<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to section 240.14a-11(c) or section 240.14a-12
</TABLE>
SALEM CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
LOGO
August 23, 1996
To Our Shareholders:
You are cordially invited to attend the Special Meeting of Shareholders of
Salem Corporation (the "Company") to be held on September 26, 1996 at 3:00 P.M.,
local time, at the Westin William Penn Hotel, 530 William Penn Place,
Pittsburgh, Pennsylvania. The sole purpose of the Special Meeting will be to
approve the Agreement and Plan of Merger, dated as of June 28, 1996 (the "Merger
Agreement"), among Salem Group, Inc., a Delaware corporation (the "Parent"), SC
Acquisition Corporation, a Pennsylvania corporation and wholly-owned subsidiary
of the Parent (the "Subsidiary"), and the Company. The Merger Agreement provides
for the merger of the Subsidiary with and into the Company (the "Merger") and
will result in the Company becoming a wholly-owned subsidiary of the Parent.
The Merger will become effective as soon as practicable after all necessary
shareholder and regulatory approvals are obtained and all other conditions are
satisfied or waived (the "Effective Time"). At the Effective Time, the holders
of the Company's outstanding common stock, par value $.50 per share, will become
entitled to receive $25.00 in cash for each share held.
Your Board of Directors has carefully considered the terms and conditions
of the Merger and has approved the Merger Agreement. In addition, the Board of
Directors has received the written opinion from its financial advisor, M.J.
Whitman, Inc. (a copy of which is included with the accompanying Proxy
Statement) that the Merger is fair from a financial point of view to the
Company. YOUR BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER IS IN THE
BEST INTERESTS OF SALEM CORPORATION AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement which more fully describes the Merger
and the terms and conditions of the Merger Agreement and a proxy. Please read
and consider the Proxy Statement carefully.
All shareholders are cordially invited to attend the Special Meeting.
Should you be unable to attend, however, it is important that your shares be
represented, regardless of the number of shares you own. Accordingly, whether or
not you plan to attend, please complete, sign, date and return your proxy in the
enclosed envelope which requires no postage if mailed in the United States. If
you attend the Special Meeting, you may vote in person if you wish, even though
you have previously submitted your proxy.
On behalf of your Board of Directors, thank you for your continued support.
Sincerely,
/s/ A. A. FORNATARO
--------------------------
A. A. FORNATARO
President and
Chief Operating Officer
STOCK CERTIFICATES SHOULD NOT BE SENT WITH THE ENCLOSED PROXY CARD. IF THE
MERGER IS CONSUMMATED, SHAREHOLDERS WILL BE FURNISHED INSTRUCTIONS FOR
EXCHANGING THEIR SHARES FOR CASH.
<PAGE> 3
SALEM CORPORATION
P.O. BOX 2222
PITTSBURGH, PENNSYLVANIA 15230
------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 26, 1996
------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Salem
Corporation (the "Company") will be held at the Westin William Penn Hotel, 530
William Penn Place, Pittsburgh, Pennsylvania on Thursday, September 26, 1996 at
3:00 P.M., local time, for the following purposes:
(1) To approve and adopt the Agreement and Plan of Merger, dated as of
June 28, 1996, among Salem Group, Inc., a Delaware corporation (the
"Parent"), SC Acquisition Corporation, a Pennsylvania corporation
and wholly-owned subsidiary of the Parent (the "Subsidiary"), and
the Company, providing for the merger of the Subsidiary with and
into the Company and the conversion of each outstanding share of the
Company's common stock, par value $.50 per share, into the right to
receive $25.00 in cash, all as more fully described in the
accompanying Proxy Statement.
(2) To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The close of business on August 21, 1996 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Special Meeting and any adjournment or postponement thereof.
Whether or not you plan to attend the Special Meeting in person, please
sign and date the enclosed proxy and return it in the envelope furnished for
that purpose.
MARCO B. LOFFREDO, JR.
Secretary
<PAGE> 4
SALEM CORPORATION
------------------------------
PROXY STATEMENT
------------------------------
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER 26, 1996
This Proxy Statement is being furnished to the shareholders of Salem
Corporation, a Pennsylvania corporation (the "Company"), in connection with the
solicitation of proxies by its Board of Directors to be voted at the Special
Meeting of Shareholders to be held on Thursday, September 26, 1996 at 3:00 P.M.,
local time, at the Westin William Penn Hotel, 530 William Penn Place,
Pittsburgh, Pennsylvania and at any adjournment or postponement thereof. It is
expected that this Proxy Statement and accompanying form of proxy will be first
mailed to shareholders on or about August 23, 1996.
At the Special Meeting, the holders of the Company's outstanding common
stock, par value $.50 per share (the "Shares"), will be asked to consider and
vote upon a proposal to adopt and approve the Agreement and Plan of Merger,
dated as of June 28, 1996 (the "Merger Agreement"), among Salem Group, Inc., a
Delaware corporation (the "Parent"), SC Acquisition Corporation, a Pennsylvania
corporation and wholly-owned subsidiary of the Parent (the "Subsidiary"), and
the Company which provides for the merger of the Subsidiary with and into the
Company (the "Merger"). Upon consummation of the Merger, the Company will become
a wholly-owned subsidiary of the Parent and the holders of outstanding Shares,
other than the Parent and the Subsidiary and shareholders who have demanded and
perfected their rights as dissenting shareholders under Pennsylvania law, will
be entitled to receive $25.00 in cash for each Share held. See "THE MERGER
AGREEMENT." A copy of the Merger Agreement is attached as Appendix A to this
Proxy Statement and is incorporated herein by reference.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY............................................................................... 1
MARKET PRICE DATA..................................................................... 4
SELECTED FINANCIAL DATA............................................................... 5
THE SPECIAL MEETING
Date, Time and Place................................................................ 6
Purpose of the Special Meeting...................................................... 6
Record Date......................................................................... 6
Required Vote....................................................................... 6
Proxies............................................................................. 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 7
THE MERGER
Background of the Merger............................................................ 8
Reasons for the Merger.............................................................. 16
Opinion of Financial Advisor........................................................ 18
Recommendation of the Board of Directors............................................ 24
THE MERGER AGREEMENT
Effective Time of the Merger........................................................ 24
The Merger.......................................................................... 24
Conversion of Shares................................................................ 24
Exchange of Stock Certificates...................................................... 24
Information Concerning the Parent................................................... 25
Representations and Warranties...................................................... 25
Conduct of Business Pending the Merger.............................................. 25
Articles of Incorporation and Bylaws of the Surviving Corporation................... 26
Officers and Directors of the Surviving Corporation................................. 26
Conditions to the Merger............................................................ 27
Termination......................................................................... 27
Fees and Expenses................................................................... 28
No Solicitation..................................................................... 29
Indemnification..................................................................... 29
Amendment of the Merger Agreement................................................... 30
Future Distributions by the Surviving Corporation................................... 30
Certain Other Effects of the Merger................................................. 30
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER......................................... 31
ACCOUNTING TREATMENT.................................................................. 32
ANTITRUST MATTERS..................................................................... 32
DISSENTERS' RIGHTS OF APPRAISAL....................................................... 32
LEGAL PROCEEDINGS..................................................................... 34
INDEPENDENT PUBLIC ACCOUNTANTS........................................................ 35
AVAILABLE INFORMATION................................................................. 35
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 35
OTHER MATTERS......................................................................... 36
APPENDICES
Agreement and Plan of Merger........................................................ A-1
Opinion of M.J. Whitman, Inc........................................................ B-1
Subchapter 15D of the Pennsylvania Business Corporation Law......................... C-1
</TABLE>
<PAGE> 6
SUMMARY
The following is a summary of certain of the information contained
elsewhere in this Proxy Statement. The summary does not purport to be complete
and is qualified in its entirety by the more detailed information contained in
this Proxy Statement, the appendices and the material incorporated by reference,
all of which should be carefully reviewed.
THE PARTIES
SALEM CORPORATION
Salem Corporation (the "Company") is a Pennsylvania corporation which was
organized in 1945. The Company designs, engineers and installs heavy industrial
equipment primarily for the metals, coal and other minerals industries. The
principal executive offices of the Company are located at Arch Street Extension,
Carnegie, Pennsylvania 15106 and the mailing address of the Company is P.O. Box
2222, Pittsburgh, Pennsylvania 15230. The Company's telephone number is (412)
276-5700.
SALEM GROUP, INC. AND SC ACQUISITION CORPORATION
Salem Group, Inc., a Delaware corporation (the "Parent"), and SC
Acquisition Corporation, a Pennsylvania corporation and wholly-owned subsidiary
of the Parent (the "Subsidiary"), were recently organized for the purpose of
effecting the Merger. Neither the Parent nor the Subsidiary has engaged in any
activities except in connection with the Merger. The executive offices of the
Parent and the Subsidiary are c/o Three Cities Research, Inc., 135 East 57th
Street, New York, New York 10022. The telephone number at that address is (212)
838-9660.
THE SPECIAL MEETING OF SHAREHOLDERS
The Special Meeting of the Shareholders of the Company will be held at 3:00
P.M., local time, on Thursday, September 26, 1996, at the Westin William Penn
Hotel, 530 William Penn Place, Pittsburgh, Pennsylvania, for the purpose of
considering and voting upon a proposal to approve and adopt the Merger Agreement
(the "Merger Proposal"). Only those shareholders of record at the close of
business on August 21, 1996 (the "Record Date") are entitled to notice of, and
to vote at, the Special Meeting. A majority of the Company's outstanding common
stock, par value $.50 per share (the "Shares"), will constitute a quorum for the
transaction of business.
The affirmative vote of a majority of the total votes cast on the Merger
Proposal by the holders of the outstanding Shares is required for its approval.
On the Record Date, there were 1,864,871 Shares outstanding held by
approximately 1,100 holders of record. Shareholders are entitled to one vote per
Share and may vote in person or by proxy. See "THE SPECIAL MEETING."
On the Record Date, directors and executive officers of the Company as a
group (five persons) beneficially owned 22,475 Shares, or 1.2% of the total
outstanding Shares. The Company understands that the 917,633 Shares owned by
Victor Posner, which have been deposited in a voting trust pursuant to court
order will be voted in proportion to the votes cast by all of the Company's
other shareholders in favor of or against the Merger Proposal. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "THE
MERGER -- Background of the Merger."
THE MERGER
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has approved the Merger Agreement and has
directed that it be submitted to the Company's shareholders. The Board of
Directors recommends that the Company's shareholders approve and adopt the
Merger Agreement. See "THE MERGER -- Reasons for the Merger; Recommendation of
the Board of Directors." In considering the recommendation of the Board of
Directors
1
<PAGE> 7
with respect to the Merger Proposal, shareholders should be aware that certain
executive officers and directors of the Company have direct or indirect
interests in recommending the Merger, apart from their interests as shareholders
of the Company, which are not identical to those of unaffiliated shareholders.
See "THE MERGER -- Reasons for the Merger" and "THE MERGER AGREEMENT -- Certain
Other Effects of the Merger."
OPINION OF FINANCIAL ADVISER
On June 27, 1996, the Company's Board of Directors received a preliminary
verbal opinion from M.J. Whitman, Inc. ("MJW") to the effect that the Merger is
fair from a financial point of view to the Company and on August 8, 1996
received a written opinion to such effect. The full text of MJW's written
opinion is attached to this Proxy Statement as Appendix B. See "THE
MERGER -- Background of the Merger; Opinion of Financial Advisor."
EFFECTIVE TIME OF THE MERGER
The Merger will become effective when the Articles of Merger are duly filed
with the Secretary of State of the Commonwealth of Pennsylvania (the "Effective
Time"). The Articles of Merger will be filed as soon as practicable after all
conditions set forth in the Merger Agreement have been satisfied or waived.
Assuming all conditions to the consummation of the Merger are satisfied or
waived, the Effective Time is expected to occur on or about September 27, 1996.
See "THE MERGER AGREEMENT -- Effective Time of the Merger; Conditions to the
Merger."
CONVERSION OF SHARES
At the Effective Time, each issued and outstanding Share (other than Shares
owned by the Parent or the Subsidiary or Shares held by shareholders who have
demanded and perfected their rights as dissenting shareholders) shall be
automatically cancelled and extinguished and converted, without any action on
the part of the holder thereof, into the right to receive $25.00 in cash per
Share (the "Merger Consideration"). See "THE MERGER AGREEMENT -- Conversion of
Shares."
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Time, the Parent will make available to
American Stock Transfer & Trust Company (the "Exchange Agent") cash for payment
of all the Merger Consideration in immediately available funds. Promptly
thereafter, the Exchange Agent will mail to all former holders of record of the
Company's Shares a letter of transmittal with instructions for surrendering
their certificates in exchange for the Merger Consideration. SHAREHOLDERS ARE
REQUESTED NOT TO SURRENDER THEIR SHARE CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE A LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT. See
"THE MERGER AGREEMENT -- Exchange of Stock Certificates."
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
The Merger Agreement contains various covenants of the Company concerning
the conduct of its business between June 28, 1996 (the date of execution of the
Merger Agreement) and the Effective Time. The Company generally is required, and
is required to cause each of its subsidiaries, to conduct its business in the
ordinary course and consistent with past practice. The Company is also obligated
to refrain from taking certain actions. See "THE MERGER AGREEMENT -- Conduct of
Business Pending the Merger."
CONDITIONS TO THE MERGER
The consummation of the Merger is subject to the satisfaction, at or before
the Effective Time, of certain conditions including, among other things,
approval by the Company's shareholders of the Merger Proposal and there being no
order in effect by any court which would prevent the consummation of the Merger.
See "THE MERGER AGREEMENT -- Conditions of the Merger."
2
<PAGE> 8
TERMINATION
The Merger Agreement may be terminated, either before or after approval by
the Company's shareholders, by the mutual written consent of the Parent, the
Subsidiary and the Company, or by the Company, the Parent or the Subsidiary
under certain other circumstances. See "THE MERGER AGREEMENT -- Termination."
FEES AND EXPENSES
The Company is required to pay the Parent a termination fee of $1,500,000
and/or reimburse the Parent for all of the expenses of the Parent and its
affiliates relating to the discussion, evaluation, negotiation, documentation
and closing or potential closing of the Merger up to a maximum amount of
$500,000 in the aggregate if the Merger Agreement is terminated under certain
circumstances. See "THE MERGER AGREEMENT -- Fees and Expenses."
NO SOLICITATION
The Merger Agreement restricts the ability of the Company to solicit any
proposal to acquire the Company. See "THE MERGER AGREEMENT -- No Solicitation."
DISSENTERS' RIGHTS OF APPRAISAL
Under Pennsylvania law, shareholders of the Company who file a written
objection to the vote on the Merger Proposal and do not vote in favor of
approval and adoption of the Merger Proposal have the right to demand an
appraisal of the "fair value" of their Shares if the procedures under Subchapter
15D of the Pennsylvania Business Corporation Law of 1988, as amended (the
"BCL"), are followed. Rights of appraisal will be forfeited if the requirements
of Subchapter 15D are not fully and precisely satisfied. See "DISSENTERS' RIGHTS
OF APPRAISAL" and a copy of the text of Subchapter 15D of the BCL which is
included as Appendix C to this Proxy Statement.
FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash in exchange for Shares pursuant to the Merger or
pursuant to the exercise of dissenters' rights of appraisal under Pennsylvania
law will be a taxable transaction to the Company's shareholders for United
States federal income tax purposes and may also be a taxable transaction for
state, local and foreign tax purposes. Shareholders generally will recognize
gain or loss for federal income tax purposes in an amount equal to the
difference between the amount of cash received and their adjusted tax basis in
their Shares. Such gain or loss will be a capital gain or loss if such Shares
are held as a capital asset and will be long term gain or loss if, at the
Effective Time, such Shares were held for more than one year. See "FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER." SHAREHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES TO THEM OF THE MERGER UNDER
FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
CONFLICTS OF INTEREST
Representatives of the Parent and members of the Company's senior
management have had preliminary discussions about management's compensation
after the Merger, the award of shares of the Parent to members of management as
bonuses, the opportunity for management to make an additional investment in the
Parent and the representation of management on the Board of Directors of the
Parent. Although no definitive agreement as to these matters has been reached,
it is currently expected that following the Merger cash bonuses aggregating
$500,000 will be awarded to members of management and others, modifications will
be made in the Company's currently existing bonus plans and a stock bonus plan
will be instituted for management. It is also anticipated that A.A. Fornataro,
the Company's President and Chief Operating Officer, and Donald L. Hoylman, the
Company's Group Vice President, will be appointed to the Board of Directors of
the Parent following the Merger. In addition, Messrs. Fornataro and Hoylman are
expected to be permitted prior to the Effective Time of the Merger to exchange
Shares of the Company's common stock owned by them for shares of nonvoting
common and preferred stock and subordinated debt instruments issued
3
<PAGE> 9
by the Parent. Their Shares will be valued at $25.00 per Share for purposes of
such exchange. The stock to be issued to Messrs. Fornataro and Hoylman in such
exchange will constitute in the aggregate less than 3% of the Parent's common
and preferred shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and "THE MERGER AGREEMENT--Certain Other Effects of the Merger."
MARKET PRICE DATA
The Company's common stock is traded on the American Stock Exchange
("AMEX") under the symbol "SBS." The following table sets forth the range of
high and low closing sales prices for the Company's common stock as reported on
the AMEX for the calendar quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1994
First Quarter.............................................. $16 1/4 $12 7/8
Second Quarter............................................. 15 12
Third Quarter.............................................. 14 7/8 12 7/8
Fourth Quarter............................................. 17 3/8 13
1995
First Quarter.............................................. 25 7/8 15 3/4
Second Quarter............................................. 29 23 1/2
Third Quarter.............................................. 28 1/4 25
Fourth Quarter............................................. 25 3/8 17 7/8
1996
First Quarter.............................................. 24 3/4 18 1/2
Second Quarter............................................. 22 7/8 18 1/2
Third Quarter (through August 21, 1996).................... 24 1/8 22 1/4
</TABLE>
On October 31, 1994, the day prior to the public announcement of the
receipt by the Company of an unsolicited offer from Harbour Group Investments
III, L.P. to acquire all of the Company's outstanding Shares, the high and low
sales prices of the Shares on the AMEX were $13 5/8 and $13 1/2 per share,
respectively. On June 25, 1996, the last day on which the Company's stock traded
prior to the public announcement of the signing of the Merger Agreement, the
high and low sales prices on the AMEX were $22 1/2 and $20 3/4, respectively.
4
<PAGE> 10
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information of
the Company and its consolidated subsidiaries for the five years ended December
31, 1995 and the six months ended June 30, 1996. The data should be read in
conjunction with the historical financial statements and the notes thereto of
the Company which are incorporated herein by reference.
<TABLE>
<CAPTION>
SIX
MONTHS FOR THE YEAR ENDED DECEMBER 31,
ENDED ----------------------------------------------------
6/30/96 1995 1994 1993 1992 1991
------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Summary of Operations:
Gross Revenues...................... $60,707 $151,314 $128,189 $106,370 $118,983 $127,016
======= ======== ======== ======== ======== ========
Income before cumulative effect of
accounting changes................ 1,668 2,917 3,648 1,985 3,173 1,593
======= ======== ======== ======== ======== ========
Income per common share before
cumulative effect of accounting
changes........................... .89 1.56 1.96 1.07 1.70 .85
======= ======== ======== ======== ======== ========
Cash dividends declared per common
share............................. $ .30 $ .45 $ .40 $ .43 $ .33 $ --
======= ======== ======== ======== ======== ========
Balance Sheet Data:
Total assets...................... $83,747 $ 85,821 $ 82,554 $ 73,482 $ 66,308 $ 71,829
Cash and cash equivalents......... 18,363 18,048 20,524 22,204 19,127 22,094
Working capital................... 25,488 26,382 24,967 25,675 25,377 22,360
Long-term debt.................... 1,197 1,683 2,095 2,673 2,613 2,369
Shareholders' equity.............. 39,927 38,956 37,055 33,861 32,836 30,518
</TABLE>
See Notes 5 and 10 of the notes to the consolidated financial statements
included in the financial statements incorporated herein for a discussion of
changes in accounting principles.
5
<PAGE> 11
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting of the Company's shareholders will be held at 3:00
P.M., local time, on Thursday, September 26, 1996 at the Westin William Penn
Hotel, 530 William Penn Place, Pittsburgh, Pennsylvania.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the Company's shareholders will be asked to
consider and vote upon a proposal to adopt and approve the Merger Agreement
pursuant to which, among other things, the Subsidiary will merge with and into
the Company and the Company will survive the Merger as a wholly-owned subsidiary
of the Parent. Pursuant to the Merger Agreement, at the Effective Time, each
outstanding Share (other than shares held by the Parent or the Subsidiary or
shareholders who have demanded and perfected their rights as dissenting
shareholders under the BCL) will be converted into the right to receive $25.00
in cash per Share. Shares, if any, owned by the Parent or the Subsidiary, held
in treasury by the Company or owned by any subsidiary of the Company immediately
prior to the Effective Time will be cancelled and will cease to exist from and
after the Effective Time. As of the date of this Proxy Statement, neither the
Parent nor any subsidiary of the Parent (including the Subsidiary) owns any of
the Company's Shares. See "THE MERGER AGREEMENT -- Certain Other Effects of the
Merger."
RECORD DATE
The Company's Board of Directors has fixed the close of business on August
21, 1996 as the record date (the "Record Date") for the determination of holders
of Shares entitled to notice of and to vote at the Special Meeting. On the
Record Date, there were 1,864,871 Shares issued and outstanding and held by
approximately 1,100 holders of record.
REQUIRED VOTE
A majority of the outstanding Shares entitled to vote at the Special
Meeting must be present, either in person or by proxy, to constitute a quorum
for the transaction of business at the Special Meeting. The affirmative vote of
a majority of the total votes cast on the Merger Proposal is required for its
approval. As of the Record Date, directors and executive officers of the Company
as a group (five persons) beneficially owned 22,475 Shares, or 1.2% of the total
outstanding Shares entitled to vote at the Special Meeting. The Company
understands that the 917,633 Shares owned by Victor Posner, which have been
deposited in a voting trust pursuant to court order, will be voted in proportion
to the votes cast by all of the Company's other shareholders with respect to the
Merger Proposal. See "THE MERGER -- Background of the Merger."
PROXIES
All properly executed proxies that are not revoked will be voted at the
Special Meeting and will be voted in accordance with the instructions indicated
in such proxies. Properly executed proxies which do not contain voting
instructions will be voted FOR approval and adoption of the Merger Proposal.
Shareholders are urged to mark the box on the proxy to indicate how their Shares
are to be voted.
Brokers holding shares in street name may not give a proxy to vote without
instructions from beneficial owners when the matter to be voted upon involves a
merger or consolidation. Under the BCL, if a shareholder (including a nominee or
other record owner) either records the fact of abstention or otherwise withholds
authority to vote or fails to vote in person or by proxy, such actions will not
be considered to be a "vote cast" and will have no effect on the approval of the
Merger Proposal other than to reduce the number of affirmative votes needed for
approval.
It is not expected that any matter other than the Merger Proposal will be
brought before the Special Meeting. If, however, other matters are properly
presented, the persons named as proxies will vote in accordance with their
judgment with respect to such matters, unless authority to do so is withheld in
the proxy.
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<PAGE> 12
Any shareholder who executes and returns a proxy may revoke it at any time
before it is voted by giving written notice of revocation to the Secretary of
the Company at P.O. Box 2222, Pittsburgh, Pennsylvania 15230, by executing and
returning a subsequently dated proxy or by attending the Special Meeting and
voting in person. Attendance at the Special Meeting will not in and of itself
constitute revocation of a proxy.
The expenses incurred in connection with the printing and mailing of this
Proxy Statement and soliciting proxies will be borne by the Company. Following
the original mailing of proxy soliciting material, regular employees of the
Company, for no additional compensation, may solicit proxies by mail, telephone,
telegraph and personal interview. The Company will also request banks, brokers
and other intermediaries holding Shares beneficially owned by others to send
this Proxy Statement to and obtain proxies from such beneficial owners and will
reimburse such holders for their reasonable expenses in so doing.
SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXIES.
A LETTER OF TRANSMITTAL WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK
CERTIFICATES WILL BE MAILED AS SOON AS PRACTICABLE AFTER THE EFFECTIVE TIME OF
THE MERGER.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The security ownership of each person known to the Company to be the
beneficial owner of more than five percent of any class of the Company's voting
securities, as of August 21, 1996, is as follows:
<TABLE>
<CAPTION>
TITLE OF PERCENT
CLASS NAME & ADDRESS OF OWNER AMOUNT OF CLASS
----- ----------------------- ------ --------
<S> <C> <C> <C>
Common Stock Victor Posner(1) 917,633 Shares 49.2%
6917 Collins Avenue
Miami Beach, FL 33141
Common Stock Heartland Advisors, Inc.(2) 127,450 Shares 6.8%
690 North Milwaukee Street
Milwaukee, WI 53202
Common Stock Dimensional Fund Advisors, Inc.(3) 126,257 Shares 6.8%
1299 Ocean Avenue
Santa Monica, CA 90401
</TABLE>
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(1) All of such Shares are held in a voting trust pursuant to which the Trustee
exercises voting control. Victor Posner has retained sole dispositive power
with respect to such Shares. See "THE MERGER -- Background of the Merger"
for a description of the terms of such trust.
(2) The Company has been advised that Heartland Advisors, Inc. is a registered
investment advisor and is deemed to have beneficial ownership of 127,450
Shares as of December 31, 1995. Information contained herein concerning
Heartland Advisors, Inc. is based on a filing made by it on Schedule 13G as
amended by Amendment No. 1 thereto dated February 9, 1996.
(3) The Company has been informed that Dimensional Fund Advisors Inc.
("Dimensional"), a registered investment advisor, is deemed to have
beneficial ownership of 126,257 Shares as of December 31, 1995, all of which
Shares are held in portfolios of DFA Investment Dimensions Group Inc., a
registered open-end investment company, or in series of the DFA Investment
Trust Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional serves as investment manager. The
Company has been informed that Dimensional disclaims beneficial ownership of
all such Shares. Information contained herein with respect to Dimensional is
based on filings made by it on Schedule 13G as amended by Amendment No. 7
thereto dated February 7, 1996.
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<PAGE> 13
The beneficial ownership as of August 21, 1996 of the Company's Shares by
each director of the Company who has such ownership, and by all officers and
directors of the Company as a group, is set forth in the following table:
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
---------------- ----------------------- --------
<S> <C> <C>
A.A. Fornataro................................................... 7,125 Shares(2) *
Donald L. Hoylman................................................ 14,500 Shares(3) *
Martin J. Posner................................................. 700 Shares *
Officers and directors of the Company as a group (5 persons)..... 22,475 Shares 1.2%
</TABLE>
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* Constitutes less than one percent of the outstanding Shares.
(1) Except as otherwise noted, to the best of the Company's knowledge, each
listed person has both sole voting power and sole investment power as to the
Shares set forth opposite his name.
(2) Does not include 7 Shares owned by Mr. Fornataro's daughter as to which he
disclaims any beneficial ownership.
(3) Includes 3,000 Shares owned by Mr. Hoylman's wife.
See "THE MERGER AGREEMENT -- Certain Other Effects of the Merger."
THE MERGER
BACKGROUND OF THE MERGER
In April 1979, a company controlled by Victor Posner began purchasing
Shares and by December 1981 had acquired 23.8% of the Company's outstanding
common stock. Such Shares were subsequently transferred to Mr. Posner and he
ultimately increased his holdings in 1984 to 49.2% by purchasing shares from the
Marmon Group, Inc.
Marshall Suit. In November, 1989 a shareholders derivative suit (the
"Marshall suit") was filed in the United States District Court for the Western
District of Pennsylvania against the Company's directors which alleged, among
other things, that (i) Victor Posner, the Company's Chairman and Chief Executive
Officer, received excessive compensation, (ii) the Company failed to hold annual
shareholders meetings and distribute shareholder reports, and (iii) the Company
paid excessive insurance premiums to two Posner-controlled companies, Insurance
and Risk Management, Inc. and Essex Insurance Company, Ltd. The Marshall suit
was settled in July 1993 and, under the stipulation of settlement, restrictions
were placed on the amount of Mr. Posner's compensation, three directors resigned
and three new independent directors were added to the Company's Board of
Directors and various committees of the Board. In addition, a compensation
consultant was engaged and other procedures instituted to ensure that
compensation paid to members of the Company's senior management would be
competitive.
SEC Enforcement Action. On December 29, 1993, judgment was entered by the
United States District Court for the Southern District of New York in favor of
the Securities and Exchange Commission ("SEC") and against Victor Posner and his
son, Steven Posner, in a civil suit filed by the SEC in September 1988 against
Victor and Steven Posner and others. The United States Court of Appeals for the
Second Circuit affirmed the lower court's judgment and a petition for certiorari
was denied by the United States Supreme Court in October 1994. Pursuant to the
judgment, Victor and Steven Posner have been enjoined from violating various
provisions of the federal securities laws, barred from serving as officers or
directors of any reporting company under the Securities Exchange Act of 1934
(the "Exchange Act"), ordered to disgorge approximately $4,000,000 which had
been paid by Fischbach Corporation and to place certain securities owned by them
into a voting trust. Victor Posner resigned as an officer and director of the
Company on January 4, 1994 and is prohibitted from participating in its
management.
On February 18, 1994, the District Court entered a trust order under which
Victor Posner and Steven Posner were required to deliver to the Trustee all
voting securities ("Trust Securities") they own, directly or
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<PAGE> 14
indirectly, in any company they control (as defined in the Exchange Act) which
has a class of securities registered under Section 12 of the Exchange Act or
which is required to file reports pursuant to Section 15(d) of the Exchange Act.
Salem Corporation is such a company. Under the terms of the Voting Trust, the
Trustee is required to vote all Trust Securities upon any proposal submitted to
a vote of security holders in proportion to the votes cast by the other holders.
Notwithstanding the foregoing, unless otherwise ordered by the District Court,
the Trustee, in his sole discretion, may depart from the proportionate voting
provisions of the Voting Trust in any manner he deems necessary in order to act
in accordance with the purposes of the District Court's judgment. The Trustee
must give ten days' advance written notice to the District Court, the SEC,
Victor Posner and Steven Posner before voting any of the Trust Securities in
such manner.
The Trustee is not permitted to sell, transfer or encumber the Trust
Securities. Victor Posner and Steven Posner, however, are not restricted in
their ability to direct that Trust Securities be sold, transferred or pledged to
unrelated parties. If an issuer of Trust Securities ceases to be a reporting
company under the Exchange Act, such securities are no longer to be subject to
the Voting Trust and are to be returned to Victor and Steven Posner. Unless
sooner terminated by the agreement of Victor Posner, Steven Posner and the SEC,
and an order of the District Court, the Voting Trust will terminate with respect
to Trust Securities owned by Victor Posner upon his death and with respect to
Steven Posner's Trust Securities upon his death.
By letter dated June 26, 1995, the Trustee advised the District Court that
if a merger proposal were made for the Company, the Trustee likely would follow
Mr. Posner's instructions in regard to voting on a merger, unless otherwise
instructed by the District Court. On June 30, 1995, the District Court entered
an Order directing that "with respect to all proposed transactions that require
shareholder approval...[t]he Trustee has, in all cases, the right and the duty
to vote Victor Posner's shares proportionately, which Victor Posner may not
question." The District Court further ordered that Mr. Posner "continues to
retain the right to bid for himself or to make his own offer with respect to any
such transaction." On March 8, 1996, the United States Court of Appeals for the
Second Circuit entered a Summary Order affirming the District Court's Order. No
further review of the Order was sought and the Order is, therefore, final.
SEC Investigation. On January 19, 1995 a Formal Order of Private
Investigation was issued by the SEC concerning the Company. All of the Company's
directors were 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. Documents were also obtained from the
Company and its counsel. 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 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 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.
Initial Unsolicited Offers. On October 16, 1994, a member of the Company's
Board of Directors received a telephone call from an intermediary acting on
behalf of the Harbour Group, a privately owned investment and operating
organization headquartered in St. Louis, Missouri, who was seeking a meeting to
discuss the possible acquisition of the Company. The director referred the
caller to counsel for the Company, Titus & McConomy LLP, and an exploratory
meeting among representatives of the Harbour Group and counsel for the Company
was held on October 25, 1994. The representatives of the Harbour Group stated at
that time that they did not wish to engage in an adversarial takeover of the
Company.
Following the meeting, counsel for the Company informed the members of the
Company's Executive Committee of the discussions with the Harbour Group and a
meeting of the Executive Committee was then scheduled for October 31, 1994. At
that meeting, the members of the Executive Committee considered the appropriate
response to the Harbour Group's approach. The Executive Committee members noted
that the Company's stock was then trading at prices of between $13.00 and $16.00
per Share but they believed it was worth considerably more. Although it was felt
that offers for the Company should neither be encouraged or discouraged at that
time, it was the sense of the members of the Executive Committee that the
Company's Shares were worth more than the amount expected to be offered by the
Harbour Group. The members of the
9
<PAGE> 15
Executive Committee agreed that any offer for the Company should be publicly
disclosed. The members decided to recommend to the full Board of Directors that
Arthur D. Little, Inc. ("ADL"), which was advising the Board of Directors on
strategic planning matters at the time, be engaged on an hourly basis to assist
the Board of Directors in considering any offer that might be received. Later
that day, counsel for the Company and counsel for the Harbour Group spoke and it
was understood that the Harbour Group would submit a written proposal to the
Board of Directors of the Company the following day.
On November 1, 1994, the Company received an unsolicited proposal from
Harbour Group Investments III, L.P. to acquire all of the Company's outstanding
Shares through a cash merger paying a premium of not less than 25% in excess of
the average closing price of the Company's Shares during the 30 trading days
preceding the proposal date. The closing price for the Company's Shares on the
AMEX on October 31, 1994 was $13 1/2 and the price offered by the Harbour Group
was calculated to be $17.41. In its proposal, the Harbour Group requested that
it be granted the exclusive right to negotiate with the Company until December
31, 1994 and that the Company not solicit or engage in any discussions with any
other person with respect to the acquisition of all or any part of the Company
or its business during that period. The proposal also contemplated the payment
of a break-up fee in an amount to be negotiated if the Company terminated
negotiations to pursue discussions with another bidder. The Company issued a
press release that day disclosing the receipt of the Harbour Group's offer.
In response to the press release concerning the Harbour Group's proposal,
Victor Posner wrote to the Company's Board of Directors on November 2, 1994 to
advise the Board that he had no interest in selling his shares of the Company's
stock. He further stated he "would certainly be interested in buying any and all
of the remaining outstanding shares of Salem Corp. at the price offered by
Harbour or better."
A meeting of the Company's Board of Directors was convened on November 3,
1994 to discuss the proposals received from the Harbour Group and Victor Posner.
Following extensive discussion, the directors agreed to engage ADL, as advisors
to the Board of Directors, to conduct a valuation of the Company's Shares and
assist in the identification and assessment of appropriate strategic responses
to third party acquisition offers.
The Board of Directors met the following week on November 10, 1994 and
November 11, 1994. Representatives of ADL briefed the Board of Directors on the
valuation process and the methodologies utilized. Following discussion, the
Board of Directors decided to create a committee of three independent directors
(the "Independent Committee") which was given the responsibility of, among other
things, establishing a fair process to deal with parties expressing an interest
in acquiring the Company.
The Harbour Group was thereafter advised of the creation of the Independent
Committee and informed that the Company did not consider it appropriate to agree
to the exclusivity, non-solicitation and break-up fee provisions included in the
Harbour Group's November 1, 1994 offer. Mr. Posner was also informed of the
Company's response to the Harbour Group and told that, because the Harbour
Group's proposal had been rejected due to its restrictive provisions and Mr.
Posner's offer had not contained definitive terms, the Company's Board of
Directors believed that it was unable to act on his proposal and that his
proposal was considered to be moot.
During November 1994 and December 1994 discussions continued with the
Harbour Group and expressions of interest were also received from several other
parties. The Independent Committee met with representatives of ADL on the
evening of December 7, 1994 and the morning of December 8, 1994 to review a
preliminary draft of the valuation of the Company's Shares. The draft report
indicated a range of valuations with a preliminary estimate of the value of the
Company to an investor of between $23.00 and $26.00 per Share.
On December 23, 1994, the Harbour Group raised its offer to "at least
$17.50 per share" and removed the restrictive provisions that had been objected
to by the Company. After considering the Harbour Group's revised offer, the
Independent Committee responded on December 27, 1994 that it considered the
price of $17.50 inadequate based on the Company's positive earnings trend, near
record backlog and book value per share of $18.98 (as of September 30, 1994).
10
<PAGE> 16
On January 11, 1995, the Harbour Group raised its offer to $21.00 per
Share. The Independent Committee held a telephonic meeting that day in which
representatives of ADL participated. On January 14, 1995, the Independent
Committee engaged its own legal counsel. On January 16, 1995, the Company issued
a press release disclosing the Harbour Group's revised offer but stating that
although the Independent Committee believed the price offered was insufficient
and significantly below the value of the Company's Shares, the Company was
prepared to supply non-public information requested by the Harbour Group after a
confidentiality agreement was signed. A confidentiality agreement was entered
into by Harbour Group Investments III, L.P. on January 30, 1995.
Initial Valuation. On January 24, 1995, ADL delivered a revised draft
valuation report to the members of the Independent Committee. The report
indicated a valuation range from $23.34 to $29.27 for the Company's Shares and
concluded that $25.00 was a "fair value" per Share. ADL's draft report was sent
to the members of the Executive Committee on January 31, 1995 and to the
remaining members of the Company's Board of Directors on February 10, 1995.
Engagement of DLJ. A joint meeting of the Company's Executive and
Independent Committees was held on February 24, 1995. At that meeting the
directors decided it was advisable to engage an investment banking firm to
assist in the sale process for the Company. During early March 1995, the
Independent Committee conducted interviews of a number of investment banking
firms and ultimately recommended that two be invited to make formal
presentations to the full Board of Directors at a meeting on March 15, 1995. The
presentations included descriptions of the firms' merger and acquisition
expertise, the services they could provide in advising the Board of Directors
with respect to strategic alternatives available to the Company, valuation
techniques and the sale process. The investment bankers also discussed issues
unique to the Company and responded to questions from directors and counsel to
the Company.
Following the presentations, the Board of Directors selected Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") as its financial advisor and an
engagement letter was signed on March 30, 1995. Among other things, DLJ agreed
to (i) provide assistance in preparing offering materials describing the
Company, (ii) identify and contact selected qualified acquirors, (iii) arrange
for potential acquirors to conduct business investigations, (iv) negotiate the
final aspects of any proposed acquisition of the Company, and (v) deliver an
opinion to the Company's Board of Directors as to the fairness from a financial
point of view of the consideration to be received by the Company's shareholders
in any proposed acquisition.
Formal Sale Process. During early April 1995, DLJ conducted its own due
diligence investigation of the Company. Later that month, DLJ prepared a
Confidential Information Memorandum describing the Company and contacted over
150 potential buyers to determine their interest and arrange for presentations
by the Company. Beginning in May 1995, DLJ distributed copies of the
Confidential Information Memorandum to 60 prospective purchasers who had signed
confidentiality agreements. Management presentations were also made to a number
of prospective purchasers that month.
DLJ established May 31, 1995 as the deadline for receipt of non-binding
preliminary indications of interest from prospective purchasers. Nine
indications of interest were received by the deadline. Of those, DLJ, working
with the members of the Independent Committee, selected five prospective
purchasers to conduct a second round of due diligence. DLJ set June 30, 1995 as
the date upon which final bids would have to be submitted. Bidders were
instructed that final proposals had to be fully financed and the sources of
financing disclosed together with the relevant information necessary to enable
DLJ to verify the financing. In addition, bidders were supplied with a draft
agreement and plan of merger and directed to include a copy of the merger
agreement marked to indicate any changes they would request with their final
proposals.
On the final bid date of June 30, 1995, DLJ received two proposals to
acquire all of the Company's Shares. The first indicated a range of $25.00 to
$26.50 per Share but contained no additional information about the terms of the
proposal. The second proposal was "at a price of approximately $33.00" per Share
and was premised on the assumption that the Company would have minimum cash (net
of debt) of $22,000,000. That proposal was further subject to a due diligence
investigation, obtaining requisite financing and reaching an agreement with
"each shareholder that beneficially owns a significant number of shares of
common stock" to vote in favor of the acquisition. Following discussions among
that bidder, its counsel, DLJ and counsel for the Independent Committee and the
Company, the bidder submitted a revised proposal on July 21, 1995. In
11
<PAGE> 17
the revised proposal, the bidder imposed additional conditions including (i)
execution of an agreement with Victor Posner under which he agreed to allow the
bidder to purchase and vote his Shares and approval of that agreement by the
United States District Court for the Southern District of New York, (ii)
execution of releases by Victor Posner, his affiliates and associates, (iii)
resignation by Victor Posner and his affiliates and associates as employees,
officers, directors, agents, consultants and representatives of the Company, and
(iv) agreement by the SEC to dismiss with prejudice all actions and
investigations against the Company and its affiliates and associates. The bidder
also sought to require payment of a break-up fee of $2,500,000 if the Company
terminated its agreement with the bidder and entered into an agreement for the
sale of the Company within 12 months thereafter. Conversations with that bidder
and representatives of Victor Posner occurred throughout the summer and fall of
1995.
During the summer and fall of 1995 the Company and DLJ received other
expressions of interest from prospective purchasers. Management cooperated in
their due diligence investigations and made frequent presentations to interested
parties.
On September 25, 1995, a proposal to acquire all of the Company's stock at
a price of $21.75 per Share was received. The proposal was subject to a due
diligence investigation and the approval of the Boards of Directors of the
Company and the bidder. In addition, the proposal contained break-up fees
ranging from $1,200,000 to $2,000,000 and restricted the Company's ability to
engage in negotiations with other parties. On September 21, 1995, the last date
on which trading occurred prior to the receipt of the proposal, the high and low
sales prices for the Company's stock on the AMEX were $26 1/2 per Share.
The Company's Board of Directors met on October 10, 1995 and received
written reports from DLJ and the Independent Committee describing the sale
process, the persons contacted, the bids and expressions of interest received
and follow up contacts. Among the proposals discussed with the Board was a
proposal for the acquisition of the Company's Shares at a price of $23.00 per
Share from a firm which conducted a limited amount of due diligence. It was also
reported that another firm had expressed an interest in acquiring the Company at
a price of $28.00 per Share but subject to due diligence and obtaining
financing. Representatives of DLJ commented upon various aspects of the
proposals received including the adequacy of the price offered and the
conditions to closing a transaction. Concern was expressed as to whether a
fairness opinion could be rendered with respect to the $21.75 and $23.00 per
Share proposals. DLJ also cautioned the Board that it was unknown whether the
party which had made the earlier proposal of $33.00 per share would waive the
conditions of reaching agreements with Victor Posner and the SEC. After
extensive discussion, it was agreed to add A.A. Fornataro, the Company's
President and Chief Operating Officer, to the Independent Committee (which was
renamed the "Special Negotiating Committee") and continue the Committee's
existence until the next regularly scheduled Board of Directors meeting on
December 7, 1995 in order to permit DLJ and the Committee to follow through with
the remaining prospective purchasers. The Company's counsel was also directed to
participate in the deliberations of the Committee.
At a Board meeting held on November 2, 1995, representatives of DLJ
reported that they had spoken to the parties which had made the proposals of
$21.75 and $23.00 per Share and both had declined to increase the amount of
their offers. It was noted that both proposals contained due diligence and
financing contingencies. The party that had made the proposal of $28.00 per
Share had lost its source of equity financing, which had declined to go forward
unless Victor Posner's approval of their offer was obtained. It was also
reported that the party which had made the proposal of $33.00 per Share still
refused to remove the conditions requiring Victor Posner's cooperation and,
although discussions continued, it appeared unlikely that these conditions could
be satisfied.
By letter dated December 4, 1995, a proposal to acquire the Company's
outstanding stock for $26.00 per Share was communicated to DLJ. The letter
requested a due diligence period of 60 days and a $2,000,000 break-up fee. This
proposal was described to the Board of Directors at its December 7, 1995
meeting. Representatives of DLJ expressed skepticism that the recently received
proposal would result in the culmination of a sale of the Company. They also
explained that the proposals that had been discussed at prior Board meetings
were stagnant and potential bidders appeared reluctant to make a firm offer for
the Company as long as it appeared that Victor Posner would not be supportive.
Following extensive debate, the Board of Directors nonetheless determined to
keep the Special Negotiating Committee in place for an additional 45
12
<PAGE> 18
days in order to permit it to follow through with the most recently received
proposal. In addition, the Board of Directors encouraged the Company's
management to consider making a bid for the Company.
A letter dated December 17, 1995 was received by DLJ from the new bidder
indicating that the bidder was prepared to begin a 45-day due diligence period
but warned that it was unlikely that its ultimate offer would exceed $26.00 per
share. Moreover, the bidder informed DLJ that it would want to divest the
Company's Minerals Group at the time of closing and requested a deposit of
$100,000 to cover the bidder's expenses if it was unsuccessful in acquiring the
Company within three months. On January 4, 1996, the Company's Board of
Directors responded that the Company would be willing to pay $100,000 for the
bidder's expenses (i) if the bidder presented an offer of $26.00 per share to
the Board but the Board decided not to recommend the offer to the Company's
shareholders or (ii) if the Board chose to recommend another party's bid to the
Company's shareholders.
Following its due diligence investigation, the bidder sent a letter on
February 28, 1996 to DLJ stating that it was "not prepared to move forward with
discussions to acquire Salem Corporation for $26 per share." The bidder's
response was discussed at a Board of Directors meeting on March 4, 1996 at which
time the Board directed DLJ to go back to the bidder for clarification. During a
conference call on March 18, 1996, the bidder confirmed that it was not
interested in proceeding with an acquisition of the Company.
Termination of DLJ. A regularly scheduled meeting of the Board of
Directors was held on March 21, 1996 at which time Mr. Fornataro announced that
he had been contacted by the bidder who had previously indicated an interest in
acquiring the Company for $28.00 per Share and was informed that the bidder had
located a new source of equity financing and requested a meeting. Mr. Fornataro
said that although he would be cooperative in negotiating a sale on the
Company's behalf with that bidder, he had no interest in being an equity
participant in the bid as had been suggested previously by the bidder. Further,
if it appeared that this was the only remaining bidder for the Company, Mr.
