful test results on a major
contract.
Operating income of $116,000 in the current quarter was adversely
impacted by a loss at the Company's Salem Automation subsidiary in the United
Kingdom. This loss is the result of a low level of sales and gross income
insufficient to cover operating expenses.
In the first quarter of 1995, the Company recorded unusual legal and
consulting charges totaling $808,000 as a result of an SEC investigation (see
Part II, Item 1 Legal Proceedings) and efforts to maximize shareholder value,
including a possible sale of the Company. In the first quarter of 1994, the
Company recorded an unusual charge of $675,000 as a result of a court order
entered in the settlement of plaintiffs legal fees and expenses in a
shareholder derivative suit.
Interest income increased to $346,000 in the current quarter from
$183,000 in 1994. This increase is primarily attributable to an increase in
interest rates.
The provision for income taxes was approximately $226,000 in the first
quarter of 1995 as compared to $112,000 in the first quarter of 1994. This
increase in income taxes is due primarily to the increased level of pre-tax
income.
The Company's backlog at March 31, 1995 was $90.8 million compared to
$74.8 million at March 31, 1994 and $76.0 million at December 31, 1994.
Page 9 of 13
<PAGE> 10
FINANCIAL CONDITION AND LIQUIDITY
Cash and cash equivalents of approximately $21.5 million at March 31,
1995 increased from the $20.5 million at December 31, 1994. This increase
reflects the generation of $2.6 million cash from operations as a result of
collection of accounts receivable and payment of accounts payable and was
offset by the use of $1.7 million cash for investing and financing activities.
Such funds were used primarily for the acquisition of Enviroplant International
Group Limited, the purchase of short-term investments as collateral for standby
letters of credit and fixed assets and repayments under financing arrangements.
The Company has two separate 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, 1995, approximately $4.8 million of
such facilities were currently 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 $2.9 million and an overdraft and loan facility of up to $1.6 million.
At March 31, 1995, $2.3 million of the bank guarantee facility and none 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 ability to attain and sustain sufficient cash flows from operations.
Page 10 of 13
<PAGE> 11
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
information has been reported to the SEC tending to show possible violations by
the Company, its officers, directors, employees and affiliates and others of
Section 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 to enable Victor Posner to take the Company
private at a less expensive price. The Company is unaware of evidence that any
of the alleged violations has occurred but believes the investigation is
ongoing.
On February 22, 1995, Phillip H. Smith, a member of the Company's
Board of Directors, filed a motion to intervene in a previously settled
shareholder derivative suit. At the time he also filed a motion for a
preliminary injunction wherein he alleged Victor Posner, Bernard Posner, Martin
J. Posner, Melvin R. Colvin, A.A. Fornataro, Donald L. Hoylman and the
Company's outside counsel, as agent for the foregoing individuals, conspired to
have Mr. Smith removed from the Company's Board of Directors and the ad hoc
committee of independent directors created in November 1994 to establish a fair
process with respect to the evaluation of any offer to acquire the Company.
Mr. Smith further alleged that such persons conspired to thwart the intent of
the stipulation of settlement entered in the shareholder derivative suit and
interfered with his ability to govern the Company in an independent manner.
Mr. Smith sought an injunction prohibiting such individuals from "violating the
intent and spirit of the stipulation of settlement by removing him from the
Salem Board of Directors and any of the committees on which he currently
serves" or "by interfering with, or taking steps to prevent or limit, his
ability to act as an independent director on the Salem Board of Directors."
On March 3, 1995, Mr. Smith withdrew without prejudice his motions for
preliminary injunction and leave to intervene after receiving written
assurances that (i) the directors named in Mr. Smith's motions agreed to
continue to abide by the terms of the stipulation of settlement, (ii) Mr. Smith
retained the same rights, privileges and protections under the Company's Bylaws
and applicable corporate law as the Company's other directors, and (iii) the
named directors would take steps to assure that
Page 11 of 13
<PAGE> 12
Mr. Smith's legal expenses not in excess of $13,000 incurred in connection with
his motions for preliminary injunction and leave to intervene be reimbursed by
the Company upon formal approval by the Company's Board of Directors.
The Company is involved in no litigation other than ordinary
litigation incidental to its business, which the Company does not believe will
have a material adverse effect on its financial condition.
Page 12 of 13
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 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: MAY 3, 1995 SALEM CORPORATION
------------------------
(Registrant)
BY: A. A. Fornataro
------------------------
A. A. Fornataro
President and Chief
Operating Officer
BY: G. A. Douglas
------------------------
George A. Douglas
Treasurer and Corporate
Controller
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 26,118
<SECURITIES> 0
<RECEIVABLES> 17,695
<ALLOWANCES> 245
<INVENTORY> 13,566
<CURRENT-ASSETS> 62,800
<PP&E> 25,645
<DEPRECIATION> 16,343
<TOTAL-ASSETS> 80,364
<CURRENT-LIABILITIES> 37,543
<BONDS> 0
<COMMON> 1,345
0
0
<OTHER-SE> 35,802
<TOTAL-LIABILITY-AND-EQUITY> 80,364
<SALES> 32,067
<TOTAL-REVENUES> 32,067
<CGS> 26,676
<TOTAL-COSTS> 26,676
<OTHER-EXPENSES> 5,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> 552
<INCOME-TAX> 226
<INCOME-CONTINUING> 326
<DISCONTINUED> 0
<EXTRAORDINARY> 2
<CHANGES> 0
<NET-INCOME> 328
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