Fornataro said he intended to pursue with other members of senior management an
offer to acquire the Company's outstanding Shares. A long discussion ensued
about the bidding process and the prospects for a sale of the Company. Among
other considerations discussed by members of the Board and management was the
high level of expense associated with the sale process. The Board of Directors
decided to terminate the engagement of DLJ (whose one year contract was
scheduled to end on March 30, 1996), disband the Special Negotiating Committee
and terminate the engagement of its separate counsel.
A press release was issued on March 22, 1996 which announced that the Board
of Directors had received no firm offers for the purchase of the Company and had
decided to terminate the engagement of DLJ and disband the Special Negotiating
Committee. The release further stated that although discussions with potential
acquirors would continue and inquiries from financially responsible bidders
would be welcomed, the Board of Directors had determined to cease the active
solicitation of bids for the Company.
On March 27, 1996, Mr. Fornataro and counsel for the Company met with the
remaining active bidder who informed them he was not interested in proceeding
with the acquisition of the Company because of the ownership position of Victor
Posner.
Receipt of Offers from Management and Victor Posner. On April 3, 1996, the
Company received an offer from Victor Posner to acquire all of the Company's
outstanding stock not owned by him at a price of $20.00 per Share. Mr. Posner's
offer was not subject to due diligence or financing contingencies. It did,
however, contain a $500,000 break-up fee and a non-solicitation provision. In
his letter to the Chairman of the Company's Board of Directors, Mr. Posner said
he was "sure the Board will agree that my proposal is fair to and in the best
interests of Salem and the Salem shareholders." The offer was accompanied by a
proposed draft of a merger agreement and requested a response by April 12, 1996.
On April 3, 1996, the high and low sales prices on the AMEX for the Company's
stock were $19 1/8 and $18 1/2, respectively, per Share.
The Company's Board of Directors met on April 4, 1996 and discussed Mr.
Posner's offer. On that date, the high and low sales prices for the Company's
stock on the AMEX were $21 1/8 and $19 3/4, respectively, per Share. The Board
of Directors resumed its consideration of Mr. Posner's offer at a meeting held
on April 11, 1996. At that time, it was noted that Mr. Posner's $20.00 per Share
offer was below the book value of approximately $21.00 per Share, was below the
closing price on the AMEX for the stock on April 10, 1996 of
13
<PAGE> 19
$20 3/4 per Share and was below the valuation range provided by ADL. The Board
of Directors also considered whether it would be possible to obtain a fairness
opinion as to the price offered by Mr. Posner which was a condition of closing
in the merger agreement proposed by Mr. Posner. Members of management expressed
the view that the Company's relationships with suppliers, customers and
employees would suffer if Mr. Posner regained control of the Company and would
also be affected adversely if the sale process was not concluded promptly. The
Board of Directors concluded that it was not prepared to accept Mr. Posner's
offer but would invite him to conduct a due diligence investigation after
signing a confidentiality agreement and directed the Company's counsel to
attempt to negotiate terms with Mr. Posner that would ensure an open and fair
bidding process for the Company.
At the Board meeting on April 11, 1996, the directors also authorized a
loan of $60,000 to management to investigate the possibility of making an offer
to purchase the Company. It was agreed that repayment of the loan would be
forgiven if management continued to cooperate with other bidders for the Company
and submitted a bid of more than $20.00 per Share for the Company's stock.
At the Board of Directors meeting on May 9, 1996, management presented an
offer to acquire all of the Company's stock for $22.00 per Share. The offer was
subject to obtaining financing but was accompanied by a letter from management's
financial advisors indicating their confidence that financing could be arranged
upon satisfactory terms. Management requested authority to spend up to $100,000
of the Company's funds to secure financing for their bid. The Board of
Directors, however, declined to act on their request.
On May 16, 1996, Mr. Posner again wrote to the Chairman of the Company's
Board of Directors and stated that although he continued to believe the terms of
his April 3, 1996 offer to acquire complete equity ownership of the Company for
$20.00 per Share were "fair and in the best interests of Salem's shareholders,"
he increased his offer to $22.00 per Share. The offer was not subject to
financing or due diligence contingencies. In addition, Mr. Posner offered to
reimburse the Company for any expenses incurred in providing information to him.
The revised offer further provided that the $500,000 break-up fee previously
requested would be waived if the Company received an offer of $24.00 per Share
or better and was able to close that transaction within 120 days. Mr. Posner
also offered to place $1,000,000 in escrow.
At a Board meeting on May 21, 1996, the directors discussed the pending
offers from Mr. Posner and management. They concluded it would be in the best
interests of the shareholders for there to be more than one viable offer for the
Company and decided to approve payment of $100,000 to enable management to
secure financing for its bid. A press release was issued by the Company on May
22, 1996 disclosing the decision to advance additional funds to management. On
May 23, 1996, Mr. Posner withdrew his $22.00 per Share offer.
Receipt of Additional Offers. During May and June, 1996 a number of
inquiries were received by management, the Chairman of the Company's Board of
Directors and the Company's counsel from prospective purchasers for the Company.
Confidentiality agreements were signed by several parties and information about
the Company was distributed to them. Various parties met with management, the
Chairman of the Board and the Company's counsel and some conducted more
extensive due diligence. The progress of these discussions was reported at
meetings of the Board of Directors on May 21, 1996, May 29, 1996 and June 12,
1996. At the May 29, 1996 Board meeting the directors discussed the need for a
financial advisor to assist the Board in managing the sale process. The Chairman
of the Board and the Chairman of the Audit Committee were directed to work with
the Company's counsel to investigate the terms under which an investment banker
could be engaged and to identify suitable candidates for consideration by the
full Board of Directors.
Three Cities Research, Inc. An industry analyst who also holds shares of
the Company's stock had contacted the Company's counsel from time to time during
1995 and 1996 to inquire about the sale process. On April 2, 1996, not long
after the issuance by the Company of the press release announcing the
termination of DLJ's engagement, he again contacted the Company's counsel and
asked whether the Company was still interested in finding a buyer. Counsel
replied that although the active solicitation process had ended, discussions
with potential purchasers continued and the Company would welcome inquiries from
interested parties. He told counsel he knew of someone he thought would be
interested in the Company and would mention the Company to them. On May 24,
1996, he called counsel to say they should expect to receive a call
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<PAGE> 20
from J. William Uhrig of Three Cities Research, Inc. ("TCR"). Later that day,
Mr. Uhrig called counsel for the Company and executed a confidentiality
agreement.
On May 30, 1996 representatives of TCR met with the Company's senior
management, two members of the Board of Directors and the Company's counsel. Mr.
Uhrig described the history and investment philosophy of TCR and its recently
created investment funds, Three Cities Fund II, L.P. and Three Cities Offshore
II C.V., and gave a brief description of some of their portfolio companies. He
noted a distinctive feature of TCR being its willingness and ability to pursue
"all cash" transactions which provided both a high degree of certainty and a
means of better controlling the timing of the completion of a transaction. He
also explained that although TCR relied upon operating management to manage the
business of the companies in which it invested, TCR provided assistance in
defining business strategies and capital to fund opportunities for profitable
growth.
Management then gave an overview of the Company's operations and answered
questions. It was stressed by management and the Board members that although
management had made an offer to acquire the Company, they remained open to
working with another bidder if it would benefit the Company and its
shareholders. Mr. Uhrig suggested that management meet the other partners of TCR
and talk to others with whom TCR had done business. TCR continued its due
diligence investigation of the Company with visits to its various facilities and
additional discussions with management. On or about June 11, 1996, Mr. Uhrig
contacted counsel for the Company to discuss the presentation of a formal offer
to acquire the Company. Counsel informed Mr. Uhrig that because the Company was
in the process of interviewing financial advisors to assist in the evaluation of
offers it might be inadvisable for TCR to make an offer before the Board of
Directors was prepared to receive it.
Engagement of M.J. Whitman, Inc. On June 6, 1996 and June 12, 1996 the
Chairman of the Company's Board of Directors, the Chairman of the Audit
Committee and counsel conducted preliminary interviews with three investment
banking firms. During the afternoon of June 12, 1996 presentations were made by
the investment bankers to the Company's Board of Directors. The investment
bankers described their experience in comparable transactions, their approach in
valuing companies, their suggestions for structuring the sale process and the
timing thereof and the fees they would charge. Following the presentations, the
Board members concluded that M.J. Whitman, Inc. ("MJW") was best qualified to
assist the Board of Directors at a crucial stage in the sale process and offered
the most attractive pricing for its services.
On June 13, 1996 the Company engaged MJW to (i) perform a complete
financial analysis of the Company in order to determine an appropriate valuation
of the Company, (ii) counsel the Company's Board of Directors as to strategy and
tactics in negotiating with various bidders for the Company, (iii) evaluate the
consideration offered and the structure of various bids for the Company, and
(iv) render a written opinion as to the fairness to the Company, from a
financial point of view, of any proposed sale or merger. Later that day
representatives of MJW began to contact the interested parties and invited them
to make presentations to the Board of Directors at a meeting on June 20, 1996.
The Company's counsel also wrote to all parties who had previously signed
confidentiality agreements to inform them of the engagement of MJW and advised
them to contact M.J. Whitman, Inc. if they had any continuing interest in
acquiring the Company.
Presentations by Bidders. On June 20, 1996 the Board of Directors met and
received presentations by several bidders for the Company. At that time, members
of senior management announced that they had secured a commitment for financing
for their $22.00 per Share bid and were prepared to proceed. Victor Posner's
counsel indicated that Victor Posner would be willing to resubmit his $22.00 per
Share bid if he could be assured it would be treated fairly and seriously. A bid
of $24.00 per Share was received from another party which was subject to
obtaining debt and equity financing and also subject to due diligence
investigation. A written proposal offering $22.00 to $24.00 per Share which was
subject to due diligence was also received.
The last presentation to the Board on June 20, 1996 was by TCR which
offered to acquire all of the Company's outstanding stock for $25.00 per Share
in cash. The TCR offer was not subject to due diligence or a financing
contingency. TCR proposed to enter into a definitive merger agreement as soon as
possible but required confidentiality and exclusivity in the interim. TCR's
offer also sought to impose a break-up fee of $1,750,000 and reimbursement of
expenses of up to $500,000 if a merger was not consummated.
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<PAGE> 21
The Board of Directors considered the presentations during the evening of
June 20, 1996 and continued its deliberations on June 21, 1996. At that time,
MJW recommended that the Board accept the offer from TCR. MJW pointed out to the
Board that the offer satisfied three criteria: it was the highest price; the
transaction could be consummated immediately; and the financing for the offer
would not over leverage the Company. After extensive deliberations, the Board
decided to continue discussions with TCR and authorized MJW and the Company's
counsel to negotiate with TCR concerning price, break-up fee, expense
reimbursement and the other terms and conditions of the TCR offer. On June 20,
1996, the high and low sales prices for the Company's stock on the AMEX were
$20 1/4 per Share.
Following adjournment of the meeting, the other bidders for the Company
were informed that the Board had decided to engage in negotiations with a bidder
whose identity could not be disclosed and the Board intended to meet again on
June 27, 1996 to act upon that offer. If the offer could not be accepted at that
time, it was the Company's intention to recontact the other bidders.
On June 24, 1996, representatives of TCR, counsel for TCR, counsel for the
Company and representatives of MJW met to discuss the terms of the offer and the
changes proposed by TCR to the form of merger agreement previously supplied by
the Company. A number of the requested changes were incorporated in a draft
merger agreement and the draft was distributed to the Company's directors and
TCR and its counsel on the evening of June 25, 1996.
On June 27, 1996, the Company's Board of Directors met to review the draft
merger agreement with counsel and representatives of MJW and the Company's
auditors, Arthur Andersen LLP. MJW rendered a preliminary verbal opinion that
the consideration to be paid in the proposed merger would be fair to the Company
from a financial point of view. The proposed merger agreement was reviewed in
detail by the directors. Counsel reviewed with the Board of Directors their
fiduciary duties under Pennsylvania law and representatives of MJW also
discussed with them the principal factors to be considered by the Board of
Directors in their deliberations: fair price, ability to close promptly and
protection of the Company's ongoing business. The Board of Directors asked that
certain of the terms of the proposed merger agreement be modified or clarified.
Representatives of TCR and their counsel were present in an adjoining room
throughout the meeting and available to answer questions and/or continue
negotiations. When the Board finally concluded its review of the merger
agreement and discussion of the terms of the offer late in the afternoon, they
were informed that TCR had decided to withdraw the offer if it was not accepted
by 3:00 p.m. the following day. The parties nonetheless discussed the remaining
open issues and reached agreement with respect to some of such issues.
A revised draft of the merger agreement incorporating changes agreed to by
both sides was prepared during the evening of June 27, 1996 and telecopied to
TCR and its counsel the following morning and distributed to the Board of
Directors. When the Board of Directors resumed its meeting at approximately
11:00 a.m. on June 28, 1996, representatives of MJW confirmed that they would be
prepared to deliver a formal written fairness opinion with respect to the TCR
offer. The changes in the revised draft of the merger agreement were explained
by counsel and the remaining open issues were described by MJW and counsel and
discussed by the Board. Negotiations with TCR and its counsel over the terms of
the offer and the language in the merger agreement continued by telephone. At
3:00 p.m. the Board of Directors agreed in principle to accept the TCR offer and
authorized counsel and MJW to work out the few remaining issues. By
approximately 6:00 p.m. on June 28, 1996, those issues were resolved, the
language in the merger agreement was agreed upon and counterpart signature pages
were signed.
REASONS FOR THE MERGER
At its reconvened meeting on June 28, 1996, the Board of Directors
concluded that the Merger is fair to, and in the best interests of, the Company
and its shareholders. The Board of Directors recommends that the Company's
shareholders VOTE FOR approval and adoption of the Merger Proposal.
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<PAGE> 22
The determination of the Board of Directors to approve the Merger Agreement
was based upon consideration of a number of factors, including the following:
(1) An active and extensive process of negotiation, study and offering of
the Company for sale had been conducted following the receipt of the
Harbour Group's initial offer on November 1, 1994 and continuing
through June 20, 1996 when the $25.00 per Share offer was received
from TCR, which was the highest non-contingent bid received;
(2) The $25.00 per Share Merger Consideration represents a substantial
premium over the Company's book value per share and a premium over the
AMEX closing price of $20 1/4 on June 19, 1996, the date prior to the
receipt by the Board of Directors of TCR's offer;
(3) The Company's management and Victor Posner, the owner of 49.2% of the
Company's Shares, offered to pay $22.00 for the Shares, a price which
both bidders characterized as being fair to the Company's
shareholders;
(4) MJW delivered its preliminary verbal opinion to the Board of Directors
on June 27, 1996, which was confirmed by a written opinion dated
August 8, 1996, as to the fairness to the Company, from a financial
point of view, of the Merger;
(5) Alternatives to the Merger were considered, including the continued
operation of the Company as an independent, publicly owned entity with
49.2% of its Shares beneficially owned by Victor Posner but held in
the Voting Trust, but it was the opinion of management and a majority
of the directors that continuation of that situation could have a
deleterious effect on the Company's employees, customers, suppliers
and business prospects, and it was determined that the Merger provided
the best result for the Company's shareholders, employees, customers
and suppliers and the communities in which the Company and its
subsidiaries have offices and other facilities;
(6) The terms of the financing for TCR's offer and the covenants in the
Merger Agreement restricting certain payments by the Company, as the
corporation surviving the Merger (See "THE MERGER AGREEMENT -- Future
Distributions by the Surviving Corporation"), provided substantial
assurance to the Company's Board of Directors that the ongoing
operations of the Company would be soundly financed;
(7) TCR expressed a desire and displayed the ability to close the Merger
with minimal delay and little disruption in the Company's operations;
(8) The Merger Agreement continues to permit the Board of Directors, in
the exercise of its fiduciary duties, to consider and accept an
unsolicited proposal to acquire the Company which the Board of
Directors believes is more favorable to the Company and its
shareholders than the Merger Proposal;
(9) The adverse impact on the Company's operations and employees likely to
be caused by continuing the sale process on the possibility that a
qualified bidder could be found who would be willing to pay a price
higher than $25.00 per Share; and
(10) The current ownership of the Company with 49.2% of the Company's
Shares held by Victor Posner but subject to the Voting Trust has been
the source of continuing uncertainty for potential investors, lenders,
suppliers, customers and employees and the Merger will resolve those
uncertainties.
The Board of Directors recognizes that if the Merger is consummated the
Company's shareholders will not have the opportunity to continue their equity
interest in any future growth of the Company. See "THE MERGER
AGREEMENT -- Certain Other Effects of the Merger." However, the Board of
Directors placed special consideration on the fact that the Merger Consideration
represents a substantial premium over the price at which the Shares had been
trading prior to the receipt of the Harbour Group's unsolicited offer on
November 1, 1994 and a premium over the Share price on the date prior to the
receipt of TCR's offer.
The foregoing discussion of the factors considered by the Board of
Directors is not meant to be exhaustive but is believed to include the material
factors considered by the Board in its deliberations. The directors did
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<PAGE> 23
not quantify or attach any specific weight to the various factors they
considered in reaching their determination that the Merger Agreement and the
transactions contemplated thereby, including the Merger, are in the best
interests of the Company and its shareholders. In reaching their determination,
the directors took the various factors into account collectively and did not
perform a factor-by-factor analysis during their deliberations.
OPINION OF FINANCIAL ADVISOR
MJW has delivered its opinion to the Company's Board of Directors to the
effect that, as of August 8, 1996, the consideration to be paid by TCR in the
Merger is fair, from a financial point of view, to the Company (the "MJW
Opinion").
A COPY OF THE MJW OPINION DATED AUGUST 8, 1996 WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, LIMITATIONS ON THE SCOPE OF THE REVIEW
UNDERTAKEN AND PROCEDURES FOLLOWED BY MJW IN RENDERING ITS OPINION IS ATTACHED
HERETO AS APPENDIX B, AND IS INCORPORATED HEREIN BY REFERENCE. THE COMPANY'S
SHAREHOLDERS ARE URGED TO READ THE MJW OPINION IN ITS ENTIRETY. THE SUMMARY OF
THE MJW OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION LETTER. THE FULL REPORT OF THE MJW
OPINION IS AVAILABLE FOR REVIEW AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE
DURING NORMAL BUSINESS HOURS EACH BUSINESS DAY. MJW HAS CONSENTED TO THE
INCLUSION OF ITS OPINION LETTER IN THIS PROXY STATEMENT.
The MJW Opinion is directed only to the fairness from a financial point of
view of the Merger Consideration in the Merger. MJW was not asked to consider,
nor did it express any opinion with respect to, the fairness of any other
transaction. The MJW Opinion does not constitute a recommendation to any
shareholder as to how such shareholder should vote at the Special Meeting.
It should be understood that, although subsequent developments may affect
the MJW Opinion, MJW does not have any obligation to update, revise or reaffirm
its opinion and the Company's obligation to consummate the Merger is not
conditioned upon an update of the MJW Opinion. However, MJW is unaware of any
event which has occurred subsequent to August 8, 1996 which would impact its
opinion.
The following briefly summarizes the procedures followed by MJW in reaching
its opinion and the basis for and methods of arriving at such opinion. No
limitations were imposed by the Company's Board of Directors with respect to the
investigations made or procedures followed.
MJW was selected and retained by the Board of Directors to render its
opinion to the Board and has received a fee for its services. In addition to
MJW, several other investment banks of varying sizes were approached by the
Board of Directors and/or submitted bids to render the fairness opinion and to
provide advice to the Board. MJW was selected on the basis of expertise, price,
reputation and the absence of any prior relationship with the Company. MJW, as
part of its advisory and investment banking business, is regularly engaged in
the valuation of businesses and their securities for corporate, estate and other
purposes.
In connection with the MJW Opinion, MJW reviewed and analyzed, among other
things, (i) a draft of this Proxy Statement dated July 19, 1996; (ii) certain
publicly available information concerning the Company including the annual
reports on Form 10-K of the Company for each of the fiscal years in the
five-year period ended December 31, 1995; (iii) the quarterly reports on Form
10-Q of the Company for the quarters ended March 31, 1996 and June 30, 1996;
(iv) certain other internal information, primarily financial in nature,
furnished to it by the Company, including projections prepared by the management
of the Company ("Projections") concerning the businesses and operations of the
Company; (v) certain publicly available information concerning the trading of,
and the trading for, the Shares; (vi) the Merger Agreement; (vii) the
confidential information memorandum dated April 1996 prepared by the Company, as
well as various other information memorandums prepared by advisors to the
Company; (viii) certain information concerning offers to acquire the Company
contained in Schedules 13D relating to the Company dated April 3, 1996, May 16,
1996 and May 23, 1996, as well as certain information concerning other offers to
acquire the Company; (ix) the trust order dated March 2, 1994 of the United
States District Court for the Southern District of New York in Securities and
Exchange Commission v. Drexel Burnham Lambert Inc., et al.; (x) publicly
available information with respect to certain other publicly traded companies;
and (xi) publicly available information
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<PAGE> 24
concerning the nature and terms of other transactions that MJW considered
relevant to its inquiry. In addition, representatives of MJW met with certain
officers and employees of the Company to discuss the past and current business
operations, financial condition and future prospects of the Company, visited
certain of the Company's facilities and considered such other matters that they
believed to be relevant to their inquiry.
The MJW Opinion states that, in the course of their review and analysis and
in arriving at said opinion, MJW assumed and relied upon the accuracy and
completeness of all the financial and other information provided to MJW or
publicly available, and did not independently verify any such information. In
the course of MJW's review, nothing came to MJW's attention which led MJW to
believe that it would not be reasonable to rely upon and utilize such
information for the purposes of expressing MJW's opinion. MJW did not make or
obtain any independent evaluations or appraisals of any of the properties or
facilities of the Company.
In conducting their analysis and arriving at their opinion, MJW considered
such financial and other factors as they deemed appropriate under the
circumstances including, among others, (i) the historical, current and projected
financial position and results of operations of the Company; (ii) the business
prospects of the Company; (iii) the process which had previously occurred in
connection with the marketing for sale of the Company, including the status,
terms and conditions of other offers to acquire the Company; (iv) the historical
and current market for the Shares; (v) the terms and conditions of the Merger;
and (vi) financial and other publicly available information concerning other
publicly traded companies. MJW also took into account its assessment of general
economic, market and financial conditions as well as its experience in
connection with similar transactions and securities valuation generally. The MJW
Opinion is necessarily based upon conditions as they existed and could be
evaluated on the date it was rendered.
In accordance with recognized professional standards as generally practiced
in the valuation industry, the fee for MJW's services is not contingent upon
MJW's conclusions. MJW determined, to the best of its knowledge and in good
faith, that neither it nor any of its agents or employees has a material
financial interest in the Company.
The MJW Opinion does not represent an assurance, guarantee or warranty that
the Company will not default on any debt obligations associated with the
proposed transaction.
The following is a summary of certain analyses performed by MJW in
connection with its opinion, which it discussed with the Company's Board of
Directors. The summary of the financial and comparative analyses set forth below
does not purport to be a complete description of such analyses and of the
factors considered by MJW. The failure to consider all such factors and analyses
could create a misleading view of the processes underlying the MJW Opinion.
Arriving at a fairness opinion is a complex process not necessarily susceptible
to partial or summary description.
Takeover Offers/Market Test. In arriving at its conclusions, MJW
considered the takeover offers for the Company received by the Board of
Directors. With respect thereto, MJW considered the following factors: (i) the
Merger Consideration was the highest offer for the Company as of the date of the
MJW Opinion; (ii) the Merger Consideration is all-cash and is not subject to any
contingencies; (iii) the Company had been the subject of an extensive market
test commencing in November 1994 when the Company received an unsolicited offer
from the Harbour Group; (iv) the Merger Consideration represents an amount $3.00
per Share higher than the offer submitted by both the management of the Company
and the Company's largest single shareholder; and (v) the adverse impact of the
prolonged sale process on the Company's business.
Comparable Company Analysis. MJW compared selected historical share,
price, earnings and operating and financial ratios for the Company to the
corresponding data and ratios for certain other publicly traded companies. MJW
stated that while none of the other publicly traded companies considered in
their analysis is directly comparable to the Company, the analysis of a group of
publicly traded companies engaged in businesses or industries similar to the
Company provides a reasonable basis of comparison which a prudent investor would
utilize in evaluating the Company. An analysis of the results of the foregoing
is not mathematical nor necessarily precise; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of companies and other factors that could affect public trading
values.
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<PAGE> 25
The data and ratios compared by MJW include, among others, (i) the ratio of
total market capitalization of common stock plus total debt plus preferred stock
plus minority interest less cash and cash equivalents ("Enterprise Value") to
(A) earnings before interest and taxes ("EBIT"), (B) earnings before interest,
taxes, depreciation and amortization ("EBITDA"), and (C) EBITDA minus capital
expenditures, as well as (ii) the ratio of current stock price to (A) net
earnings and (B) book value. All of these items were evaluated for the latest
five-year period and adjusted for non-recurring and extraordinary items. In
addition, MJW analyzed historical EBIT, EBITDA and gross margins, the ratios of
net income to book value and EBITDA to total assets, and the ratios of total
debt to total capitalization, capital expenditures to revenues and capital
expenditures to depreciation for the Company and the other publicly traded
companies. The financial multiples implied by the Merger and the Company's
historical financial results were compared to the results of eleven companies
based upon the most recent public information available as of August 8, 1996.
Outlying results were excluded from the multiples analysis.
The eleven companies were Bridgeport Machines, DeVlieg-Bullard, Dualstar
Technologies, Gleason Corp., Jacobs Engineering, Kennametal, Layne Christensen,
Monarch Machine Tool, Prab Inc., Secom General and Sifco Industries (the
"Comparable Companies").
The analysis of Enterprise Value to the latest twelve months ("LTM") EBIT
yielded a median multiple of 8.3x for the Comparable Companies versus 5.3x for
the Merger Consideration. However, adjusting the calculation of Enterprise Value
for the Company to reflect only excess cash, which MJW assumed was $12.8
million, results in an EBIT multiple in the Merger Consideration of 7.3x. The
analysis of Enterprise Value to LTM EBITDA yielded a median multiple of 5.8x for
the Comparable Companies versus 3.9x for the Merger Consideration. However,
adjusting the calculation of Enterprise Value for the Company to reflect only
excess cash results in an EBITDA multiple in the Merger Consideration of 5.4x.
The analysis of Enterprise Value to LTM EBITDA minus capital expenditures
yielded a median multiple of 7.3x versus 7.7x for the Merger Consideration.
Adjusting the calculation of Enterprise Value for the Company to reflect only
excess cash results in an EBITDA minus capital expenditure multiple in the
Merger Consideration of 10.6x. The analysis of stock price to LTM earnings
yielded a median multiple of 11.6x versus 11.1 for the Merger Consideration. The
analysis of stock price to book value yielded a median multiple of 1.3x for the
Comparable Companies versus 1.2x for the Merger Consideration.
In evaluating the fairness of the Merger Consideration, MJW used this
comparable company analysis to estimate a range of values for the Shares. Using
this comparable company analysis, MJW estimated a range of Enterprise Values for
the Company of $30 to $40 million. The $30 and $40 million values imply LTM EBIT
multiples of 6.0x and 8.0x, respectively, LTM EBITDA multiples of 4.5x and 6.0x,
respectively, and LTM EBITDA minus capital expenditure multiples of 8.8x and
11.8x, respectively. MJW made the following additions and subtractions to
Enterprise Value in order to derive a value for the Shares: (i) MJW added $12.8
million, representing the amount of excess cash it estimated for the Company,
(ii) deducted $1.8 million to reflect the amount of the Company's outstanding
indebtedness, and (iii) deducted $423,000 to reflect the costs associated with
the discontinuation of Enviroplant International Group Limited ("EIG"). These
adjustments resulted in estimated equity values for the Company of $40.6 to
$50.6 million. MJW applied a 10% control premium to these amounts to arrive at
estimated equity values for the Company on a controlling interest basis ranging
from $44.7 to $55.7 million, or $23.95 to $29.85 per Share.
Discounted Cash Flow Analysis. MJW estimated the present value of the
Company's projected cash flows by utilizing a discounted cash flow analysis. The
following is a summary of the discounted cash flow analysis performed by MJW.
MJW estimated the present value of the Company by discounting the projected
cash flows of the Company for a five-year and five-month period commencing
August 1, 1996. In preparing its projections, MJW considered the Projections
prepared by management of the Company as well as the historical experience and
future prospects of the Company. MJW performed discounted cash flow analyses for
each of Herr-Voss Corporation ("Herr-Voss"), Salem Furnace Co. ("Furnace") and
the minerals processing equipment division (Industrial Resources, Inc., West
Virginia Electric Corporation and A.L. Lee Corporation, collectively, the
"Minerals Division"). MJW then consolidated these results and made certain
adjustments, including adjustments to reflect the costs associated with the
Company's U.K. subsidiaries, to determine the
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<PAGE> 26
net present value of the Company. The following more fully describes the
assumptions utilized by MJW in its discounted cash flow analyses for Herr-Voss,
Furnace, the Minerals Division, and the Company on a consolidated basis.
Herr-Voss: Revenues were estimated for 1996 through 1998 based upon
management's projections and were increased thereafter at a rate of 6.0% per
annum. Gross margins were estimated to be 25.4% in 1996 and were assumed to be
23.5% thereafter based upon historical experience. Royalty income was estimated
to be $100,000 in 1996 increasing at a rate of 6.0% per annum. Operating
expenses were projected based upon the following assumptions: (i) research and
development expense was estimated to be $150,000 in 1996 and 1997 and was
increased at a rate of 4.0% per annum thereafter; (ii) engineering expense was
projected to be approximately 10.0% of revenue; (iii) selling expense was
projected to be approximately 7.8% of revenue; and (iv) general and
administrative expense for 1996 was estimated at $1.4 million and was increased
at a rate of 4.0% per annum thereafter. Other items were projected based upon
the following assumptions: (i) absorbed engineering was assumed to be 90% of
engineering expense based upon historical experience and discussions with
management; (ii) other income was assumed to be zero going forward based upon
the fact that the majority of other income was historically a result of interest
on cash balances, which cash balances MJW valued separately from operations;
(iii) depreciation, amortization and capital expenditures were projected based
on management's estimates; (iv) corporate overhead of $1.25 million in 1995 was
increased at a rate of 4.0% per annum; and (v) net uses of working capital were
estimated to be $1 million in 1996, increasing at a rate of 4.0% per annum.
Furnace: Revenues were estimated for 1996 based upon management's
projections and were increased thereafter at a rate of 6.0% per annum. Gross
margins were estimated to be 16.7% in 1996 and were assumed to be 17.6%
thereafter based upon historical experience. Royalty income was estimated to be
zero. Operating expenses were projected based upon the following assumptions:
(i) research and development expense was estimated based upon management's
projections; (ii) engineering expense for 1996 was based upon management's
estimate and was assumed to be approximately 15.6% of revenue thereafter; (iii)
selling expense was projected to be approximately 7.0% of revenue; and (iv)
general and administrative expense was assumed to increase from $1.5 million in
1995 at a rate of 4.0% per annum. Other items were projected based upon the
following assumptions: (i) absorbed engineering was assumed to be approximately
96% of engineering expense based upon historical experience and discussions with
management; (ii) other income was assumed to be zero going forward based upon
the fact that the majority of other income was historically a result of interest
on cash balances, which cash balances MJW valued separately from operations;
(iii) depreciation and amortization were projected based on management's
estimates; (iv) corporate overhead of $300,000 in 1995 was increased at a rate
of 4.0% per annum; (v) capital expenditures for 1996 were based on management's
estimates and were assumed to be $250,000 on a normalized basis, increasing at a
rate of 4.0% per annum; and (vi) net changes in working capital were assumed to
be zero.
Minerals Division: Revenues were estimated for 1996 based upon management's
projections and were increased thereafter at a rate of 5.0% per annum. Gross
margins were estimated to be 13.7% in 1996 and were assumed to be 14.6%
thereafter based upon historical experience. Royalty income was estimated to be
nominal, if any. Operating expenses were projected based upon the following
assumptions: (i) research and development expense was estimated for 1996 based
upon management's projections and was assumed to be $25,000 on a normalized
basis, increasing at a rate of 4.0% per annum; (ii) engineering expense was
assumed to be approximately 8.1% of revenue; (iii) selling expense was assumed
to be approximately 4.1% of revenue; and (iv) general and administrative expense
was assumed to increase from $1.7 million in 1996 at a rate of 4.0% per annum.
Other items were projected based upon the following assumptions: (i) absorbed
engineering was assumed to be approximately 97% of engineering expense based
upon historical experience and discussions with management; (ii) other income
was assumed to be zero going forward based upon the fact that the majority of
other income was historically a result of interest on cash balances, which cash
balances MJW valued separately from operations; (iii) depreciation, amortization
and capital expenditures were projected based on management's estimates; (iv)
corporate overhead of $1.1 million in 1995 was increased at a rate of 4.0% per
annum; and (v) net uses of working capital were assumed to be approximately
$225,000 in 1996, increasing at a rate of 4.0% per annum thereafter.
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<PAGE> 27
MJW consolidated the projections described above for Herr-Voss, Furnace and
the Minerals Division and, for the consolidated projection, assumed that
approximately $3.4 million of existing overhead would continue to be incurred
and would increase at a rate of 4.0% per annum.
MJW estimated a terminal value in 2001 by using two methodologies and
comparing the results of each: (i) dividing stabilized 2002 free cash flow by
capitalization rates reflecting the difference between the Company's weighted
average cost of capital and a 4.0% assumed stabilized growth rate in free cash
flow; and (ii) multiplying 2001 EBITDA by a multiple of 5.8x.
MJW discounted the projected cash flows to the present using an estimated
weighted average cost of capital for the Company. The assumptions used in
estimating the weighted average cost of capital for the Company were as follows:
(i) a cost of equity for the Company of 14.0%; (ii) a pre-tax cost of debt for
the Company of 9.5%; and (iii) a ratio of debt to equity ranging from 5.0% to
30.0%.
This discounted cash flow analysis returned a range of values for the
Company from $35 to $45 million. MJW made the following adjustments to this
amount: (i) deducted $2.5 million to reflect the costs associated with funding
the Company's U.K. subsidiaries; (ii) added $12.8 million, representing the
amount of excess cash it estimated for the Company; (iii) deducted $1.8 million
to reflect the amount of the Company's outstanding indebtedness; and (iv)
deducted $423,000 to reflect the costs associated with the discontinuation of
EIG. These adjustments resulted in equity values for the Company ranging from
$43.1 to $53.1 million, or $23.10 to $28.50 per Share.
Net Asset Value Analysis. MJW estimated the net asset value of the
Company's assets and liabilities. The following is a summary of the net asset
value analysis performed by MJW.
MJW evaluated the potential break-up value of the Company assuming that
each of its subsidiaries or divisions could be sold separately. The assumptions
used in this analysis were as follows: (i) transaction costs equaled 3.0% of
sales proceeds; (ii) the tax basis of each subsidiary or division equaled its
book value (which MJW was informed by management was a reasonable estimate);
(iii) a capital gains tax rate of 28.0%; (iv) a value for the Company's
investments in affiliates was $2.1 million, which was the amount reflected on
the Company's June 30, 1996 balance sheet; (v) wind-down costs equal to $5
million, which include approximately $2.5 million attributable to the Company's
U.K. subsidiaries; and (vi) excess cash equal to $18.9 million resulting from an
additional $6.1 million becoming available as a result of a liquidation of the
Company.
MJW noted that there was a high degree of uncertainty associated with the
break-up value analysis in that the sale of each of the Company's businesses
could take a substantial amount of time, and as a result, the estimated amounts
might not be readily realizable. MJW also noted that it was possible that a
buyer for any one of the business units might not be found and the Company could
end up incurring disproportionate levels of overhead for residual businesses.
MJW's net asset value analysis returned a range of $46.7 to $58.4 million,
or $25.00 to $31.30 per Share.
Stock Trading History. MJW examined the history of the trading prices and
volume for the Company's common stock and the relationship between movements in
its price and movements in certain stock indices. The $25.00 price for the
Shares in the Merger represents a premium of 55.0%, 85.2%, 24.2% and 23.5%,
respectively, compared to the closing price of the Shares on (i) January 14,
1994, the date on which the common stock was its highest prior to the Company's
receipt of an offer from the Harbour Group, (ii) October 31, 1994, the date
prior to the public announcement of the Harbour Group offer, (iii) June 12,
1996, the date prior to the public announcement by the Board of Directors of a
date to evaluate offers to acquire the Company, and (iv) June 19, 1996, the date
prior to the date the Board received the $25.00 offer from TCR. The closing
price of the Shares on each of these dates was $16.13, $13.50, $20.13 and
$20.25, respectively.
Control Premium Analysis. MJW examined premiums paid in completed merger
and acquisition control transactions from 1994 to 1996 to the stock price of the
target in those transactions on the day prior to the announcement of those
transactions. MJW then compared those premiums to the premiums implied by the
Merger. The median premium paid in these merger and acquisition control
transactions was 32.4%.
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<PAGE> 28
MJW also compared the multiples of earnings and book value paid in
completed merger and acquisition control transactions from 1994 to 1996 to the
multiples implied by the Merger. The median multiples of earnings and book value
paid in these merger and acquisition control transactions were 18.6x and 2.0x,
respectively. The earnings and book value multiples implied in the Merger are
11.1x and 1.2x, respectively.
Other Factors. While MJW considered all factors they deemed relevant,
their conclusions were based largely upon the fact that the $25.00 offer was the
highest offer achieved by the Company as the result of an extensive effort to
sell the Company. In arriving at its conclusions, MJW considered several
elements of value, including market, investment and net asset values. MJW
considered the results of the takeover offers for the Company and the price of
the Company's Shares as traded on the AMEX to be indicative of market value; MJW
considered the comparable company and discounted cash flow analyses described
above to be indicative of investment value; and MJW considered the break-up
value analysis to be indicative of net asset value. Rather than rely on any
single valuation methodology, MJW considered all factors they deemed relevant
and weighted them accordingly. MJW weighted each element based upon their
judgment and experience valuing companies and securities, applying the majority
of the weight to market value (65%), with a 30% weight to investment value and a
5% weight to net asset value, as follows:
<TABLE>
<CAPTION>
VALUATION
METHODOLOGY WEIGHT
----------- ------
<S> <C>
Market value:
Takeover offers.................................................. 60%
Public market for Company's common stock......................... 5%
Investment value:
Comparable company analysis...................................... 15%
Discounted cash flow analysis.................................... 15%
Net asset value:
Break-up value................................................... 5%
---
TOTAL WEIGHT....................................................... 100%
</TABLE>
In calculating the above amounts, MJW utilized $22.00 as the takeover offer
amount, which reflects the amount of the next highest firm offer for the
Company. With respect to the public market for the Company's common stock, MJW
utilized the $20.25 amount, reflective of the closing price of the Shares on
June 19, 1996, the date prior to the date the Board of Directors received the
$25.00 offer from TCR. Based upon the foregoing, MJW determined that the
weighted average fair value of the Company's common stock was $42.0 to $45.76
million, or approximately $22.50 to $24.50 per Share.
The summary set forth above is not a complete description of the analyses
performed by MJW. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
Therefore, such an opinion is not susceptible to summary description.
No single analytical methodology used by MJW was critical to its overall
conclusion, as each analytical technique has its inherent strengths and
weaknesses. The nature of available information may further affect the value of
any particular methodology or technique. MJW's conclusion was based upon all of
the analyses and factors that it considered taken as a whole and also on the
application of MJW's experience and judgment. Its conclusion involved
significant elements of subjective judgment and qualitative analyses.
Accordingly, MJW believes that its analyses must be considered as a whole and
that to focus upon specific portions of such analyses and factors would create
an incomplete and misleading view of the process underlying the preparation of
the MJW Opinion. MJW's analyses and opinion were based upon the forecasts and
projections of future results which are not necessarily indicative of actual
future results.
MJW's Fee Arrangement. MJW has received to date fees aggregating $250,000
in connection with the rendering of its opinion and expects to be reimbursed for
all reasonable out-of-pocket expenses it incurred in connection therewith. The
terms of the fee arrangement with MJW, which are customary in transactions of
this nature, were negotiated at arms' length between the Company's Board of
Directors and MJW and, at the time it received the MJW Opinion, the Board of
Directors was aware of such fee arrangement.
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<PAGE> 29
In connection with the retention of MJW by the Board of Directors, the
Company has agreed to indemnify MJW and its directors, officers, employees,
agents and shareholders against certain liabilities to which it may be subject
arising out of the performance of its services under the retention agreement
between MJW and the Board.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has determined that the Merger Agreement and the
Merger are advisable and in the best interests of the Company and its
shareholders and has approved the Merger Agreement. ACCORDINGLY, THE BOARD OF
DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS VOTE FOR THE APPROVAL OF
THE MERGER PROPOSAL.
THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MERGER AGREEMENT. THIS SUMMARY
DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MERGER AGREEMENT WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. WHILE THE COMPANY BELIEVES
THAT THIS DESCRIPTION COVERS THE MATERIAL TERMS OF THE MERGER AGREEMENT, ALL
SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective when the Articles of Merger are filed with
the Secretary of State of the Commonwealth of Pennsylvania in accordance with
the provisions of the BCL or at such later time as may be specified in the
Articles of Merger in accordance with applicable law (the "Effective Time"). The
Articles of Merger will be filed as soon as practicable after the Special
Meeting and after satisfaction or waiver, where permissible, of the conditions
contained in the Merger Agreement. Assuming all conditions to the consummation
of the Merger have been satisfied or waived, the Effective Time is expected to
occur on or about September 27, 1996.
THE MERGER
The Merger Agreement provides that, subject to the approval and adoption of
the Merger Agreement by the Company's shareholders and compliance with certain
other conditions, the Subsidiary will be merged with and into the Company, the
separate corporate existence of the Subsidiary will cease, and the Company will
continue as the surviving corporation of the Merger (the "Surviving
Corporation"). Following consummation of the Merger, the Company, as the
Surviving Corporation, will be a wholly-owned subsidiary of the Parent.
CONVERSION OF SHARES
At the Effective Time, each issued and outstanding Share (other than Shares
owned by the Parent or the Subsidiary or Shares held by shareholders who have
demanded and perfected their rights as dissenting shareholders) will be
automatically cancelled and extinguished and converted, without any action on
the part of the holder thereof, into the right to receive $25.00 in cash per
Share (the "Merger Consideration"), without interest. Each share of the
Company's common stock owned by, or held in the treasury of, the Company or any
of its subsidiaries immediately prior to the Effective Time will be cancelled
and no consideration will be given with respect thereto. Each share of common
stock of the Subsidiary issued and outstanding immediately prior to the
Effective Time will be converted into one share of common stock of the Surviving
Corporation.
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Time, the Parent will make available to
American Stock Transfer & Trust Company (the "Exchange Agent") cash for payment
of all the Merger Consideration in immediately available funds. Promptly
thereafter, the Exchange Agent will mail to all former holders of record of the
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<PAGE> 30
Company's Shares a letter of transmittal with instructions for surrendering
their certificates in exchange for the Merger Consideration. SHAREHOLDERS ARE
REQUESTED NOT TO SURRENDER THEIR SHARE CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE A LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT.
In the event payment of any Merger Consideration is to be made to a person
other than a person in whose name the certificate surrendered is registered, it
will be a condition of payment that the person requesting such payment will pay
any transfer or other taxes required by reason of the issuance of the Merger
Consideration in a name other than that of the registered holder of the stock
certificates surrendered, or shall establish to the satisfaction of the Parent
that such tax has been paid or is not applicable.
Any funds remaining with the Exchange Agent nine months after the Effective
Time will be delivered to the Parent and the Exchange Agent's duties will
terminate. Thereafter, any holders of certificates formerly representing Shares
may surrender such certificates to the Surviving Corporation and (subject to
applicable abandoned property, escheat and similar laws) receive in exchange
therefor the Merger Consideration, without any interest thereon.
INFORMATION CONCERNING THE PARENT
The Parent has advised the Company that it will obtain the required funds
for the aggregate Merger Consideration through the issuance of its securities to
certain persons, including Three Cities II, L.P. and Three Cities Offshore II
C.V., that have previously committed to acquire such securities.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations, warranties and
agreements of the Company, the Parent and the Subsidiary including
representations and warranties regarding: (i) their due organization, valid
existence and authority to enter into the Merger Agreement; (ii) compliance with
all applicable laws, judgments, orders, decrees, rules and regulations; (iii)
the enforceability of the Merger Agreement; (iv) notices or approvals required
for execution and delivery of the Merger Agreement; and (v) fees payable to
brokers or finders.
In addition, the Merger Agreement contains certain representations and
warranties made by the Company concerning itself and its subsidiaries as to
their: (i) financial statements; (ii) conduct of business and absence of
material changes in their business since December 31, 1995; (iii) pending and
threatened litigation; (iv) tax matters; (v) benefit plans; (vi) labor matters;
(vii) environmental matters; (viii) intellectual property; (ix) title to assets;
and (x) transactions with affiliates.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed that it will
conduct the businesses of the Company and its subsidiaries prior to the
Effective Time in the ordinary and usual course of business and consistent with
past practice. The Merger Agreement also restricts the ability of the Company
and its subsidiaries to:
(i) issue, sell or pledge any shares of capital stock or any options,
warrants or rights to acquire any shares of capital stock or any debt
or equity securities convertible into or exchangeable for capital
stock;
(ii) enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other
similar arrangements with any directors, officers or key employees;
(iii) adopt, enter into or amend any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation,
healthcare, employment or other employee benefit plan, agreement,
trust, fund or arrangement for the benefit or welfare of any
employee or retiree, except as required to comply with changes in
applicable law;
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<PAGE> 31
(iv) waive or release any rights that are material to the Company and its
subsidiaries or make any payments of any material liabilities before
they become due in accordance with their terms;
(v) amend its charter or bylaws;
(vi) split, combine or reclassify its outstanding capital stock;
(vii) declare, set aside or pay any dividend or distribution with respect
to its capital stock except for the payment of dividends or
distributions by a wholly-owned subsidiary of the Company and except
for the declaration and payment of regular quarterly cash dividends
not in excess of $.15 per Share in accordance with the Company's
past dividend policy and with usual record and payment dates; or
(viii) enter into any other material agreements, commitments or contracts
other than in the ordinary course of business consistent with past
practice or otherwise make any material change in any existing
agreement, commitment or arrangement or any material change in the
conduct of the business or operations of the Company and its
subsidiaries.
The Merger Agreement prohibits the transfer of additional funds in excess
of $1,000,000 to or for the direct benefit of any of the Company's United
Kingdom subsidiaries, the guarantee of any additional indebtedness or other
obligations of any of the Company's United Kingdom subsidiaries or the
incurrence by any of the Company's United Kingdom subsidiaries of any additional
obligations which are guaranteed by the Company. The Merger Agreement also
prohibits the incurrence or payment of expenses arising out of, relating to, or
incidental to the discussion, evaluation, negotiation, documentation and closing
or potential closing of the transactions contemplated by the Merger Agreement
other than reimbursed Parent Transaction Expenses (as defined below)
(collectively referred to as the "Company Transaction Expenses") in excess of
$1,100,000.
The Merger Agreement also provides that the Company and each of its
subsidiaries will use all reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of its officers and key
employees and preserve the goodwill and business relationships with customers
and others having business relationships with the Company. Under the Merger
Agreement, the Company and its subsidiaries are required to confer on a regular
and frequent basis with one or more designated representatives of the Parent to
report operational matters of materiality and the general status of ongoing
operations.
ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
At the Effective Time, the articles of incorporation and bylaws of the
Surviving Corporation will be amended and restated to be identical to the
articles of incorporation and bylaws of the Subsidiary as in effect immediately
prior to the Effective Time, except that the name of the Surviving Corporation
will remain unchanged. Thereafter, the Surviving Corporation's articles of
incorporation and bylaws may be amended in accordance with their terms and as
provided in the BCL. Notwithstanding the foregoing, pursuant to the Merger
Agreement the articles of incorporation and bylaws of the Surviving Corporation
and each of its subsidiaries are required to contain provisions no less
favorable with respect to indemnification than are set forth in the articles of
incorporation and bylaws of the Company and its subsidiaries as in effect
immediately prior to the Effective Time and such provisions may not be amended,
repealed or otherwise modified for a period of four years after the Effective
Time in any manner that would adversely affect the rights of individuals who
were directors, officers, agents or employees of the Company or any of its
subsidiaries or who were otherwise entitled to indemnification pursuant to the
articles of incorporation and bylaws of the Company or any of its subsidiaries
at the Effective Time.
OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION
The directors of the Subsidiary immediately prior to the Effective Time
will be the initial directors of the Surviving Corporation. The officers of the
Subsidiary and certain officers of the Company in office immediately prior to
the Effective Time will be the officers of the Surviving Corporation. The
officers and directors of the Surviving Corporation will serve until the earlier
of their death, resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
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<PAGE> 32
CONDITIONS TO THE MERGER
The obligations of the parties to consummate the Merger are subject to the
satisfaction of the following conditions: (i) requisite approval by the
Company's shareholders; (ii) expiration or termination of the waiting period
applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"); (iii) no injunction, order or decree by any court which
prevents the consummation of the Merger having been issued and remaining in
effect (each party agreeing to use its reasonable best efforts to have any such
injunction, order or decree lifted); (iv) no action having been taken and no
statute, rule or regulation having been enacted by any governmental authority
which would prevent the consummation of the Merger or make the consummation of
the Merger illegal; and (v) all material governmental waivers, consents, orders
and approvals required for the consummation of the Merger and the transactions
contemplated by the Merger Agreement and all material consents from lenders
required to consummate the Merger having been obtained and in effect at the
Effective Time.
The obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions: (i) the performance by the
Parent and the Subsidiary in all material respects of their agreements contained
in the Merger Agreement on or prior to the date of the closing of the
transactions contemplated by the Merger Agreement (the "Closing Date"); (ii) the
accuracy of the representations and warranties of the Parent and the Subsidiary
contained in the Merger Agreement in all material respects on and as of the date
made and on and as of the Closing Date; (iii) the Company having received an
opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Parent and
the Subsidiary, reasonably satisfactory to the Company; and (iv) the Company
having received from MJW (or other nationally recognized investment banking
firm) an opinion prior to the date on which this Proxy Statement is first
distributed to shareholders to the effect that the Merger is fair from a
financial point of view to the Company and such opinion not having been
withdrawn. See "THE MERGER -- Opinion of Financial Advisor" and Appendix B to
this Proxy Statement.
The obligations of the Parent and the Subsidiary to consummate the Merger
are subject to the satisfaction of the following additional conditions: (i) the
performance by the Company in all material respects of its agreements contained
in the Merger Agreement on or prior to the Closing Date; (ii) the accuracy of
the representations and warranties of the Company contained in the Merger
Agreement in all material respects on and as of the date made and as of the
Closing Date; (iii) the Parent having received the opinion of Titus & McConomy
LLP, counsel to the Company, reasonably satisfactory to the Parent; (iv) there
being not more than 10% of the Shares with respect to which shareholders have
demanded and perfected their rights as dissenting shareholders under the BCL;
and (v) the aggregate amount of Company Transaction Expenses and litigation,
indemnification and all other costs arising out of or related to the Merger
Agreement or the transactions contemplated thereby incurred or paid on or before
the Closing Date, excluding amounts considered to be Parent Transaction
Expenses, not exceeding $1,600,000. See "THE MERGER AGREEMENT -- Fees and
Expenses" and "DISSENTERS' RIGHTS OF APPRAISAL."
TERMINATION
The Merger Agreement may be terminated, either before or after approval by
the Company's shareholders, under certain circumstances, including the
following:
(i) by the mutual written consent of the Parent, the Subsidiary and the
Company;
(ii) by the Parent, the Subsidiary or the Company (a) if the Merger is
enjoined by a final, nonappealable order, (b) if the Merger is not
completed by December 31, 1996 for reasons other than the failure of
the party requesting termination to fulfill materially any of its
obligations under the Merger Agreement, or (c) if the Company's
shareholders fail to approve the Merger Proposal;
(iii) by the Company if (a) simultaneously with such termination, the
Company executes a definitive agreement with respect to an
Acquisition Transaction (as defined below), (b) the Company's Board
of Directors has determined that the Acquisition Transaction would
yield a higher value to the Company's shareholders than the Merger
and the execution of such definitive agreement is in
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<PAGE> 33
the best interests of the Company and its shareholders, and (c) such
definitive agreement is no less favorable to the Company and its
shareholders than the Merger Agreement;
(iv) by the Parent or the Subsidiary if the Company's Board of Directors
determines not to give, withdraws, modifies or changes its approval
or recommendation of the Merger Agreement or the transactions
contemplated thereby;
(v) by the Parent or the Subsidiary if there is a material breach of any
representation, warranty, covenant or agreement of the Company
contained in the Merger Agreement which is incurable or which is not
cured within 30 days after written notice from the Parent;
(vi) by the Company if there is a material breach of any representation,
warranty, covenant or agreement of the Parent or the Subsidiary
contained in the Merger Agreement which is incurable or which is not
cured within 30 days after written notice from the Company;
(vii) by the Parent or the Subsidiary if the aggregate amount of Company
Transaction Expenses and litigation, indemnification and all other
costs arising out of or related to the Merger Agreement or the
transactions contemplated thereby incurred or paid on or before the
Closing Date, excluding Parent Transaction Expenses, exceeds
$1,600,000; or
(viii) by the Parent or the Subsidiary if any event since June 28, 1996 has
or is reasonably likely to have a Material Adverse Effect (as
defined below) with respect to the Company.
FEES AND EXPENSES
Except as hereinafter described, all costs and expenses incurred in
connection with the Merger Agreement and the Merger are to be paid by the party
incurring them. The Company is required to pay the Parent a termination fee of
$1,500,000 and reimburse the Parent for all of the expenses of the Parent and
its affiliates arising out of, relating to or incidental to the discussion,
evaluation, negotiation, documentation and closing or potential closing of the
Merger and any filing or other fees incurred in connection therewith ("Parent
Transaction Expenses") up to a maximum amount of $500,000 in the aggregate if
the Merger Agreement is terminated by the Parent or the Subsidiary because (i)
the Merger is not completed by December 31, 1996 for reasons other than the
failure of the Parent or the Subsidiary to materially fulfill their respective
obligations under the Merger Agreement, (ii) the Company's Board of Directors
determines not to give, withdraws, modifies or changes its approval or
recommendation of the Merger Agreement or the transactions contemplated thereby,
or (iii) there has been a material breach of any representation, warranty,
covenant or agreement of the Company contained in the Merger Agreement which is
incurable or which has not been cured by the Company within 30 days after
written notice from the Parent (other than a material breach by the Company
which is directly attributable to a Material Adverse Effect with respect to the
Company which was not caused by or directly resulted from the intentional action
or inaction by the Company or any of its subsidiaries and which would also
constitute grounds for termination of the Merger Agreement due to the occurrence
of an event that has had or is reasonably likely to have a Material Adverse
Effect with respect to the Company). For purposes of the Merger Agreement, the
term "Material Adverse Effect" is defined as a material adverse effect on the
business, assets, properties, condition (financial or other) or results of
operations of the Company and its subsidiaries taken as a whole.
If the Merger Agreement is terminated by any party because the Company's
shareholders failed to approve the Merger Proposal, the Company is required to
reimburse the Parent for all of its Parent Transaction Expenses up to a maximum
of $500,000 in the aggregate. In addition, if within nine months after the date
of termination the Company announces any transaction which is described in the
definition of "Acquisition Proposal" or a series of such transactions, the
Company is required to pay the Parent a termination fee of $1,500,000. See "THE
MERGER AGREEMENT -- No Solicitation."
The Company is also required to reimburse the Parent for all of its Parent
Transaction Expenses up to a maximum of $500,000 in the aggregate if (i) the
Merger Agreement is terminated by any party because the Merger is enjoined by a
final nonappealable order, (ii) the Merger Agreement is terminated by the Parent
or the Subsidiary if the aggregate amount of Company Transaction Expenses and
litigation, indemnification and all other costs arising out of or related to the
Merger Agreement or the transactions contemplated thereby
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<PAGE> 34
incurred or paid on or before the Closing Date, excluding amounts considered to
be Parent Transaction Expenses, exceeds $1,600,000, or (iii) the Merger
Agreement is terminated by the Parent or the Subsidiary if any event has
occurred since June 28, 1996 that has had or is reasonably likely to have a
Material Adverse Effect with respect to the Company.
In order to assure the prompt payment by the Company of any Parent
Transaction Expenses which are payable under the Merger Agreement, the Company,
TCR and United States Trust Company, as escrow agent, have entered into an
Escrow Agreement pursuant to which the Company has agreed to deposit a total of
$500,000 into an escrow account.
NO SOLICITATION
The Merger Agreement provides that the Company will not and will not permit
any of its subsidiaries or any officer, director, employee, attorney,
accountant, financial advisor, investment banker or other agent of the Company
or any of its subsidiaries to initiate, solicit, negotiate, encourage or provide
information to facilitate any Acquisition Proposal. However, in response to an
unsolicited written proposal with respect to an Acquisition Proposal, the
Company may furnish confidential or nonpublic information concerning the Company
to a financially capable corporation, partnership, person or other entity or
group ("Potential Acquiror") or negotiate with a Potential Acquiror if based
upon advice of its outside legal counsel the Company's Board of Directors
determines in good faith that the failure to provide such confidential or
nonpublic information to such Potential Acquiror or negotiate with such
Potential Acquiror would constitute a breach of its fiduciary duty to the
Company's shareholders. The Company must promptly inform the Parent that
confidential information is to be provided, that negotiations are to take place
or that an offer has been received and must furnish to the Parent the identity
of the Potential Acquiror and the material terms of any offer received. The term
"Acquisition Proposal" as used in the Merger Agreement means any proposal or
offer to acquire all or any substantial part of the business and properties of
the Company or any capital stock of the Company, whether by merger, purchase of
assets, tender offer or otherwise, and whether for cash, securities or any other
consideration or combination thereof. See "THE MERGER AGREEMENT -- Fees and
Expenses."
INDEMNIFICATION
The Merger Agreement requires the articles of incorporation and bylaws of
the Surviving Corporation and each of its subsidiaries to contain a provision no
less favorable with respect to indemnification than those currently contained in
the articles of incorporation and bylaws of the Company and its subsidiaries.
The Merger Agreement further provides that such provisions are not to be
amended, repealed or otherwise modified for a period of four years after the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who at the Effective Time were directors, officers, agents or
employees of the Company or any of its subsidiaries or who were otherwise
entitled to indemnification pursuant to the articles of incorporation and bylaws
of the Company or any of its subsidiaries. In addition, the Parent is required
to maintain in effect for three years after the Effective Time the current
policies of directors' and officers' liability insurance maintained by the
Company and its subsidiaries with respect to matters occurring prior to the
Effective Time to the extent such policies are available. The Parent may
substitute policies of at least the same coverage containing terms and
conditions that are not less advantageous than the existing policies. The Parent
is not, however, required to pay premiums for such insurance in excess of
$370,000 for a three-year period or a proportionate amount thereof for a lesser
period.
Under the Merger Agreement, the Company has agreed to indemnify the Parent
and the Subsidiary and their respective officers, directors, employees,
partners, advisors, representatives and controlling persons for all losses and
other liabilities resulting from any legal, administrative or other actions or
investigations relating to the Merger Agreement or the Merger. The Company is
not liable under the Merger Agreement to indemnify a person if it is finally
judicially determined that the loss resulted primarily from the willful
malfeasance of such person.
Pursuant to the Merger Agreement, the Parent and the Subsidiary, on the one
hand, and the Company, on the other hand, have agreed to indemnify the other
from any claim or demand for commission or other
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compensation by any broker, finder, agent or similar intermediary claiming to
have been employed by or on behalf of the Parent or the Subsidiary or any of
their affiliates, on the one hand, or by the Company or any of its affiliates,
on the other hand, and to bear the cost of legal expenses incurred in defending
any such claim or demand.
AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be amended at any time before or after approval by
the Company's shareholders by written agreement of the Company, the Parent and
the Subsidiary, except that after shareholder approval of the Merger, no
amendment may be made without the further approval of the Company's shareholders
which either decreases the amount of cash to which the shareholders of the
Company are entitled pursuant to the Merger Agreement or otherwise materially
adversely affects the Company's shareholders.
FUTURE DISTRIBUTIONS BY THE SURVIVING CORPORATION
Under the Merger Agreement, the Surviving Corporation is required to take
formal and binding corporate action to limit to $250,000 annually the payment of
management fees to, and salaries and bonuses for officers and directors (other
than full time employees) of, any affiliate or associate (other than
subsidiaries) or interested shareholders (as those terms are defined in Section
2552 of the BCL). However, the payment of dividends by the Surviving Corporation
will not be prohibited or limited. The Surviving Corporation will also be
permitted to make payments in the ordinary course of business on commercially
reasonable terms and to repay amounts advanced on behalf of, or contributed to,
the Surviving Corporation together with commercially reasonable interest,
dividend or other similar payments thereon. A merger between the Parent and the
Subsidiary is not restricted under the Merger Agreement.
CERTAIN OTHER EFFECTS OF THE MERGER
If the Merger is consummated, the Company's shareholders will not have the
opportunity to continue their equity interest in the Company and therefore will
not share in the future earnings and growth of the Company. Further, if the
Merger is consummated, public trading of the Shares will cease, the Shares will
no longer be listed on the AMEX and the registration of the Shares under the
Exchange Act will be terminated. Consequently, the Shares beneficially owned by
Victor Posner will no longer be subject to the Voting Trust. See "THE
MERGER -- Background of the Merger." However, unless Mr. Posner is able to and
does exercise rights as a dissenting shareholder under the BCL, his Shares will
automatically be cancelled and extinguished and converted at the Effective Time
into the right to receive the Merger Consideration. See "THE MERGER
AGREEMENT -- Conversion of Shares" and "DISSENTERS' RIGHTS OF APPRAISAL."
The Merger will have certain effects on the Company's officers and
directors as described below. In its deliberations concerning the Merger, the
Board of Directors was aware of these effects. However, because these effects
reflect amounts to be received based on the same per Share price as will be
received by all Shareholders or are a continuation of obligations of the Company
which existed prior to the commencement of negotiations to sell the Company, the
Board of Directors did not consider such matters as affecting the fairness of
the Merger to the Company's shareholders.
As of the Record Date, executive officers and directors of the Company
owned of record or beneficially an aggregate of 22,475 Shares, for which they
will receive the same Merger Consideration as other shareholders, for a total of
$561,875 if the Merger is consummated. It is expected, however, that A.A.
Fornataro, the Company's President and Chief Operating Officer, and Donald L.
Hoylman, the Company's Group Vice President, will be permitted prior to the
Effective Time of the Merger to exchange all of the Shares of the Company's
common stock owned by them for shares of nonvoting common and preferred stock
and subordinated debt instruments to be issued by the Parent. Their Shares will
be valued at $25.00 per Share for purposes of such exchange. The stock to be
issued to Messrs. Fornataro and Hoylman in such exchange will constitute in the
aggregate less than 3% of the Parent's common and preferred shares. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
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Certain officers of the Company at the Effective Time are expected to
continue as officers of the Surviving Corporation after the Merger. It is also
anticipated that Messrs. Fornataro and Hoylman will be appointed to the Board of
Directors of the Parent following the consummation of the Merger. No officer of
the Company is party to any employment agreement with the Company or any
agreement which would provide compensation to the officer upon a change in
control of the Company.
During early June 1996, representatives of TCR and members of the Company's
senior management had preliminary discussions about the continued employment of
management following the Effective Time and the terms of their compensation.
Among other things, they discussed the possible award of between 5% to 25% of
the Parent's stock to current and future management with some or all of such
bonus awards to be subject to vesting based upon continued employment and the
performance of the Surviving Corporation. While these discussions were disclosed
to the Board of Directors at the time of receipt of TCR's offer on June 20,
1996, management insisted that they did not want the future employment and
compensation arrangements for management to be a factor in the Board's decision
as to whether or not to approve the Merger. Management elected to defer
negotiation of such matters until after the Board reached a decision on the
Merger.
In July and August 1996, representatives of TCR and members of the
Company's senior management continued discussions concerning compensation
matters. Although, as of the date of the mailing of this Proxy Statement, a
definitive agreement has not been reached as to all such matters, it has been
tentatively agreed that a stock bonus plan will be instituted following the
Merger pursuant to which members of management will be entitled to receive
awards of between 5% to 25% of the Parent's nonvoting common stock. Ownership of
approximately 5% of the shares would vest immediately, ownership of
approximately 5% of the shares would vest based upon continued employment and
ownership of an additional 5% of the shares would vest based on the Parent's
performance. An additional 10% of the shares would be reserved for future
awards. It has also been agreed that cash bonuses aggregating $500,000 will be
paid to management and others after the Effective Time of the Merger and
extensive revamping of the Company's current cash bonus plans will be
considered.
Under the Merger Agreement, the Parent has agreed to cause to be maintained
in effect for three years after the Effective Time the directors' and officers'
liability insurance policies currently maintained by the Company or comparable
insurance coverage with respect to matters occurring prior to the Effective
Time. The Surviving Corporation is not, however, required to pay premiums for
such insurance in excess of $370,000 per three-year period or a proportionate
amount thereof for a lesser period. See "THE MERGER
AGREEMENT -- Indemnification."
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
THE DISCUSSION SET FORTH BELOW PRESENTS ALL MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO THE SHAREHOLDERS OF THE COMPANY. THIS DISCUSSION
AS IT RELATES TO A PARTICULAR SHAREHOLDER MAY VARY DEPENDING UPON THE
SHAREHOLDER'S PARTICULAR CIRCUMSTANCES. EACH SHAREHOLDER IS URGED TO CONSULT HIS
OR HER OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THE
SHAREHOLDER OF THE MERGER OR THE EXERCISE OF DISSENTERS' APPRAISAL RIGHTS,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAXES.
The exchange of Shares pursuant to the Merger (and the receipt of cash in
respect of the exercise of dissenters' appraisal rights) will be taxable
transactions for federal income tax purposes under the Internal Revenue Code of
1986, as amended, and may also be taxable transactions under applicable state,
local, foreign and other tax laws. For federal income tax purposes, each holder
of Shares whose Shares are exchanged in the Merger will generally recognize gain
or loss equal to the difference between the amount of cash received by such
shareholder in the Merger and such shareholder's adjusted tax basis in such
shares. As long as the shareholder is not also the holder, directly or
indirectly, of an equity interest in the Parent, gain or loss recognized will be
treated as a long-term capital gain or loss if the Shares are held as capital
assets and have been held for a period of more than one year at the Effective
Time.
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If a noncorporate shareholder recognizes a capital loss in connection with
the sale or exchange of Shares, the shareholder may offset the capital loss
against any other capital gains realized by such shareholder in the taxable year
and against up to $3,000 of such shareholder's ordinary income (for individuals
filing joint returns). Any excess loss may be carried forward indefinitely. A
corporate shareholder may use a capital loss recognized in connection with the
sale or exchange of Shares to offset any capital gains realized by it in the
same taxable year but not to offset ordinary income. Any unused capital loss of
a corporation may generally be carried back to its three preceding taxable years
and then, to the extent unused, forward for five succeeding taxable years, in
each case to offset capital gains, if any.
ACCOUNTING TREATMENT
The Merger will be treated by the Parent as a "purchase" for accounting and
financial reporting purposes.
ANTITRUST MATTERS
The HSR Act provides that certain acquisition transactions, including the
Merger, may not be consummated unless specified information is furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and certain waiting period requirements have been satisfied. The required
information was supplied by the Company and the Parent on August 2, 1996. The
Company has been advised that early termination of the waiting period required
under the HSR Act has been granted. See "THE MERGER AGREEMENT -- Conditions to
the Merger."
DISSENTERS' RIGHTS OF APPRAISAL
For purposes of this section of the Proxy Statement, the term "Company"
will be deemed to also refer to the Surviving Corporation with respect to
actions taken after the Effective Time.
Pursuant to the Merger Agreement and the BCL, the holders of Shares will
have dissenters' rights in connection with the Merger under Sections 1571
through 1580 of Subchapter 15D of the BCL ("Subchapter 15D"), a copy of which is
attached to this Proxy Statement as Appendix C. A shareholder of the Company may
object to the Merger Proposal and demand in writing that the Company pay the
fair value of his or her Shares. If a shareholder properly exercises dissenters'
rights of appraisal in connection with the Merger under Subchapter 15D (a
"Dissenting Shareholder"), any Shares held by the Dissenting Shareholder will
not be converted into the right to receive the Merger Consideration, but instead
will be converted into the right to receive the fair value of such Shares
pursuant to Subchapter 15D. THE FOLLOWING SUMMARY OF THE PROVISIONS OF
SUBCHAPTER 15D IS NOT INTENDED TO BE A COMPLETE STATEMENT THEREOF AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUBCHAPTER 15D, A
COPY OF WHICH (AS WELL AS A COPY OF SECTION 1930 OF THE BCL) IS ATTACHED TO THIS
PROXY STATEMENT AS APPENDIX C AND INCORPORATED HEREIN BY REFERENCE. The Company
will not give any notice of the following requirements other than as described
in this Proxy Statement and as required by the BCL.
General. Any holder of Shares who has duly demanded the payment of the
fair value of his or her Shares under Subchapter 15D will not, after the
Effective Time, be a shareholder of the Company for any purpose or be entitled
to the payment of dividends or other distributions on any such Shares. The
Shares of any Dissenting Shareholder will be converted into the right to receive
either (i) the fair value of such Shares, determined in accordance with
Subchapter 15D, or (ii) the right to receive the Merger Consideration, if the
Dissenting Shareholder effectively withdraws his or her demand for appraisal
rights.
SHAREHOLDERS SHOULD RECOGNIZE THAT, UNLESS ALL THE REQUIRED PROCEDURES FOR
CLAIMING DISSENTERS' RIGHTS ARE FOLLOWED WITH PARTICULARITY, DISSENTERS' RIGHTS
WILL BE LOST. VOTING AGAINST THE MERGER, WHETHER IN PERSON OR BY PROXY, IS NOT
SUFFICIENT NOTICE TO PERFECT DISSENTERS' RIGHTS.
Filing Notice of Intention to Demand Fair Value. Before any shareholder
vote is taken on the Merger Proposal, a Dissenting Shareholder must deliver to
the Company a written notice of his or her intention to
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demand fair value of the Shares if the Merger is effected. The written notice
may be sent to the Secretary of the Company at P.O. Box 2222, Pittsburgh,
Pennsylvania 15230. Neither the return of a proxy by the Dissenting Shareholder
with instructions to vote the Shares represented thereby against the Merger
Proposal nor a vote against the Merger Proposal or an abstention from voting on
the Merger Proposal is sufficient to satisfy the requirement of delivering a
written notice to the Company. In addition, the Dissenting Shareholder must not
make any change in the beneficial ownership of the Shares from the date of
filing the notice with the Company through the Effective Time, and the
Dissenting Shareholder must not vote the Shares for which payment of fair value
is sought in favor of the Merger Proposal. The submission of a signed blank
proxy will serve to waive appraisal rights if not revoked, but a failure to
vote, a vote against or an abstention from voting on the Merger Proposal will
not waive a Dissenting Shareholder's rights. Proper revocation of a signed blank
proxy or of a signed proxy instructing a vote in favor of the Merger Proposal
will also preserve dissenters' rights under the BCL. Failure by a Dissenting
Shareholder to comply with any of the foregoing will result in the Dissenting
Shareholder forfeiting any right to payment of the fair value of his or her
Shares.
Record and Beneficial Owners. A record holder of Shares may assert
dissenters' rights with respect to fewer than all the Shares registered in his
or her name only if the holder dissents with respect to all the Shares
beneficially owned by any one person and discloses the name and address of the
person or persons on whose behalf the holder dissents. A beneficial owner of
Shares who is not the record holder may assert dissenters' rights with respect
to Shares held on his or her behalf if the Dissenting Shareholder submits to the
Company the written consent of the record holder not later than the time of
assertion of dissenters' rights. The beneficial owner may not dissent with
respect to less than all the Shares he or she owns, whether or not the Shares
are registered in the beneficial owner's name.
Notice to Demand Payment. If the Merger Proposal is approved by the
requisite vote at the Special Meeting, the Company will mail to all Dissenting
Shareholders who gave due notice of their intention to demand payment of fair
value and who refrained from voting in favor of the Merger Proposal a notice
stating where and when a demand for payment must be sent and stock certificates
representing the Shares held by the Dissenting Shareholder must be deposited to
obtain payment. The notice will be accompanied by a copy of Subchapter 15D and
include a form for demanding payment, which form will have a request for
certification of the date that beneficial ownership of the Shares was acquired
by the Dissenting Shareholder or the person on whose behalf the Dissenting
Shareholder dissents. The time set for the receipt of a demand and the
Dissenting Shareholder's stock certificates will not be less than 30 days from
the mailing of the notice. Failure by a Dissenting Shareholder to timely demand
payment and deposit the stock certificates pursuant to such notice will cause
the Dissenting Shareholder to lose all right to receive payment of the fair
value of his or her Shares. All mailings to the Company are at the risk of the
Dissenting Shareholder. The Company recommends that the notice of intention to
dissent, the demand form and the Dissenting Shareholder's stock certificates be
sent by certified mail. If the Merger has not been effected within 60 days after
the date set for demanding payment and depositing stock certificates, the
Company will return any stock certificates that have been deposited. The
Company, however, may at any later time send a new notice regarding demand for
payment and deposit of stock certificates with like effect.
Payment of Fair Value of Shares. Promptly after the Effective Time, or
upon timely receipt of demand for payment if the Merger has already been
effected, the Company will either remit to Dissenting Shareholders who have made
demand and deposited their stock certificates the amount the Company estimates
to be the fair value of the Shares or give written notice that no remittance
will be made under Section 1577 of the BCL. The remittance or notice shall be
accompanied by:
(i) the Company's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months prior to the date of
remittance or notice, together with the latest available interim
financial statements;
(ii) a statement of the Company's estimate of the fair value of
Shares; and
(iii) a notice of the right of a Dissenting Shareholder to demand
payment or supplemental payment, as the case may be, accompanied
by a copy of Subchapter 15D.
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If the Company does not remit the amount of its estimate of the fair value of
the Shares, it will return all stock certificates that have been deposited and
may make a notation thereon that a demand for payment has been made. If Shares
carrying such notation are thereafter transferred, each new stock certificate
issued therefor will bear a similar notation, together with the name of the
original Dissenting Shareholder or owner of such Shares. A transferee of such
Shares will not acquire by such transfer any rights in the Company other than
those which the original Dissenting Shareholder had after making demand for
payment of their fair value.
Estimate by Dissenting Shareholder of Fair Value of Shares. If a
Dissenting Shareholder believes that the amount estimated or paid by the Company
for his or her Shares is less than their fair value, the Dissenting Shareholder
may send to the Company his or her own estimate of the fair value, which will be
deemed a demand for payment of the amount of the deficiency. If the Dissenting
Shareholder does not file his or her own estimate of the fair value within 30
days after the mailing of such remittance or notice by the Company, the
Dissenting Shareholder will be entitled to no more than the amount estimated in
the notice or remitted by the Company.
Valuation Proceedings. Within 60 days after the latest of (i) the
Effective Time, (ii) timely receipt of any demands for payment, or (iii) timely
receipt of any Dissenting Shareholder's estimates of fair value, if any demands
for payment remain unsettled, the Company may file in court an application for
relief requesting that the fair value of the Shares be determined by the court.
All Dissenting Shareholders whose demands have not been settled will be made
parties to the proceeding and will be entitled to recover the amount by which
the fair value of their Shares is found to exceed the amount, if any, previously
remitted. Such Dissenting Shareholders will also be entitled to interest on such
amount from the Effective Time until the date of payment. If the Company fails
to file an application with the court within the 60-day period, any Dissenting
Shareholder who has not settled his or her claim may do so in the Company's name
within 30 days after the expiration of the 60-day period. If no Dissenting
Shareholder files an application within such 30-day period, each Dissenting
Shareholder who has not settled his or her claim will be paid no more than the
Company's estimate of the fair value of the Shares and may bring an action to
recover any amount not previously remitted.
Costs and Expenses of Valuation Proceedings. The costs and expenses of any
valuation proceeding, including the reasonable compensation and expenses of any
appraiser appointed by the court, will be determined by the court and assessed
against the Company, except that any part of such costs and expenses may be
assessed as the court deems appropriate against all or some of the Dissenting
Shareholders whose action in demanding supplemental payment is found by the
court to be dilatory, obdurate, arbitrary, vexatious or in bad faith. The court
may also assess the fees and expenses of counsel and experts for any or all of
the Dissenting Shareholders against the Company if the Company fails to comply
substantially with Subchapter 15D or acts in a dilatory, obdurate, arbitrary or
vexatious manner or in bad faith. The court can also assess any such fees or
expenses incurred by the Company against any Dissenting Shareholder if such
Dissenting Shareholder is found to have acted in a dilatory, obdurate, arbitrary
or vexatious manner or in bad faith. If the court finds that the services of
counsel for any Dissenting Shareholder were of substantial benefit to the other
Dissenting Shareholders and should not be assessed against the Company, it may
award to such counsel reasonable fees to be paid out of the amounts awarded to
the Dissenting Shareholders who were benefited.
Under the BCL, a shareholder of the Company has no right to obtain, in the
absence of fraud or fundamental unfairness, an injunction against the Merger,
nor any right to valuation and payment of the fair value of the holder's Shares
because of the Merger, except to the extent provided by the dissenters' rights
provisions of Subchapter 15D. The BCL also provides that absent fraud or
fundamental unfairness, the rights and remedies provided by Subchapter 15D are
exclusive.
The foregoing description of the rights of dissenters under Subchapter 15D
should be read in conjunction with Appendix C to this Proxy Statement, and is
qualified in its entirety by the provisions of Subchapter 15D.
LEGAL PROCEEDINGS
On April 9, 1996, a complaint was filed in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida against Victor Posner and
naming the Company as a nominal defendant. The action is entitled Harry Lewis v.
Victor Posner, et al., and is pending at Case No. 96-7128. On May 9, 1996, a
complaint was
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filed in the Court of Common Pleas of Allegheny County, Pennsylvania against the
Company's directors and the Company. The action is entitled Crandon Capital
Partners v. Bernard Posner, et al., and is pending at GD96-006911. Both
complaints are asserted as class actions and challenge the offer to acquire the
Company previously made, and withdrawn, by Victor Posner.
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of Arthur Andersen LLP, independent accountants and
auditors of the Company's financial statements, is expected to be present at the
Special Meeting, will have an opportunity to make a statement if he or she so
desires and will be available to respond to appropriate questions.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files periodic reports, proxy statements and
other information with the SEC. Such reports, proxy statements and other
information can be inspected at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Regional Offices of the SEC at the Northwestern Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and Suite 1300,
Seven World Trade Center, New York, New York 10048. In addition, copies of such
materials may also be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such reports, proxy statements and other information
also may be inspected at the office of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
After the Effective Time, the Shares will no longer be publicly traded and
the Shares will cease to be listed on the AMEX. Moreover, the Surviving
Corporation will be relieved of the obligation to file informational reports
under the Exchange Act, such as proxy statements, and its officers, directors
and more than 10% shareholders will be relieved of the reporting requirements
under, and the 'short-swing' profit recapture provisions of, Section 16 of the
Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the SEC are incorporated
herein by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1995;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1996;
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; and
4. Report on Form 8-K dated as of July 9, 1996.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
These documents (without exhibits, unless such exhibits are specifically
incorporated by reference into the information that this Proxy Statement
incorporates by reference herein) are available without charge to each person,
including each beneficial owner, to whom a copy of this Proxy Statement is
delivered, upon written or oral request of such person and by first class mail
or other equally prompt means within one business day of receipt of request.
Requests should be directed to Salem Corporation, P.O. Box 2222, Pittsburgh,
Pennsylvania 15230, Attention: Secretary; telephone number (412) 276-5700.
The Company is mailing with this Proxy Statement a copy of the Company's
Annual Report to Shareholders for the year ended December 31, 1995 and the
Company's Form 10-Q Quarterly Report for the quarter ended June 30, 1996.
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OTHER MATTERS
The Board of Directors of the Company does not intend to bring any other
matters before the Special Meeting and does not know of any other matters that
may be brought before the Special Meeting by others. If any other matter should
come before the Special Meeting, the persons named in the enclosed proxy will
have discretionary authority to vote the Shares represented thereby in
accordance with their best judgment.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
JUNE 28, 1996
BY AND AMONG
SALEM GROUP, INC.,
SC ACQUISITION CORPORATION
AND
SALEM CORPORATION
<PAGE> 43
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<PAGE> 44
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE I THE MERGER................................................................ A-1
Section 1.1 The Merger............................................................ A-1
Section 1.2 Effective Time of the Merger.......................................... A-1
ARTICLE II THE SURVIVING AND PARENT CORPORATIONS.................................... A-1
Section 2.1 Articles of Incorporation............................................. A-1
Section 2.2 By-Laws............................................................... A-1
Section 2.3 Directors............................................................. A-1
Section 2.4 Officers.............................................................. A-1
ARTICLE III CONVERSION OF SHARES.................................................... A-2
Section 3.1 Conversion of Company Shares in the Merger............................ A-2
Section 3.2 Conversion of Subsidiary Shares....................................... A-2
Section 3.3 Exchange of Certificates.............................................. A-2
Section 3.4 Dissenting Shares..................................................... A-3
Section 3.5 Closing............................................................... A-3
Section 3.6 Closing of the Company's Transfer Books............................... A-3
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY.................. A-4
Section 4.1 Organization and Qualification........................................ A-4
Section 4.2 Capitalization........................................................ A-4
Section 4.3 Authority; Non-Contravention; Approvals............................... A-4
Section 4.4 Litigation............................................................ A-5
Section 4.5 Proxy Statement....................................................... A-5
Section 4.6 Financial Resources................................................... A-5
Section 4.7 Voting Requirements................................................... A-5
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................. A-5
Section 5.1 Organization and Qualification........................................ A-5
Section 5.2 Capitalization........................................................ A-5
Section 5.3 Subsidiaries.......................................................... A-6
Section 5.4 Authority; Non-Contravention; Approvals............................... A-6
Section 5.5 Reports and Financial Statements...................................... A-7
Section 5.6 Absence of Undisclosed Liabilities.................................... A-7
Section 5.7 Absence of Certain Changes or Events.................................. A-8
Section 5.8 Litigation............................................................ A-8
Section 5.9 Proxy Statement....................................................... A-8
Section 5.10 No Violation of Law................................................... A-8
Section 5.11 Compliance with Agreements............................................ A-8
Section 5.12 Taxes................................................................. A-8
Section 5.13 Employee Benefit Plans; ERISA......................................... A-9
Section 5.14 Labor Controversies................................................... A-10
Section 5.15 Environmental Matters................................................. A-10
Section 5.16 Intellectual Property................................................. A-10
Section 5.17 Title to Assets....................................................... A-11
Section 5.18 Fairness Opinion...................................................... A-11
Section 5.19 Affiliate Transactions................................................ A-11
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER................................... A-12
Section 6.1 Conduct of Business by the Company Pending the Merger................. A-12
Section 6.2 Control of the Company's Operations................................... A-13
Section 6.3 Acquisition Transactions.............................................. A-13
</TABLE>
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<TABLE>
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PAGE
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<S> <C>
ARTICLE VII ADDITIONAL AGREEMENTS................................................... A-14
Section 7.1 Access to Information................................................. A-14
Section 7.2 Proxy Statement....................................................... A-14
Section 7.3 Shareholders' Approvals............................................... A-14
Section 7.4 Provision for Expenses and Fees....................................... A-15
Section 7.5 Agreement to Cooperate; Additional Actions............................ A-15
Section 7.6 Public Statements..................................................... A-15
Section 7.7 Notification of Certain Matters....................................... A-15
Section 7.8 Directors' and Officers' Indemnification.............................. A-16
Section 7.9 Indemnification of Brokerage.......................................... A-16
Section 7.10 Indemnification by the Company........................................ A-16
Section 7.11 Corrections to the Proxy Statement.................................... A-17
ARTICLE VIII CONDITIONS............................................................. A-17
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger............ A-17
Section 8.2 Conditions to Obligation of the Company to Effect the Merger.......... A-18
Section 8.3 Conditions to Obligations of Parent and Subsidiary to Effect the
Merger................................................................ A-18
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER........................................ A-19
Section 9.1 Termination........................................................... A-19
Section 9.2 Fees and Expenses..................................................... A-19
Section 9.3 Procedure for and Effect of Termination............................... A-20
Section 9.4 Amendment............................................................. A-20
Section 9.5 Waiver................................................................ A-21
ARTICLE X GENERAL PROVISIONS........................................................ A-21
Section 10.1 Non-Survival of Representations and Warranties....................... A-21
Section 10.2 Brokers.............................................................. A-21
Section 10.3 Notices.............................................................. A-21
Section 10.4 Interpretation; Material Adverse Effect.............................. A-22
Section 10.5 Miscellaneous........................................................ A-22
Section 10.6 Governing Laws....................................................... A-22
Section 10.7 Counterparts......................................................... A-22
Section 10.8 Parties In Interest.................................................. A-22
</TABLE>
ii
<PAGE> 46
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 28, 1996, (the "Agreement"),
by and among SALEM GROUP, INC., a Delaware corporation ("Parent"), SC
ACQUISITION CORPORATION, a Pennsylvania corporation and a wholly-owned
subsidiary of Parent ("Subsidiary"), and SALEM CORPORATION, a Pennsylvania
corporation (the "Company"). The Company and Subsidiary are sometimes
collectively referred to herein as the "Constituent Corporations."
WHEREAS, the Boards of Directors of Parent, Subsidiary and the Company have
each determined that it is in the best interests of their respective
shareholders for Parent, through Subsidiary, to acquire the Company by
effectuating the merger of Subsidiary with and into the Company (the "Merger"),
as a result of which the Company will become a wholly-owned subsidiary of
Parent; and
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2) in accordance
with the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"),
Subsidiary shall be merged with and into the Company and the separate existence
of Subsidiary shall thereupon cease. The Company shall be the surviving
corporation in the Merger and is hereinafter sometimes referred to as the
"Surviving Corporation."
Section 1.2 Effective Time of The Merger. The Merger shall become
effective at such time (the "Effective Time") as shall be stated in the Articles
of Merger, in the form attached hereto and made a part hereof as Exhibit A, to
be filed with the Secretary of State of the Commonwealth of Pennsylvania in
accordance with the BCL (the "Merger Filing"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the closing of the
transactions contemplated by this Agreement in accordance with Section 3.5. The
parties acknowledge that it is their mutual desire and intent to consummate the
Merger as soon as practicable after the date hereof. Accordingly, the parties
shall use all reasonable efforts to consummate, as soon as practicable, the
transactions contemplated by this Agreement in accordance with Section 3.5.
ARTICLE II
THE SURVIVING AND PARENT CORPORATIONS
Section 2.1 Articles of Incorporation. The Articles of Incorporation of
the Surviving Corporation shall be amended and restated at and as of the
Effective Time to be identical to the Articles of Incorporation of Subsidiary as
in effect immediately prior to the Effective Time (except that the name of the
Surviving corporation will remain unchanged), and thereafter may be amended in
accordance with its terms and as provided in the BCL.
Section 2.2 By-Laws. The by-laws of the Surviving Corporation shall be as
amended at and as of the Effective Time to be identical to the by-laws of
Subsidiary as in effect immediately prior to the Effective Time, and thereafter
may be amended in accordance with their terms and as provided by the Articles of
Incorporation of the Surviving Corporation and the BCL.
Section 2.3 Directors. The directors of Subsidiary immediately prior to
the Effective Time shall be the initial directors of the Surviving Corporation,
each to hold office in accordance with the Articles of Incorporation and by-laws
of the Surviving Corporation.
Section 2.4 Officers. Except as otherwise agreed, the officers of
Subsidiary in office immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, to serve in accordance with the by-laws
of the Surviving Corporation until their respective successors are duly elected
or appointed and qualified.
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ARTICLE III
CONVERSION OF SHARES
Section 3.1 Conversion of Company Shares in The Merger. At the Effective
Time, by virtue of the Merger and without any action on the part of any holder
of any capital stock of the Company:
(a) each share of common stock, par value $0.50 per share, of the
Company (the "Company Common Stock"; shares of Company Common Stock being
hereinafter collectively referred to as the "Shares") issued and
outstanding immediately prior to the Effective Time, subject to Sections
3.3 and 3.4, shall be automatically cancelled and extinguished and
converted automatically into the right to receive, an amount equal to
$25.00 per share (the "Per Share Amount") in cash (the "Merger
Consideration") payable, without interest, to the holder of such Share,
upon surrender, in the manner provided in Section 3.3, of the certificate
that formerly evidenced such Share; and
(b) each share of capital stock of the Company, if any, owned by
Parent or any subsidiary of Parent or held in treasury by the Company or
any subsidiary of the Company immediately prior to the Effective Time shall
be cancelled and shall cease to exist from and after the Effective Time.
Section 3.2 Conversion of Subsidiary Shares. At the Effective Time, by
virtue of the Merger and without any action on the part of Parent as the sole
shareholder of Subsidiary, each issued and outstanding share of common stock,
par value $0.01 per share, of Subsidiary ("Subsidiary Common Stock") shall be
converted into one share of common stock, par value $0.01 per share, of the
Surviving Corporation.
Section 3.3 Exchange of Certificates.
(a) From and after the Effective Time, each holder of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Shares (the "Company Certificates") shall be entitled to receive in
exchange therefor, upon surrender thereof to an exchange agent reasonably
satisfactory to Parent and the Company (the "Exchange Agent"), the Merger
Consideration to which such holder is entitled pursuant to Section 3.1(a).
Notwithstanding any other provision of this Agreement, without regard to when
such Company Certificates are surrendered for exchange as provided herein, no
interest shall be paid on any payment of the Merger Consideration.
(b) If any Merger Consideration is to be issued in a name other than that
in which the Company Certificate surrendered in exchange therefor is registered,
it shall be a condition of such exchange that the person requesting such
exchange shall pay any transfer or other taxes required by reason of the
issuance of such Merger Consideration in a name other than that of the
registered holder of the Company Certificate surrendered, or shall establish to
the satisfaction of Parent that such tax has been paid or is not applicable.
(c) Promptly at the Effective Time, Parent shall make available to the
Exchange Agent the cash for payment of all the Merger Consideration in
immediately available United States funds.
(d) Promptly after the Effective Time, the Exchange Agent shall mail to
each holder of record of a Company Certificate (i) a form letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Company Certificates shall pass, only upon actual delivery of the Company
Certificates to the Exchange Agent) and (ii) instructions for use in effecting
the surrender of the Company Certificates in exchange for the applicable Merger
Consideration. Upon surrender of Company Certificates for cancellation to the
Exchange Agent, together with a duly executed letter of transmittal and such
other documents as the Exchange Agent shall reasonably require, the holder of
such Company Certificates shall be entitled to receive in exchange therefor the
applicable Merger Consideration into which the Shares theretofore represented by
the Company Certificates so surrendered shall have been converted pursuant to
the provisions of Section 3.1(a), and the Company Certificates so surrendered
shall forthwith be cancelled. Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder of Shares for
Merger Consideration delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(e) Promptly following the date which is nine months after the Effective
Date, the Exchange Agent shall deliver to Parent all cash, certificates and
other documents in its possession relating to the transactions described in this
Agreement, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of a
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<PAGE> 48
Company Certificate may surrender such Company Certificate to the Surviving
Corporation and (subject to applicable abandoned property, escheat and similar
laws) receive in exchange therefor the Merger Consideration, without any
interest thereon. Notwithstanding the foregoing, none of the Exchange Agent,
Parent, Subsidiary, the Company or the Surviving Corporation shall be liable to
a holder of Company Common Stock for any Merger Consideration delivered to a
public official pursuant to applicable abandoned property, escheat and similar
laws.
(f) In the event any Company Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Company Certificate to be lost, stolen or destroyed, the Surviving
Corporation shall issue in exchange for such lost, stolen or destroyed Company
Certificate the Merger Consideration deliverable in respect thereof determined
in accordance with this Article III. When authorizing such payment in exchange
therefor, the Board of Directors of the Surviving Corporation may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Company Certificate to give the
Surviving Corporation such indemnity as it may reasonably direct as protection
against any claim that may be made against the Surviving Corporation with
respect to the Company Certificate alleged to have been lost, stolen or
destroyed.
Section 3.4 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
Shares held by a holder who has demanded and perfected his right for payment of
the fair value of such Shares in accordance with the BCL and who, as of the
Effective Time, has not effectively withdrawn or lost such right to payment
("Dissenting Shares"), shall not be converted into or represent a right to
receive the Merger Consideration pursuant to Section 3.1, but the holder thereof
shall only be entitled to such rights as are granted by the BCL.
(b) Notwithstanding the provisions of subsection (a), if any holder of
Shares who demands payment of the fair value of such Shares under the BCL shall
effectively withdraw or lose (through failure to perfect or otherwise) his right
to payment, then, as of the later of Effective Time or the occurrence of such
event, such holder's Shares shall automatically be converted into and represent
only the right to receive the Merger Consideration as provided in Section 3.1,
without interest thereon, upon surrender of the certificate or certificates
representing such Shares.
(c) The Company shall give Parent (i) prompt notice of any written notice
of dissent, written demands for payment of the fair value of any Shares,
withdrawals of such demands, and any other instruments served pursuant to the
BCL and received by the Company and (ii) the opportunity to participate in all
negotiations and proceedings with respect to demands for payment of the fair
value under the BCL. The Company shall not, except with the prior written
consent of Parent, voluntarily make any payment with respect to any demands for
payment of the fair value of any Shares or offer to settle any such demands.
Section 3.5 Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at a location mutually agreeable
to Parent and the Company on the first business day immediately following the
date on which the last of the conditions set forth in Article VIII is fulfilled
or waived, or at such other time and place as Parent and the Company shall agree
(the date on which the Closing occurs is referred to in this Agreement as the
"Closing Date").
Section 3.6 Closing of the Company's Transfer Books. At and after the
Effective Time, holders of Shares shall cease to have any rights as shareholders
of the Company, except for the right to receive the applicable Merger
Consideration pursuant to Section 3.3. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Shares which were
outstanding immediately prior to the Effective Time shall thereafter be made.
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<PAGE> 49
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUBSIDIARY
Parent and Subsidiary each represent and warrant to the Company as follows:
Section 4.1 Organization and Qualification. Each of Parent and Subsidiary
is a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation and has the requisite power and authority
to own, lease and operate its assets and properties and to carry on its business
as it is now being conducted. Each of Parent and Subsidiary is qualified to do
business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
and in good standing will not, when taken together with all other such failures,
have a Material Adverse Effect (as defined in Section 10.4(b) hereof) with
respect to Parent or Subsidiary. True, accurate and complete copies of each of
Parent's and Subsidiary's certificate or articles of incorporation and by-laws,
in each case as in effect on the date hereof, including all amendments thereto,
have heretofore been delivered to the Company.
Section 4.2 Capitalization.
(a) The authorized capital stock of Parent consists of (i) 2,000,000 shares
of common stock, par value $0.01 per share, of which 10 shares were outstanding
as of the date hereof and owned beneficially and of record by Three Cities Fund
II, L.P., a Delaware limited partnership, and (ii) 90,000 shares of preferred
stock, par value $100.00 per share, none of which were issued and outstanding as
of the date hereof.
(b) The authorized capital stock of Subsidiary consists of 1,000 shares of
common stock, par value $0.01 per share, all of which shares are issued and
outstanding as of the date hereof, which shares are owned beneficially and of
record by Parent.
Section 4.3 Authority; Non-Contravention; Approvals.
(a) Parent and Subsidiary each have full corporate power and authority to
enter into this Agreement and, subject to the Parent Required Statutory
Approvals (as defined in Section 4.3(c)), to consummate the transactions
contemplated hereby. This Agreement has been approved by the Boards of Directors
of Parent and Subsidiary, and no other corporate proceedings on the part of
Parent or Subsidiary are necessary to authorize the execution and delivery of
this Agreement or the consummation by Parent and Subsidiary of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by each
of Parent and Subsidiary, and, assuming the due authorization, execution and
delivery hereof by the Company, constitutes a valid and legally binding
agreement of each of Parent and Subsidiary enforceable against each of them in
accordance with its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii)
general equitable principles.
(b) The execution and delivery of this Agreement by each of Parent and
subsidiary do not violate, conflict with or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Parent or any of
its subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or by-laws of Parent or any of its subsidiaries, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable to
Parent or any of its subsidiaries or any of their respective properties or
assets or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which Parent or any of its subsidiaries is now a
party or by which Parent or any of its subsidiaries or any of their respective
properties or assets may be bound or affected. The consummation by Parent and
Subsidiary of the transactions contemplated hereby will not result in any
violation, conflict, breach, termination, acceleration or creation of liens
under any of the terms, conditions or provisions described in clauses (i)
through (iii) of the
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<PAGE> 50
preceding sentence, subject, in the case of the terms, conditions or provisions
described in clause (ii) above, to obtaining (prior to the Effective Time) the
Parent Required Statutory Approvals.
(c) Except for (i) the filings by Parent and the Company required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and (ii) the making of the Merger Filing with the Secretary of State of
the Commonwealth of Pennsylvania in connection with the Merger (the filings and
approvals referred to in clauses (i) and (ii) are collectively referred to as
the "Parent Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution and
delivery of this Agreement by Parent or Subsidiary or the consummation by Parent
or Subsidiary of the transactions contemplated hereby.
Section 4.4 Litigation. On the date hereof, there are no claims, suits,
actions or proceedings pending or, to the knowledge of Parent, threatened
against, relating to or affecting Parent or any of its subsidiaries, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator. On the date hereof, neither Parent nor any of its
subsidiaries is subject to any judgment, decree, injunction, rule or order of
any court, governmental department, commission, agency, instrumentality or
authority or any arbitrator.
Section 4.5 Proxy Statement. None of the information to be supplied by or
on behalf of Parent or its subsidiaries for inclusion in the proxy statement to
be distributed in connection with the Company's meeting of its shareholders (the
"Shareholders Meeting") to vote upon this Agreement and the transactions
contemplated hereby (the "Proxy Statement") will, in the case of the Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto, and at
the time of the Shareholders Meeting contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
Section 4.6 Financial Resources. Parent has and will have sufficient
financial resources to enable it to pay the Merger Consideration at the
Effective Time.
Section 4.7 Voting Requirements. No action by the shareholders of Parent
or by any affiliate of Parent is required to approve this Agreement and the
transactions contemplated hereby.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Subsidiary as follows:
Section 5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and presently subsisting under the laws of the
Commonwealth of Pennsylvania and has the requisite corporate power and authority
to own, lease and operate its assets and properties and to carry on its business
as it is now being conducted. The Company is qualified to do business and is in
good standing in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in good
standing will not, when taken together with all other such failures, have a
Material Adverse Effect with respect to the Company. True, accurate and complete
copies of the Company's articles of incorporation and bylaws, in each case as in
effect on the date hereof, including all amendments thereto, have heretofore
been delivered to Parent.
Section 5.2 Capitalization.
(a) The authorized capital stock of the Company consists of 112,485 shares
of preferred stock, par value $25.00 per share (the "Preferred Stock") and
15,000,000 Shares. As of the date hereof, no shares of Preferred Stock are
issued and outstanding. As of the date hereof, 1,864,871 Shares are issued and
outstanding and 825,442 shares are held in treasury. All of such issued and
outstanding Shares are validly issued and are fully paid, nonassessable and free
of preemptive rights. No subsidiary of the Company holds any Shares.
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<PAGE> 51
(b) As of the date hereof there are no outstanding subscriptions, options,
calls, contracts, commitments, understandings, restrictions, arrangements,
rights or warrants, including any right of conversion or exchange under any
outstanding security, instrument or other agreement and also including any
rights plan or other anti-takeover agreement, obligating the Company or any
subsidiary of the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of the capital stock of the Company or
obligating the Company or any subsidiary of the Company to grant, extend or
enter into any such agreement or commitment. Except as set forth on Schedule 5.2
attached hereto, there are no voting trusts, proxies or other agreements or
understandings to which the Company or any subsidiary of the Company is a party
or is bound with respect to the voting of any shares of capital stock of the
Company.
Section 5.3 Subsidiaries.
(a) Each direct and indirect corporate subsidiary of the Company is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the requisite power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. Each subsidiary of the Company is qualified to do
business, and is in good standing, in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
and in good standing will not, when taken together with all such other failures,
have a Material Adverse Effect with respect to the Company.
(b) All of the outstanding shares of capital stock of each corporate
subsidiary of the Company are validly issued, fully paid, nonassessable and free
of preemptive rights and are owned directly or indirectly by the Company free
and clear of any liens, claims, encumbrances, security interests, equities,
charges and options of any nature whatsoever except as set forth in Schedule
5.3(b) attached hereto. There are no subscriptions, options, warrants, rights,
calls, contracts, voting trusts, proxies or other commitments, understandings,
restrictions, or arrangements relating to the issuance, sale, voting, transfer,
ownership or other rights with respect to any shares of capital stock of any
corporate subsidiary of the Company, including any right of conversion or
exchange under any outstanding security, instrument or agreement.
Section 5.4 Authority; Non-Contravention; Approvals.
(a) The Company has full corporate power and authority to enter into this
Agreement and, subject to the Company Shareholders' Approval (as defined in
Section 7.3), to consummate the transactions contemplated hereby. This Agreement
has been approved by the Board of Directors of the Company, and no other
corporate proceedings on the part of the Company are necessary to authorize the
execution and delivery of this Agreement or, except for the Company
Shareholders' Approval, the consummation by the Company of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Company, and, assuming the due authorization, execution and delivery hereof by
Parent and Subsidiary, constitutes a valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
that such enforcement may be subject to (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (b) general equitable principles.
(b) Except as set forth in Schedule 5.4 attached hereto, the execution and
delivery of this Agreement by the Company do not violate, conflict with or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or any of its subsidiaries under any of the
terms, conditions, or provisions of (i) the respective charters or by-laws of
the Company or any of its subsidiaries, (ii) any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
court or governmental authority applicable to the Company or any of its
subsidiaries or any of their respective properties or assets, or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which the Company or any of its subsidiaries is now a party or by which
the Company or any of its subsidiaries or any of their respective properties or
assets may be bound or affected. The consummation by the Company of the
transactions contemplated hereby will not result in any
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<PAGE> 52
violation, conflict, breach, termination, acceleration or creation of liens
under any of the terms, conditions, or provisions described in clauses (i)
through (iii) of the preceding sentence, subject (x) in the case of the terms,
conditions or provisions described in clause (ii) above, to obtaining (prior to
the Effective Time) the Company Required Statutory Approvals and the Company
Shareholder's Approval and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the Effective
Time) the consents required from commercial lenders, lessors or other third
parties set forth on Schedule 5.4 hereto. Excluded from the foregoing sentences
of this paragraph (b), insofar as they apply to the terms, conditions or
provisions described in clauses (ii) and (iii) of the first sentence of this
paragraph (b), are such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges or encumbrances
that would not, in the aggregate, have a Material Adverse Effect with respect to
the Company.
(c) Except for (i) the filings by Parent and the Company required by the
HSR Act, (ii) the filing of the Proxy Statement with the SEC pursuant to the
Exchange Act (iii) the making of the Merger Filing with the Secretary of State
of the Commonwealth of Pennsylvania in connection with the Merger and (iv) the
filings with or approvals from applicable state environmental authorities,
public service commissions and public utility commissions set forth on Schedule
5.4 hereto (the filings and approvals referred to in clauses (i) through (iv)
are collectively referred to as the "Company Required Statutory Approvals"), no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by the Company or the
consummation by the Company of the transactions contemplated hereby, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in the
aggregate, have a Material Adverse Effect with respect to the Company.
Section 5.5 Reports and Financial Statements. Except as set forth on
Schedule 5.5 attached hereto, since December 31, 1992, the Company has filed
with the SEC all forms, statements, reports and documents (including all
exhibits, amendments and supplements thereto) required to be filed by it under
each of the Securities Act, the Exchange Act and the respective rules and
regulations thereunder, all of which, as amended if applicable, complied in all
material respects with all applicable requirements of the appropriate act and
the rules and regulations thereunder. The Company has previously made available
to Parent copies of its (a) Annual Reports on Form 10-K for the fiscal year
ended December 31, 1995 and for each of the two immediately preceding fiscal
years, as filed with the SEC, (b) proxy and information statements relating to
(i) all meetings of its shareholders (whether annual or special) and (ii)
actions by written consent in lieu of a shareholders' meeting from December 31,
1992 until the date hereof, and (c) all other reports, including quarterly
reports, or registration statements filed by the Company with the SEC since
December 31, 1992 and (the documents referred to in clauses (a), (b) and (c) are
collectively referred to as the "Company SEC Reports"). At the time of filing,
the Company SEC Reports did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements of the
Company included in the Company SEC Reports (collectively, the "Company
Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial position of
the Company and its subsidiaries as of the dates thereof and the results of
their operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end audit adjustments and any other adjustments described therein.
Section 5.6 Absence of Undisclosed Liabilities. Except as disclosed in the
Company SEC Reports or in Schedule 5.6 attached hereto, neither the Company nor
any of its subsidiaries had at December 31, 1995, or has incurred since that
date, any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature, except (a) liabilities, obligations or contingencies
(i) which are fully accrued or reserved against in the Company Financial
Statements or reflected in the notes thereto or (ii) which were incurred after
December 31, 1995, and were incurred in the ordinary course of business and
consistent with past practices, (b) liabilities, obligations or contingencies
which (i) would not, in the aggregate, have a Material Adverse Effect with
respect to the Company, or (ii) have been discharged or paid in full prior to
the date hereof, and (c) liabilities and obligations which are of a nature not
required to be reflected in the consolidated
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financial statements of the Company and its subsidiaries prepared in accordance
with generally accepted accounting principles consistently applied and which
were incurred in the normal course of business.
Section 5.7 Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports or in Schedule 5.7 attached hereto, since December 31,
1995 there has not been any condition, event or occurrence that, individually or
in the aggregate, has resulted, or could reasonably be expected to result, in a
Material Adverse Effect with respect to the Company.
Section 5.8 Litigation.
(a) Except as referred to in the Company SEC Reports or in Schedule 5.8(a)
attached hereto, there are no claims, suits, actions or proceedings pending or,
to the knowledge of the Company, threatened against, relating to or affecting
the Company or any of its subsidiaries, before any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator
that seek to restrain the consummation of the Merger or which, if determined
adversely, could reasonably be expected, either alone or in the aggregate with
all such claims, actions or proceedings, to have a Material Adverse Effect with
respect to the Company.
(b) Except as referred to in the Company SEC Reports or in Schedule 5.8(b)
attached hereto, neither the Company nor any of its subsidiaries is subject to
any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator.
Section 5.9 Proxy Statement. The Proxy Statement (as amended or
supplemented) will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. The Proxy Statement will comply, as of its mailing
date, in all material respects with the Exchange Act and the rules and
regulations promulgated thereunder. Notwithstanding the foregoing, no
representation is made by the Company with respect to information supplied by or
on behalf of Parent or Subsidiary for inclusion therein.
Section 5.10 No Violation of Law. Except as disclosed in the Company SEC
Reports or in Schedule 5.10 attached hereto, neither the Company nor any of its
subsidiaries is in violation of or has been given notice or been charged with
any violation of, any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any governmental or regulatory body or authority.
Except as disclosed in the Company SEC Reports, as of the date of this
Agreement, to the knowledge of the Company, no investigation or review by any
governmental or regulatory body or authority is pending or threatened, nor has
any governmental or regulatory body or authority indicated an intention to
conduct the same. The Company and its subsidiaries have all permits, licenses,
franchises, variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct their businesses as presently
conducted (collectively, the "Company Permits"), except for permits, licenses,
franchises, variances, exemptions, orders, authorizations, consents and
approvals the absence of which, alone or in the aggregate, would not have a
Material Adverse Effect with respect to the Company. The Company and its
subsidiaries are not in violation of the terms of any Company Permit, except for
delays in filing reports or violations which, alone or in the aggregate, would
not have a Material Adverse Effect with respect to the Company.
Section 5.11 Compliance with Agreements. Except as disclosed in the
Company SEC Reports or Schedule 5.11 attached hereto, the Company and each of
its subsidiaries are not in breach or violation of or in default in the
performance or observance of any term or provision of, and no event has occurred
which, with lapse of time or action by a third party, could result in a default
under, (a) the respective charters, by-laws or similar organizational
instruments of the Company or any of its subsidiaries or (b) any contract,
commitment, agreement, indenture, mortgage, loan agreement, note, lease, bond,
license, approval or other instrument to which the Company or any of its
subsidiaries is a party or by which any of them is bound or to which any of
their property is subject, which breaches, violations and defaults, in the case
of clause (b) of this Section 5.11, would have, in the aggregate, a Material
Adverse Effect with respect to the Company.
Section 5.12 Taxes. Except as disclosed in Schedule 5.12 attached hereto,
the Company and its subsidiaries (i) have duly and timely filed with the
appropriate governmental authorities all tax returns
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required to be filed by them for all periods ending on or prior to the date
hereof and as of any other date when this representation is repeated or deemed
to be made such tax returns are true, correct and complete in all material
respects and (ii) have duly and timely paid in full or made adequate provision
for, or will duly and timely pay or make adequate provision for, the payment of
all such taxes for all such periods ending at or prior to the date hereof and as
of any other date when this representation is repeated or deemed to be made. The
liabilities and reserves for taxes reflected in the Company's balance sheet
included in the latest Company SEC Report are adequate to cover all reasonably
anticipated taxes for all periods ending at or prior to the date hereof and as
of any other date when this representation repeated or is deemed to be made and
there are no liens for taxes upon any property or assets of the Company or any
subsidiary thereof, except for liens for taxes not yet due. The Company and each
of its subsidiaries has made all required current estimated tax payments in
amounts deemed sufficient to avoid any underpayment penalties. The income tax
returns of the Company and its subsidiaries have been audited by the Internal
Revenue Service or other taxing authority, or the statute of limitations has
expired for all taxable years through the dates set forth on Schedule 5.12.
Except as set forth on Schedule 5.12 attached hereto, there are no unresolved
issues of law or fact arising out of a notice of deficiency, proposed deficiency
or assessment from the Internal Revenue Service or any other governmental taxing
authority with respect to taxes of the Company or any of its subsidiaries.
Except as set forth in Schedule 5.12 attached hereto, there are no outstanding
agreements, waivers or arrangements extending the statutory period of limitation
applicable to any claim for, or the period for the collection or assessment of,
taxes due from or with respect to the Company or any subsidiary for any taxable
period. No closing agreement pursuant to section 7121 of the Internal Revenue
Code of 1986, as amended, and the regulations promulgated thereunder (the
"Code") (or any predecessor provision), or any similar provision of any state,
local or foreign law, has been entered into by or with respect to the Company or
any subsidiary. Except as set forth in Schedule 5.12 attached hereto, no audit
or other proceeding is pending or threatened with respect to any taxes due from
or with respect to the Company or any subsidiary or any tax return filed by or
with respect to the Company or any subsidiary. Neither the Company nor any of
its subsidiaries is a party to any agreement providing for the allocation or
sharing of taxes with any entity that is not, directly or indirectly, a
wholly-owned corporate subsidiary of the Company. Neither the Company nor any of
its corporate subsidiaries has, with regard to any assets or property held,
acquired or to be acquired by any of them, filed a consent to the application of
section 341(f) of the Code. None of the assets or properties of the Company or
any subsidiary is an asset or property that is or will be required to be treated
as being (i) owned by any person other than the Company or such subsidiary
pursuant to the provisions of section 168(f)(8) of the Internal Revenue Code of
1954, as amended and in effect immediately before the enactment of the Tax
Reform Act of 1986 or (ii) tax-exempt use property within the meaning of section
168(h)(1) of the Code. The Company and its subsidiaries have not agreed to and
are not required to make any adjustment pursuant to section 481(a) of the Code
(or any predecessor provision) by reason of any change in any accounting method,
and there is no application by the Company or any subsidiary pending with any
taxing authority requesting permission for any changes in any accounting method
of the Company or any subsidiary. The Internal Revenue Service has not proposed
any adjustment or change in accounting method with respect to the Company or any
subsidiary.
Section 5.13 Employee Benefit Plans; Erisa. Schedule 5.13, taken together
with the Company's SEC Reports, identifies each employee benefit plan as defined
in Section 3(3) of the Employee Retirement Security Act of 1974, as amended, and
any successor statute thereto, and the rules and regulations promulgated
thereunder ("ERISA"), that (a) is subject to any provision of ERISA, (b) is
maintained, administered, or contributed to by the Company or any entity which,
together with the Company, is treated as a single employer under Section 414 of
the Code ("ERISA Affiliate") and (c) covers any employee or former employee of
the Company or any ERISA Affiliate ("Employee Plan"). Schedule 5.13, taken
together with the Company SEC Reports, identifies all employment, severance or
similar contract, arrangement or policy, or any plan or arrangement (whether or
not written) providing for severance benefits, insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement options, stock
appreciation rights or other forms of incentive benefits that (a) is not an
Employee Plan, (b) is entered into or maintained by the Company or any ERISA
Affiliate and (c) covers any United States employee or former employee of the
Company or any ERISA Affiliate ("Benefit Arrangement"). Copies of Employee Plans
and Benefit Arrangements have been furnished or made available to Parent
(together with the most recent annual report prepared in connection with any
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Employee Plan). Each Employee Plan and Benefit Arrangement has been maintained
in substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations, including but not limited
to ERISA and the Code, that are applicable to such Employee Plan or Benefit
Arrangement. Neither the Company nor any ERISA Affiliate has any material
unfunded liabilities relating to or arising out of any Employee Plan or Benefit
Arrangement.
Section 5.14 Labor Controversies. Except as set forth in the Company SEC
Reports and Schedule 5.14 attached hereto, (a) there are no controversies
pending or, to the knowledge of the Company, threatened between the Company or
its subsidiaries and any representatives of any of their employees, (b) to the
knowledge of the Company, there are no organizational efforts presently being
made involving any of the presently unorganized employees of the Company or any
of its subsidiaries, (c) the Company and its subsidiaries have, to the knowledge
of the Company, complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (d) no person has, to the knowledge of the
Company, asserted that the Company or any of its subsidiaries is liable in any
amount for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
Section 5.15 Environmental Matters.
(a) Except as set forth in the Company SEC Reports and Schedule 5.15
attached hereto, (i) the Company and its subsidiaries have conducted their
respective businesses in compliance with all applicable Environmental Laws (as
hereinafter defined); without limitation of the foregoing, the Company and its
subsidiaries have all permits, licenses and other approvals and authorizations
necessary for the operation of their respective businesses as presently
conducted, (ii) neither the Company nor any of its subsidiaries has received any
notice, demand letter or request for information from any federal, state, local
or foreign governmental entity or third party indicating that the Company or any
of its subsidiaries may be in violation of, or liable under, any Environmental
Law in connection with the ownership or operation of their businesses, (iii)
there are no civil, criminal or administrative actions, suits, demands, claims,
hearings, investigations or proceedings pending or to Company's knowledge
threatened, against the Company or any of its subsidiaries relating to any
violation, or alleged violation, of any Environmental Law or any potential
liability under any Environmental Law, (iv) no reports have been filed, or are
required to be filed, by the Company or any of its subsidiaries concerning the
release of any Hazardous Substance (as hereinafter defined), or the threatened
or actual violation of any Environmental Law, (v) there has been no
environmental assessment or test which is in the possession of the Company or
any of its subsidiaries relating to the activities of the Company or its
subsidiaries which has not been delivered to Parent prior to the date hereof,
and (vi) neither the Company nor its subsidiaries are subject to any material
liability or expenditure relating to any suit, settlement, court order,
administrative order, regulatory requirement, judgment or claim asserted or
arising under any Environmental Law including, without limitation, any material
liability arising from conditions on their respective properties.
(b) As used herein, "Environmental Law" means any federal, state, local or
foreign law, statute, ordinance, rule, rule of common law, regulation, code,
license, permit, authorization, approval, consent, order, judgment, decree,
injunction or requirement or any agreement with any governmental entity relating
to (i) the protection, preservation or restoration of the environment
(including, without limitation, air, surface water, groundwater, surface land,
subsurface land) or to human health or safety or (ii) the exposure to, or the
use, storage, treatment, generation, transportation, processing, handling,
release or disposal of Hazardous Substances, in each case as amended and as in
effect on the date hereof.
(c) As used herein, "Hazardous Substance" means any substance currently
listed, defined, designated or classified as hazardous, toxic, radioactive,
caustic or otherwise hazardous including petroleum, its derivatives, byproducts
and other hydrocarbons regulated under any Environmental Law.
Section 5.16 Intellectual Property.
(a) Schedule 5.16(a) sets forth a true and complete list and a brief
description, including a complete identification of each patent and patent
application and each trademark or copyright registration or application for
registration thereof, of all Intellectual Property (as herein defined) owned or
licensed by the Company and its subsidiaries which is material to the business
of the Company or its subsidiaries. Except as otherwise
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described in Schedule 5.16(a), in each case where a registration or patent or
application for registration or patent listed in Schedule 5.16(a) is held by
assignment, the assignment has been duly recorded with the United States Patent
Office, Trademark Office or Copyright Office or state trademark office from
which the original patent or registration issued or before which the application
for trademark or copyright registration is pending. Except as disclosed in
Schedule 5.16(a), to the knowledge of the Company, the rights of the Company or
any subsidiary, as the case may be, in or to such Intellectual Property do not
conflict with or infringe on the rights of any other person, and neither the
Company nor any subsidiary has received any claim or written notice from any
person to such effect.
(b) Except as disclosed in Schedule 5.16(b): (i) all the Intellectual
Property which is owned by the Company and its subsidiaries is free and clear of
any mortgages, liens, pledges, charges or encumbrances of any nature whatsoever
and (ii) no actions have been made or asserted or are pending (nor, to the best
knowledge of the Company, has any such action been threatened) against the
Company or any subsidiary either (A) based upon or challenging or seeking to
deny or restrict the use by the Company or any subsidiary of any of Intellectual
Property or (B) alleging that any services provided, or products manufactured or
sold by the Company or any subsidiary are being provided, manufactured or sold
in violation of any patents or trademarks, or any other rights of any person. To
the best knowledge of the Company and except as disclosed in Schedule 5.16(b),
no person is using any patents, copyrights, trademarks, service marks or trade
names owned by the Company and its subsidiaries or that infringe upon the
Intellectual Property or upon the rights of the Company or any subsidiary
therein. Except as disclosed in Schedule 5.16(b), neither the Company nor any
subsidiary has granted any license or other right to any other person with
respect to the Intellectual Property owned by the Company and its subsidiaries.
The consummation of the transactions contemplated by this Agreement will not
result in the termination or impairment of any of the Intellectual Property
owned by the Company and its subsidiaries.
(c) For purposes hereof, the term "Intellectual Property" shall mean all
computer software, patents and registrations for trademarks, trade names,
service marks and copyrights which are unexpired as of the date of this
Agreement and which are used in connection with the operation of the Company's
and its subsidiaries' businesses, as well as all applications pending on said
date for patents or for trademarks, trade name, service mark or copyright
registrations.
Section 5.17 Title to Assets. The Company and each of its subsidiaries has
good and marketable title in fee simple to all its real property and good title
to all its leasehold interests and other properties, as reflected in the most
recent balance sheet included in the Company Financial Statements, except for
properties and assets that have been disposed of in the ordinary course of
business since the date of such balance sheet, free and clear of all mortgages,
liens, pledges, charges or encumbrances of any nature whatsoever, except (a) the
lien of current taxes, payments of which are not yet delinquent, (b) such
imperfections in title and easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not interfere with the present
use of the property subject thereto or affected thereby, or otherwise impair the
Company's business operations (in the manner presently carried on by the
Company) or (c) as disclosed in the Company SEC Reports or Schedule 5.17
attached hereto. Copies of all leases under which the Company or any of its
subsidiaries leases any substantial amount of real or personal property have
been delivered or made available to Parent and are in good standing, valid and
effective in accordance with their respective terms, and, to the knowledge of
the Company, there is not, under any such leases, any existing default or event
which with notice or lapse of time or both would become a default other than
defaults under such leases which in the aggregate will not have a Material
Adverse Effect with respect to the Company.
Section 5.18 Fairness Opinion. As of the date of this Agreement, the
Company has received a preliminary verbal opinion from its financial advisor,
M.J. Whitman, Inc., as to the fairness from a financial point of view of the
Merger to the Company.
Section 5.19 Affiliate Transactions. Schedule 5.19, taken together with
the Company's SEC Reports, sets forth a true and complete list and a brief
description of each transaction, agreement and understanding between the Company
or any of its subsidiaries on the one hand and its affiliates (which shall
include, without limitation, Victor Posner, any of his affiliates or associates,
any director or officer of the Company or its subsidiaries, or any affiliate or
associate of any such director or officer) on the other hand.
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ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger. Except
as otherwise contemplated by this Agreement, after the date hereof and prior to
the Closing Date or earlier termination of this Agreement, unless Parent shall
otherwise agree in writing, the Company shall, and shall cause each of its
subsidiaries, to:
(a) conduct its business in the ordinary and usual course of business
and consistent with past practice;
(b) not (i) amend or propose to amend its charter or by-laws, (ii)
split, combine or reclassify its outstanding capital stock or (iii)
declare, set aside or pay any dividend or distribution payable in cash,
stock, property or otherwise, except for the payment of dividends or
distributions by a wholly-owned subsidiary of the Company and except for
the declaration and payment of regular quarterly cash dividends not in
excess of $0.15 per Share in accordance with the Company's past dividend
policy and with usual record and payment dates; provided, however, that the
Company's right to continue to pay such quarterly dividends shall be
contingent upon the Company's continued compliance with Sections 7.2 and
7.3;
(c) not issue, sell or pledge, or agree to issue, sell or pledge any
additional shares of, or any options, warrants or rights of any kind to
acquire any shares of its capital stock of any class or any debt or equity
securities convertible into or exchangeable for such capital stock;
(d) use all reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of its officers and
key employees, and preserve the goodwill and business relationships with
customers and others having business relationships with the Company and not
engage in any action, directly or indirectly, with the intent to adversely
impact the transactions contemplated by this Agreement;
(e) confer on a regular and frequent basis with one or more designated
representatives of Parent to report operational matters of materiality and
the general status of ongoing operations;
(f) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees;
(g) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust,
fund or arrangement for the benefit or welfare of any employee or retiree,
except as required to comply with changes in applicable law;
(h) not enter into any other agreements, commitments or contracts that
are material to the Company and its subsidiaries taken as a whole, other
than in the ordinary course of business consistent with past practice, or
otherwise make any material change in (i) any existing agreement,
commitment or arrangement that is material to the Company and its
subsidiaries taken as a whole or (ii) the conduct of the business or
operations of the Company and its subsidiaries taken as a whole;
(i) not waive or release any rights that are material to the Company
and its subsidiaries taken as a whole or make any payments, direct or
indirect, of any liabilities of the Company or any of its subsidiaries that
are material to the Company and its subsidiaries taken as a whole before
the same come due in accordance with their terms;
(j) neither incur nor pay expenses arising out of, relating to or
incidental to the discussion, evaluation, negotiation, documentation and
closing or potential closing of the transactions contemplated hereby
(including, without limitation, the fees, disbursements and other expenses
of lawyers, accountants, actuaries, investment bankers and any other
advisors thereto) and any filing or other fees incurred in connection with
such transactions other than litigation related expenses (which shall
include indemnifica-
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tion payments and expenses of lawyers in connection therewith (at customary
rates)) and other than reimbursed Parent Transaction Expenses ("Company
Transaction Expenses") in excess of $1,100,000; or
(k) not transfer additional funds in excess of $1,000,000 to or for
the direct benefit of any of the Company's United Kingdom subsidiaries
without the prior consent of Parent, guaranty any additional indebtedness
or other obligations of any of the Company's United Kingdom subsidiaries or
permit any of the Company's United Kingdom subsidiaries to incur any
additional obligations guaranteed by the Company.
Notwithstanding the foregoing provisions of this Section 6.1, (i) the Company
shall be permitted to amend the terms of its non-qualified deferred compensation
plan in order to permit the deferral of bonuses paid from time to time under the
Company's Management Incentive Plan, and (ii) the Company's wholly-owned
subsidiary, Herr-Voss Corporation, shall be permitted to enter into an agreement
with J&L Specialty Steel Corporation upon substantially the terms previously
approved by the Company's Board of Directors.
Section 6.2 Control of the Company's Operations. Nothing contained in this
Agreement shall give to Parent, directly or indirectly, rights to control or
direct the Company's operations prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of its
operations.
Section 6.3 Acquisition Transactions.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company shall not, and shall not permit any
of its subsidiaries to, initiate, solicit, negotiate, encourage or provide
information to facilitate, and the Company shall, and shall cause its
subsidiaries to, cause any officer, director or employee of, or any attorney,
accountant or other agent retained by it, and any financial advisor or
investment banker retained by it, not to initiate, solicit, negotiate, encourage
or provide information to facilitate, any proposal or offer to acquire all or
any substantial part of the business and properties of the Company or any
capital stock of the Company, whether by merger, purchase of assets, tender
offer or otherwise, whether for cash, securities or any other consideration or
combination thereof (any such transactions being referred to herein as
"Acquisition Transactions"); provided, however, that such persons may provide
documents in the form filed with the SEC after informing Parent of which
documents will be provided and to whom.
(b) Notwithstanding the provisions of paragraph (a) above, following
delivery of the notice required by paragraph (c) below, the Company may, in
response to an unsolicited written proposal with respect to an Acquisition
Transaction furnish (subject to a confidentiality agreement reasonably
acceptable to the Company) confidential or non-public information concerning its
business, properties or assets to a financially capable corporation,
partnership, person or other entity or group (a "Potential Acquirer") or
negotiate with such Potential Acquirer if based upon advice of its outside legal
counsel, the Company's Board of Directors determines in good faith that the
failure to provide such confidential or non-public information to such Potential
Acquirer or negotiate with such Potential Acquirer would constitute a breach of
its fiduciary duty to the Company's shareholders.
(c) In the event the Company shall determine to provide any information or
negotiate as described in paragraph (b) above, or shall receive any offer of the
type referred to in paragraph (b) above, it shall promptly inform Parent that
information is to be provided, that negotiations are to take place or that an
offer has been received and shall furnish to Parent the identity of the person
receiving such information or the proponent of such offer, if applicable, and,
if an offer has been received, a description of the material terms thereof.
(d) The Company may terminate this Agreement pursuant to Section 9.1 (c) in
order to enter into a definitive agreement for an Acquisition Transaction which
meets the requirements set forth above with a Potential Acquirer with which it
is permitted to negotiate pursuant to paragraph (b) above, but only if (i) the
Company's Board of Directors shall have duly determined that such Acquisition
Transaction would yield a higher value to the Company's shareholders than the
Merger and that the execution of such definitive agreement is in the best
interests of the Company and its shareholders and (ii) such definitive agreement
is no
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less favorable to the Company and its shareholders than this Agreement
including, without limitation, as to conditions to closing.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access to Information.
(a) The Company and its subsidiaries shall afford to Parent and Subsidiary
and their respective accountants, counsel, financial advisors and other
representatives (the "Parent Representatives") full access during normal
business hours throughout the period prior to the Effective Time to all of their
respective properties, books, contracts, commitments and records (including, but
not limited to, tax returns) and, during such period, shall furnish promptly to
Parent or the Parent Representatives (i) a copy of each report, schedule and
other document filed by any of them with the SEC in connection with the
transactions contemplated by this Agreement or which may have a material effect
on their respective businesses, properties or personnel and (ii) such other
information concerning the Company's business as Parent or Subsidiary shall
reasonably request; provided that no investigation pursuant to this Section 7.1
shall amend or modify any representations or warranties made herein or the
conditions to the obligations of the respective parties to consummate the
Merger. Parent and its subsidiaries shall hold and shall use their reasonable
best efforts to cause the Parent Representatives to hold in strict confidence
all non-public documents and information furnished to Parent and Subsidiary in
connection with the transactions contemplated by this Agreement, except that (i)
Parent and Subsidiary may disclose such information as may be necessary in
connection with seeking the Parent Required Statutory Approvals and (ii) each of
Parent and Subsidiary and the Company may disclose any information that it is
required by law or judicial or administrative order to disclose.
(b) In the event that this Agreement is terminated in accordance with its
terms, Parent and the Parent Representatives shall promptly redeliver to the
other all non-public written material provided pursuant to this Section 7.1 and
shall not retain any copies, extracts or other reproductions in whole or in part
of such written material. In such event, all documents, memoranda, notes and
other writings prepared by Parent or the Parent Representatives based on the
information in such material shall be destroyed (and Parent and the Parent
Representatives shall use their best efforts to cause their advisors and
representatives to similarly destroy their documents, memoranda and notes), and
such destruction (and best efforts) shall be certified in writing by an
authorized officer supervising such destruction.
Section 7.2 Proxy Statement. The Company shall file with the SEC as soon
as is reasonably practicable after the date hereof the Proxy Statement. Parent
shall promptly furnish to the Company all information, and take such other
actions, as may reasonably be requested in connection with any action by the
Company in connection with the preceding sentence. The information provided and
to be provided by Parent and the Company, respectively, for use in the Proxy
Statement shall be true and correct in all material respects without omission of
any material fact which is required to make such information not false or
misleading as of the date thereof and in light of the circumstances under which
given or made.
Section 7.3 Shareholders' Approvals. The Company shall, as promptly as
practicable, submit this Agreement and the transactions contemplated hereby for
the approval of its shareholders at a meeting of shareholders and, subject to
the fiduciary duties of the Board of Directors of the Company under applicable
law, shall use its reasonable best efforts to obtain shareholder approval and
adoption (the "Company Shareholders' Approval") of this Agreement and the
transactions contemplated hereby. Such meeting of shareholders shall be held as
soon as practicable following the date upon which the Company has cleared all
comments, if any, from the SEC with respect to the Proxy Statement. Subject to
the fiduciary duties of the Board of Directors of the Company under applicable
law, the Company shall, through its Board of Directors, recommend to its
shareholders approval of this Agreement and the transactions contemplated by
this Agreement.
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Section 7.4 Provision For Expenses and Fees. Except as provided in
Sections 7.9, 7.10 and 9.2, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs and expenses.
Section 7.5 Agreement To Cooperate; Additional Actions.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto shall use all reasonable efforts to take, or cause to be taken,
all action and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement, including using its reasonable
efforts to obtain all necessary or appropriate waivers, consents and approvals
to effect all necessary filings and submissions and to lift any injunction or
other legal bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), subject, however, to the requisite votes of the
shareholders of the Company.
(b) Without limitation of the foregoing, each of Parent and the Company
undertakes and agrees to file as soon as practicable after the date hereof a
Notification and Report Form under the HSR Act with the Federal Trade Commission
(the "FTC") and the Antitrust Division of the Department of Justice (the
"Antitrust Division"). Each of Parent and the Company shall (i) use its best
efforts to comply as expeditiously as possible with all lawful requests of the
FTC or the Antitrust Division for additional information and documents and (ii)
not extend any waiting period under the HSR Act or enter into any agreement with
the FTC or the Antitrust Division not to consummate the transactions
contemplated by this Agreement, except with the prior consent of the other
parties hereto.
(c) If, at any time after the Effective Time, the Surviving Corporation
shall determine or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in the Surviving Corporation the
right, title or interest in, to or under any of the rights, properties or assets
of either of the Constituent Corporations acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of the Constituent Corporations or otherwise, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name
and on behalf of each of the Constituent Corporations or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out this
Agreement.
(d) The Surviving Corporation shall take appropriate action by resolution
of its Board of Directors or other formal and binding corporate action to limit
to $250,000 annually, the payment of management fees to, and salaries and
bonuses for officers or directors (other than full time employees) of, an
affiliate or associate (other than subsidiaries) or interested shareholders (as
those terms are defined in Section 2552 of the BCL), provided that the foregoing
shall not prohibit or limit dividends duly declared and paid by the Surviving
Corporation, payments in the ordinary course of business on commercially
reasonable terms, and the repayment by the Surviving Corporation of amounts
advanced on behalf of, or contributed to, the Surviving Corporation together
with commercially reasonable interest, dividend or other similar payments
thereon. This Section 7.5(d) shall not restrict or otherwise prohibit a merger
between Parent and Subsidiary.
Section 7.6 Public Statements. The parties shall use reasonable efforts to
consult with each other prior to issuing any press release or any written public
statement with respect to this Agreement or the transactions contemplated hereby
and shall not issue any such press release or written public statement prior to
such reasonable efforts.
Section 7.7 Notification of Certain Matters. Each of the Company, Parent
and Subsidiary agrees to give prompt notice to each other of, and to use their
respective reasonable best efforts to prevent or promptly remedy, (a) the
occurrence or failure to occur or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect at the date hereof or the Effective
Time and (b) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice
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pursuant to this Section 7.7 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
Section 7.8 Directors' and Officers' Indemnification. The certificate of
incorporation and by-laws (or equivalent governing instruments) of the Surviving
Corporation and each of its subsidiaries shall contain provisions no less
favorable with respect to indemnification than are set forth in the articles of
incorporation and by-laws of the Company and its subsidiaries, which provisions
shall not be amended, repealed or otherwise modified for a period of four years
after the Effective Time in any manner that would adversely affect the rights
thereunder of individuals who at the Effective Time were directors, officers,
agents or employees of the Company or any of its subsidiaries or who were
otherwise entitled to indemnification pursuant to the articles of incorporation
and by-laws (or equivalent governing instruments) of the Company or any of its
subsidiaries. The Parent shall cause to be maintained in effect for three years
after the Effective Time the current policies of the directors' and officers'
liability insurance maintained by the Company and its subsidiaries with respect
to matters occurring prior to the Effective Time to the extent available;
provided, however, that Parent may substitute therefor policies of at least the
same coverage containing terms and conditions that are not less advantageous
than the existing policies; provided, further, however that the Surviving
Corporation shall not be required to pay premiums for such insurance in excess
of $370,000 per three-year period or a proportionate amount thereof for a lesser
period.
Section 7.9 Indemnification of Brokerage. Parent and Subsidiary, on the
one hand, and the Company, on the other hand, each agree to indemnify and save
the other harmless from any claim or demand for commission or other compensation
by any broker, finder, agent or similar intermediary claiming to have been
employed by or on behalf of Parent or Subsidiary or any of their affiliates, on
the one hand, or by the Company or any of its affiliates, on the other hand, and
to bear the cost of legal expenses incurred in defending any such claim or
demand.
Section 7.10 Indemnification by the Company. (a) In addition to all other
sums due hereunder or provided for in this Agreement, the Company agrees to
indemnify and hold harmless Parent and Subsidiary and the respective officers,
directors, agents, employees, subsidiaries, partners, advisors, representatives
and controlling persons of each of the foregoing (each, an "indemnified party")
to the fullest extent permitted by law from and against any and all losses,
claims, damages, expenses (including reasonable fees, disbursements and other
charges of counsel) or other liabilities ("Liabilities") resulting from any
legal, administrative or other actions brought by any person or entity
(including actions brought by the Company or any equity or debt holders of the
Company or derivative actions brought by any person claiming through the Company
or in the Company's name), proceedings or investigations (whether formal or
informal), or written threats thereof, based upon, relating to or arising out of
this Agreement, the transactions contemplated hereby, or any indemnified party's
role therein or in the transactions contemplated hereby; provided, that the
Company shall not be liable under this Section 7.10 to an indemnified party to
the extent that it is finally judicially determined that such Liabilities
resulted primarily from the willful malfeasance of such indemnified party; and
provided, further, that if and to the extent that such indemnification is
unenforceable for any reason other than the immediately preceding proviso, the
Company shall make the maximum contribution to the payment and satisfaction of
such indemnified Liabilities that shall be permissible under applicable laws. In
connection with the obligation of the Company to indemnify for Liabilities as
set forth above, the Company further agrees to reimburse each indemnified party
for all such expenses (including reasonable fees, disbursements and other
charges of counsel) as they are incurred by such indemnified party provided that
each such indemnified party shall have undertaken to repay any such amounts in
the event that it is finally judicially determined that the Company is not
liable under this Section 7.10 for such Liabilities.
(b) Notification. Each indemnified party under this Section 7.10 will,
promptly after the receipt of notice of the commencement of any action or other
proceeding against such indemnified party in respect of which indemnity may be
sought from the Company under Section 7.10, notify the Company in writing of the
commencement thereof. The omission of any indemnified party so to notify the
Company of any such action shall not relieve the Company from any liability that
it may have to such indemnified party unless the Company is materially
prejudiced thereby. In case any such action or other proceeding shall be brought
against any indemnified party and it shall notify the Company of the
commencement thereof, the Company shall be entitled to participate therein and,
to the extent that it may wish, to assume the defense thereof, with
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counsel reasonably satisfactory to such indemnified party; provided, however,
that any indemnified party may, at its own expense, retain separate counsel to
participate in such defense. Notwithstanding the foregoing, in any action or
proceeding in which both the Company and an indemnified party is, or is
reasonably likely to become, a party, such indemnified party shall have the
right to employ separate counsel at the Company's expense and to control its own
defense of such action or proceeding if, in the reasonable opinion of counsel to
such indemnified party, there are or may be legal defenses available to such
indemnified party or to other indemnified parties that are different from or
additional to those available to the Company which, if the Company and such
indemnified party were to be represented by the same counsel, would constitute a
conflict of interest for such counsel or materially prejudice the prosecution of
the defenses available to such indemnified party; provided, however, that in no
event shall the Company be required to pay fees and expenses under this Section
7.10 for more than one firm of attorneys representing the indemnified parties
(together, if appropriate, with one firm of local counsel per jurisdiction) in
any one legal action or group of related legal actions. In the event that an
indemnified party exercises the right to retain separate counsel pursuant to the
provisions of the immediately preceding sentence, the indemnified party shall
take all steps reasonably required to cause such separate counsel to cooperate
with the Company and its counsel in the defense of the pending action. The
Company shall not be liable for any settlement of such action or proceeding
effected without its prior written consent, not to be unreasonably withheld. The
Company agrees that the Company will not, without the prior written consent of
Parent, not to be unreasonably withheld, settle, compromise or consent to the
entry of any judgment in any pending or threatened claim, action or proceeding
relating to any matter subject to indemnification hereunder unless such
settlement, compromise or consent includes an unconditional release of Parent
and each other indemnified party from all Liabilities and Parent and each other
indemnified party are not obligated to take or forego taking any action,
including the payment of money, thereunder. The rights accorded to indemnified
parties hereunder shall be in addition to any rights that any indemnified party
may have at common law, under federal and state securities laws, by separate
agreement or otherwise.
Section 7.11 Corrections to the Proxy Statement. Prior to the date of
approval of the Merger by the shareholders of the Company, each of the Company,
Parent and Subsidiary shall correct promptly any information provided by it to
be used in the Proxy Statement that shall have become false or misleading in any
material respect and shall take all steps necessary to file with the SEC and
have cleared by the SEC and delivered to the shareholders of the Company, as
necessary, any amendment or supplement to the Proxy Statement so as to correct
the same and to cause the Proxy Statement as so corrected to be disseminated to
the shareholders of the Company to the extent required by applicable law.
ARTICLE VIII
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) this Agreement and the transactions contemplated hereby shall have
been approved and adopted by the requisite vote of the shareholders of the
Company under applicable law and applicable listing requirements;
(b) the waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated;
(c) no preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger
shall have been issued and remain in effect (each party agreeing to use its
reasonable efforts to have any such injunction, order or decree lifted);
(d) no action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the
consummation of the Merger or make the consummation of the Merger illegal;
and
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(e) all material governmental waivers, consents, orders and approvals
required for the consummation of the Merger and the transactions
contemplated hereby, and all material consents from lenders required to
consummate the Merger, shall have been obtained and be in effect at the
Effective Time.
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger. Unless waived by the Company, the obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
of the following additional conditions:
(a) Parent and Subsidiary shall have performed in all material
respects their agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and
warranties of Parent and Subsidiary contained in this Agreement shall be
true and correct in all material respects on and as of the date made and on
and as of the Closing Date as if made at and as of such date, and the
Company shall have received a certificate of the Chairman of the Board,
Chief Executive Officer, President or a Vice President of Parent and of the
President, Chief Executive Officer or a Vice President of Subsidiary to
that effect;
(b) the Company shall have received an opinion from Paul, Weiss,
Rifkind, Wharton & Garrison counsel to Parent and Subsidiary, dated the
Closing Date, reasonably satisfactory to the Company and covering the due
incorporation of Parent and Subsidiary, the binding nature of this
Agreement, the effectiveness of the Merger and such other matters as may be
reasonably requested by the Company; and
(c) The Company shall have received from M.J. Whitman, Inc. (or other
nationally recognized investment banking firm) an opinion, dated as of a
date on or immediately prior to the date on which the Proxy Statement is
first distributed to the Company's shareholders, to the effect that the
Merger is fair from a financial point of view to the Company and such
opinion shall not have been withdrawn.
Section 8.3 Conditions to Obligations of Parent and Subsidiary to Effect
the Merger. Unless waived by Parent and Subsidiary, the obligations of Parent
and Subsidiary to effect the Merger shall be subject to the fulfillment at or
prior to the Closing Date of the additional following conditions:
(a) the Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on and as of the date made and on and as of the Closing Date as if
made at and as of such date, and Parent shall have received a Certificate
of the President and Chief Operating Officer or of a Vice President of the
Company to that effect;
(b) Parent shall have received an opinion from Titus & McConomy LLP,
counsel to the Company, dated the Closing Date, reasonably satisfactory to
Parent and covering the due incorporation of the Company and its
subsidiaries, the binding nature of this Agreement, the effectiveness of
the Merger and such other matters as may be reasonably requested by Parent;
(c) Not more than 10% of the outstanding Shares are Dissenting Shares;
and
(d) The aggregate amount of Company Transaction Expenses and
litigation, indemnification and all other costs arising out of or related
to this Agreement or the transactions contemplated hereby, incurred or paid
on or before the Closing Date, excluding amounts considered to be Parent
Transaction Expenses, does not exceed $1,600,000; provided that amounts
paid by Parent or Subsidiary and reimbursed by the Company shall only be
counted once.
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ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination.
This Agreement may be terminated and the Merger contemplated hereby may be
abandoned at any time prior to the Effective Time, whether before or after
adoption by the shareholders of the Company:
(a) By the mutual written consent of Parent, Subsidiary and the
Company;
(b) By Parent, Subsidiary or the Company:
(i) if a court of competent jurisdiction or other Governmental
Entity of the United States shall have issued an order or taken any
other action permanently restraining, enjoining or otherwise prohibiting
the Merger and such order or other action shall have become final and
nonappealable; or
(ii) if the Effective Time shall not have occurred on or before
December 31, 1996; provided, however, that the right to terminate this
Agreement under this Section 9.1(b)(ii) shall not be available to any
party whose failure to fulfill materially any covenant or obligation
under this Agreement has been the cause of, or resulted in, the failure
of the Effective Time to occur on or before such date;
(c) by the Company if, simultaneously with such termination, the
Company executes a definitive agreement in accordance with Section 6.3(d);
(d) by Parent or Subsidiary if the Company's Board of Directors
determines not to give, withdraws, modifies or changes its approval or
recommendation of this Agreement or the transactions contemplated hereby;
(e) by Parent, Subsidiary or the Company if the Company's shareholders
fail to approve this Agreement and the transactions contemplated hereby;
(f) by Parent or Subsidiary if there has been a material breach of any
representation, warranty, covenant or agreement of the Company contained in
this Agreement, which breach is incurable or has not been cured by the
Company within 30 days after written notice from Parent;
(g) by the Company if there has been a material breach of any
representation, warranty, covenant or agreement of Parent or Subsidiary
contained in this Agreement, which breach is incurable or has not been
cured by Parent or Subsidiary, as the case may be, within 30 days after
written notice from the Company;
(h) by Parent or Subsidiary if the aggregate amount of Company
Transaction Expenses and litigation, indemnification and all other costs
arising out of or related to this Agreement or the transactions
contemplated hereby, incurred or paid on or before the Closing Date,
excluding amounts considered to be Parent Transaction Expenses, exceeds
$1,600,000; provided that amounts paid by Parent or Subsidiary and
reimbursed by the Company shall only be counted once; and
(i) by Parent or Subsidiary if any event has occurred since the date
hereof, that has had, or would be reasonably likely to have, a Material
Adverse Effect with respect to the Company.
Section 9.2 Fees and Expenses.
(a) If this Agreement is terminated by Parent or Subsidiary pursuant to
Section 9.1(b)(ii), (d) or (f)(other than as a result of a material breach by
the Company which is directly attributable to a Material Adverse Effect with
respect to the Company which was not caused by or directly resulted from the
intentional action or inaction by the Company or any of its subsidiaries and
which would also constitute grounds for termination of this Agreement pursuant
to Section 9.1(i)) or by the Company pursuant to Section 9.1(c), then the
Company shall promptly, but in no event later than one business day after the
date of termination of this Agreement, pay Parent a termination fee of
$1,500,000 and reimburse Parent for all of the expenses of Parent and its
affiliates arising out of, relating to or incidental to the discussion,
evaluation, negotiation,
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documentation and closing or potential closing of the transactions contemplated
hereby (including, without limitation, the fees, disbursements and other
expenses of lawyers, accountants, actuaries, investment bankers and any other
advisors thereto) and any filing or other fees incurred in connection with such
transactions ("Parent Transaction Expenses") (up to a maximum amount of $500,000
in the aggregate; provided, that neither this limitation, nor any limitation on
the reimbursement of Parent Transaction Expenses contained elsewhere in this
Agreement, shall limit or in any way affect the amount of payments to Parent,
Subsidiary or any indemnified person pursuant to indemnification provisions
contained elsewhere in this Agreement).
(b) If this Agreement is terminated pursuant to Section 9.1(e) the Company
shall promptly, but in no event later than one business day after the date of
termination of this Agreement, reimburse Parent for all of its Parent
Transaction Expenses (up to a maximum amount of $500,000 in the aggregate), and,
in addition, if on or prior to the date that is nine months from the date that
this Agreement is terminated pursuant to such Section 9.1(e), the Company
announces any transaction described in the definition of "Acquisition Proposal"
or a series of such transactions, then the Company shall pay to the Purchaser a
termination fee equal to $1,500,000.
(c) If this Agreement is terminated pursuant to Section 9.1(b)(i), (h) or
(i), the Company shall promptly, but in no event later than one business day
after the date of termination of this Agreement, reimburse Parent for all of its
Parent Transaction Expenses (up to a maximum amount of $500,000 in the
aggregate).
(d) In the event that any party (the "plaintiff") brings a legal action
against any other party (the "defendant") for the collection of any termination
fees or Parent Transaction Expenses under this Section 9.2 and thereafter the
plaintiff collects any portion of such fees or Parent Transaction Expenses from
the defendant, the defendant shall also reimburse the plaintiff for all
out-of-pocket costs, fees and expenses, including, without limitation, the fees
and disbursements of counsel and the expenses of litigation, incurred by the
plaintiff in connection with such legal action. If, however, the plaintiff does
not collect any such fees in such legal action, the plaintiff shall reimburse
all out-of-pocket costs, fees and expenses, including, without limitation, the
fees and disbursements of counsel and the expenses of litigation incurred by the
defendant in connection with such legal action.
(e) All amounts payable under this Section 9.2 shall be paid in immediately
available funds to an account or accounts designated by the relevant party.
(f) In order to assure the prompt payment by the Company of any Parent
Transaction Expenses which are payable under this Section 9.2, not later than
July 1, 1996 the Company shall have deposited $154,000 in an escrow account (the
"Escrow Account") with pursuant to an escrow agreement among the Company, Parent
and Arthur Andersen LLP, as escrow agent in form and substance satisfactory to
the parties thereto (the "Escrow Agreement"). On August 1, 1996 and August 31,
1996, the Company shall deposit the additional sums of $150,000 and $196,000,
respectively, into the Escrow Account. Subject to the terms and conditions of
the Escrow Agreement, any interest earned upon the Escrow Account shall be paid
to the Company.
Section 9.3 Procedure For and Effect of Termination. In the event that
this Agreement is terminated and the Merger is abandoned by Parent or
Subsidiary, on the one hand, or by the Company, on the other hand, pursuant to
Section 9.1, written notice of such termination and abandonment shall forthwith
be given to the other parties and this Agreement shall terminate and the Merger
shall be abandoned without any further action. If this Agreement is terminated
as provided herein, no party hereto shall have any liability or further
obligation to any other party under the terms of this Agreement except as
provided herein and with respect to the willful breach by any party hereto and
except that the provisions of Section 9.2 and this Section 9.3, Sections 7.1(b),
7.4, 7.8, 7.9, 7.10 and Article X shall survive the termination of this
Agreement. Nothing in this Section 9.3 shall relieve any party from liability
for any breach of this Agreement.
Section 9.4 Amendment. This Agreement may not be amended except by action
taken by the respective Boards of Directors of each of the parties hereto or
duly authorized committee thereof and then only by an instrument in writing
signed on behalf of each of the parties hereto and in compliance with applicable
law.
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Section 9.5 Waiver. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts or the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations and Warranties. All
representations and warranties in this Agreement shall not survive the Merger,
and after the Effective Time of the Merger neither the Company, Parent,
Subsidiary or their respective officers or directors shall have any further
obligation with respect thereto. Notwithstanding the immediately preceding
sentence, the Surviving Corporation's obligations set forth in Section 7.8 shall
continue in full force and effect following the Effective Time.
Section 10.2 Brokers. The Company represents and warrants that no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
(except for the fee payable to the investment banking firm described in Section
8.2(c)) or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. Parent and Subsidiary represent and warrant that no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent or
Subsidiary.
Section 10.3 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via overnight
courier or facsimile to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) If to Parent or Subsidiary to:
c/o Three Cities Research, Inc.
157 East 57th Street
New York, NY 10022
Attention: J. William Uhrig
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019
Attention: Neale M. Albert
(b) If to the Company, to:
Salem Corporation
P.O. Box 2222
Pittsburgh, PA 15230
Attention: A.A. Fornataro
President
with copies to:
Titus & McConomy LLP
Four Gateway Center, 20th Floor
Pittsburgh, PA 15222
Attention: Paul H. Titus
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and
Marco B. Loffredo, Jr.
9999 NE Second Avenue
Miami Shores, FL 33138
Section 10.4 Interpretation; Material Adverse Effect.
(a) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. In this Agreement, unless a contrary intention appears, (a) the words
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular Article, Section or other
subdivision and (b) reference to any Article or Section means such Article or
Section hereof. No provision of this Agreement shall be interpreted or construed
against any party hereto solely because such party or its legal representative
drafted such provision.
(b) For purposes of this Agreement, the term "Material Adverse Effect" with
respect to any person shall mean a material adverse effect on the business,
assets, properties, condition (financial or other) or results of operations of
such person and its subsidiaries taken as a whole.
Section 10.5 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof.
Section 10.6 Governing Laws. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
Commonwealth of Pennsylvania applicable to contracts executed and to be
performed wholly within such Commonwealth.
Section 10.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 10.8 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and except for the rights of
indemnified parties under Sections 7.8 and 7.10, nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
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IN WITNESS WHEREOF, Parent, Subsidiary and the Company have caused this
Agreement to be singed by their respective officers as of the date first written
above.
SALEM GROUP, INC.
By: /s/ J. William Uhrig
--------------------------------------
Name: J. William Uhrig
Title: President
SC ACQUISITION CORPORATION
By: /s/ J. William Uhrig
--------------------------------------
Name: J. William Uhrig
Title: President
SALEM CORPORATION
By: /s/ A.A. Fornataro
--------------------------------------
Name: A.A. Fornataro
Title: President and Chief
Operating Officer
By: /s/ Marco B. Loffredo, Jr.
--------------------------------------
Name: Marco B. Loffredo, Jr.
Title: Chairman of the Board
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EXHIBIT A
ARTICLES OF MERGER -- DOMESTIC BUSINESS CORPORATION
DSCB:15-1926 (REV 90)
In compliance with the requirements of 15 Pa.C.S. Section 1926 (relating to
articles of merger or consolidation), the undersigned business corporations,
desiring to effect a merger, hereby state that:
1. The name of the corporation surviving the merger is: Salem
Corporation
2. The surviving corporation is a domestic business corporation and the
address of its current registered office in this Commonwealth is (the
Department is hereby authorized to correct the following information
to conform to the records of the Department):
Arch Street, Carnegie, PA 15106, Allegheny County
3. The name and address of the registered office in this Commonwealth or
name of its commercial registered office provider and the county of
venue of each other domestic corporation and qualified foreign
corporation which is a party to the plan of merger is as follows:
SC Acquisition Corporation, c/o Corporation Service Company, Dauphin
County
4. (Check, and if appropriate complete, one of the following):
/ / The plan of merger shall be effective upon filing the Articles of
Merger in the Department of State.
/ / The plan of merger shall be effective on: (date) at (hour)
5. The manner in which the plan of merger was adopted by each domestic
corporation is as follows:
Salem Corporation -- Adopted by the directors and shareholders
pursuant to 15 Pa.C.S. Section 1924(a)
SC Acquisition Corporation -- Adopted by action of the
shareholders pursuant to 15 Pa.C.S. Section 1905
6. (Check, and if appropriate, complete one the following):
/ / The plan of merger as set forth in full in Exhibit A is attached
hereto and made a part hereof.
/ / Pursuant to 15 Pa.C.S. Section 1901 (relating to omission of
certain provisions from filed plans) the provisions, if any, of
the plan of merger that amend or constitute the operative
Articles of Incorporation of the surviving corporation as in
effect subsequent to the effective date of the plan are set forth
in full in Exhibit A attached hereto and made a part hereof. The
full text of the plan of merger is on file at the principal place
of business of the surviving corporation, the address of which
is:
Arch Street, Carnegie, PA 15106, Allegheny County
IN TESTIMONY WHEREOF, the undersigned corporation or each undersigned
corporation has caused these Articles of Merger to be signed by a duly
authorized officer thereof this day of , 1996.
<TABLE>
<S> <C>
SALEM CORPORATION SC ACQUISITION CORPORATION
By: By:
- --------------------------------------------- ---------------------------------------------
Title: Title:
</TABLE>
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<PAGE> 70
APPENDIX B
MJ WHITMAN
August 8, 1996
Board of Directors
Salem Corporation
Arch Street Extension
Carnegie, PA 15106
Members of the Board of Directors:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to Salem Corporation (together with its
subsidiaries and affiliates, "Salem" or the "Company") of the consideration to
be paid to the shareholders of the Company in the proposed transaction involving
the acquisition of Salem by Salem Group, Inc. ("Parent") and SC Acquisition
Corporation ("Subsidiary"; Parent and Subsidiary, together with Three Cities
Fund II, L.P., Three Cities Offshore II C.V., and Teribe Limited being
collectively called ("TCR")) for $25 per common share (the "Common Stock") in
cash, reflecting an aggregate purchase price (the "Purchase Price") of $46.6
million (the "Acquisition"). For the purposes hereof, we do not express any
opinion as to the fairness of any transaction other than the Acquisition as
described in the draft of the preliminary Proxy Statement of the Company dated
July 19, 1996 (the "Statement"), which the Company has filed with the Securities
and Exchange Commission in connection with the proposed Acquisition.
M.J. Whiteman, Inc. ("MJW") has been engaged by the Board of Directors of
the Company (the "Board") to render its opinion to the Board and will receive a
fee for its services. MJW, as part of its advisory and investment banking
business, is regularly engaged in the valuation of businesses and their
securities for corporate, estate and other purposes.
In connection with rendering our opinion we have reviewed and analyzed,
among other things, the following: (i) the Statement; (ii) certain publicly
available information concerning the Company including the annual reports on
Form 10-K of the Company for each of the fiscal years in the five-year period
ended December 31, 1995; the quarterly report on Form 10-Q of the Company for
the quarter ended March 31, 1996; the preliminary quarterly report on Form 10-Q
of the Company for the quarter ended June 30, 1996; (iii) certain other internal
information, primarily financial in nature, furnished to us by the Company,
including projections prepared by the management of the Company ("Projections")
concerning the businesses and operations of the Company; (iv) certain publicly
available information concerning the trading of, and the trading market for, the
Common Stock; (v) the confidential memorandum dated April 1996 prepared by the
Company, as well as various other information memorandums prepared by advisors
to the Company; (vi) the merger agreement (the "Merger Agreement") dated June
28, 1996 among Salem, Parent and Subsidiary; (vii) certain information
concerning offers to acquire the Company contained in Schedules 13D relating to
the Company dated April 3, 1996, May 16, 1996 and May 23, 1996, as well as
certain information concerning other offers to acquire the Company; (viii) the
trust order ("Trust Order") dated March 2, 1994 of the United States District
Court for the Southern District of New York in Securities and Exchange
Commission v. Drexel Burnham Lambert Inc., et al.; (ix) publicly available
information with respect to certain other publicly traded companies; and (x)
publicly available information concerning the nature and terms of other
transactions that we considered relevant to our inquiry. We have also (i) met
with certain officers and employees of the Company to discuss the past and
current business operations, financial condition and future prospects of the
Company, (ii) visited certain of the Company's facilities and (iii) considered
such other matters we believed to be relevant to our inquiry.
We have not been requested or authorized to solicit alternative
transactions which might otherwise be available to the Company.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have not
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Board of Directors MJ WHITMAN
Salem Corporation
August 8, 1996
Page 2
independently verified any of such information. In the course of our review,
nothing came to our attention which led us to believe that it would not be
reasonable to rely upon and utilize such information for the purposes of
expressing our opinion set forth herein. We have not made or obtained any
independent evaluations or appraisals of any of the properties or facilities of
the Company.
We have assumed that the Acquisition will be consummated, in all material
respects, in accordance with the terms described in the Statement and will, in
all material respects, have all of the legal, tax and accounting effects as
described therein, and that no material conditions to the consummation of any
such transactions will be modified or waived. We have further assumed, without
independent verification, that the Statement is true, accurate and complete in
all material respects.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical, current and projected financial position and results of
operations of the Company; (ii) the business prospects of the Company; (iii) the
process which has occurred to date in connection with the marketing for sale of
the Company, including the status, terms and conditions of other offers to
acquire the Company; (iv) the historical and current market for the Common
Stock; (v) the terms and conditions of the Acquisition; and (vi) financial and
other publicly available information concerning other publicly traded companies
we deemed somewhat comparable to the Company. We have also taken into account
our assessment of general economic, market and financial conditions as well as
our experience in connection with similar transactions and securities valuation
generally. Our opinion is necessarily based upon conditions as they exist and
can be evaluated on the date hereof.
This opinion has been prepared solely for the information of the Board in
connection with its consideration of the Acquisition and may be relied upon
solely by such persons and holders of Common Stock in connection with their
consideration of the Acquisition. This opinion may not be used for any other
purpose or reproduced, disseminated, quoted or referred to at any time, in any
manner or for any purpose without our prior written consent, except as provided
by the retention agreement dated June 13, 1996 between MJW and the Board (the
"Retention Agreement"). This opinion does not constitute a recommendation to any
security holder of the Company as to how such security holder should vote, or as
to any other action which such security holder should take, in connection with
the Acquisition, or otherwise.
Based upon and subject to the foregoing, and subject to the limitations
described in Exhibit A, we are of the opinion as investment bankers and the
consideration to be paid by TCR in the Acquisition is fair, from a financial
point of view, to the Company.
Very truly yours,
M.J. WHITMAN, INC.
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MJ WHITMAN
EXHIBIT A
GENERAL LIMITING CONDITIONS AND ASSUMPTIONS
In accordance with recognized professional standards as generally practiced
in the valuation industry, the fee for these services is not contingent upon the
conclusions of value contained herein. MJW has determined to the best of its
knowledge in good faith that neither it nor any of its agents or employees has a
material financial interest in the Company.
Neither MJW, nor its agents or employees, assume any responsibility for
matters legal in nature, nor do they render any opinion as to any title to, or
legal status of, property which may be involved, both real and personal,
tangible and intangible, which title is assumed to be good and marketable.
Where there may be real property involved, MJW has not made a land survey
of the property, but has relied on the Company's information, including any and
all appraisals of property, plant and equipment. It is assumed that there are no
hidden or unapparent conditions in the property, subsoil, or structures thereon
that render it more or less valuable except as disclosed to us in the course of
our due diligence. No responsibility is assumed for such conditions or for
arranging for engineering studies that may be required to discover them.
MJW has assumed that all laws, statutes, ordinances, licenses or other
regulations, or regulations of any governmental authority relevant to and in
connection with the Acquisition and the Statement, have been and are being
complied with unless express written notice of such noncompliance has been
provided to MJW and is stated and defined by those parties upon which MJW has
relied, including the Company and its management. In the course of our review,
nothing came to our attention which led us to believe that it would not be
reasonable to rely upon and utilize such assumption for the purposes of
expressing our opinion set forth herein.
MJW has relied on certain information furnished by others, including, but
not limited to, the Company and its management, without independent
verification. In the course of our review of such information and analysis
nothing came to our attention which led us to believe that it was unreasonable
to rely upon or utilize such information and analyses for the purposes of
expressing our opinion set forth herein. MJW believes such information to be
reliable as to accuracy and completeness but offers no warranty or
representation to that effect. Such information generally includes, but is not
limited to, financial analyses and forecasts; historical, pro forma, audited and
unaudited financial statements; and analyses and projections prepared by the
management of the Company.
In some instances, public information and statistical information have been
obtained from sources which MJW has accepted as being reliable. However, MJW
makes no representations as to the accuracy or completeness of such information,
and has accepted the information without further verification. In the course of
our review of such information, nothing came to our attention which led us to
believe that it would not be reasonable to rely upon and utilize such
information for the purposes of expressing our opinion set forth herein.
The opinion of MJW does not represent an assurance, guarantee or warranty
that the Company will not default on any debt obligations associated with the
proposed transaction.
MJW has no responsibility to update this letter for events and
circumstances occurring after the date of this letter. Any further consultation,
testimony, attendance, research or opinion in reference to the present
engagement beyond the date of this letter is subject to agreement by MJW and to
specific written arrangements between the parties.
In the event of any conflict or inconsistency between this Exhibit A and
the opinion dated August 8, 1996 to which it is attached, the terms of the
opinion shall control.
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APPENDIX C
DISSENTERS RIGHTS PROVISIONS OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW
Section 1930. Dissenters Rights.
(a) General rule. If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan of merger
or consolidation objects to the plan of merger or consolidation and complies
with the provisions of Subchapter D of Chapter 15 (relating to dissenters
rights), the shareholder shall be entitled to the rights and remedies of
dissenting shareholders therein provided, if any. See also Section 1906(c)
(relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only. Except as otherwise provided pursuant
to Section 1571(c) (relating to grant of optional dissenters rights), Subchapter
D of Chapter 15 shall not apply to any of the shares of a corporation that is a
party to a merger or consolidation pursuant to section 1924(1)(i) (relating to
adoption by board of directors).
(c) Cross references. See Section 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
SUBCHAPTER D
DISSENTERS RIGHTS
Section 1571. Application and effect of subchapter.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
<TABLE>
<S> <C>
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversions).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on transfer
of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).
Section 7104(b)(3) (relating to procedure).
</TABLE>
(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting at
which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to
be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
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shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the case
of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or solely
into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles, the
plan or the terms of the transaction entitle all shareholders of the class
to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of the
votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under Section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares, property
or assets of another corporation by the issuance of shares, obligations or
otherwise, with or without assuming the liabilities of the other corporation and
with or without the intervention of another corporation or other person, shall
not be entitled to the rights and remedies of dissenting shareholders provided
in this subchapter regardless of the fact, if it be the case, that the
acquisition was accomplished by the issuance of voting shares of the corporation
to be outstanding immediately after the acquisition sufficient to elect a
majority or more of the directors of the corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) A copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
Section 1572. Definitions.
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the
dissenter before the corporate action or the successor by merger,
consolidation, division, conversion or otherwise of that issuer. A plan of
division may designate which of the resulting corporations is the successor
corporation for the purposes of this subchapter. The successor corporation
in a division shall have sole responsibility for payments to dissenters and
other liabilities under this subchapter except as otherwise provided in the
plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed
every act required up to the time involved for the assertion of those
rights.
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"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects, taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the corporation action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all
circumstances, taking into account all relevant factors, including the
average rate currently paid by the corporation on its principal bank loans.
Section 1573. Record and beneficial holders and owners.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
Section 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed corporate
action shall constitute the written notice required by this section.
Section 1575. Notice to demand payment.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
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Section 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares. If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporation action.
Section 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action. Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment. If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenter had after
making demand for payment of their fair value.
Section 1578. Estimate by dissenter of fair value of shares.
(a) General Rule. If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) (relating to payment of fair value of shares) and the
dissenter believes that the
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amount stated or remitted is less than the fair value of his shares, he may send
to the corporation his own estimate of the fair value of the shares, which shall
be deemed a demand for payment of the amount or the deficiency.
(b) Effect of failure to file estimate. Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
Section 1579. Valuation proceedings generally.
(a) General Rule. Within 60 days after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
(b) Mandatory joinder of dissenters. All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
Section 1580. Costs and expenses of valuation proceedings.
(a) General rule. The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally), including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are parties
and whose action in demanding supplemental payment under section 1578 (relating
to estimate by dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad
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faith or in a dilatory, obdurate, arbitrary or vexatious manner in respect to
the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
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SALEM CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Milton Deaner, Alexander Stuart and
Leo L. Wallberg, Jr. and each of them, with full power of substitution,
attorneys and proxies to represent and to vote all shares of Common Stock
of Salem Corporation which the undersigned is entitled to vote at the
Special Meeting of Shareholders of Salem Corporation to be held at the
Westin William Penn Hotel, 530 William Penn Place, Pittsburgh,
Pennsylvania on September 26, 1996 at 3:00 P.M. local time, and at any
adjournments or postponements thereof:
1. APPROVAL AND ADOPTION OF MERGER PROPOSAL
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, upon such other business as may properly come
before the meeting or any adjournment or postponement thereof.
(Continued and to be signed on the reverse side)
The Board of Directors recommends a vote FOR Proposal 1. This proxy when
properly executed will be voted in the manner directed herein by the
undersigned shareholder. If no direction is made, this proxy will be voted
FOR Proposal 1.
.......................... [SEAL]
.......................... [SEAL]
This proxy should bear your
signature(s) exactly as your
name(s) appear(s) in the stencil
to the left. When signing as
attorney, executor, administrator,
personal representative, trustee,
guardian or corporate officer,
please give full title. For joint
accounts, each joint owner should
sign.
Date ......................, 1996
PLEASE DATE, SIGN AND RETURN
TODAY IN THE ENCLOSED ENVELOPE.
<PAGE> 80
CONFORMED
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of (I.R.S. employer
incorporation or organization) identification number)
P.O. Box 2222, Pittsburgh, Pennsylvania 15230
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 412-276-5700
------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------- -----------------------------------------
Common Stock, Par Value $.50 American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
---------------------------------------------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
The aggregate market value of shares of the Registrant's common stock
on March 7, 1996, par value $.50, held by nonaffiliates of the Registrant was
approximately $14,281,000. Such aggregate market value was computed by
reference to the reported closing price on the American Stock Exchange on said
date. The number of shares owned by nonaffiliates has been determined, solely
for the purpose of the foregoing, by subtracting all shares known by the
Registrant to be beneficially owned by any of its directors or officers or
persons who have filed reports on Schedule 13D or 13G with the Commission
(1,204,466) from the number of outstanding shares (1,864,882).
As of March 7, 1996, the Registrant had outstanding 1,864,882 shares
of its common stock, par value $.50.
Page 1 of 46
<PAGE> 81
PART I
ITEM 1. BUSINESS
The Registrant is a Pennsylvania corporation which was organized in
1945. Reference herein to the "Registrant" or the "Company" includes
collectively Salem Corporation and its subsidiaries, unless the context
otherwise requires. The Company is in the business of designing, engineering
and installing heavy industrial equipment primarily for the metals, coal and
other minerals industries. The Company presently operates in four business
segments: metal processing equipment, industrial furnaces, minerals processing
equipment and automation controls and systems. Segment information for the
three years ended December 31, 1995 is set forth in Note 14 of the notes to the
consolidated financial statements included elsewhere herein. The subsidiaries
maintain only those manufacturing facilities necessary to control quality and
delivery conditions which cannot otherwise be met on a consistent basis. A
major portion of the components and materials sold in the business is purchased
from independent suppliers or subcontractors.
METAL PROCESSING EQUIPMENT
Herr-Voss Corporation designs, engineers and manufactures strip, plate
and coil processing systems and equipment for the continuous processing of
ferrous and nonferrous metals. Such equipment includes a wide range of
precision machinery and auxiliary equipment which is designed to cut, join,
slit, level, clean and coat metals in coil or sheet form. A United Kingdom
subsidiary of the Company, Herr-Voss Limited, performs similar services.
Herr-Voss designs and manufactures special mechanical and materials handling
equipment for use in metals producing plants, fabricating plants and forge
shops. Herr-Voss manufactures its patented Strand Extensioner(R) equipment for
the coil slitting market. The primary markets for its equipment are metal
service centers, steel mills, metals producers and large manufacturers of metal
products. Herr-Voss owns the technology of Herman Foundry equipment and
provides machinery, spares and service for the foundry industry. In 1995, the
market for such business was worldwide, with approximately 30% of the revenues
derived from outside North America.
INDUSTRIAL FURNACES
Salem Furnace Co. and Salem Engineering Company Limited, a United
Kingdom subsidiary of the Company, design, engineer and construct thermal
processing equipment, ovens and furnaces in a wide range of sizes and for
various end-uses. Salem reheat furnaces are designed for the ferrous and
nonferrous metals industries to reheat ingots, slabs, blooms, billets and other
materials preparatory to forging, rolling and other shaping. Salem specialty
furnaces are designed to meet exact customer specifications for heat treating a
variety of industrial and consumer products. Carbon products furnaces are
designed for thermal processing of carbonaceous material. Salem also produces
rotating perforate deck furnaces for drying and pyrolyzing low-rank coals by
extracting water or condensible and noncondensible hydrocarbons. Salem
furnaces and related equipment are also used in the production of tubular
products for the oil industry's drilling and exploration programs. Salem
Furnace Co. also supports
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<PAGE> 82
Lectromelt technology, including new furnaces for smelting and ferro-alloy
vitrification, continuous smelting, slag cleaning, refractory and fused
abrasives and pyrolysis. Salem Furnace Co. supports existing Lectromelt
clients by providing upgrades, renewal parts and rebuilds. In 1995, this
segment's products were sold worldwide, with approximately 58% of the revenues
derived from outside North America.
Salem Furnace Co. has the rights to market numerous proprietary
technologies pursuant to license agreements. The principal license agreement
relates to Daido Steel Co., Ltd.'s thermal process technology for continuous
cast slab edge heating, galvanizing, aluminizing and flotation type annealing
furnaces.
MINERALS PROCESSING EQUIPMENT
Industrial Resources, Inc. designs, manufactures and installs material
handling and processing systems and products for the coal, rock, cement,
utility and oil industries. Industrial Contracting of Fairmont, Inc. and
Mountaineer Resources, Inc. provide independent construction services for these
facilities.
West Virginia Electric Corporation engineers and installs a broad
range of electrical and automation systems for processing and material handling
systems used by the coal, rock, cement, utility and oil industries. West
Virginia Electric is a recognized leader in the design of programmable
controlled computerized electrical circuits. McHal Corporation and West
Virginia Electric Industries, Inc. provide field services for the construction
of these facilities.
A. L. Lee Corporation designs, manufactures and rebuilds equipment for
the underground mining industry, consisting of rockdusters, face fans,
generators, tractors, fork lifts, compressor packages, maintenance and service
vehicles and personnel carriers. A. L. Lee also distributes related mining
equipment and spare parts.
The revenues of this segment have come primarily from projects in
Alabama, Colorado, Illinois, Kentucky, North Carolina, Pennsylvania, Virginia
and West Virginia.
AUTOMATION CONTROLS AND SYSTEMS
(Formerly included as a part of Industrial Furnaces Segment)
Salem Automation Limited in the United Kingdom supplies control and
instrumentation systems to industrial users for a variety of process control
and automation needs. Salem Automation Limited designs and builds safety
systems for the petrochemical industry and control and instrumentation systems
for diverse applications including materials handling, water treatment,
petroleum product transportation and storage. Enviroplant International Group,
Ltd. ("EIG"), a United Kingdom subsidiary of the Company, designs, manufactures
and installs customized heating, ventilation, air conditioning and
refrigeration systems primarily for the petrochemical industry.
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GENERAL
The revenues of the Company's business are derived primarily from
long-term contracts which are negotiated by sales engineers employed by the
Company. In 1995, no single customer accounted for 10% or more of consolidated
contract revenues. In 1994, one customer, Consolidated Coal Co., accounted for
approximately 15.9% of consolidated contract revenues. In 1993, one customer,
Drummond Coal Company, accounted for approximately 17.7% of consolidated
contract revenues. In 1995, 1994 and 1993, the Company's export sales to any
single foreign country did not comprise 10% or more of consolidated contract
revenues. Customers placing contracts can vary from year to year and thus a
major customer in one year would not necessarily be a major customer in the
following year. Additional information with respect to customers is set forth
in Note 14 of the notes to the consolidated financial statements included
elsewhere herein.
The Company's business, both domestic and foreign, is of a highly
competitive nature. Under current market conditions, pricing is a particularly
critical determinant in the bidding process. A number of companies, some with
greater resources than the Company, provide intense competition for market
share in each of the Company's business segments. Accordingly, it is difficult
to state the overall competitive position of the segments of the Company's
business in each market which they serve.
Success or failure in each of the Company's business segments,
including foreign and domestic operations, is largely based upon the ability to
compete successfully for contracts and to complete them at a profit despite the
hazards inherent to the business. The Company's operations are also dependent
to a great extent upon conditions in the basic metals, coal and other minerals
industries.
Export sales may bear additional credit risks beyond normal credit
risks and are usually secured by letters of credit or other forms of credit
insurance. As a multinational corporation, the Company manages it foreign
currency risk through the purchase of forward contracts in the limited number
of contracts denominated in foreign currencies. The fair value of forward
contracts outstanding as of December 31, 1995 and 1994 was not material. The
Company does not manage its exposure to translation gains and losses; however,
by borrowing in local currencies, such exposures are reduced. The Company does
not engage in the trading of, or speculation in, derivative instruments.
The backlog of unfilled orders of the Company at the end of 1995 was
$75.9 million, as compared to the backlog at the end of 1994 of $76.0 million.
The 1995 and 1994 backlogs, respectively, consisted of $36.3 million and $36.6
million in the metal processing equipment segment, $20.1 million and $19.9
million in the industrial furnaces segment, $14.8 million and $16.0 million in
the minerals processing equipment segment and $4.7 million and $3.5 million in
the automation controls and systems segment. The Company estimates that
virtually all of the 1995 backlog will be completed during 1996. This estimate
is dependent, in part, upon customers' scheduling requirements.
A portion of the Company's business, both foreign and domestic,
including contracts included in its backlog, is dependent upon the Company's
ability to continue to obtain bid and performance bonds relating to such
contracts and/or letters of credit as security for, or in lieu of, such bonds.
See Note 8 of the notes to the consolidated financial statements included
elsewhere herein.
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The principal components used in the Company's equipment and products
are steel, refractories, special castings (including high-alloy materials),
electrical and electronic controls, electrical motors and materials handling
equipment. These items are available from a wide range of independent
suppliers.
It is the Company's policy to apply for patents on those inventions
and improvements which it considers significant and which are likely to be
incorporated into its products. The Company currently owns a number of United
States and foreign patents. It is licensed under patents owned by others and
has granted licenses to others on a royalty basis. In the opinion of the
Company, although these patents collectively are valuable to it, except as
described elsewhere herein, no one patent or license or group of patents or
licenses is of material importance to its business as a whole.
The Company maintains facilities for the development of new products
and processes, the improvement of existing products and processes, and
supporting services. In 1995, 1994 and 1993, the expenditures for these
activities totaled approximately $463,000, $274,000 and $249,000, respectively.
No significant research and development projects were sponsored by customers
during this period.
Compliance with the various governmental regulations concerning
environmental protection has not been, and is not presently, or in the future,
anticipated to be a significant problem for the Company. As a result, the
Company did not in prior years make any significant capital expenditures for
environmental control facilities, nor does it expect to make any significant
capital expenditures for environmental control facilities in 1996 or future
years. Accordingly, the Company does not expect such compliance to have a
significant impact on its financial condition, liquidity or results of its
operations.
There is no seasonal aspect to the Company's business, although
weather-related conditions can have an effect upon the progress and completion
of construction and installation projects.
At December 31, 1995, the Company and its subsidiaries employed 873
persons, of whom 110 were graduate or licensed engineers and 319 were hourly
employees.
Part of the Company's hourly employees are covered by union contracts
which expire from time to time from October 1, 1997 through April 30, 1999.
The Company believes that its relations with employees are generally
satisfactory.
Additional information about foreign and domestic operations and
export sales is set forth in Note 14 of the notes to the consolidated financial
statements included elsewhere herein.
Page 5
<PAGE> 85
ITEM 2. PROPERTIES
The Company's corporate offices and development facilities are located
in Carnegie, near Pittsburgh, Pennsylvania, in two buildings. All the domestic
properties, with the exception of the A. L. Lee facilities in Illinois, are
owned in fee. The Company is engaged primarily in engineering, and its
manufacturing and fabricating facilities are those maintained by Herr-Voss
Corporation, Industrial Resources, Inc., A. L. Lee Corporation and Salem
Automation Limited. The Company considers all properties to be adequately
maintained and suitable for its purposes. During 1995 as a whole, there was
not a substantial amount of idle capacity at such facilities.
METAL PROCESSING EQUIPMENT
Herr-Voss Corporation owns and occupies facilities located in Callery,
Pennsylvania, also near Pittsburgh, Pennsylvania. Its facilities include a
manufacturing and fabrication plant and an administration and engineering
building. Nearby is a plant in which hardened and ground precision rolls used
in processing line equipment are manufactured. Herr-Voss also owns a
steel-framed machine shop in Conway, Pennsylvania, approximately 30 miles from
Callery. The Company's United Kingdom subsidiary, Herr-Voss Limited, leases
its office space in Derby, England at an aggregate annual rental of
approximately $77,600 under a lease which is cancelable in 1998.
INDUSTRIAL FURNACES
The Company's domestic subsidiary, Salem Furnace Co., occupies one of
the two buildings in Carnegie, referred to above. The Company's United Kingdom
subsidiary, Salem Engineering Company Limited, shares facilities currently
under lease to Herr-Voss Limited in Derby, England as described above. In
January 1994, Salem Engineering Company Limited vacated its owned facility.
Sale of the vacated facility has been authorized, but final disposition has not
yet occurred; however, the appraised value of the vacated facility is greater
than its carrying value. Such carrying value is not material to the
consolidated financial statements.
MINERALS PROCESSING EQUIPMENT
Industrial Resources, Inc. and its sister companies, located near
Fairmont, West Virginia, own and occupy an administration building and
fabrication facility. A. L. Lee Corporation owns a steel-framed and brick
building located near Beckley, in southern West Virginia, containing a shop and
office. A. L. Lee Corporation also leases a manufacturing and sales facility
in Mt. Vernon, Illinois. The annual rental under the lease, which expires upon
a 90 day notice, is approximately $31,000. West Virginia Electric Corporation
and its sister companies, located near Fairmont, West Virginia, own and occupy
an office and warehouse building of steel-framed construction.
AUTOMATION CONTROLS AND SYSTEMS
Salem Automation Limited, located in Rotherham, England, occupies an
office and workshop. This facility is owned in fee by such corporation. In
February 1995, the Company acquired Enviroplant International Group, Ltd. which
is located in Hull, England. Enviroplant leases an office and workshop
facility at an annual rental of approximately $79,000 under a lease expiring in
February 1997.
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ITEM 3. LEGAL PROCEEDINGS
On January 19, 1995, a Formal Order of Private Investigation ("the
Order") 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 to ultimately 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 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 or results of
operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
Not applicable.
Page 8
<PAGE> 88
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The American Stock Exchange is the principal market on which the
Company's common stock is traded. The high and low sales prices on such
Exchange in each quarter of 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- ----------------
<S> <C> <C> <C> <C>
Quarter High Low High Low
------- ---- --- ---- ---
First 25 7/8 15 3/4 16 1/4 12 7/8
Second 29 23 1/2 15 12
Third 28 1/4 25 14 7/8 12 7/8
Fourth 25 3/8 17 7/8 17 3/8 13
</TABLE>
As of March 7, 1996, there were approximately 996 shareholders of
record of the Company's common stock.
CASH DIVIDENDS
<TABLE>
<CAPTION>
Amount Record
Date Paid (In Thousands) Per Share Date
- --------- -------------- --------- -------
<S> <C> <C> <C>
January 15, 1996 $280 $.15 December 29, 1995
October 16, 1995 187 .10 September 29, 1995
July 17, 1995 187 .10 June 30, 1995
April 17, 1995 187 .10 March 31, 1995
January 16, 1995 187 .10 December 30, 1994
October 17, 1994 187 .10 October 3, 1994
July 15, 1994 187 .10 June 30, 1994
April 18, 1994 187 .10 April 1, 1994
January 5, 1994 187 .10 December 23, 1993
</TABLE>
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<PAGE> 89
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Summary of Operations:
For the Year Ended December 31: 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross revenues $151,314 $128,189 $106,370 $118,983 $127,016
======== ======== ======== ======== ========
Income before cumulative effect
of accounting changes $ 2,917 $ 3,648 $ 1,985 $ 3,173 $ 1,593
======== ======== ======== ======== ========
Income per common share
before cumulative effect
of accounting changes $ 1.56 $ 1.96 $ 1.07 $ 1.70 $ .85
======== ======== ======== ======== ========
Cash dividends declared
per common share $ .45 $ .40 $ .43 $ .33 $ -
======== ======== ======== ======== ========
Balance Sheet Data:
Total assets $ 86,490 $ 82,554 $ 73,482 $ 66,308 $ 71,829
Cash and cash equivalents 18,048 20,524 22,204 19,127 22,094
Working capital 26,337 24,967 25,675 25,377 22,360
Long-term debt 1,715 2,095 2,673 2,613 2,369
Shareholders' equity 38,956 37,055 33,861 32,836 30,518
</TABLE>
See Notes 5 and 10 of the notes to the consolidated financial statements
included elsewhere herein for a discussion of changes in accounting principles.
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<PAGE> 90
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1995 AS COMPARED TO 1994
OVERVIEW
The Company's 1995 gross revenues increased to $151.3 million or 18.0%
compared to $128.2 million in 1994. This increase was primarily attributable
to increases in the Company's metal processing equipment and industrial
furnaces segments, reflecting the strong backlog entering 1995 and higher
orders during the year. The increase in revenues resulted in an increase in
gross income to $25.1 million in 1995 from $23.0 million in 1994. Gross profit
as a percentage of gross revenues decreased to 16.6% in 1995 from 18.0% in
1994. This decrease is primarily attributable to a loss incurred on a major
contract at the Company's Enviroplant International Group, Ltd. subsidiary in
the United Kingdom.
Selling, general and administrative expenses increased to $19.6 million
in 1995 from $17.4 million in 1994 as a result of increased personnel, profit
sharing and retirement savings (401k plan) expenses. However, selling, general
and administrative expenses as a percentage of revenues declined to 13.0% in
1995 from 13.6% in 1994, reflecting, in part, the effects of continued cost
management.
Adversely affecting income in 1995 was $1.9 million of nonrecurring
charges consisting of approximately $173,000 for legal fees associated with an
SEC investigation and $1.7 million for legal, accounting, consulting and
directors' fees ($652,000, $89,000, $643,000 and $339,000, respectively)
incurred in efforts to maximize shareholder value, including the possible sale
of the Company. On March 22, 1996 the Company announced that, since no firm
offers have been received for the purchase of the Company, the active
solicitation of bids for the Company has ceased and the engagement of its
financial advisor was terminated. The Company also ceased the activities of
its Special Negotiating Committee and counsel to such Committee in order to
greatly limit future expenditures for the sale process.
Other income increased to $1.8 million in 1995 from $1.0 million in 1994.
Approximately $700,000 was attributable to a gain from a legal settlement. An
increase in interest rates in 1995 over 1994 also contributed to the increase
in other income.
Although the provision for income taxes in 1995 of $2.3 million is
virtually unchanged from the $2.2 million in 1994, the effective tax rate of
42.8% in 1995 is significantly greater than the effective tax rate of 36.7% in
1994. This increase resulted from a reversal in 1994 of prior years' tax
accruals, the receipt in 1994 of tax-free life insurance proceeds and increased
taxes on foreign joint ventures. These factors, which increased the effective
tax rate, were offset in part by reductions in 1995 as compared to 1994 of
state taxes, domestic dividends received deduction and also greater benefits
recognized in 1995 from the Company's foreign sales corporation and income of a
Bermuda subsidiary which is not tax affected.
The Company's revenues and profitability are largely dependent upon the
volume of capital orders received. At December 31, 1995, the Company had a
backlog of approximately $75.9 million as compared to approximately $76.0
million at December 31, 1994.
Inflation did not have a significant effect on the income of the Company
during the last three years.
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<PAGE> 91
RESULTS OF BUSINESS SEGMENTS
Gross revenues in the Company's metal processing equipment segment
increased to $63.9 million in 1995 or 22.4% from $52.2 million in 1994.
Operating income for 1995 increased to $7.3 million compared with $4.8 million
for 1994. Both revenues and operating income are at record levels for this
segment. These record levels were made possible by the $36.6 million backlog
entering 1995 compared to the $19.8 million backlog entering 1994. Operating
income increased primarily due to the increase in revenues and improved margins
on work performed by the Company's domestic subsidiary.
Gross revenues in the Company's industrial furnaces segment increased to
$37.9 million in 1995 or 59.9% from $23.7 million in 1994. Operating income
increased $1.6 million in 1995, to $1.7 million from $100,000 in 1994. The
increase in revenues is primarily attributable to new orders received in 1995
of approximately $38.0 million as compared to $24.9 million in 1994. All of
this increase was recorded at the Company's domestic subsidiary. The increase
in operating income is attributable to the Company's domestic subsidiary,
offset in part by a decline at the Company's United Kingdom subsidiary. This
increase is the result of increased revenues and improved margins on work
performed by the Company's domestic subsidiary.
Gross revenues in the Company's minerals processing equipment segment
declined slightly in 1995 to $40.4 million or 6.7% from $43.3 million in 1994.
Operating income declined to its second highest level of $3.0 million down from
a record $3.6 million in 1994. The decline in revenues and operating income
reflect the weak market and competitive pricing in the coal and rock
industries. In addition, the Company has also experienced greater competition
for smaller sized projects involving upgrading and maintenance work which
generally sustain greater gross margins.
Gross revenues in the Company's automation controls and systems segment
increased slightly to $9.1 million in 1995 or 3.4% from $8.8 million in 1994.
An operating loss in 1995 of $3.4 million was incurred compared with operating
income of $1.0 million for 1994. The increase in revenues was attributable to
$3.0 million of revenues at the Company's Enviroplant International Group, Ltd.
("EIG") acquired in February 1995 for which no revenues were included in this
segment in 1994. Significant operating losses were incurred at both the Salem
Automation Limited and EIG subsidiaries. An operating loss of $2.3 million was
incurred in 1995 at EIG, attributable to a contract for engineering and
installation of a heating, ventilating and air conditioning (HVAC) system for a
governmental agency in India. The total anticipated loss on this contract has
been recognized in 1995. An operating loss of $1.0 million was incurred at the
Company's Salem Automation Limited subsidiary, attributable in part to a
contract for an industrial process control system.
1994 AS COMPARED TO 1993
OVERVIEW
The Company's gross revenues for 1994 were $128.2 million compared to
$106.4 million in 1993. This increase was primarily attributable to increases
in the Company's metal finishing equipment and minerals processing equipment
segments. This increase, along with an increase in profitability to 18.0% in
1994 from 17.2% in 1993, resulted in an increase in gross income to $23.0
million in 1994 from
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<PAGE> 92
$18.2 million in 1993. Partially offsetting this increase in income was an
increase in selling, general and administrative expenses to $17.4 million in
1994 from $16.2 million in 1993 or 7.4%. This increase is attributable to an
increase in legal fees, professional consulting fees and incentive compensation
expense over 1993 amounts. Included in such amounts were charges of $675,000
and $1.0 million in 1994 and 1993, respectively, as a result of a court order
entered in the settlement of plaintiffs' legal fees and expenses in a
shareholder derivative suit. Operating income increased to $5.0 million in
1994 from $1.0 million in 1993.
Other income of $1.0 million in 1994 was significantly less than the $1.9
million in 1993. In 1993, the Company benefitted by $800,000 from a
nonrecurring cash distribution from a currently inactive investment.
The provision for income taxes in 1994 of $2.2 million is significantly
greater than the provision in 1993 of $575,000 as a result of increased income
in 1994 and the beneficial tax rate applied to the cash distribution from the
inactive investment in 1993.
The effective tax rate of 36.7% in 1994 is greater than the effective tax
rate of 19.9% in 1993. The effective tax rate in 1994 is lower than the
combined federal and state statutory income tax rates primarily due to a
reversal of prior year tax accruals. The lower effective tax rate in 1993
reflects the beneficial tax rate applied to the cash distribution from an
inactive investment and to the taxation of equity income only to the extent
dividends are received.
The Company's profitability is largely dependent upon the volume of
capital orders available. At December 31, 1994, the Company had a backlog of
approximately $76.0 million compared to approximately $54.1 million at
December 31, 1993.
Inflation did not have a significant effect on the gross income of the
Company during the last three years.
RESULTS OF BUSINESS SEGMENTS
Consolidated gross revenues increased to $128.2 million in 1994 from
$106.4 million in 1993. The most significant increases occurred in the
Company's metal processing equipment and minerals processing equipment
segments. The increase in gross revenues in the metal processing equipment
segment to $52.2 million in 1994 from $34.7 million in 1993 reflects the record
level of orders received in 1994. As a result of this increase in revenues,
and a significant improvement in the Company's United Kingdom subsidiary,
operating income increased in this segment to $4.8 million in 1994 from $2.0
million in 1993.
Gross revenues increased in the Company's minerals processing equipment
segment to $43.3 million in 1994 from $36.8 million in 1993. This increase is
attributable to increased revenues from sales of electrical systems and
handling equipment used in the coal mining industry. As a result of this
increase in revenues, operating income increased significantly to $3.6 million
in 1994 from $1.8 million in 1993.
Gross revenues declined in the Company's industrial furnaces segment to
$32.6 million in 1994 from $34.7 million in 1993. Operating income declined to
$1.1 million in 1994 from $1.5 million in 1993. The Company's United Kingdom
subsidiary recorded decreased revenues and income on sales of automation
control products. Such decreases were offset in part by increased sales and
income at the Company's domestic industrial furnace subsidiary.
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<PAGE> 93
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $2.5 million from $20.5 million
at December 31, 1994 to $18.0 million at December 31, 1995. This decrease was
primarily the result of the use of cash for nonrecurring charges related to
efforts to maximize shareholder value including the possible sale of the
Company, payments on debt, capital expenditures and dividends paid which were
partially offset by cash generated from operations. Consolidated working
capital at December 31, 1995 amounted to $26.3 million, a slight increase from
the $25.0 million at December 31, 1994. At December 31, 1995, cash and cash
equivalents and short-term investments of $10.7 million were restricted or
pledged as collateral under various agreements related to contract matters and
insurance policies.
Capital expenditures for the years 1995, 1994 and 1993 were $2.3
million, $1.4 million and $2.2 million, respectively. The Company anticipates
capital expenditures in 1996 of approximately $7.7 million, which it expects to
finance from its existing cash or financing arrangements.
The Company has a facility for the issuance of up to $10.0 million of
surety bonds. In connection with such facility, the Company, through its bank,
has provided a $2.0 million standby letter of credit in favor of the issuer of
such bonds. The standby letter of credit is fully collateralized by a
certificate of deposit. At December 31, 1995, approximately $2.4 million of
this facility was currently utilized. In September 1993, the Company obtained
an additional facility for the issuance of up to $10.0 million of surety bonds.
In connection with such facility, the Company, through its bank, has provided a
$500,000 standby letter of credit in favor of the issuer of such bonds. This
standby letter of credit is also fully collateralized by a certificate of
deposit. At December 31, 1995, the entire $10.0 million was available.
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 $1.6 million. At
December 31, 1995, approximately $2.7 million of the bank guarantee facility
was utilized. Of the $1.6 million facility for overdrafts and loans,
approximately $825,000 is currently utilized. (See Note 6 of the notes to the
consolidated financial statements included elsewhere herein.)
In November 1988, the Company acquired, by assignment from Mellon Bank
N.A., Industrial Revenue Bonds in an original aggregate principal amount of
$2.4 million ($1.5 million at December 31, 1995) which are the obligation of
ATEC South, Inc., a wholly-owned subsidiary of APL Corporation, which may be
deemed to be an affiliate of the Company. Such bonds are guaranteed by APL
Corporation. On June 25, 1993, creditors of APL Corporation filed an
involuntary petition for relief under Chapter 7 of the Federal Bankruptcy Code.
The proceeding was converted to a voluntary proceeding under Chapter 11 of the
Federal Bankruptcy Code on July 27, 1993. On September 2, 1994, ATEC South,
Inc. filed for protection under Chapter 11 of the Federal Bankruptcy Code.
Subsequently, in 1994, Security Management Corp. acquired APL Corporation.
Equal payments of
Page 14
<PAGE> 94
principal and interest on the unpaid balance were to be made monthly until
March 1, 1993, with a balloon payment of $1.1 million due on that date.
Interest is calculated at 72% of the Mellon Bank N.A. prime rate (adjusted by
formula for any change in the corporate federal income tax rate from 1982 to
the current year). These bonds are secured by promissory notes which, in turn,
are secured by first lien rights on the real property, furniture, fixtures and
machinery and equipment of ATEC South, Inc. No payments have been received
since May 1992 and the balloon payment is past due. Valuation reserves were
previously established for such investment. Interest, including late charges,
is due and owing on such bonds and is fully reserved.
On September 28, 1994, an order was signed by the Clerk of Superior
Court of Person County, North Carolina authorizing foreclosure by the Company
under the Deed of Trust securing the bonds on real estate owned by ATEC South,
Inc. On November 29, 1994, an order was entered by the bankruptcy judge
granting a motion to compromise the controversy between APL Corporation and the
Company. Pursuant to that order, the bankruptcy trustee and the committee of
unsecured creditors agreed to dismiss the Company from litigation pending in
the bankruptcy proceedings. APL Corporation and ATEC South, Inc. have agreed
to abandon their interest in the North Carolina property, thereby permitting
the Company to foreclose upon it and, in return, the Company has agreed to
withdraw its claims against APL Corporation and ATEC South, Inc. The Company
will determine whether to foreclose upon the property following an assessment
of potential environmental liability.
In March 1995, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement of Financial Accounting Standards No. 121 requires that the carrying
value of long-lived operating assets, when determined to be impaired, be
adjusted so as not to exceed the estimated undiscounted cash flows provided by
such assets. Statement of Financial Accounting Standards No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of in future periods. In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock-Based Compensation."
Statement of Financial Accounting Standards No. 123 recommends, but does not
require, that companies change their method of accounting for stock-based
compensation plans to one that attributes compensation costs equal to the fair
value of a stock-based compensation arrangement over the period service is
rendered that qualifies an employee to receive such compensation. Companies
not electing to change their method of accounting are required, among other
things, to provide additional disclosures which in effect restate a company's
results for comparative periods as if the new method of accounting had been
adopted. The Company will be subject to the provisions of Statement of
Financial Accounting Standards No. 121 and Statement of Financial Accounting
Standards No. 123 in 1996; however, the Company does not believe that the
adoption of either of the new accounting pronouncements will have a material
effect on its financial condition or results of its operations.
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 15
<PAGE> 95
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No. in
This Report
-----------
Report of Independent Public Accountants 17
Consolidated Balance Sheets - December 31, 1995
and 1994 18
Consolidated Statements of Income -
Three Years Ended December 31, 1995 19
Consolidated Statements of Shareholders' Equity -
Three Years Ended December 31, 1995 20
Consolidated Statements of Cash Flows -
Three Years Ended December 31, 1995 21
Notes to the Consolidated Financial Statements 22
Page 16
<PAGE> 96
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Salem Corporation:
We have audited the accompanying consolidated balance sheets of Salem
Corporation (a Pennsylvania corporation) and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Salem Corporation and
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statement, the Company
changed its method of accounting for income taxes and its method of accounting
for employee postretirement benefits other than pensions as of January 1, 1993.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule for
each of the three years in the period ended December 31, 1995, listed in Item
14.(A)(2), is presented for purposes of complying with the Securities and
Exchange Commission's rules and regulations under the Securities Exchange Act
of 1934 and is not otherwise a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 5, 1996
Page 17
<PAGE> 97
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
A S S E T S 1995 1994
----------- -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (including restricted cash of
$5,998 and $5,373, respectively) $18,048 $20,524
Restricted short-term investments 4,687 4,315
Receivables 24,717 22,259
Indebtedness of related parties 97 97
Contracts-in-progress 9,344 7,407
Inventories 6,050 5,147
Income tax benefit 3,078 2,857
Prepaid expenses 2,319 2,232
------- -------
Total current assets 68,340 64,838
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost 25,538 25,456
Less-Accumulated depreciation 16,051 16,085
------- -------
Net property, plant and equipment 9,487 9,371
------- -----
OTHER ASSETS:
Investments in affiliated companies, at equity 2,098 2,344
Other restricted investments - 600
Income tax benefit 2,817 1,792
Other assets 3,748 3,609
------- -------
Total assets $86,490 $82,554
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Dividends payable $ 280 $ 187
Current maturities of long-term debt 710 608
Accounts payable (including outstanding checks
of $1,720 and $1,975, respectively) 18,812 12,597
Advance billings on contracts 8,755 14,096
Accrued income taxes 1,389 758
Accrued payroll and employee benefits 4,834 4,367
Accrued loss reserves 2,347 2,595
Other accrued liabilities 1,187 1,038
Reserves for warranty expense 3,689 3,625
------- -------
Total current liabilities 42,003 39,871
------- -------
LONG-TERM DEBT 1,715 2,095
OTHER NONCURRENT LIABILITIES 3,285 3,128
MINORITY INTEREST 531 405
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 31,753 29,677
Pension adjustment (1) -
Cumulative translation adjustment (245) (71)
Treasury stock, at cost (825,442 shares) (3,197) (3,197)
------- -------
Total shareholders' equity 38,956 37,055
------- -------
Total liabilities and shareholders' equity $86,490 $82,554
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
Page 18
<PAGE> 98
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
CONTRACT REVENUES $151,054 $127,780 $105,656
ROYALTY INCOME 260 409 714
-------- -------- --------
Gross revenues 151,314 128,189 106,370
COST OF REVENUES 126,259 105,188 88,212
-------- -------- --------
Gross income 25,055 23,001 18,158
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 19,631 17,370 16,180
NONRECURRING CHARGES 1,896 675 1,000
-------- --------- --------
Operating income 3,528 4,956 978
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 1,394 1,015 841
Interest expense (404) (295) (243)
Equity in net earnings of affiliates 36 72 524
Other income, net 767 255 789
-------- -------- --------
Total other income 1,793 1,047 1,911
-------- -------- --------
Income before taxes, minority
interest and cumulative effect
of accounting changes 5,321 6,003 2,889
PROVISION FOR INCOME TAXES (2,278) (2,204) (575)
MINORITY INTEREST (126) (151) (329)
-------- -------- --------
Income before cumulative effect
of accounting changes 2,917 3,648 1,985
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - (517)
-------- -------- --------
Net income $ 2,917 $ 3,648 $ 1,468
======== ======== ========
PER COMMON SHARE DATA:
Income before cumulative
effect of accounting changes $ 1.56 $ 1.96 $ 1.07
Cumulative effect of accounting changes - - (.28)
-------- -------- --------
Earnings per common share $ 1.56 $ 1.96 $ .79
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 19
<PAGE> 99
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON PAID-IN RETAINED PENSION TRANSLATION TREASURY
STOCK SURPLUS EARNINGS ADJUSTMENT ADJUSTMENT STOCK
------ ------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 $1,345 $9,304 $26,117 $(65) $(668) $(3,197)
Net income - - 1,468 - - -
Cash dividend
paid ($.33 per share) - - (621) - - -
Cash dividend
declared ($.10 per share) - - (187) - - -
Aggregate translation
adjustment - - - - 303 -
Cash in lieu of
fractional shares - (3) - - - -
Pension adjustment - - - 65 - -
------ ------ ------- ---- ----- -------
BALANCE, December 31, 1993 1,345 9,301 26,777 - (365) (3,197)
Net income - - 3,648 - - -
Cash dividend
paid ($.30 per share) - - (561) - - -
Cash dividend
declared ($.10 per share) - - (187) - - -
Aggregate translation
adjustment - - - - 294 -
------ ------ ------- ---- ----- -------
BALANCE, December 31, 1994 1,345 9,301 29,677 - (71) (3,197)
Net income - - 2,917 - - -
Cash dividend
paid ($.30 per share) - - (561) - - -
Cash dividend
declared ($.15 per share) - - (280) - - -
Aggregate translation
adjustment - - - - (174)
Pension adjustment - - - (1) - -
------ ------ ------- ---- ----- -------
BALANCE, December 31, 1995 $1,345 $9,301 $31,753 $ (1) $ (245) $(3,197)
====== ====== ======= ==== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
Page 20
<PAGE> 100
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,917 $ 3,648 $ 1,468
Adjustments for noncash items -
Cumulative effect of change in accounting principles - - 517
Depreciation and amortization 1,725 1,523 1,369
Deferred income taxes (1,248) (433) (810)
Other noncurrent liabilities 157 (459) 389
Allowance for doubtful accounts 22 - (77)
Reserves for warranty expense 64 1,032 17
Earnings of affiliates, net (36) (72) (524)
Minority interest 126 151 504
Changes in certain balance sheet accounts -
Receivables (1,959) (6,506) (517)
Contracts-in-progress, net (7,278) 4,056 4,600
Inventories (904) (136) (483)
Prepaid expenses (10) 878 (643)
Intangible pension asset (1) - 19
Accounts payable 6,354 1,783 (1,078)
Accrued income taxes 664 1,161 (614)
Accrued liabilities 371 (203) (366)
Cumulative translation adjustments 67 (224) 343
------- ------- -------
Net cash flows provided by operating activities 1,031 6,199 4,114
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends from equity affiliates 245 81 73
Restricted investments 600 - -
Short-term investments (372) (3,290) 2,140
Investment in affiliates (738) (2,342) (325)
Purchases of property, plant and equipment (2,305) (1,441) (2,195)
Proceeds from sale of property, plant and equipment 314 111 67
------- ------- -------
Net cash flows used by investing activities (2,256) (6,881) (240)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (748) (748) (621)
Principal payments under capital leases (437) (331) (295)
Payments on long-term debt (503) (435) (350)
Proceeds from long-term debt 671 - 550
------- ------- -------
Net cash flows used by financing activities (1,017) (1,514) (716)
------- ------ -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (234) 516 (81)
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,476) (1,680) 3,077
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,524 22,204 19,127
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $18,048 $20,524 $22,204
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 430 $ 399 $ 358
Income taxes paid, net 2,829 1,122 1,630
</TABLE>
The accompanying notes are an integral part of these statements.
Page 21
<PAGE> 101
SALEM CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Salem Corporation and its wholly-owned and majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation. Investments in other than wholly-owned and
majority-owned subsidiaries include two 50%-owned subsidiaries in Japan and a
40%-owned subsidiary in India, all of which are carried at equity.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results may differ from those estimates.
CASH EQUIVALENTS. Cash equivalents, which consist primarily of certificates of
deposit and time deposits, are stated at cost, which approximates market. For
purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with maturities of three months or less at the
date of acquisition to be cash equivalents.
SHORT-TERM INVESTMENTS. Short-term, interest-bearing investments are those
with maturities of one year or less but greater than three months when
purchased. These investments are readily convertible to cash and are stated at
cost, which approximates fair value.
CONTRACT ACCOUNTING. The Company and its subsidiaries account for contracts on
the percentage-of-completion method. Based upon the nature of the contract,
the Company determines the stage of completion using the relationship of total
costs incurred to total estimated costs at completion. Contract costs, as
reflected in the consolidated statements of income, include all direct contract
costs and overhead, including all related engineering costs. Changes in
contract performance, estimated profitability and final contract settlements
may result in revisions to costs and revenues and are recognized in the period
in which the revisions are determined. If a loss is projected on any
contract-in- progress, provision is made currently for the entire projected
loss. Warranty reserves are provided during the course of contract performance
for costs which may be incurred after completion. For contracts where the
Company is also licensing the technology, royalty income is recognized in
accordance with the terms of the contract.
INVENTORIES. Inventories are valued at the lower of cost (determined by the
first-in, first-out method) or market and consist primarily of raw materials.
OPERATING CYCLE. The operating cycles of contracts vary and in some cases are
more than one year. In accordance with industry practices, all
contract-related accounts are included in current assets and liabilities.
Page 22
<PAGE> 102
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at
cost. Major additions and betterments are capitalized, while maintenance and
repairs which do not significantly improve or extend the lives of the
respective assets are expensed in the year incurred. Property disposed of is
removed from the asset and accumulated depreciation accounts, with the gain or
loss credited or charged to current income.
DEPRECIATION AND AMORTIZATION. The Company provides for depreciation over the
estimated useful lives of the plant and equipment, employing both straight-line
and accelerated methods. License agreements and other purchased technology are
amortized on the straight-line method over the remaining years expected to be
benefitted.
Excess of cost over net assets of acquired businesses arising prior to 1971
($1.4 million) is not being amortized, while those amounts arising subsequent
to 1971 ($1.7 million) are being amortized over 15-20 year periods.
DEVELOPMENT COSTS. Development costs are charged to operations as incurred and
amounted to $463,000 in 1995, $274,000 in 1994 and $249,000 in 1993.
INCOME TAXES. As discussed in Note 5, effective January 1, 1993, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this standard, deferred tax assets or
liabilities are computed based on the difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate. Deferred income tax expense or credit is based on the
changes in the assets and liabilities from period to period.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS. The financial statements
of foreign subsidiaries are translated using the standards established by the
Financial Accounting Standards Board ("FAS No. 52"). Accordingly, all assets
and liabilities of foreign subsidiaries are translated at year-end exchange
rates; revenue and expense accounts are translated at the average exchange
rates during the year. Net unrealized translation gains or losses are
reflected in the cumulative translation adjustment and are not included in net
income.
RESTATEMENTS. Prior year comparative consolidated financial statements have
been restated where necessary to conform with the 1995 presentation.
EARNINGS PER COMMON SHARE. Earnings per share of common stock have been
computed using the weighted average number of shares outstanding during the
periods (1,864,882 in 1995, 1994 and 1993).
NEW ACCOUNTING PRONOUNCEMENTS. In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Statement of Financial Accounting Standards No. 121
requires that the carrying value of long-lived operating assets, when
determined to be impaired, be adjusted so as not to exceed the estimated
undiscounted cash flows provided by such assets. Statement of Financial
Accounting Standards No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of in future periods. In October 1995,
the FASB issued Statement of Financial Accounting Standards No. 123 -
"Accounting for Stock-Based Compensation." Statement of Financial Accounting
Standards No. 123 recommends, but does not require, that companies change their
method of accounting for stock-based
Page 23
<PAGE> 103
compensation plans to one that attributes compensation costs equal to the fair
value of a stock-based compensation arrangement over the period service is
rendered that qualifies an employee to receive such compensation. Companies
not electing to change their method of accounting are required, among other
things, to provide additional disclosures which in effect restate a company's
results for comparative periods as if the new method of accounting had been
adopted. The Company will be subject to the provisions of Statement of
Financial Accounting Standards No. 121 and Statement of Financial Accounting
Standards No. 123 in 1996; however, the Company does not believe that the
adoption of either of the new accounting pronouncements will have a material
effect on its financial condition or results of its operations.
2. RECEIVABLES:
Receivables at December 31, 1995 and 1994 are net of allowances for doubtful
accounts of $257,000 and $235,000, respectively.
In accordance with the provisions of long-term contracts, certain percentages
of billings or amounts are withheld by customers until completion and
acceptance of the project. At December 31, 1995 and 1994, these contract
retentions amounted to approximately $731,000 and $1.9 million, respectively.
Retentions due are included in current receivables. Based upon prior
experience with similar contracts, retentions are expected to be collected
within one year.
3. INVESTMENTS IN AFFILIATED COMPANIES, AT EQUITY:
NIPPON HERR CO., LTD.
The Company owns 48,000 shares of capital stock of Nippon Herr Co., Ltd.,
representing a 50% interest of Nippon Herr's outstanding common stock at
December 31, 1995. The Company's equity in net earnings of Nippon Herr was
recorded through November 30, based on financial statements at that date. The
Company accounts for its investment in Nippon Herr using the equity method.
Following is a summary of the Company's investment in Nippon Herr and other
equity affiliates:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1995 1994
------ ------
<S> <C> <C>
Balance at beginning of year - Nippon Herr $1,704 $1,604
Equity in net earnings 21 97
Dividends received (85) (81)
Cumulative translation adjustment (32) 84
------ ------
Balance at end of year - Nippon Herr 1,608 1,704
Investments in other affiliates, at equity 490 640
------ ------
Total investments in affiliated companies,
at equity $2,098 $2,344
====== ======
</TABLE>
Page 24
<PAGE> 104
Shown below is the summarized financial position of Nippon Herr at November 30,
1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1995 1994
------ ------
<S> <C> <C>
Cash $ 973 $ 364
Receivables 2,288 2,344
Inventory 4,269 3,306
Other current assets 347 276
Fixed assets 39 49
Investments and deposits 607 629
Other assets 326 -
------ ------
Total assets $8,849 $6,968
====== ======
Payables $1,255 $ 947
Loans payable 1,274 1,314
Advance billings 1,934 283
Other current liabilities 479 369
Other liabilities 692 647
Stockholder's equity 3,215 3,408
------ ------
Total liabilities and equity $8,849 $6,968
====== ======
</TABLE>
Shown below are the summarized results of operations for Nippon Herr and other
equity affiliates:
<TABLE>
<CAPTION>
(Dollars in Thousands)
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales - Nippon Herr $8,564 $8,499 $26,528
====== ====== =======
Cost of goods sold $6,551 $6,688 $21,898
====== ====== =======
Net earnings $ 42 $ 193 $ 830
====== ====== =======
Salem's 50% equity interest - Nippon Herr $ 21 $ 97 $ 415
Equity in net earnings of other affiliates 15 (25) 109
------ ------ -------
Total equity in net earnings of affiliates $ 36 $ 72 $ 524
====== ====== =======
</TABLE>
Prior to 1993, the equity earnings of Nippon Herr were recorded as of their
fiscal year-end (March 31). In 1993, these earnings were recorded on a more
current basis; thus, in that year the equity earnings recorded by the Company
covered the period April 1, 1992 through November 30, 1993.
Nippon Herr's principal business is the engineering and installation of metal
forming equipment for the can industry.
Other affiliates consist of Daido Herr Engineering Co., Ltd. and Wesalem
Company Pvt. Ltd.
The Company received cash distributions in 1995, 1994 and 1993 of $160,000, $0
and $800,000, respectively, from an inactive investment that has ceased
operations and is in the process of being liquidated. There are no amounts
recorded in the Company's consolidated balance sheets related to this
investment.
Page 25
<PAGE> 105
4. CONTRACTS-IN-PROGRESS:
Amounts reflected in the balance sheets as contracts-in-progress consist of
costs incurred on contracts-in-progress plus estimated earnings thereon less
progress billings. Where progress billings exceed costs and earnings, the
amount is reflected as advance billings on contracts. At December 31, 1995 and
1994, these amounts were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1995 1994
---- ----
<S> <C> <C>
Costs incurred plus estimated earnings $85,286 $133,031
Less-Progress billings (84,697) (139,720)
------- --------
$ 589 $ (6,689)
======= ========
Presentation in balance sheets:
Contracts-in-progress $ 9,344 $ 7,407
Advance billings on contracts (8,755) (14,096)
------- --------
$ 589 $ (6,689)
======= ========
</TABLE>
5. INCOME TAXES:
Effective January 1, 1993, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement No. 109, "Accounting for Income Taxes."
Under this new method, deferred income tax assets and liabilities are
recognized which reflect the future tax consequences of differences between the
tax and financial reporting bases of assets and liabilities. Deferred income
tax expense or credit is based on the changes in the net asset or liability
from period to period. The Company, in the first quarter of 1993, recorded a
credit to earnings of $415,000, or $.22 per share, attributable to Statement of
Financial Accounting Standards No. 109 without restating prior years.
The Company and all of its domestic subsidiaries file a consolidated federal
income tax return. The parent company and its domestic subsidiaries each
report current income tax expense as allocated under a consolidated tax
allocation agreement. Generally, this allocation results in profitable
companies recognizing a tax provision as if the individual company filed a
separate return, and loss companies recognizing benefits to the extent their
losses contribute to reduced consolidated taxes. Deferred income taxes are
established and segregated for each member of the consolidated group. Similar
procedures are followed by the Company's United Kingdom subsidiaries, which
file tax returns under available group relief provisions.
Page 26
<PAGE> 106
Income before taxes, minority interest and cumulative effect of accounting
changes as shown in the accompanying consolidated statements of income include
the following components:
<TABLE>
<CAPTION>
(Dollars in Thousands)
-------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Domestic $9,267 $6,228 $2,349
Foreign (3,946) (225) 540
------ ------ ------
Income before taxes, minority interest
and cumulative effect of
accounting changes $5,321 $6,003 $2,889
====== ====== ======
</TABLE>
A reconciliation of the United States federal statutory income tax rate to the
effective income tax rate follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
United States federal statutory rate 34.0% 34.0% 34.0%
State and foreign taxes, net
of federal tax 9.1 11.1 6.7
Taxes on foreign subsidiaries
and joint ventures .4 (.4) (6.3)
Valuation allowance 2.3 .5 -
Domestic dividends received deduction (.8) - (7.5)
United Kingdom and Bermuda losses for
which no future benefit is assured - - .1
Life insurance proceeds - (1.8) -
Income of Bermuda subsidiary upon which
no taxes are imposed (1.5) (.3) (1.8)
Benefit of foreign sales corporation (2.7) (1.4) (3.1)
Reversal of prior years' tax accruals - (3.7) -
Other, net 2.0 (1.3) (2.2)
---- ---- ----
Effective book income tax rate 42.8% 36.7% 19.9%
==== ==== ====
</TABLE>
Taxes on income, as shown in the accompanying consolidated statements of
income, include the following components:
<TABLE>
<CAPTION>
(Dollars in Thousands)
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current provision:
Federal $3,303 $1,561 $ 406
State 708 645 147
Foreign (487) 429 23
------ ------ ------
Total current tax provision 3,524 2,635 576
------ ------ ------
Deferred provision:
Federal (208) (172) (202)
State (37) (35) (41)
Foreign (1,001) (224) 242
------ ------ ------
Total deferred tax provision (1,246) (431) (1)
------ ------ ------
Provision for income taxes $2,278 $2,204 $ 575
====== ====== ======
</TABLE>
Page 27
<PAGE> 107
The components of the deferred tax assets and liabilities recorded in the
accompanying balance sheets at December 31, 1995 and 1994, and the change in
such accounts for the 1995 year were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------------------------------
Deferred
December 31, Expense/ December 31,
1995 (Credit) 1994
------------ ---------- ------------
<S> <C> <C> <C>
Deferred Tax Assets:
Reserves recorded for-
Warranty $ 899 $ 124 $ 1,023
Cost after shipment 502 21 523
Compensation 381 (120) 261
Liability claims 339 26 365
Vacation pay 285 (24) 261
Investments 408 - 408
Inventory 208 (21) 187
Self-insurance claims 717 68 785
Postemployment benefits 741 44 785
Foreign tax credit and net
operating loss carryforwards 2,033 (1,538) 495
Advance corporation tax 435 (84) 351
Other 828 (146) 682
Valuation allowance (634) 481 (153)
------ ------ ------
Total deferred tax assets 7,142 (1,169) 5,973
------ ------- ------
Deferred Tax Liabilities:
Excess of book basis over tax
basis of plant and equipment (800) (31) (831)
Unrealized foreign exchange gains (243) 243 -
Other (204) (289) (493)
------ ------ ------
Total deferred tax liabilities (1,247) (77) (1,324)
------ ------ ------
Net deferred taxes $5,895 $(1,246) $4,649
====== ======= ======
</TABLE>
The Company has signed consents to extend the time to assess tax with the
Internal Revenue Service ("IRS") for the 1987 through 1991 tax years. Such
consents extend the period during which the IRS may assess tax for the
Company's federal income tax returns until June 30, 1996. The Company's
federal income tax returns for the years 1987 through 1992, inclusive, are
currently being examined by the IRS. Management believes that adequate tax
accruals have been provided for these and subsequent years.
Undistributed earnings of non-U.S. subsidiaries amounting to $3.8 million at
December 31, 1995 were considered by management to be permanent business
requirements of these subsidiaries under present circumstances and no provision
has been made for the additional U.S. income taxes which might result if these
undistributed earnings were remitted to the parent company. However, any
decision to remit such earnings in the future in the form of dividends is not
expected in the aggregate to result in significant additional income taxes.
Page 28
<PAGE> 108
At December 31, 1995, the United Kingdom operations are in a net operating loss
carryforward position. Approximately $1.8 million of tax benefits resulting
from operating losses and $435,000 of tax credits resulting from a payment of
Advance Corporation Tax are available in the United Kingdom to offset future
income. These net operating losses and tax credit carryforwards can be carried
forward indefinitely.
The Company has generated book pretax income from continuing operations of $5.3
million, $6.0 million and $2.9 million in 1995, 1994 and 1993, respectively.
Except for the effects of the reversal of net deductible temporary differences,
the Company is not aware of any factors which would cause any significant
differences between book and taxable income in future years. Although there
can be no assurances that the Company will generate any earnings or specific
level of continuing earnings in any jurisdiction, management believes that it
is more likely than not that the net deductible differences will reverse during
periods when the Company generates sufficient net taxable income, and that
sufficient taxable income will be generated in foreign jurisdictions to permit
utilization of related net operating loss and credit carryforwards to the
extent recorded at December 31, 1995. The Company has established a valuation
allowance of $469,000 against the United Kingdom tax loss carryforwards since
it is more likely than not that this portion of the tax benefit may not be
recognized. The Company has also established a valuation allowance of $165,000
for a portion of its foreign tax credit carryforwards available against U.S.
income taxes.
6. CREDIT AND BORROWING ARRANGEMENTS:
The Company's United Kingdom subsidiaries have two separate credit facilities
at one major bank consisting of a facility for the issuance of bank guarantees
and an overdraft and loan facility. Interest on borrowings is charged at 1.25%
over the bank's base rate for borrowings up to $1.2 million and 1.5% over the
bank's base rate for borrowings between $1.2 million and $1.6 million. The
current bank base rate is 6.25%. Of the $2.8 million facility for the issuance
of bank guarantees, approximately $2.7 million is currently utilized. All of
the amounts utilized have been for guarantees issued by the bank to customers
of the Company for assuring contract performance related to the operations of
its United Kingdom subsidiaries. Of the $1.6 million facility for overdrafts
and loans, approximately $825,000 is currently utilized.
The agreement for such combined credit facility requires a Salem Corporation
guarantee limited to $3.1 million, an unlimited multilateral guarantee wherein
the United Kingdom subsidiaries individually guarantee the debt of the others,
approximately $854,000 cash collateral and a pledge of the assets of these
subsidiaries. This credit line is subject to periodic review by the bank.
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1995 1994
---- ----
<S> <C> <C>
Long-term debt obligations $2,007 $2,444
Capitalized lease obligations 418 259
------ ------
2,425 2,703
Less-Current maturities 710 608
------ ------
Long-term debt $1,715 $2,095
====== ======
</TABLE>
Page 29
<PAGE> 109
Long-term debt is comprised of various borrowing facilities which bear interest
at rates ranging from 5.9% to 12.5% under various payment terms and with
various maturities through 1999.
Maturities of long-term debt during the five years ending December 31, 2000 and
the years thereafter are as follows: 1996 - $710,000; 1997 - $1,129,000; 1998
- - $395,000; 1999 - $191,000; 2000 - $0; and years thereafter - $0.
The capitalized lease obligations relate primarily to vehicles. Operating
leases relate primarily to office equipment and facility rentals. Minimum
future payments for capitalized lease obligations and noncancelable operating
leases are as follows at December 31, 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1996 $236 $103
1997 181 62
1998 41 40
1999 - 39
2000 - 39
Thereafter - 256
---- ----
Total minimum lease payments 458 $539
====
Less-Implicit interest 40
----
Net capitalized lease
obligations $418
====
</TABLE>
Rental expenses under noncancelable operating leases were approximately
$119,000, $103,000 and $196,000 for the years 1995, 1994 and 1993,
respectively. Total rental expenses were approximately $806,000, $666,000 and
$567,000 for 1995, 1994 and 1993, respectively.
8. COMMITMENTS AND CONTINGENCIES:
On January 19, 1995, a Formal Order of Private Investigation ("the Order") 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 to ultimately 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 engaged in ordinary litigation incidental to its business. The
Company does not believe that this litigation will have a material adverse
effect on its consolidated financial position or results of operations.
Page 30
<PAGE> 110
As security for performance and advances on long-term contracts, the Company
has, at December 31, 1995, provided customers standby letters of credit in the
amount of $2.2 million. The Company, through its bank, has provided the issuer
of the standby letters of credit with collateral in the form of certificates of
deposit. The Company has also obtained a facility for the issuance of up to
$10.0 million of surety bonds. In connection with such facility, the Company,
through its bank, has provided a $2.0 million standby letter of credit in favor
of the issuer of such bonds. This standby letter of credit is fully
collateralized by a certificate of deposit. At December 31, 1995,
approximately $2.4 million of such bonds were outstanding. The Company also
has an additional facility for the issuance of up to $10.0 million of surety
bonds. In connection with such facility, the Company, through its bank, has
provided a $500,000 standby letter of credit in favor of the issuer of such
bonds. This standby letter of credit is also fully collateralized by a
certificate of deposit. At December 31, 1995, the entire $10.0 million was
available.
9. EMPLOYEE RETIREMENT BENEFITS:
The Company maintains a retirement savings plan, qualified under Section 401(k)
of the Internal Revenue Code, for its salaried employees. The Company makes
mandatory contributions of 3% of base compensation for eligible employees to
this plan. Total 1995, 1994 and 1993 mandatory employer contributions to the
retirement savings plan were approximately $466,000, $421,000 and $390,000,
respectively. Additionally, the Company made a supplemental discretionary
contribution of 2% of base compensation for eligible employees based on the
Company's 1994 performance. This contribution was approximately $245,000. The
Company also accrued approximately $300,000 for a similar contribution in
respect of its 1995 performance.
Two of the Company's U.S. subsidiaries have noncontributory defined benefit
pension plans covering certain of their collective bargaining employees.
Pension benefits are determined by a fixed benefit formula and number of years
of service. Company contributions are computed using the projected unit credit
method of funding. During 1995 and 1994, the Company contributed amounts in
excess of the minimum required contributions under the Employee Retirement
Income Security Act (ERISA). During 1993, the Company contributed the minimum
amount required under ERISA. During 1995, 1994 and 1993, total contributions
by the Company to these plans were $430,000, $300,000 and $166,000,
respectively. Additionally, in February 1996, the Company contributed $387,000
to these plans.
Page 31
<PAGE> 111
Net periodic pension cost for the Company's collective bargaining plans for
1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current service cost $100 $112 $101
Interest cost on projected
benefit obligation 223 207 187
Actual return on assets (340) (11) (260)
Net amortization and deferrals 215 (91) 168
---- ---- ----
Net periodic pension cost $198 $217 $196
==== ==== ====
</TABLE>
The following table sets forth the funded status of these plans as of October
31, 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------
1995 1994
------ ------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $3,285 $2,790
====== ======
Accumulated benefit obligation $3,388 $2,875
====== ======
Projected benefit obligation $3,388 $2,875
Plan assets at fair value 2,999 2,389
------ ------
Plan assets under projected
benefit obligation (389) (486)
Unrecognized net gain (54) (124)
Unrecognized transition amount 61 73
Unrecognized prior service cost 486 409
Adjustment required to recognize
minimum liability (493) (358)
------ ------
Accrued pension liability in the
consolidated balance sheets $ (389) $ (486)
====== ======
</TABLE>
Actuarial assumptions used in developing this data were:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.5% 8.0% 7.5%
Long-term rate of return on assets 7.5% 7.0% 7.0%
</TABLE>
In 1995, 1994 and 1993, the Company recorded an additional pension liability
which represents the excess of the accumulated benefit obligation over the plan
assets at fair value. Concurrently, the Company also recorded an intangible
asset.
Page 32
<PAGE> 112
Plan assets in 1995, 1994 and 1993 were primarily invested in common stocks,
bonds, mortgages and government securities.
The Company's United Kingdom subsidiaries have a contributory defined benefit
retirement plan covering substantially all salaried employees. Pension
benefits are based primarily on years of service and the employee's average
compensation during the three highest consecutive years in the last ten years
preceding the date of normal retirement. In addition, employees contribute
either 3.0% or 5.0% of their salary, depending upon their position in the
Company. The Company contributions are computed using the projected unit
credit method of funding, taking into account future salary increases at 5.5%
per year. During 1995, 1994 and 1993, total contributions by the Company were
approximately $32,000, $418,000 and $297,000, respectively. Additionally, in
January 1996, the Company contributed $170,000 to these plans.
Net periodic pension cost for these plans for 1995, 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current service cost $204 $218 $190
Interest cost on projected
benefit obligation 206 151 141
Actual return on assets (210) 194 (138)
Net amortization and deferrals 34 (334) 58
---- ---- ----
Net periodic pension cost $234 $229 $251
==== ==== ====
</TABLE>
The following table sets forth the funded status of these plans as of October
28, 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $2,070 $1,834
====== ======
Accumulated benefit obligation $2,258 $1,834
====== ======
Projected benefit obligation $2,399 $2,009
Plan assets at fair value 2,285 2,175
------ ------
Plan assets (under) over projected
benefit obligation (114) 166
Unrecognized net loss 578 484
Unrecognized transition amount 191 211
------ ------
Prepaid pension cost in the
consolidated balance sheets $ 655 $ 861
====== ======
</TABLE>
Actuarial assumptions used in developing this data in 1995, 1994 and 1993 were:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate 8.0% 9.0% 7.5%
Long-term rate of return on assets 8.5% 9.0% 9.0%
</TABLE>
Page 33
<PAGE> 113
Plan assets in 1995, 1994 and 1993 were invested in a pooled collective
investment fund comprised of publicly traded stocks and bonds.
Several of the Company's subsidiaries participate in multiemployer pension
plans, primarily the United Mine Workers of America (UMWA) Pension Plan, as the
result of collective bargaining agreements. The Company contributed and
expensed approximately $80,000, $104,000 and $87,000 in 1995, 1994 and 1993,
respectively, for such plans. In addition to the pension contributions, the
Company's subsidiaries also contributed to a UMWA fund for retiree health care
benefits. The amounts contributed in 1995, 1994 and 1993 were approximately
$170,000, $151,000 and $163,000, respectively.
10. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company provides certain retiree health care benefits covering
substantially all domestic salaried employees. Employees are generally
eligible for benefits upon retirement with the Company and completion of ten
years of service. The Company does not currently pre-fund these benefits and
retains the right to modify or terminate certain of these benefits in the
future.
In the first quarter of 1993, the Company, as required, adopted the provisions
of the Financial Accounting Standards Board's Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which changes the
method of accounting for these benefits effective January 1, 1993. Prior to
January 1, 1993, the Company recognized postretirement benefit expense as
claims were paid. As a result, the Company recorded a pretax charge during the
first quarter of 1993 of approximately $1.6 million ($932,000 after taxes or
$.50 per share) as the cumulative effect of an accounting change at that date.
Additionally, the Company recorded postretirement benefit expense for 1995,
1994 and 1993 of approximately $204,000, $202,000 and $202,000, respectively.
The components of expense in 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current service cost of benefits
earned during the period $ 76 $ 74 $ 74
Interest cost on accumulated
postretirement benefit obligation 128 128 128
---- ---- ----
Net periodic postretirement benefit cost $204 $202 $202
==== ==== ====
</TABLE>
The accumulated postretirement benefit obligation at December 31, 1995 and
1994, which is reflected in the accompanying balance sheets, is comprised of
the following:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1995 1994
------ ------
<S> <C> <C>
Retirees $ 565 $ 580
Fully eligible active plan participants 457 419
Other active plan participants 849 660
------ ------
Accumulated postretirement benefit obligation 1,871 1,659
Unrecognized prior service cost (18) (19)
Unrecognized net (loss)/gain (1) 185
------ ------
Accrued postretirement benefit cost $1,852 $1,825
====== ======
</TABLE>
Page 34
<PAGE> 114
Future benefit costs were estimated assuming medical costs would increase by
9.78% per year, decreasing by .61% over each of the next seven years and
remaining at 5.5% per year thereafter. A 1% increase in this annual trend rate
would have increased the accumulated postretirement benefit obligation at
December 31, 1995 by approximately $95,000 and increased the 1995
postretirement benefit expense by approximately $14,000. The weighted average
discount rate used to estimate the accumulated postretirement benefit
obligation at December 31, 1995 and the 1996 net periodic postretirement
benefit cost was 7.5%.
The Company continues to evaluate ways in which it can better manage these
benefits and control costs. Any changes in the plan or revisions to
assumptions that affect the amount of expected future benefits may have a
significant effect on the amount of the reported obligation and annual expense.
11. NONRECURRING CHARGES:
For the year ended December 31, 1995, the Company recorded $1.9 million of
nonrecurring charges consisting of approximately $173,000 for legal fees
associated with an SEC investigation and $1.7 million for legal, accounting,
consulting and directors' fees ($652,000, $89,000, $643,000 and $339,000,
respectively) incurred in efforts to maximize shareholder value, including the
possible sale of the Company. On March 22, 1996, the Company announced that,
since no firm offers have been received for the purchase of the Company, the
active solicitation of bids for the Company has ceased and the engagement of
its financial advisor was terminated. The Company also ceased the activities
of its Special Negotiating Committee and counsel to such Committee in order to
greatly limit future expenditures for the sale process. Nonrecurring charges
in 1994 and 1993, resulting from a shareholder derivative suit, were $675,000
and $1.0 million, respectively.
12. TRANSACTIONS WITH AFFILIATES:
Effective July 1, 1995, the Company renewed its coverage for domestic workers'
compensation, general liability and automobile insurance. This new 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 new program resulted in a
discontinuance of Essex Insurance Co. Ltd. ("Essex"), the Company's 65%-owned
Bermuda insurance corporation, as a reinsurer. Essex will continue to provide
reinsurance coverage for claims incurred prior to July 1, 1995. A major
shareholder of the Company indirectly owns the remaining 35% of Essex. In
1995, 1994 and 1993, amounts ceded to Essex as reinsurance premiums were
approximately $295,000, $890,000 and $965,000, respectively. At December 31,
1995 and 1994, cash and cash equivalents of $4.6 million and $4.1 million,
respectively, have been restricted under facultative reinsurance agreements for
the payment of insurance claims. In July 1994, Essex received claims for
property damage to residences wherein Victor Posner (a 49% shareholder of the
Company and the Chairman of the Board of Essex) is the claimant. Such claims
are based on homeowners policies issued by Essex. However, in the opinion of
Essex's legal counsel and other outside legal counsel, such policies are
considered invalid. Reserves at Essex have been established for reimbursement
of insurance premiums paid by Victor Posner, including interest thereon.
Page 35
<PAGE> 115
During 1993, DWG Corporation ("DWG"), which was previously deemed to be an
affiliate of the Company, was sold to a nonaffiliated party. Amounts accrued
for insurance and purchasing services but unpaid in prior years totaling
approximately $113,000 were reversed and offset against expenses in 1993.
There were no transactions with DWG during 1995 and 1994.
Prior to 1994, the Company leased vehicles through NPC Leasing Corp. ("NPC"),
which was an indirect wholly-owned subsidiary of DWG. Prior to its sale in
1993, DWG was deemed to be an affiliate of the Company. Payments to NPC for
leased vehicles were approximately $30,000 in 1993. There were no transactions
with, or payments to, NPC during 1995 and 1994 since all lease obligations were
fulfilled during prior years.
In November 1988, the Company acquired, by assignment from Mellon Bank N.A.,
Industrial Revenue Bonds in an original aggregate principal amount of $2.4
million ($1.5 million at December 31, 1995) which are the obligation of ATEC
South, Inc., a wholly-owned subsidiary of APL Corporation, which may be deemed
to be an affiliate of the Company. Such bonds are guaranteed by APL
Corporation. On June 25, 1993, creditors of APL Corporation filed an
involuntary petition for relief under Chapter 7 of the Federal Bankruptcy Code.
The proceeding was converted to a voluntary proceeding under Chapter 11 of the
Federal Bankruptcy Code on July 27, 1993. On September 2, 1994, ATEC South,
Inc. filed for protection under Chapter 11 of the Federal Bankruptcy Code.
Subsequently, in 1994, Security Management Corp. acquired APL Corporation.
Equal payments of principal and interest on the unpaid balance were to be made
monthly until March 1, 1993, with a balloon payment of $1.1 million due on that
date. Interest is calculated at 72% of the Mellon Bank N.A. prime rate
(adjusted by formula for any change in the corporate federal income tax rate
from 1982 to the current year). These bonds are secured by promissory notes
which, in turn, are secured by first lien rights on the real property,
furniture, fixtures and machinery and equipment of ATEC South, Inc. No
payments have been received since May 1992 and the balloon payment is past due.
Valuation reserves were previously established for such investment. Interest,
including late charges, is due and owing on such bonds and is fully reserved.
On September 28, 1994, an order was signed by the Clerk of Superior Court
of Person County, North Carolina authorizing foreclosure by the Company under
the Deed of Trust securing the bonds on real estate owned by ATEC South, Inc.
On November 29, 1994, an order was entered by the bankruptcy judge granting a
motion to compromise the controversy between APL Corporation and the Company.
Pursuant to that order, the bankruptcy trustee and the committee of unsecured
creditors agreed to dismiss the Company from litigation pending in the
bankruptcy proceedings. APL Corporation and ATEC South, Inc. have agreed to
abandon their interest in the North Carolina property, thereby permitting the
Company to foreclose upon it and, in return, the Company has agreed to withdraw
its claims against APL Corporation and ATEC South, Inc. The Company will
determine whether to foreclose upon the property following an assessment of
potential environmental liability.
13. ACQUISITIONS:
On February 3, 1995, Salem Automation Limited acquired Enviroplant
International Group, Ltd. ("EIG") for $738,000. EIG is an international
specialist in the design and manufacture of customized heating, ventilation,
air conditioning and refrigeration systems primarily for the offshore
petrochemical industry. This acquisition was accounted for under the purchase
method (APB 16), and, accordingly, the consolidated financial statements
include the operations of EIG from the date of acquisition. The prior
operations of EIG were not material; therefore, pro forma financial statements
are not presented.
Page 36
<PAGE> 116
14. BUSINESS SEGMENTS:
The Company considers its business to consist primarily of designing,
engineering and installing heavy industrial equipment within four segments
based upon the markets and industries to which the Company's services and
products are sold. These four business segments are (a) metal processing
equipment, (b) industrial furnaces, (c) minerals processing equipment and (d)
automation controls and systems.
Summary business segment data for 1995, 1994 and 1993 by industry and
geographic segments are as follows:
INDUSTRY SEGMENT
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------------------------------------------------------------------------------
Metal Minerals Automation
Processing Industrial Processing Controls
Equipment Furnaces Equipment and Systems Corporate Consolidated
--------- ---------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1995
- ----
Gross revenues $63,920 $37,914 $40,424 $ 9,056 $ - $151,314
Operating
income/(loss) 7,325 1,728 3,000 (3,367) (5,158) 3,528
Identifiable
assets 40,583 14,083 17,245 7,010 7,569 86,490
Capital
expenditures 988 492 405 401 19 2,305
Depreciation and
amortization 827 218 320 310 50 1,725
1994
- ----
Gross revenues $52,202 $23,729 $43,288 $8,827 $ 143 $128,189
Operating
income/(loss) 4,845 148 3,565 988 (4,590) 4,956
Identifiable
assets 35,733 8,035 19,983 6,805 11,998 82,554
Capital
expenditures 840 135 336 45 85 1,441
Depreciation and
amortization 704 266 340 163 50 1,523
1993
- ----
Gross revenues $34,725 $24,197 $36,810 $10,462 $ 176 $106,370
Operating
income/(loss) 1,976 (246) 1,811 1,775 (4,338) 978
Identifiable
assets 27,409 8,673 15,927 7,012 14,461 73,482
Capital
expenditures 1,460 145 409 163 18 2,195
Depreciation and
amortization 571 233 351 166 48 1,369
</TABLE>
Page 37
<PAGE> 117
GEOGRAPHIC SEGMENTS
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------------------------------------------
United
States Europe International Consolidated
------ ------ ------------- ------------
<S> <C> <C> <C> <C>
1995
- ----
Gross revenues $104,975 $19,428 $26,911 $151,314
Operating income (loss) 6,713 (2,421) (764) 3,528
Identifiable assets 63,358 17,373 5,759 86,490
1994
- ----
Gross revenues $ 82,590 $16,487 $29,112 $128,189
Operating income 3,985 271 700 4,956
Identifiable assets 66,850 10,177 5,527 82,554
1993
- ----
Gross revenues $ 68,848 $ 9,829 $27,693 $106,370
Operating income (loss) 430 933 (385) 978
Identifiable assets 58,684 9,469 5,329 73,482
</TABLE>
Export sales were approximately $26.8 million, $28.7 million and $27.2 million
in 1995, 1994 and 1993, respectively.
In 1995, no single customer accounted for 10% or more of consolidated contract
revenues. In 1994, revenues from Consolidated Coal Co. comprised
approximately $20.4 million (15.9%) of consolidated contract revenues. In
1993, revenues from Drummond Coal Company comprised approximately $18.8 million
(17.7%) of consolidated contract revenues. Customers placing contracts can
vary from year to year and thus a major customer in one year would not
necessarily be a major customer in the following year.
15. MANAGEMENT INCENTIVE PLAN:
The Company maintains a Management Incentive Plan ("Plan") for the executive
officers of the Company. This Plan was approved by the shareholders at the
Annual Meeting held in 1989, and became effective for the Company's fiscal year
ended December 31, 1988. Awards aggregating $403,705, $100,000 and $1,320,000
were paid in 1995, 1994 and 1993, respectively, based on earnings in prior
years.
Amounts expensed for this Plan in 1995, 1994 and 1993 were $756,000, $403,000
and $298,000, respectively.
Page 38
<PAGE> 118
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND SIGNIFICANT
GROUP CONCENTRATION OF CREDIT RISK:
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
-------------------------------------------------------
1995 1994
---------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents $18,048 $18,048 $20,524 $20,524
Restricted short-term investments 4,687 4,687 4,315 4,315
Indebtedness of related parties 97 97 97 97
Other restricted investments 18 18 600 600
Long-term debt obligations 2,298 1,923 2,939 2,355
Capital leases 458 398 292 258
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The fair value and carrying value of cash and cash equivalents and restricted
short-term investments are deemed to be approximately equivalent because of the
short maturity of these investments.
INDEBTEDNESS OF RELATED PARTIES
The fair market value of the indebtedness of related parties is based upon the
Company's estimate of the net realizable value of the investment.
OTHER RESTRICTED INVESTMENTS
The fair value and carrying value of other restricted investments are deemed to
be approximately equivalent as these investments are readily convertible to
cash at their carrying value.
LONG-TERM DEBT OBLIGATIONS AND CAPITAL LEASES
The fair value of the Company's debt obligations was computed by discounting
expected cash flow at the rates currently offered to the Company for debt of
similar remaining maturities, as advised by an independent banker.
The majority of the Company's receivables are from customers in steel-related
industries.
Page 39
<PAGE> 119
17. UNAUDITED QUARTERLY FINANCIAL DATA:
The following table summarizes the reported results of operations for each
quarterly period in 1995 and 1994.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1995
- ----
Gross revenues $32,067 $37,128 $40,913 $41,206
======= ======= ======= =======
Gross income $ 5,391 $ 6,814 $ 5,988 $ 6,862
======= ======= ======= =======
Net income $ 328 $ 565 $ 625 $ 1,399
======= ======= ======= =======
Earnings per common share $ .18 $ .30 $ .33 $ .75
======= ======= ======= =======
1994
- ----
Gross revenues $25,405 $29,546 $34,785 $38,453
======= ======= ======= =======
Gross income $ 4,896 $ 5,332 $ 5,777 $ 6,996
======= ======= ======= =======
Net income $ 84 $ 814 $ 1,008 $ 1,742
======= ======= ======= =======
Earnings per common share $ .04 $ .44 $ .54 $ .94
======= ======= ======= =======
</TABLE>
Page 40
<PAGE> 120
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
Items 10, 11, 12 and 13 will be furnished by amendment hereto on or
prior to April 30, 1996, or the Company will otherwise have filed a definitive
proxy statement involving the election of directors pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) Financial Statements:
See Index to Financial Statements (Item 8), page 16 of this report.
(2) Financial Statement Schedules:
II-Valuation and Qualifying Accounts and Reserves -
Three years ended December 31, 1995, page 44 of this report.
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
(3) Exhibits:
Listed in Index to Exhibits, page 45 of this report.
(B) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended December 31, 1995.
Page 41
<PAGE> 121
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DATED: MARCH 21, 1996 SALEM CORPORATION
By: /s/ A. A. FORNATARO
_________________________________
A. A. Fornataro, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on the 21st day of March 1996 by the following
persons on behalf of the Registrant in the capacities indicated:
Signature Title
--------- -----
Principal Executive Officer:
/s/ A. A. FORNATARO
_____________________________________ President, Chief Operating
A. A. Fornataro Officer and Director
Principal Financial Officer:
/s/ GEORGE A. DOUGLAS Treasurer and Corporate Controller
_____________________________________
George A. Douglas
/s/ BRENDA N. CASTELLANO Director
_____________________________________
Brenda N. Castellano
/s/ MELVIN R. COLVIN Director
_____________________________________
Melvin R. Colvin
/s/ MILTON DEANER Director
_____________________________________
Milton Deaner
Page 42
<PAGE> 122
/s/ DONALD L. HOYLMAN Director
_______________________________________
Donald L. Hoylman
/s/ MARCO B. LOFFREDO, JR. Director
_______________________________________
Marco B. Loffredo, Jr.
/s/ ROBERT D. McBRIDE Director
_______________________________________
Robert D. McBride
/s/ BERNARD D. POSNER Director
_______________________________________
Bernard I. Posner
/s/ MARTIN J. POSNER Director
_______________________________________
Martin J. Posner
/s/ VINCENT J. SCHAFMEISTER, JR. Director
_______________________________________
Vincent J. Schafmeister, Jr.
Director
_______________________________________
Phillip H. Smith
/s/ ALEXANDER STUART Director
_______________________________________
Alexander Stuart
/s/ LEO L. WALLBERG, JR. Director
_______________________________________
Leo L. Wallberg, Jr.
Page 43
<PAGE> 123
SALEM CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
Beginning Charged to from at End
Description of Year Earnings Reserves of Year
- --------------------------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Reserves deducted from
assets to which they apply -
Allowance for doubtful
accounts receivable -
1995 $235 $113 $91 $257
==== ==== === ====
1994 $235 $ 30 $30 $235
==== ==== === ====
1993 $312 $ 18 $95 $235
==== ==== === ====
</TABLE>
Page 44
<PAGE> 124
INDEX TO EXHIBITS
The following exhibits to this report are filed herewith or, if marked
with an asterisk (*), have been filed previously with the Commission as
indicated and are incorporated herein by reference.
The Registrant will furnish to requesting shareholders a copy of any
exhibit(s) listed below upon payment of $10.00 plus $.03 per page to cover the
Registrant's expenses in furnishing such exhibit(s). Requests should be
addressed to the Assistant Secretary, Salem Corporation, P.O. Box 2222,
Pittsburgh, Pennsylvania 15230.
<TABLE>
<CAPTION>
Prior Filing
or Page No. in
Exhibit No. Description This Report
- ----------- ----------- -----------------------
<S> <C> <C>
3.1 Articles of Incorporation Exhibit 3.1 to the 1994 10-K
(composite)
3.2 By-Laws Exhibit 3.2 to the 1994 10-K
10.5.1 Salem Corporation Management Appendix A to Proxy
Incentive Plan effective for Statement filed
fiscal years beginning September 25, 1989
January 1, 1988 (*)
21.1 Subsidiaries of the Registrant Filed herewith (Exhibit 21.1)
(Page 46)
27 Financial Data Schedule Filed herewith
</TABLE>
Page 45
<PAGE> 125
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
The following is a list of certain subsidiaries of the Registrant
included in the consolidated financial statements, all of which are 100% owned
at December 31, 1995, except for Essex Insurance Company, Ltd. which is 65%
owned.
<TABLE>
<CAPTION>
State or Country in
Which Incorporated
Name of Corporation or Organized
- ------------------------------------- -------------------
<S> <C>
Salem Furnace Co. Pennsylvania
Herr-Voss Corporation Pennsylvania
Industrial Contracting of Fairmont, Inc. West Virginia
Industrial Resources, Inc. Delaware
West Virginia Electric Corporation West Virginia
Salem Engineering Company Limited Great Britain
Salem Automation Limited Great Britain
Herr-Voss Limited Great Britain
Enviroplant International Group, Ltd. Great Britain
Salem Industries Canada Limited Canada
A. L. Lee Corporation Pennsylvania
Salem Electric Company Delaware
McHal Corporation West Virginia
Mountaineer Resources, Inc. Pennsylvania
West Virginia Electric Industries, Inc. West Virginia
Salem International Services, Inc. Pennsylvania
Salem Erectors, Inc. Pennsylvania
Salem Asset Management Corp. Delaware
Essex Insurance Company, Ltd. Bermuda
Salem Mexicana S.A. de C.V. Mexico
Salem Foreign Sales Corp. U.S. Virgin Islands
</TABLE>
Three subsidiaries, which are inactive, are omitted since they do not, in the
aggregate, constitute a significant subsidiary.
Page 46
<PAGE> 126
[ARTICLE] 5
[CIK] 0000086358
[NAME] SALEM CORPORATION
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[CASH] 22,735
[SECURITIES] 0
[RECEIVABLES] 25,071
[ALLOWANCES] 257
[INVENTORY] 15,394
[CURRENT-ASSETS] 68,340
[PP&E] 25,538
[DEPRECIATION] 16,051
[TOTAL-ASSETS] 86,490
[CURRENT-LIABILITIES] 42,003
[BONDS] 0
[COMMON] 1,345
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 37,611
[TOTAL-LIABILITY-AND-EQUITY] 86,490
[SALES] 151,314
[TOTAL-REVENUES] 151,314
[CGS] 126,259
[TOTAL-COSTS] 126,259
[OTHER-EXPENSES] 21,527
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 404
[INCOME-PRETAX] 5,321
[INCOME-TAX] 2,278
[INCOME-CONTINUING] 3,043
[DISCONTINUED] 0
[EXTRAORDINARY] (126)
[CHANGES] 0
[NET-INCOME] 2,917
[EPS-PRIMARY] 1.56
[EPS-DILUTED] 1.56
</TABLE>
<PAGE> 127
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
--------------------------------------------------
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
<PAGE> 128
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, 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
</TABLE>
Page 2 of 13
<PAGE> 129
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,
---------------------------
1996 1995
------- -------
(In Thousands Except
Per Share Amounts)
<S> <C> <C>
Gross revenues $29,496 $31,856
Cost of revenues 23,752 26,332
------- -------
Gross income 5,744 5,524
Unusual charges 44 808
Selling, general & administrative expenses 4,613 4,367
------- -------
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
------- -------
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)
------- -------
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
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 13
<PAGE> 130
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(Unaudited)
<S> <C> <C>
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
------- -------
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
------- -------
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)
------- -------
Total shareholders' equity 39,600 38,956
------- -------
Total liabilities and shareholders'
equity $79,016 $85,821
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 13
<PAGE> 131
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,
--------------------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
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)
------- -------
Net cash flows from operating activities $ 621 $ 2,438
------- -------
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)
------- -------
Net cash flows used for
investing activities $(1,252) $(1,157)
------- -------
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)
------- -------
Net cash flows used for
financing activities $ (79) $ (471)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ (75) $ 84
------- -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $ (785) $ 894
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,048 20,524
------- -------
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
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 13
<PAGE> 132
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
Page 6 of 13
<PAGE> 133
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).
Page 7 of 13
<PAGE> 134
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
<PAGE> 135
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
Page 9 of 13
<PAGE> 136
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.
Page 10 of 13
<PAGE> 137
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.
Page 11 of 13
<PAGE> 138
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.
Page 12 of 13
<PAGE> 139
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
-------------------------------
(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 13 of 13
<PAGE> 140
EXHIBIT 10.1
SALEM CORPORATION
EXHIBIT
NONQUALIFIED DEFERRED COMPENSATION PLAN
Nonqualified Retirement Plan 7.5A
Effective January 1, 1996
<PAGE> 141
TABLE OF CONTENTS
INTRODUCTION
ARTICLE I DEFINITIONS
ARTICLE II PARTICIPATION
ARTICLE III CONTRIBUTIONS
Section 3.01 -- Employer Contributions
Section 3.02 -- Allocation
Section 3.03 -- Transfer and Disposition of Certain Contributions
ARTICLE IV INVESTMENT OF CONTRIBUTIONS
ARTICLE V BENEFITS
Section 5.01 -- Retirement Benefits
Section 5.02 -- Death Benefits
Section 5.03 -- Disability Benefits
Section 5.04 -- Termination Benefits
ARTICLE VI DISTRIBUTION OF BENEFITS
Section 6.01 -- Automatic Forms of Distribution
Section 6.02 -- Optional Forms of Distribution
Section 6.03 -- Election Procedures
ARTICLE VII GENERAL PROVISIONS
Section 7.01 -- Amendments
Section 7.02 -- Provisions Relating to the Insurer
and Other Parties
Section 7.03 -- Employment Status
Section 7.04 -- Rights to Plan Assets
Section 7.05 -- Nonalienation of Benefits
Section 7.06 -- Construction
Section 7.07 -- Legal Actions
Section 7.08 -- Word Usage
PLAN EXECUTION
TABLE OF CONTENTS 3 (Salem)
<PAGE> 142
INTRODUCTION
The Employer is establishing a nonqualified, defined contribution
employees' retirement plan which has been designed as, and is intended to be,
an unfunded plan for purposes of the Employee Retirement Income Security Act
of 1974, as amended, and a nonqualified plan under the Internal Revenue Code of
1986, including any later amendments to the Code. The Employer agrees to
operate the plan according to the terms, provisions and conditions set forth in
this document
Any funds accumulated for purposes of providing benefits under this plan
are fully available to satisfy the claims of the Employer's creditors.
Participants have no greater rights with regard to such fund than any other
general creditor of the Employer.
INTRODUCTION 4 (Salem)
<PAGE> 143
ARTICLE I
DEFINITIONS
ACCOUNT means, for a Participant, his share of the Investment Fund. Separate
accounting records are kept for those parts of his Account that result from:
(a) Salary Deferral Contributions.
(b) Employer Basic Contributions.
(c) Employer Discretionary Contributions.
A Participant's Account shall be reduced by any distribution of his Account. A
Participant's Account will participate in the earnings credited, expenses
charged and any appreciation or depreciation of the Investment Fund. His
Account is subject to any minimum guarantees applicable under the Group
Contract or other investment arrangement.
BENEFICIARY means the person or persons named by a Participant to receive any
benefits under this Plan upon the Participant's death.
BENEFIT DATE means, for a Participant, the first day of the first period for
which an amount of benefit is payable to him under this Plan. See Article V -
BENEFITS.
CODE means the Internal Revenue Code of 1986, as amended.
COMPENSATION means base pay made available to an Employee by the Employer
during any specified period .
However, the following shall be excluded:
bonuses
commissions
overtime pay
any pay other than base pay
CONTRIBUTIONS moans
Salary Deferral Contributions
Employer Basic Contributions
Employer Discretionary Contributions
as set out in Article III, unless the context clearly indicates otherwise.
ELIGIBLE EMPLOYEE means any Employee of the Employer who is invited to
participate in the Plan and who represents a select group of highly-compensated
or management employees, as determined by the Employer.
ARTICLE I 5 (Salem)
<PAGE> 144
EMPLOYEE means an individual who is employed by the Employer.
EMPLOYER means SALEM CORPORATION and any of the adopting employers as specified
in the qualified plan who participate with the Salem Corporation in a single
plan.
ENTRY DATE means the date an Employee first enters the Plan as an Active
Participant. See Article II - PARTICIPATION.
ERISA means the Employee Retirement Income Security Act of 1974, as amended.
FISCAL YEAR means the Employer's taxable year. The last day of the Fiscal Year
is December 31.
GROUP CONTRACT means the group annuity contract or contracts into which the
Trustee enters with the Insurer for the investment of Contributions and the
payment of benefits under this Plan. The term Group Contract as it is used in
this Plan is deemed to include the plural unless the context clearly indicates
otherwise.
Any funds accumulated under the Group Contract are available to the general
creditors of the Employer.
INSURER means Principal Mutual Life Insurance Company and any other insurance
company or companies named by the Trustee or Employer.
INVESTMENT FUND means the total assets held for the purpose of providing
benefits for Participants. These funds result from Contributions made under
the Plan.
The Investment Fund is not held for the exclusive benefit of Participants or
their Beneficiaries.
MONTHLY DATE means each Yearly Date and the same day of each following month
during the Plan Year beginning on such Yearly Date.
NET SALARY DEFERRAL CONTRIBUTIONS means, for a Participant, the Salary Deferral
Contributions remaining under this Plan after a transfer of contributions has
occurred under the TRANSFER AND DISPOSITION OF CERTAIN CONTRIBUTIONS SECTION of
Article III.
NORMAL FORM means a single life annuity with installment refund.
PARTICIPANT means an Eligible Employee who is actively participating in the
Plan.
PLAN means the nonqualified retirement plan of the Employer set forth in this
document, including any later amendments to it.
PLAN ADMINISTRATOR means the Employer.
PLAN YEAR means a period beginning on a Yearly Date and ending on the day
before the next Yearly Date.
QUALIFIED PLAN means Salem Corporation Retirement Savings Plan.
ARTICLE I 6 (Salem)
<PAGE> 145
REENTRY DATE means the date a former Participant reenters the Plan. See
Article II - PARTICIPATION.
RETIREMENT DATE means the later of:
(a) The first day of the month on or after the date he has attained age 65.
(b) The date he actually retires (for Participants who work beyond age 65).
TOTALLY AND PERMANENTLY DISABLED means that a Participant is disabled to the
extent he is unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or be of long-continued and indefinite duration, pursuant to
Code Section 72(m)(7).
TRUST means an agreement of trust between the Employer and Trustee established
for the purpose of holding and distributing the Trust Fund under the provisions
of the Plan. The Trust may provide for the investment of all or any portion of
the Trust Fund in the Group Contract.
TRUST FUND means the total funds held under the Trust for the purpose of
providing benefits for Participants. These funds result from Contributions made
under the Plan which are forwarded to the Trustee to be deposited in the Trust
Fund.
TRUSTEE means the trustee or trustees under the Trust. The term Trustee as it
is used in this Plan is deemed to include the plural unless the context clearly
indicates otherwise.
VESTED ACCOUNT means the part of a Participant's Account in which he has a
vested interest. The Participant's Vested Account is equal to zero before his
Benefit Date and is equal to his Account on and after such date.
YEARLY DATE means January 1, 1996, and the same day of each following year.
ARTICLE I 7 (Salem)
<PAGE> 146
ARTICLE II
PARTICIPATION
An Employee shall first become a Participant (begin active participation
in the Plan) on the earliest Monthly Date on or after January 1, 1996, on which
he is an Eligible Employee. This date is his Entry Date.
A former Participant shall again become a Participant (resume active
participation in the Plan) on the date he again performs an hour of service as
an Eligible Employee. This date is his Reentry Date.
A Participant shall cease to be a Participant on the date he is no longer
an Eligible Employee and the value of his Account is zero.
ARTICLE II 8 (Salem)
<PAGE> 147
ARTICLE III
CONTRIBUTIONS
SECTION 3.01--EMPLOYER CONTRIBUTIONS.
Employer Contributions for each Plan Year will be equal to the Employer
Contributions as described below.
(a) Salary Deferral Contributions. The amount of each Salary Deferral
Contribution for a Participant shall be equal to a percentage of his
Compensation for the Plan Year, not to exceed 25%, as elected in his
deferral agreement. An Employee who is eligible to participate in the
Plan may file a deferral agreement with the Employer no later than
December 31 of the calendar year immediately preceding the Plan Year
for which the Salary Deferral Contributions are effective. A
Participant's deferral agreement shall also include his or her election
to have the maximum amount of elective deferral contributions that
could be made for such year under the actual deferral percentage test
(and actual contribution percentage test) either (i) contributed to the
Qualified Plan on his behalf or (ii) paid to him in cash. Any such
contributions shall be subject to the limitation on such contributions
under Code Section 402(g).
The deferral agreement is irrevocable while it is in effect. The
deferral agreement must be in writing and effective before the
beginning of the Plan Year in which Salary Deferral Contributions are
to start. The Participant may make any change or terminate the deferral
agreement by filing a new deferral agreement. The Participant's
deferral agreement to stop Salary Deferral Contributions or to make a
change shall only be effective for Compensation earned in future years.
(b) Employer Basic Contributions. The amount of each Employer Basic
Contribution made by the Employer for a Participant eligible for an
allocation for the Plan Year shall be equal to 3% of the Participant's
Net Salary Deferral Contributions for the Plan Year.
(c) Employer Discretionary Contributions. The Employer may choose to make
this contribution at the end of a Plan Year. The amount of the Employer
Discretionary Contribution made by the Employer for a Participant
eligible for an allocation for the Plan Year shall be equal to 2% of
the Participant's Net Salary Deferral Contributions for the Plan Year.
SECTION 3.02--ALLOCATION.
The following Contributions for each Plan Year shall be allocated among all
Participants:
Employer Basic Contributions
Employer Discretionary Contributions
The eligible persons are all Participants who the Employer determines are
eligible for an allocation for the Plan Year. The amount allocated to such a
person shall be determined below.
The following Contributions for each Plan Year shall be allocated to each
Participant for whom such Contributions were made under the EMPLOYER
CONTRIBUTIONS SECTION of Article III:
ARTICLE III 9 (Salem)
<PAGE> 148
Salary Deferral Contributions
These Contributions shall be allocated when made and credited to the
Participant's Account.
The following Contributions are allocated as of the last day of the Plan
Year to each Participant for whom they are made and credited to his Account:
Employer Basic Contributions
Employer Discretionary Contributions
SECTION 3.03--TRANSFER AND DISPOSITION OF CERTAIN CONTRIBUTIONS.
Not later than January 31 of each following Plan Year, preliminary actual
deferral percentage tests will be performed as to the Qualified Plan to
determine the amount of additional elective deferral contributions that can be
made on behalf of the Participant to the Qualified Plan. Once determined, and in
no event later than March 15 of the Plan Year following the Plan Year for which
the determination is made, the Plan Administrator shall have such amounts
(without regard to any interest earnings) transferred directly to the Qualified
Plan as an elective contribution, or paid to the Participant in cash, according
to the Participant's salary deferral agreement.
ARTICLE III 10 (Salem)
<PAGE> 149
ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
All Contributions are forwarded by the Employer to the Trustee to be
deposited in the Trust Fund.
Investment of Contributions is governed by the provisions of the Trust,
the Group Contract and any other funding arrangement in which the Trust Fund is
or may be invested. To the extent permitted by the Trust, Group Contract or
other funding arrangement, the Participant, with the consent of the Trustee,
shall direct the Contributions to any of the accounts available under the Trust
or Group Contract and may request the transfer of assets resulting from those
Contributions between such accounts. A Participant may not direct the Trustee
to invest the Participant's Account in collectibles. To the extent that a
Participant does not direct the investment of his Account, such Account shall
be invested ratably in the accounts available under the Trust or Group Contract
in the same manner as the undirected Accounts of all other Participants. The
Accounts of all inactive Participants may be segregated and invested separately
from the Accounts of all other Participants.
The Trust Fund shall be valued at current fair market value as of the last
day of the last calendar month ending in the Plan Year and, at the discretion
of the Trustee, may be valued more frequently. The valuation shall take into
consideration investment earnings credited, expenses charged, payments made and
changes in the value of the assets held in the Trust Fund. The Account of a
Participant shall be credited with its share of the gains and losses of the
Trust Fund. That part of a Participant's Account invested in a funding
arrangement which establishes an account or accounts for such Participant
thereunder shall be credited with the gain or loss from such account or
accounts. That part of a Participant's Account which is invested in other
funding arrangements shall be credited with a proportionate share of the gain
or loss of such investments. The share shall be determined by multiplying the
gain or loss of the investment by the ratio of the part of the Participant's
Account invested in such funding arrangement to the total of the Trust Fund
invested in such funding arrangement.
ARTICLE IV 11 (Salem)
<PAGE> 150
ARTICLE V
BENEFITS
SECTION 5.01--RETIREMENT BENEFITS.
On a Participant's Retirement Date, his Vested Account shall be
distributed to him according to the distribution of benefits provisions of
Article VI. This date shall be a Participant's Benefit Date.
SECTION 5.02--DEATH BENEFITS.
If a Participant dies before his Retirement Date, his Vested Account shall
be distributed according to the distribution of benefits provisions of Article
VI. This date shall be a Participant's Benefit Date.
SECTION 5.03--DISABILITY BENEFITS.
If a Participant becomes Totally and Permanently Disabled before his
Retirement Date, his Vested Account shall be distributed according to the
distribution of benefits provisions of Article VI. This date shall be a
Participant's Benefit Date.
SECTION 5.04--TERMINATION BENEFITS.
A Participant will receive a distribution of his Vested Account if he
ceases to be an Employee before his Retirement Date, provided he has not again
become an Employee. This date shall be a Participant's Benefit Date.
ARTICLE V 12 (Salem)
<PAGE> 151
ARTICLE VI
DISTRIBUTION OF BENEFITS
SECTION 6.01--AUTOMATIC FORMS OF DISTRIBUTION.
Unless an election of an optional form of benefit has been made according
to the ELECTION PROCEDURES SECTION of Article VI, the automatic form of benefit
payable to or on behalf of a Participant is determined as follows:
(a) The automatic form of benefit at retirement or disability shall be the
Normal Form.
(b) The automatic form of death benefit shall be a single sum payment to
the Participant's Beneficiary.
SECTION 6.02--OPTIONAL FORMS OF DISTRIBUTION.
An election of an optional form of benefit may be made by the Participant
(see the ELECTION PROCEDURES SECTION of Article VI).
(a) The optional forms of retirement benefit shall be the following: a
straight life annuity; single life annuities with certain periods of
five, ten or fifteen years; survivorship life annuities with
installment refund and survivorship percentages of 50, 66 2/3 or 100;
and fixed period annuities for any period of whole months which is not
less than 60 nor more than 360. The Participant may also elect to
receive his Vested Account in a single-sum payment.
Election of an optional form is subject to the election provisions of
Article VI.
(b) The optional forms of death benefit are any annuity that is an optional
form of retirement benefit.
SECTION 6.03--ELECTION PROCEDURES.
The Participant or Beneficiary shall make any election under this section
in writing. The Plan Administrator may require such individual to complete and
sign any necessary documents as to the provisions to be made.
(a) Retirement Benefits. A Participant may elect his Beneficiary. A
Participant may elect to have retirement benefits distributed under any
of the optional forms of retirement benefit described in the OPTIONAL
FORMS OF DISTRIBUTION SECTION of Article VI.
(b) Disability Benefits. A Participant may elect his Beneficiary. A
Participant who is Totally and Permanently Disabled may elect to have
disability benefits distributed under any of the optional forms of
retirement benefit described in the OPTIONAL FORMS OF DISTRIBUTION
SECTION of Article VI.
(c) Death Benefits. A Participant may elect his Beneficiary. A Participant
may elect to have death benefits distributed under any of the optional
forms of death benefit described in the OPTIONAL FORMS OF DISTRIBUTION
SECTION of Article VI.
ARTICLE VI 13 (Salem)
<PAGE> 152
If the Participant has not elected an optional form of distribution for
the death benefit payable to his Beneficiary, the Beneficiary may, for
his own benefit, elect the form of distribution, in like manner as a
Participant.
Any election of an optional form of distribution by a Participant under this
section shall be made in writing on a form provided by the Employer. Such
election must be made on or before December 31 of the year preceding the year
in which the distribution is made.
ARTICLE VI 14 (Salem)
<PAGE> 153
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.01--AMENDMENTS.
The Employer may amend this Plan at any time, including any remedial
retroactive changes (within the specified period of time as may be determined
by Internal Revenue Service regulations) to comply with the requirements of any
law or regulation issued by any governmental agency to which the Employer is
subject.
SECTION 7.02--PROVISIONS RELATING TO THE INSURER AND OTHER PARTIES.
The obligations of an Insurer shall be governed solely by the provisions
of the Group Contract. The Insurer shall not be required to perform any act not
provided in or contrary to the provisions of the Group Contract. See the
CONSTRUCTION SECTION of this article.
Any issuer or distributor of investment contracts or securities is
governed solely by the terms of its policies, written investment contract,
prospectuses, security instruments, and any other written agreements entered
into with the Trustee.
Such Insurer, issuer or distributor is not a party to the Plan, nor bound
in any way by the Plan provisions. Such parties shall not be required to look
to the terms of this Plan, nor to determine whether the Employer, the Plan
Administrator or the Trustee have the authority to act in any particular manner
or to make any contract or agreement .
Until notice of any amendment or termination of this Plan or a change in
Trustee has been received by the Insurer at its home office or an issuer or
distributor at their principal address, they are and shall be fully protected
in assuming that the Plan has not been amended or terminated and in dealing
with any party acting as Trustee according to the latest information which they
have received at their home office or principal address.
SECTION 7.03--EMPLOYMENT STATUS.
Nothing contained in this Plan gives an Employee the right to be retained
in the Employer's employ or to interfere with the Employer's right to discharge
any Employee.
SECTION 7.04--RIGHTS TO PLAN ASSETS.
No Employee shall have any right to or interest in any assets of the Plan
upon termination of his employment or otherwise except as specifically provided
under this Plan, and then only to the extent of the benefits payable to such
Employee in accordance with Plan provisions.
Any final payment or distribution to a Participant or his legal
representative or to any Beneficiaries or spouse of such Participant under the
Plan provisions shall be in full satisfaction of all claims against the Plan,
the Plan Administrator, the Trustee, the Insurer, and the Employer arising
under or by virtue of the Plan.
ARTICLE VII 15 (Salem)
<PAGE> 154
SECTION 7.05--NONALIENATION OF BENEFITS.
Benefits payable under the Plan are not subject to the claims of any
creditor of any Participant, Beneficiary or spouse. A Participant, Beneficiary
or spouse does not have any rights to alienate, anticipate, commute, pledge,
encumber or assign any of such benefits. The preceding sentences shall also
apply to the creation, assignment, or recognition of a right to any benefit
payable with respect to a Participant according to a domestic relations order.
SECTION 7.06--CONSTRUCTION.
The validity of the Plan or any of its provisions is determined under and
construed according to Federal law and, to the extent permissible. according to
the laws of the state in which the Employer has its principal office. In case
any provision of this Plan is held illegal or invalid for any reason, such
determination shall not affect the remaining provisions of this Plan, and the
Plan shall be construed and enforced as if the illegal or invalid provision had
never been included.
In the event of any conflict between the provisions of the Plan and the
terms of any contract or policy issued hereunder, the provisions of the Plan
control the operation and administration of the Plan.
SECTION 7.07--LEGAL ACTIONS.
The Plan, the Plan Administrator and the Trustee are the necessary parties
to any action or proceeding involving the assets held with respect to the Plan
or administration of the Plan or Trust. No person employed by the Employer, no
Participant, former Participant or their Beneficiaries or any other person
having or claiming to have an interest in the Plan is entitled to any notice of
process. A final judgment entered in any such action or proceeding shall be
binding and conclusive on all persons having or claiming to have an interest in
the Plan.
SECTION 7.08--WORD USAGE.
The masculine gender, where used in this Plan, shall include the feminine
gender and the singular words as used in this Plan may include the plural,
unless the context indicates otherwise.
ARTICLE VII 16 (Salem)
<PAGE> 155
By executing this Plan, Salem Corporation acknowledges having
counseled to the extent necessary with selected legal and tax advisors
regarding the Plan's legal and tax implications.
Executed this 20th day of December, 1995.
SALEM CORPORATION
By: /s/ G. A. DOUGLAS
--------------------------------
Treasurer & Corporate Controller
--------------------------------
Title
PLAN EXECUTION (Salem)
<PAGE> 156
[ARTICLE] 5
[CIK] 0000086358
[NAME] SALEM CORPORATION
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] MAR-31-1996
[CASH] 22,033
[SECURITIES] 0
[RECEIVABLES] 18,974
[ALLOWANCES] 244
[INVENTORY] 14,406
[CURRENT-ASSETS] 60,107
[PP&E] 26,474
[DEPRECIATION] 16,332
[TOTAL-ASSETS] 79,016
[CURRENT-LIABILITIES] 34,065
[BONDS] 0
[COMMON] 1,345
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 38,255
[TOTAL-LIABILITY-AND-EQUITY] 79,016
[SALES] 29,496
[TOTAL-REVENUES] 29,496
[CGS] 23,752
[TOTAL-COSTS] 23,752
[OTHER-EXPENSES] 4,657
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 76
[INCOME-PRETAX] 1,259
[INCOME-TAX] 550
[INCOME-CONTINUING] 709
[DISCONTINUED] (47)
[EXTRAORDINARY] 39
[CHANGES] 0
[NET-INCOME] 701
[EPS-PRIMARY] .38
[EPS-DILUTED] .38
</TABLE>
<PAGE> 157
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 June 30, 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)
<TABLE>
<S> <C>
COMMONWEALTH OF PENNSYLVANIA 25-0923435
---------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
</TABLE>
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 _____
1,864,871 Shares of Common Stock were outstanding at July 25, 1996.
Page 1 of 15
<PAGE> 158
SALEM CORPORATION AND SUBSIDIARIES
I N D E X
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
And Retained Earnings for the
three months and six months ended
June 30, 1996 and 1995 (Unaudited) 3
Consolidated Balance Sheets as of
June 30, 1996 (Unaudited) and
December 31, 1995 4
Consolidated Statements of Cash Flows
for the six months ended June 30,
1996 and 1995 (Unaudited) 5
Notes to Consolidated Financial
Statements for the six months
ended June 30, 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 10-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote
of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Page 2 of 15
<PAGE> 159
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross revenues $31,211 $36,276 $60,707 $68,132
Cost of revenues 25,469 29,516 49,221 55,848
------- ------- ------- -------
Gross income 5,742 6,760 11,486 12,284
Selling, general and
administrative expenses 4,875 5,476 9,488 9,843
Nonrecurring charges 259 504 303 1,312
------- ------- ------- -------
Operating income 608 780 1,695 1,129
------- ------- ------- -------
Other income (expense):
Interest income 315 268 626 614
Interest expense (75) (72) (151) (138)
Equity in earnings of affiliates 117 176 174 152
Other, net 135 51 15 215
------- ------- ------- -------
Total other income 492 423 664 843
------- ------- ------- -------
Income from continuing operations
before minority interest
and income taxes 1,100 1,203 2,359 1,972
Minority interest 19 25 58 27
Provision for income taxes (461) (580) (1,011) (882)
------- ------- ------- -------
Income from continuing operations 658 648 1,406 1,117
Gain (loss) from discontinued
operations 289 (83) 242 (224)
Extraordinary credit 20 - 20 -
------- ------- ------- -------
Net income 967 565 1,668 893
Retained earnings,
beginning of period 32,454 29,818 31,753 29,677
Cash dividends (559) (187) (559) (374)
------- ------- ------- -------
Retained earnings,
end of period $32,862 $30,196 $32,862 $30,196
======= ======= ======= =======
Net income per common share:
Income from continuing
operations $.36 $.34 $.75 $.60
Gain (loss) from
discontinued operations .15 (.04) .13 (.12)
Extraordinary credit .01 - .01 -
---- ---- ---- ----
Net income $.52 $.30 $.89 $.48
==== ==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 15
<PAGE> 160
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1996 1995
-------- ---------
(Unaudited)
<S> <C> <C>
A S S E T S
-----------
CURRENT ASSETS:
Cash and cash equivalents (including
restricted cash of $5,497 and $5,998) $18,363 $18,048
Restricted short-term investments 4,118 4,687
Receivables 23,674 23,890
Indebtedness of related parties, current 97 97
Contracts-in-progress 5,374 8,756
Inventories 6,910 6,018
Income tax benefit 3,613 3,078
Prepaid expenses 2,220 2,270
Investments in and advances to discontinued operations - 904
------- -------
Total current assets 64,369 67,748
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost 27,004 25,445
Less- Accumulated depreciation 16,653 16,036
------- -------
Net property, plant and equipment 10,351 9,409
OTHER ASSETS:
Investments in affiliated companies (at equity) 2,110 2,098
Income tax benefit 3,261 2,817
Other assets 3,656 3,749
------- -------
Total assets $83,747 $85,821
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Dividends payable $ 280 $ 280
Current maturities of long-term debt 642 680
Accounts payable (including outstanding
checks of $1,552 and $1,703) 13,994 18,288
Advance billings on contracts 11,394 8,720
Accrued income taxes 693 1,389
Accrued payroll and employee benefits 4,451 4,811
Accrued loss reserve 2,373 2,347
Other accrued liabilities 1,144 1,162
Reserves for warranty expense 3,487 3,689
Net current liabilities of discontinued operations 423 -
------- -------
Total current liabilities 38,881 41,366
LONG-TERM DEBT 1,197 1,683
OTHER NONCURRENT LIABILITIES 3,269 3,285
MINORITY INTEREST 473 531
SHAREHOLDERS' EQUITY
Preferred stock, par $25.00, authorized 112,485
shares, issued 0 shares - -
Common stock, par $.50, authorized 15,000,000
shares, issued 2,690,313 shares 1,345 1,345
Paid-in surplus 9,301 9,301
Pension adjustment (1) (1)
Retained earnings 32,862 31,753
Cumulative translation adjustment (383) (245)
Treasury stock, at cost (825,442 shares) (3,197) (3,197)
------- -------
Total shareholders' equity 39,927 38,956
------- -------
Total liabilities and shareholders'
equity $83,747 $85,821
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 15
<PAGE> 161
SALEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 1,406 $ 1,117
Extraordinary credit 20 -
------- -------
Income from continuing operations 1,426 1,117
Adjustments for noncash items-
Depreciation and amortization 813 786
Deferred income taxes (979) (86)
Other noncurrent liabilities (16) 86
Allowance for doubtful accounts (12) (25)
Equity of affiliates, net (174) (152)
Reserves for warranty expense (202) 270
Cumulative translation adjustments 114 (415)
Gain/(loss) from discontinued operations 242 (224)
Changes in certain assets and liabilities-
Receivables 219 69
Contracts-in-progress, net 6,055 (1,519)
Inventories (892) 231
Prepaid expenses 50 376
Accounts payable (4,272) (371)
Accrued income taxes (726) (996)
Accrued liabilities (352) 944
Minority interest (58) (27)
Net liabilities of discontinued operations 1,327 (1,024)
------- -------
Net cash flows provided by (used for)
from operating activities $ 2,563 $ (960)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments $ 569 $ 554
Restricted investments - 100
Purchases of property, plant, & equipment, net (1,626) (614)
Dividends received from equity affiliates 48 245
Investment in affiliated companies - (738)
------- -------
Net cash flows (used for)
investing activities $(1,009) $ (453)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (559) $ (374)
Principal payments under financing arrangements - (69)
Proceeds from debt 91 296
Payments on debt (706) (6)
------- -------
Net cash flows (used for)
financing activities $(1,174) $ (153)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ (65) $ 439
------- -------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS $ 315 $(1,127)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,048 20,524
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,363 $19,397
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 168 $ 166
Income taxes paid, net 2,709 1,594
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 15
<PAGE> 162
SALEM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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.
2. NONRECURRING CHARGES
In the second quarter of 1996, the Company recorded $259,000 of
additional nonrecurring charges primarily the result of legal and consulting
fees resulting from efforts related to the sale of the Company. For the six
months ended June 30, 1996 these nonrecurring charges amounted to $303,000 as
compared to $1.3 million for the six months ended June 30, 1995 of which
$1,150,000 related to the possible sale of the Company and $150,000 related to
an SEC investigation.
3. INCOME TAXES
The Company's effective income tax rates for the three and six months
ended June 30, 1996 were 41.9% and 42.9%, respectively. These rates exceed a
combined federal and state rate of 40% due to losses at Essex Insurance Co.,
the Company's 65% owned Bermuda insurance company which are not tax effected.
The extraordinary credit of $20,000 recorded in the current quarter represents
utilization of a net operating loss carryforward in Mexico. The Company's
effective income tax rate for the three and six months ended June 30, 1995 were
48.2% and 44.7%, 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 and resulted in the above effective income tax rates.
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
Enviroplant's
Page 6 of 15
<PAGE> 163
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 June 28, 1996, the Company announced that Salem Group, Inc., a
Delaware corporation (the "Parent"), and SC Acquisition Corporation, a
Pennsylvania corporation and wholly-owned subsidiary of the Parent (the
"Subsidiary"), entered into a definitive Agreement and Plan of Merger (the
"Merger Agreement") providing for the merger of the Subsidiary with and into
the Company, with the Company as the surviving corporation. Following the
approval and adoption of the Merger Agreement by the affirmative vote of a
majority of the votes cast by all holders of the Company's outstanding shares
of Common Stock, and satisfaction or waiver of all other conditions precedent,
the Subsidiary will merge with the Company and each share of Common Stock
(other than common stock held by shareholders who have exercised and perfected
their rights as dissenting shareholders under Pennsylvania law) will be
converted automatically into the right to receive $25.00 in cash per share.
As previously reported, the 917,633 shares owned by Victor Posner,
which constitute 49.2% of the outstanding Common Stock, have been deposited in
a voting trust pursuant to court order. The court has further ordered that
such Common Stock is to be voted by the trustee on any merger proposal in
proportion to the votes cast by all of the Company's other shareholders.
6. INCOME PER SHARE
Per share amounts have been computed using the weighted average number
of common shares outstanding during the period (1,864,871 in 1996 and 1995).
Page 7 of 15
<PAGE> 164
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements for the six month period ended
June 30, 1996 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 9.
Page 8 of 15
<PAGE> 165
ARTHUR ANDERSEN LLP
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 June 30, 1996, and the related
consolidated statement of income and retained earnings for the three-month and
six-month period ended June 30, 1996, and the consolidated statement of cash
flows for the six-month period ended June 30, 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 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, 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 balance sheet from which
it has been derived.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
July 19, 1996
Page 9 of 15
<PAGE> 166
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 six months ended June 30,
1996 was significantly greater than the prior periods primarily due to a
decrease in nonrecurring charges and a reduction in reserves for discontinued
operations.
The Company's nonrecurring charges were $259,000 and $303,000 for the
three and six months ended June 30, 1996, respectively as compared to $504,000
and $1.3 million for the comparable period in 1995, respectively. These
nonrecurring charges were comprised principally of investment banking, legal
and other consulting fees incurred in connection with the possible sale of the
Company.
SECOND QUARTER OF 1996 COMPARED TO SECOND QUARTER OF 1995
Gross revenues of $31.2 million in the current quarter decreased $5.1
million or 14.0% from the gross revenues of $36.3 million during the comparable
quarter of 1995. This decrease is primarily attributable to a decline in
operating levels of the Company's domestic furnaces and strip processing
subsidiaries resulting from a lower level of backlog entering 1996. Gross
income as a percentage of gross revenues was 18.4% for the second quarter of
1996 as compared to 18.6% for the same period of 1995.
In the second quarter of 1996, the Company recorded nonrecurring
charges of $259,000 for legal and consulting fees resulting from efforts
related to the sale the Company. This compares to $504,000 for similar costs
in the second quarter of 1995.
Selling, general and administrative expenses of $4.9 million for the
second quarter of 1996 were approximately $600,000 less than those in the
comparable quarter of 1995. This decrease reflects an adjustment of
approximately $400,000 in incentive compensation for unpaid amounts returned to
income.
The provision for income taxes was approximately $461,000 in the
second quarter of 1996 as compared to $580,000 in the second quarter of 1995.
This decrease in income taxes is primarily due the fact that tax benefits for
losses incurred by the Company's United Kingdom subsidiaries were recorded at a
rate below the combined federal and state rate.
Page 10 of 15
<PAGE> 167
A gain from discontinued operations amounting to $289,000 was recorded
in the second quarter of 1996 as compared to a loss of $83,000 for the same
period last year. This gain reflects the reversal in 1996 of amounts reserved
in 1995 for the discontinued operations.
SIX MONTHS 1996 COMPARED TO SIX MONTHS 1995
Gross revenues of $60.7 million for the first six months of 1996 were
$7.4 million or 10.9% less than the $68.1 million for the same period of 1995.
This decrease is primarily attributable to decreased operating levels in the
Company's domestic operations as a result of a lower backlog entering 1996 as
compared to 1995. Gross income as a percentage of gross revenues increased to
18.9% for the first six months of 1996 as compared to 18.0% for the same period
of a year ago. This 5% increase in profitability can be attributed to improved
performance on contracts and a favorable product mix in 1996 as compared to the
prior period.
During the first six months of 1996, the Company recorded nonrecurring
legal and consulting fees totaling $303,000 resulting from efforts to sell the
Company as compared to $1.3 million in the prior period.
Other income of $664,000 for the first six months of 1996 declined
from the $843,000 for the same period last year. This decrease is primarily
the result of a loss on foreign exchange at the Company's United Kingdom
subsidiaries.
The provision for income taxes was approximately $1.0 million for the
first six months of 1996 as compared to $882,000 last year. This is a result
of the increase in pre-tax income.
A gain from discontinued operations amounting to $242,000 was recorded
in the first six months of 1996 as compared to a loss of $224,000 for the same
period last year. This gain reflects the reversal in 1996 of amounts reserved
in 1995 for discontinued operations.
The Company's backlog at June 30, 1996 was $92.8 million compared to
$85.9 million at June 30, 1995 and $75.9 million at December 31, 1995.
Page 11 of 15
<PAGE> 168
FINANCIAL CONDITION AND LIQUIDITY
Cash and cash equivalents of approximately $18.4 million at June 30,
1996 increased slightly from the $18.0 million at December 31, 1995. This
increase was primarily the result of $2.4 million cash provided by operations,
offset in part by cash used for investing and financing activities.
The Company has two separate facilities, each for the issuance of up
to $10 million of surety bonds. These facilities are collateralized with $2.5
million of standby letters of credit of which $500,000 is collateralized with a
certificate of deposit. At June 30, 1996, approximately $11.7 million of such
surety facilities were utilized.
In April 1996, the Company entered into an agreement with a bank that
provides the Company's domestic operations with a $10.0 million line of credit,
a $5.0 million term loan and a $3.0 million lease line. At July 31, 1996, $2.3
million of the line of credit and none of the term loan or lease line were
utilized.
The Company's United Kingdom subsidiaries have two separate credit
facilities with a major bank: a facility for the issuance of bank guarantees
up to $2.3 million and an overdraft and loan facility of up to $2.0 million.
At July 31, 1996, $1.3 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.
Page 12 of 15
<PAGE> 169
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.
On or about May 3, 1996, a class action was filed in the Court of
Common Pleas of Allegheny County, Pennsylvania by Crandon 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 $20.00 per share plus 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 from the
Company's proxy statement issued in connection with the Annual Meeting of
Shareholders held May 9, 1996 concerning Mr. Posner's offer and other offers
to acquire the Company.
Both of the above-described actions were filed prior to Mr. Posner's
submission on May 16, 1996 of an offer to acquire the Company's stock for
$22.00 per share and the subsequent withdrawal by Mr. Posner of that offer on
May 23, 1996. On June 28, 1996, the Company announced its entry into a
definitive Agreement and Plan of Merger with Salem Group, Inc. and SC
Acquisition Corporation, affiliates of Three Cities Research, Inc., pursuant to
which all of the Company's outstanding stock will be acquired for $25.00 per
share if the merger contemplated therein becomes effective. Although the
Company's counsel believes both of the legal actions are now moot, neither has
been dismissed.
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 15
<PAGE> 170
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Shareholders of the Company was held on May 9,
1996. At such meeting, the shareholders of the Company elected four directors
to serve until the annual meeting of shareholders in 1999. The directors
elected and the results of voting were as follows:
<TABLE>
<CAPTION>
BROKER
DIRECTOR FOR WITHHELD NON VOTES
-------- --- -------- ---------
<S> <C> <C> <C>
A. A. Fornataro 1,661,437 133,407 91,499
Donald L. Hoylman 1,559,361 141,533 91,499
Robert D. McBride 1,665,778 133,097 91,499
Alexander Stuart 1,665,778 133,097 91,499
</TABLE>
Continuing directors with terms to expire as indicated are:
Melvin R. Colvin 1997
Milton Deaner 1997
Bernard I. Posner 1997
Martin J. Posner 1997
Brenda N. Castellano 1998
Marco B. Loffredo, Jr. 1998
Vincent J. Schafmeister, Jr. 1998
Leo L. Wallberg, Jr. 1998
Shareholders also approved an amendment to the Company's Management
Incentive Plan permitting the return to income of any amounts remaining in the
bonus pool following the award of bonuses under the Plan. The voting results
with respect to this amendment were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON VOTES
------- ------- ----------- ---------
<S> <C> <C> <C>
1,581,141 167,556 24,675 91,499
</TABLE>
The shareholders also ratified the selection of Arthur Andersen LLP as
independent auditors to examine the financial statements of the Company. The
results of such vote were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON VOTES
------- ------- ----------- ---------
<S> <C> <C> <C>
1,656,122 111,017 6,233 91,499
</TABLE>
Page 14 of 15
<PAGE> 171
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(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: August 13, 1996
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 15 of 15
<PAGE> 172
[ARTICLE] 5
[CIK] 0000086358
[NAME] SALEM CORPORATION
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] JUN-30-1996
[CASH] 22,481
[SECURITIES] 0
[RECEIVABLES] 24,016
[ALLOWANCES] 245
[INVENTORY] 12,284
[CURRENT-ASSETS] 64,369
[PP&E] 27,004
[DEPRECIATION] 16,653
[TOTAL-ASSETS] 83,747
[CURRENT-LIABILITIES] 38,881
[BONDS] 0
[COMMON] 1,345
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 38,582
[TOTAL-LIABILITY-AND-EQUITY] 83,747
[SALES] 60,707
[TOTAL-REVENUES] 60,707
[CGS] 49,221
[TOTAL-COSTS] 49,221
[OTHER-EXPENSES] 9,791
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 151
[INCOME-PRETAX] 2,359
[INCOME-TAX] 1,011
[INCOME-CONTINUING] 1,348
[DISCONTINUED] 242
[EXTRAORDINARY] 78
[CHANGES] 0
[NET-INCOME] 1,668
[EPS-PRIMARY] .89
[EPS-DILUTED] .89
</TABLE>
<PAGE> 173
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 28, 1996
SALEM CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 1-3931 25-0923435
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
P.O. Box 2222, Pittsburgh, Pennsylvania 15230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 923-2200
N/A
................................................................................
(Former name or former address, if changed since last report.)
<PAGE> 174
ITEM 5. OTHER EVENTS.
On June 28, 1996, Salem Corporation (the "Company") announced that the
Company, Salem Group, Inc., a Delaware corporation (the "Parent"), and SC
Acquisition Corporation, a Pennsylvania corporation and wholly-owned subsidiary
of the Parent (the "Subsidiary"), entered into a definitive Agreement and Plan
of Merger (the "Merger Agreement") providing for the merger of the Subsidiary
with and into the Company with the Company as the surviving corporation.
Following the approval and adoption of the Merger Agreement by the affirmative
vote of a majority of the votes cast by all holders of the Company's
outstanding shares of common stock, par value $.50 per share (the "Shares"),
and satisfaction or waiver of all other conditions precedent, the Subsidiary
will merge with the Company and each Share, other than Shares held by the
Parent or the Subsidiary, will be converted automatically into the right to
receive $25.00 in cash per Share.
For additional information concerning the foregoing, reference is made to the
Company's press release issued June 28, 1996 and the Merger Agreement, copies
of which are attached as exhibits to this Current Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 28,
1996, among Salem Corporation, Salem Group, Inc.
and SC Acquisition Corporation
20.1 Press Release issued June 28, 1996
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SALEM CORPORATION
(Registrant)
By /s/ A.A. FORNATARO
-------------------------------------
A.A. Fornataro
President and Chief Operating Officer
<PAGE> 175
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 28,
1996, among Salem Corporation, Salem Group, Inc. and
SC Acquisition Corporation
20.1 Press Release issued June 28, 1996
</TABLE>
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EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
DATED AS OF
JUNE 28, 1996
BY AND AMONG
SALEM GROUP, INC.,
SC ACQUISITION CORPORATION
AND
SALEM CORPORATION
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TABLE OF CONTENTS
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ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II THE SURVIVING AND PARENT CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.1 Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.2 By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.3 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.4 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.1 Conversion of Company Shares in the Merger . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.2 Conversion of Subsidiary Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.3 Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.4 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.5 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.6 Closing of the Company's Transfer Books . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUBSIDIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.3 Authority; Non-Contravention; Approvals . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.5 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.6 Financial Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.7 Voting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.4 Authority; Non-Contravention; Approvals . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.5 Reports and Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5.6 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.7 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.9 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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Section 5.10 No Violation of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.11 Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.13 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.14 Labor Controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.16 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.17 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.18 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.19 Affiliate Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.1 Conduct of Business by the Company Pending
the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.2 Control of the Company's Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.3 Acquisition Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 7.1 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 7.2 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.3 Shareholders' Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.4 Provision for Expenses and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.5 Agreement to Cooperate; Additional Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.6 Public Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.7 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 7.8 Directors' and Officers' Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.9 Indemnification of Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.10 Indemnification by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.11 Corrections to the Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE VIII CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 8.3 Conditions to Obligations of Parent and Subsidiary
to Effect the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 9.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 9.2 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 9.3 Procedure for and Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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Section 9.4 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 9.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 10.1 Non-Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 10.2 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 10.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 10.4 Interpretation; Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 10.5 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.6 Governing Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 10.8 Parties In Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
SCHEDULES
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Schedule 5.2 Voting Trusts, Proxies and Other Agreements Concerning Capital Stock
Schedule 5.3(b) Liens, Claims and Other Exceptions Regarding Subsidiaries' Stock
Schedule 5.4 Violation of Agreements
Schedule 5.5 SEC Reports
Schedule 5.6 Undisclosed Liabilities
Schedule 5.7 Material Adverse Changes
Schedule 5.8(a) Litigation
Schedule 5.8(b) Judgments, Injunctions and Court Orders
Schedule 5.10 Violations of Law
Schedule 5.11 Violations of Agreements
Schedule 5.12 Tax Matters
Schedule 5.13 Employee Benefit Plans
Schedule 5.14 Labor Matters
Schedule 5.15 Environmental
Schedule 5.16(a) Intellectual Property
Schedule 5.16(b) Intellectual Property - Liens and Other Interests
Schedule 5.17 Liens and Encumbrances
Schedule 5.19 Affiliate Transactions
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 28, 1996, (the "Agreement"),
by and among SALEM GROUP, INC., a Delaware corporation ("Parent"), SC
ACQUISITION CORPORATION, a Pennsylvania corporation and a wholly-owned
subsidiary of Parent ("Subsidiary"), and SALEM CORPORATION, a Pennsylvania
corporation (the "Company"). The Company and Subsidiary are sometimes
collectively referred to herein as the "Constituent Corporations."
WHEREAS, the Boards of Directors of Parent, Subsidiary and the Company have
each determined that it is in the best interests of their respective
shareholders for Parent, through Subsidiary, to acquire the Company by
effectuating the merger of Subsidiary with and into the Company (the "Merger"),
as a result of which the Company will become a wholly-owned subsidiary of
Parent; and
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2) in accordance
with the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"),
Subsidiary shall be merged with and into the Company and the separate existence
of Subsidiary shall thereupon cease. The Company shall be the surviving
corporation in the Merger and is hereinafter sometimes referred to as the
"Surviving Corporation."
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective
at such time (the "Effective Time") as shall be stated in the Articles of
Merger, in the form attached hereto and made a part hereof as Exhibit A, to be
filed with the Secretary of State of the Commonwealth of Pennsylvania in
accordance with the BCL (the "Merger Filing"). The Merger Filing shall be made
simultaneously with or as soon as practicable after the closing of the
transactions contemplated by this Agreement in accordance with Section 3.5.
The parties acknowledge that it is their mutual desire and intent to consummate
the Merger as soon as practicable after the date hereof. Accordingly, the
parties shall use all reasonable efforts to consummate, as soon as practicable,
the transactions contemplated by this Agreement in accordance with Section 3.5.
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ARTICLE II
THE SURVIVING AND PARENT CORPORATIONS
SECTION 2.1 ARTICLES OF INCORPORATION. The Articles of Incorporation of the
Surviving Corporation shall be amended and restated at and as of the Effective
Time to be identical to the Articles of Incorporation of Subsidiary as in
effect immediately prior to the Effective Time (except that the name of the
Surviving corporation will remain unchanged), and thereafter may be amended in
accordance with its terms and as provided in the BCL.
SECTION 2.2 BY-LAWS. The by-laws of the Surviving Corporation shall be as
amended at and as of the Effective Time to be identical to the by-laws of
Subsidiary as in effect immediately prior to the Effective Time, and thereafter
may be amended in accordance with their terms and as provided by the Articles
of Incorporation of the Surviving Corporation and the BCL.
SECTION 2.3 DIRECTORS. The directors of Subsidiary immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation,
each to hold office in accordance with the Articles of Incorporation and
by-laws of the Surviving Corporation.
SECTION 2.4 OFFICERS. Except as otherwise agreed, the officers of
Subsidiary in office immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, to serve in accordance with the by-laws
of the Surviving Corporation until their respective successors are duly elected
or appointed and qualified.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 CONVERSION OF COMPANY SHARES IN THE MERGER. At the Effective
Time, by virtue of the Merger and without any action on the part of any holder
of any capital stock of the Company:
(a) each share of common stock, par value $0.50 per share, of the Company
(the "Company Common Stock"; shares of Company Common Stock being hereinafter
collectively referred to as the "Shares") issued and outstanding immediately
prior to the Effective Time, subject to Sections 3.3 and 3.4, shall be
automatically cancelled and extinguished and converted automatically into the
right to receive, an amount equal to $25.00 per share (the "Per Share Amount")
in cash (the "Merger Consideration") payable, without interest, to the holder
of such Share, upon surrender, in the manner provided in Section 3.3, of the
certificate that formerly evidenced such Share; and
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(b) each share of capital stock of the Company, if any, owned by Parent or
any subsidiary of Parent or held in treasury by the Company or any subsidiary
of the Company immediately prior to the Effective Time shall be cancelled and
shall cease to exist from and after the Effective Time.
SECTION 3.2 CONVERSION OF SUBSIDIARY SHARES. At the Effective Time, by
virtue of the Merger and without any action on the part of Parent as the sole
shareholder of Subsidiary, each issued and outstanding share of common stock,
par value $0.01 per share, of Subsidiary ("Subsidiary Common Stock") shall be
converted into one share of common stock, par value $0.01 per share, of the
Surviving Corporation.
SECTION 3.3 EXCHANGE OF CERTIFICATES.
(a) From and after the Effective Time, each holder of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Shares (the "Company Certificates") shall be entitled to receive in
exchange therefor, upon surrender thereof to an exchange agent reasonably
satisfactory to Parent and the Company (the "Exchange Agent"), the Merger
Consideration to which such holder is entitled pursuant to Section 3.1(a).
Notwithstanding any other provision of this Agreement, without regard to when
such Company Certificates are surrendered for exchange as provided herein, no
interest shall be paid on any payment of the Merger Consideration.
(b) If any Merger Consideration is to be issued in a name other than that in
which the Company Certificate surrendered in exchange therefor is registered,
it shall be a condition of such exchange that the person requesting such
exchange shall pay any transfer or other taxes required by reason of the
issuance of such Merger Consideration in a name other than that of the
registered holder of the Company Certificate surrendered, or shall establish to
the satisfaction of Parent that such tax has been paid or is not applicable.
(c) Promptly at the Effective Time, Parent shall make available to the
Exchange Agent the cash for payment of all the Merger Consideration in
immediately available United States funds.
(d) Promptly after the Effective Time, the Exchange Agent shall mail to each
holder of record of a Company Certificate (i) a form letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Company Certificates shall pass, only upon actual delivery of the
Company Certificates to the Exchange Agent) and (ii) instructions for use in
effecting the surrender of the Company Certificates in exchange for the
applicable Merger Consideration. Upon surrender of Company Certificates for
cancellation to the Exchange Agent, together with a duly executed letter of
transmittal and such other documents as the Exchange Agent shall reasonably
require, the holder of such Company Certificates shall be entitled to receive
in exchange therefor the applicable Merger Consideration into which the Shares
theretofore represented by the Company Certificates so surrendered shall have
been converted pursuant to the provisions of Section 3.1(a), and the Company
Certificates so surrendered shall
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forthwith be cancelled. Notwithstanding the foregoing, neither the Exchange
Agent nor any party hereto shall be liable to a holder of Shares for Merger
Consideration delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(e) Promptly following the date which is nine months after the Effective
Date, the Exchange Agent shall deliver to Parent all cash, certificates and
other documents in its possession relating to the transactions described in
this Agreement, and the Exchange Agent's duties shall terminate. Thereafter,
each holder of a Company Certificate may surrender such Company Certificate to
the Surviving Corporation and (subject to applicable abandoned property,
escheat and similar laws) receive in exchange therefor the Merger
Consideration, without any interest thereon. Notwithstanding the foregoing,
none of the Exchange Agent, Parent, Subsidiary, the Company or the Surviving
Corporation shall be liable to a holder of Company Common Stock for any Merger
Consideration delivered to a public official pursuant to applicable abandoned
property, escheat and similar laws.
(f) In the event any Company Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Company Certificate to be lost, stolen or destroyed, the Surviving
Corporation shall issue in exchange for such lost, stolen or destroyed Company
Certificate the Merger Consideration deliverable in respect thereof determined
in accordance with this Article III. When authorizing such payment in exchange
therefor, the Board of Directors of the Surviving Corporation may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Company Certificate to give the
Surviving Corporation such indemnity as it may reasonably direct as protection
against any claim that may be made against the Surviving Corporation with
respect to the Company Certificate alleged to have been lost, stolen or
destroyed.
SECTION 3.4 DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary, any
Shares held by a holder who has demanded and perfected his right for payment of
the fair value of such Shares in accordance with the BCL and who, as of the
Effective Time, has not effectively withdrawn or lost such right to payment
("Dissenting Shares"), shall not be converted into or represent a right to
receive the Merger Consideration pursuant to Section 3.1, but the holder
thereof shall only be entitled to such rights as are granted by the BCL.
(b) Notwithstanding the provisions of subsection (a), if any holder of
Shares who demands payment of the fair value of such Shares under the BCL shall
effectively withdraw or lose (through failure to perfect or otherwise) his
right to payment, then, as of the later of Effective Time or the occurrence of
such event, such holder's Shares shall automatically be converted into and
represent only the right to receive the Merger Consideration as provided in
Section 3.1, without interest thereon, upon surrender of the certificate or
certificates representing such Shares.
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(c) The Company shall give Parent (i) prompt notice of any written notice of
dissent, written demands for payment of the fair value of any Shares,
withdrawals of such demands, and any other instruments served pursuant to the
BCL and received by the Company and (ii) the opportunity to participate in all
negotiations and proceedings with respect to demands for payment of the fair
value under the BCL. The Company shall not, except with the prior written
consent of Parent, voluntarily make any payment with respect to any demands for
payment of the fair value of any Shares or offer to settle any such demands.
SECTION 3.5 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at a location mutually
agreeable to Parent and the Company on the first business day immediately
following the date on which the last of the conditions set forth in Article
VIII is fulfilled or waived, or at such other time and place as Parent and the
Company shall agree (the date on which the Closing occurs is referred to in
this Agreement as the "Closing Date").
SECTION 3.6 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At and after the
Effective Time, holders of Shares shall cease to have any rights as
shareholders of the Company, except for the right to receive the applicable
Merger Consideration pursuant to Section 3.3. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of Shares which
were outstanding immediately prior to the Effective Time shall thereafter be
made.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUBSIDIARY
Parent and Subsidiary each represent and warrant to the Company as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. Each of Parent and Subsidiary
is a corporation duly organized, validly existing and in good standing under
the laws of the state of its incorporation and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. Each of Parent and Subsidiary is
qualified to do business and is in good standing in each jurisdiction in which
the properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified and in good standing will not, when taken together with all
other such failures, have a Material Adverse Effect (as defined in Section
10.4(b) hereof) with respect to Parent or Subsidiary. True, accurate and
complete copies of each of Parent's and Subsidiary's certificate or articles of
incorporation and by-laws, in each case as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to the
Company.
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SECTION 4.2 CAPITALIZATION.
(a) The authorized capital stock of Parent consists of (i) 2,000,000 shares
of common stock, par value $0.01 per share, of which 10 shares were outstanding
as of the date hereof and owned beneficially and of record by Three Cities Fund
II, L.P., a Delaware limited partnership, and (ii) 90,000 shares of preferred
stock, par value $100.00 per share, none of which were issued and outstanding
as of the date hereof.
(b) The authorized capital stock of Subsidiary consists of 1,000 shares of
common stock, par value $0.01 per share, all of which shares are issued and
outstanding as of the date hereof, which shares are owned beneficially and of
record by Parent.
SECTION 4.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Parent and Subsidiary each have full corporate power and authority to
enter into this Agreement and, subject to the Parent Required Statutory
Approvals (as defined in Section 4.3(c)), to consummate the transactions
contemplated hereby. This Agreement has been approved by the Boards of
Directors of Parent and Subsidiary, and no other corporate proceedings on the
part of Parent or Subsidiary are necessary to authorize the execution and
delivery of this Agreement or the consummation by Parent and Subsidiary of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of Parent and Subsidiary, and, assuming the due
authorization, execution and delivery hereof by the Company, constitutes a
valid and legally binding agreement of each of Parent and Subsidiary
enforceable against each of them in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of Parent and
subsidiary do not violate, conflict with or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Parent or any of
its subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or by-laws of Parent or any of its subsidiaries, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable to
Parent or any of its subsidiaries or any of their respective properties or
assets or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which Parent or any of its subsidiaries is now a
party or by which Parent or any of its subsidiaries or any of their respective
properties or assets may be bound or affected. The consummation by Parent and
Subsidiary of the transactions contemplated hereby will not result in any
violation, conflict, breach, termination, acceleration or creation of liens
under any of the terms, conditions or provisions described in
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clauses (i) through (iii) of the preceding sentence, subject, in the case of
the terms, conditions or provisions described in clause (ii) above, to
obtaining (prior to the Effective Time) the Parent Required Statutory
Approvals.
(c) Except for (i) the filings by Parent and the Company required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and (ii) the making of the Merger Filing with the Secretary of State of
the Commonwealth of Pennsylvania in connection with the Merger (the filings and
approvals referred to in clauses (i) and (ii) are collectively referred to as
the "Parent Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution and
delivery of this Agreement by Parent or Subsidiary or the consummation by
Parent or Subsidiary of the transactions contemplated hereby.
SECTION 4.4 LITIGATION. On the date hereof, there are no claims, suits,
actions or proceedings pending or, to the knowledge of Parent, threatened
against, relating to or affecting Parent or any of its subsidiaries, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator. On the date hereof, neither Parent nor any of
its subsidiaries is subject to any judgment, decree, injunction, rule or order
of any court, governmental department, commission, agency, instrumentality or
authority or any arbitrator.
SECTION 4.5 PROXY STATEMENT. None of the information to be supplied by or
on behalf of Parent or its subsidiaries for inclusion in the proxy statement to
be distributed in connection with the Company's meeting of its shareholders
(the "Shareholders Meeting") to vote upon this Agreement and the transactions
contemplated hereby (the "Proxy Statement") will, in the case of the Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto, and
at the time of the Shareholders Meeting contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
SECTION 4.6 FINANCIAL RESOURCES. Parent has and will have sufficient
financial resources to enable it to pay the Merger Consideration at the
Effective Time.
SECTION 4.7 VOTING REQUIREMENTS. No action by the shareholders of Parent or
by any affiliate of Parent is required to approve this Agreement and the
transactions contemplated hereby.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Subsidiary as follows:
SECTION 5.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and presently subsisting under the laws of the
Commonwealth of Pennsylvania and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. The Company is qualified to do
business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
and in good standing will not, when taken together with all other such
failures, have a Material Adverse Effect with respect to the Company. True,
accurate and complete copies of the Company's articles of incorporation and by-
laws, in each case as in effect on the date hereof, including all amendments
thereto, have heretofore been delivered to Parent.
SECTION 5.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 112,485 shares
of preferred stock, par value $25.00 per share (the "Preferred Stock") and
15,000,000 Shares. As of the date hereof, no shares of Preferred Stock are
issued and outstanding. As of the date hereof, 1,864,871 Shares are issued and
outstanding and 825,442 shares are held in treasury. All of such issued and
outstanding Shares are validly issued and are fully paid, nonassessable and
free of preemptive rights. No subsidiary of the Company holds any Shares.
(b) As of the date hereof there are no outstanding subscriptions, options,
calls, contracts, commitments, understandings, restrictions, arrangements,
rights or warrants, including any right of conversion or exchange under any
outstanding security, instrument or other agreement and also including any
rights plan or other anti-takeover agreement, obligating the Company or any
subsidiary of the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of the capital stock of the Company or
obligating the Company or any subsidiary of the Company to grant, extend or
enter into any such agreement or commitment. Except as set forth on Schedule
5.2 attached hereto, there are no voting trusts, proxies or other agreements or
understandings to which the Company or any subsidiary of the Company is a party
or is bound with respect to the voting of any shares of capital stock of the
Company.
SECTION 5.3 SUBSIDIARIES.
(a) Each direct and indirect corporate subsidiary of the Company is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the requisite power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. Each subsidiary of the Company is qualified to do
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business, and is in good standing, in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
and in good standing will not, when taken together with all such other
failures, have a Material Adverse Effect with respect to the Company.
(b) All of the outstanding shares of capital stock of each corporate
subsidiary of the Company are validly issued, fully paid, nonassessable and
free of preemptive rights and are owned directly or indirectly by the Company
free and clear of any liens, claims, encumbrances, security interests,
equities, charges and options of any nature whatsoever except as set forth in
Schedule 5.3(b) attached hereto. There are no subscriptions, options,
warrants, rights, calls, contracts, voting trusts, proxies or other
commitments, understandings, restrictions, or arrangements relating to the
issuance, sale, voting, transfer, ownership or other rights with respect to any
shares of capital stock of any corporate subsidiary of the Company, including
any right of conversion or exchange under any outstanding security, instrument
or agreement.
SECTION 5.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to enter into this
Agreement and, subject to the Company Shareholders' Approval (as defined in
Section 7.3), to consummate the transactions contemplated hereby. This
Agreement has been approved by the Board of Directors of the Company, and no
other corporate proceedings on the part of the Company are necessary to
authorize the execution and delivery of this Agreement or, except for the
Company Shareholders' Approval, the consummation by the Company of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company, and, assuming the due authorization, execution and
delivery hereof by Parent and Subsidiary, constitutes a valid and legally
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except that such enforcement may be subject to (a) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally and (b) general
equitable principles.
(b) Except as set forth in Schedule 5.4 attached hereto, the execution and
delivery of this Agreement by the Company do not violate, conflict with or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or any of its subsidiaries under any of the
terms, conditions, or provisions of (i) the respective charters or by-laws of
the Company or any of its subsidiaries, (ii) any statute, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
court or governmental authority applicable to the Company or any of its
subsidiaries or any of their respective properties or assets, or (iii) any
note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which the Company or any of its subsidiaries is now a party or by which
the Company or any of its subsidiaries or any of their respective properties or
assets may
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be bound or affected. The consummation by the Company of the transactions
contemplated hereby will not result in any violation, conflict, breach,
termination, acceleration or creation of liens under any of the terms,
conditions, or provisions described in clauses (i) through (iii) of the
preceding sentence, subject (x) in the case of the terms, conditions or
provisions described in clause (ii) above, to obtaining (prior to the Effective
Time) the Company Required Statutory Approvals and the Company Shareholder's
Approval and (y) in the case of the terms, conditions or provisions described
in clause (iii) above, to obtaining (prior to the Effective Time) the consents
required from commercial lenders, lessors or other third parties set forth on
Schedule 5.4 hereto. Excluded from the foregoing sentences of this paragraph
(b), insofar as they apply to the terms, conditions or provisions described in
clauses (ii) and (iii) of the first sentence of this paragraph (b), are such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances that would not,
in the aggregate, have a Material Adverse Effect with respect to the Company.
(c) Except for (i) the filings by Parent and the Company required by the HSR
Act, (ii) the filing of the Proxy Statement with the SEC pursuant to the
Exchange Act (iii) the making of the Merger Filing with the Secretary of State
of the Commonwealth of Pennsylvania in connection with the Merger and (iv) the
filings with or approvals from applicable state environmental authorities,
public service commissions and public utility commissions set forth on Schedule
5.4 hereto (the filings and approvals referred to in clauses (i) through (iv)
are collectively referred to as the "Company Required Statutory Approvals"), no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by the Company or
the consummation by the Company of the transactions contemplated hereby, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would
not, in the aggregate, have a Material Adverse Effect with respect to the
Company.
SECTION 5.5 REPORTS AND FINANCIAL STATEMENTS. Except as set forth on
Schedule 5.5 attached hereto, since December 31, 1992, the Company has filed
with the SEC all forms, statements, reports and documents (including all
exhibits, amendments and supplements thereto) required to be filed by it under
each of the Securities Act, the Exchange Act and the respective rules and
regulations thereunder, all of which, as amended if applicable, complied in all
material respects with all applicable requirements of the appropriate act and
the rules and regulations thereunder. The Company has previously made
available to Parent copies of its (a) Annual Reports on Form 10-K for the
fiscal year ended December 31, 1995 and for each of the two immediately
preceding fiscal years, as filed with the SEC, (b) proxy and information
statements relating to (i) all meetings of its shareholders (whether annual or
special) and (ii) actions by written consent in lieu of a shareholders' meeting
from December 31, 1992 until the date hereof, and (c) all other reports,
including quarterly reports, or registration statements filed by the Company
with the SEC since December 31, 1992 and (the documents referred to in clauses
(a), (b) and (c) are collectively referred to as the "Company SEC Reports").
At the time of filing, the Company SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein,
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in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements of the Company included in the
Company SEC Reports (collectively, the "Company Financial Statements") have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) and fairly present the financial position of the Company and its
subsidiaries as of the dates thereof and the results of their operations and
changes in financial position for the periods then ended, subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein.
SECTION 5.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in the
Company SEC Reports or in Schedule 5.6 attached hereto, neither the Company nor
any of its subsidiaries had at December 31, 1995, or has incurred since that
date, any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature, except (a) liabilities, obligations or contingencies
(i) which are fully accrued or reserved against in the Company Financial
Statements or reflected in the notes thereto or (ii) which were incurred after
December 31, 1995, and were incurred in the ordinary course of business and
consistent with past practices, (b) liabilities, obligations or contingencies
which (i) would not, in the aggregate, have a Material Adverse Effect with
respect to the Company, or (ii) have been discharged or paid in full prior to
the date hereof, and (c) liabilities and obligations which are of a nature not
required to be reflected in the consolidated financial statements of the
Company and its subsidiaries prepared in accordance with generally accepted
accounting principles consistently applied and which were incurred in the
normal course of business.
SECTION 5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Company SEC Reports or in Schedule 5.7 attached hereto, since December 31,
1995 there has not been any condition, event or occurrence that, individually
or in the aggregate, has resulted, or could reasonably be expected to result,
in a Material Adverse Effect with respect to the Company.
SECTION 5.8 LITIGATION.
(a) Except as referred to in the Company SEC Reports or in Schedule 5.8(a)
attached hereto, there are no claims, suits, actions or proceedings pending or,
to the knowledge of the Company, threatened against, relating to or affecting
the Company or any of its subsidiaries, before any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator
that seek to restrain the consummation of the Merger or which, if determined
adversely, could reasonably be expected, either alone or in the aggregate with
all such claims, actions or proceedings, to have a Material Adverse Effect with
respect to the Company.
(b) Except as referred to in the Company SEC Reports or in Schedule 5.8(b)
attached hereto, neither the Company nor any of its subsidiaries is subject to
any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority, or any
arbitrator.
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SECTION 5.9 PROXY STATEMENT. The Proxy Statement (as amended or
supplemented) will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. The Proxy Statement will comply, as of its mailing
date, in all material respects with the Exchange Act and the rules and
regulations promulgated thereunder. Notwithstanding the foregoing, no
representation is made by the Company with respect to information supplied by
or on behalf of Parent or Subsidiary for inclusion therein.
SECTION 5.10 NO VIOLATION OF LAW. Except as disclosed in the Company SEC
Reports or in Schedule 5.10 attached hereto, neither the Company nor any of its
subsidiaries is in violation of or has been given notice or been charged with
any violation of, any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any governmental or regulatory body or authority.
Except as disclosed in the Company SEC Reports, as of the date of this
Agreement, to the knowledge of the Company, no investigation or review by any
governmental or regulatory body or authority is pending or threatened, nor has
any governmental or regulatory body or authority indicated an intention to
conduct the same. The Company and its subsidiaries have all permits, licenses,
franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct their businesses as
presently conducted (collectively, the "Company Permits"), except for permits,
licenses, franchises, variances, exemptions, orders, authorizations, consents
and approvals the absence of which, alone or in the aggregate, would not have a
Material Adverse Effect with respect to the Company. The Company and its
subsidiaries are not in violation of the terms of any Company Permit, except
for delays in filing reports or violations which, alone or in the aggregate,
would not have a Material Adverse Effect with respect to the Company.
SECTION 5.11 COMPLIANCE WITH AGREEMENTS. Except as disclosed in the Company
SEC Reports or Schedule 5.11 attached hereto, the Company and each of its
subsidiaries are not in breach or violation of or in default in the performance
or observance of any term or provision of, and no event has occurred which,
with lapse of time or action by a third party, could result in a default under,
(a) the respective charters, by-laws or similar organizational instruments of
the Company or any of its subsidiaries or (b) any contract, commitment,
agreement, indenture, mortgage, loan agreement, note, lease, bond, license,
approval or other instrument to which the Company or any of its subsidiaries is
a party or by which any of them is bound or to which any of their property is
subject, which breaches, violations and defaults, in the case of clause (b) of
this Section 5.11, would have, in the aggregate, a Material Adverse Effect with
respect to the Company.
SECTION 5.12 TAXES. Except as disclosed in Schedule 5.12 attached hereto,
the Company and its subsidiaries (i) have duly and timely filed with the
appropriate governmental authorities all tax returns required to be filed by
them for all periods ending on or prior to the date hereof and as of any other
date when this representation is repeated or deemed to be made such tax returns
are true, correct and complete in all material respects and (ii) have duly and
timely paid
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in full or made adequate provision for, or will duly and timely pay or make
adequate provision for, the payment of all such taxes for all such periods
ending at or prior to the date hereof and as of any other date when this
representation is repeated or deemed to be made. The liabilities and reserves
for taxes reflected in the Company's balance sheet included in the latest
Company SEC Report are adequate to cover all reasonably anticipated taxes for
all periods ending at or prior to the date hereof and as of any other date when
this representation repeated or is deemed to be made and there are no liens for
taxes upon any property or assets of the Company or any subsidiary thereof,
except for liens for taxes not yet due. The Company and each of its
subsidiaries has made all required current estimated tax payments in amounts
deemed sufficient to avoid any underpayment penalties. The income tax returns
of the Company and its subsidiaries have been audited by the Internal Revenue
Service or other taxing authority, or the statute of limitations has expired
for all taxable years through the dates set forth on Schedule 5.12. Except as
set forth on Schedule 5.12 attached hereto, there are no unresolved issues of
law or fact arising out of a notice of deficiency, proposed deficiency or
assessment from the Internal Revenue Service or any other governmental taxing
authority with respect to taxes of the Company or any of its subsidiaries.
Except as set forth in Schedule 5.12 attached hereto, there are no outstanding
agreements, waivers or arrangements extending the statutory period of
limitation applicable to any claim for, or the period for the collection or
assessment of, taxes due from or with respect to the Company or any subsidiary
for any taxable period. No closing agreement pursuant to section 7121 of the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder (the "Code") (or any predecessor provision), or any similar
provision of any state, local or foreign law, has been entered into by or with
respect to the Company or any subsidiary. Except as set forth in Schedule 5.12
attached hereto, no audit or other proceeding is pending or threatened with
respect to any taxes due from or with respect to the Company or any subsidiary
or any tax return filed by or with respect to the Company or any subsidiary.
Neither the Company nor any of its subsidiaries is a party to any agreement
providing for the allocation or sharing of taxes with any entity that is not,
directly or indirectly, a wholly-owned corporate subsidiary of the Company.
Neither the Company nor any of its corporate subsidiaries has, with regard to
any assets or property held, acquired or to be acquired by any of them, filed a
consent to the application of section 341(f) of the Code. None of the assets
or properties of the Company or any subsidiary is an asset or property that is
or will be required to be treated as being (i) owned by any person other than
the Company or such subsidiary pursuant to the provisions of section 168(f)(8)
of the Internal Revenue Code of 1954, as amended and in effect immediately
before the enactment of the Tax Reform Act of 1986 or (ii) tax-exempt use
property within the meaning of section 168(h)(1) of the Code. The Company and
its subsidiaries have not agreed to and are not required to make any adjustment
pursuant to section 481(a) of the Code (or any predecessor provision) by reason
of any change in any accounting method, and there is no application by the
Company or any subsidiary pending with any taxing authority requesting
permission for any changes in any accounting method of the Company or any
subsidiary. The Internal Revenue Service has not proposed any adjustment or
change in accounting method with respect to the Company or any subsidiary.
SECTION 5.13 EMPLOYEE BENEFIT PLANS; ERISA. Schedule 5.13, taken together
with the Company's SEC Reports, identifies each employee benefit plan as
defined in Section 3(3) of the
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Employee Retirement Security Act of 1974, as amended, and any successor statute
thereto, and the rules and regulations promulgated thereunder ("ERISA"), that
(a) is subject to any provision of ERISA, (b) is maintained, administered, or
contributed to by the Company or any entity which, together with the Company,
is treated as a single employer under Section 414 of the Code ("ERISA
Affiliate") and (c) covers any employee or former employee of the Company or
any ERISA Affiliate ("Employee Plan"). Schedule 5.13, taken together with the
Company SEC Reports, identifies all employment, severance or similar contract,
arrangement or policy, or any plan or arrangement (whether or not written)
providing for severance benefits, insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement options,
stock appreciation rights or other forms of incentive benefits that (a) is not
an Employee Plan, (b) is entered into or maintained by the Company or any ERISA
Affiliate and (c) covers any United States employee or former employee of the
Company or any ERISA Affiliate ("Benefit Arrangement"). Copies of Employee
Plans and Benefit Arrangements have been furnished or made available to Parent
(together with the most recent annual report prepared in connection with any
Employee Plan). Each Employee Plan and Benefit Arrangement has been maintained
in substantial compliance with its terms and with the requirements prescribed
by any and all statutes, orders, rules and regulations, including but not
limited to ERISA and the Code, that are applicable to such Employee Plan or
Benefit Arrangement. Neither the Company nor any ERISA Affiliate has any
material unfunded liabilities relating to or arising out of any Employee Plan
or Benefit Arrangement.
SECTION 5.14 LABOR CONTROVERSIES. Except as set forth in the Company SEC
Reports and Schedule 5.14 attached hereto, (a) there are no controversies
pending or, to the knowledge of the Company, threatened between the Company or
its subsidiaries and any representatives of any of their employees, (b) to the
knowledge of the Company, there are no organizational efforts presently being
made involving any of the presently unorganized employees of the Company or any
of its subsidiaries, (c) the Company and its subsidiaries have, to the
knowledge of the Company, complied in all material respects with all laws
relating to the employment of labor, including, without limitation, any
provisions thereof relating to wages, hours, collective bargaining, and the
payment of social security and similar taxes, and (d) no person has, to the
knowledge of the Company, asserted that the Company or any of its subsidiaries
is liable in any amount for any arrears of wages or any taxes or penalties for
failure to comply with any of the foregoing.
SECTION 5.15 ENVIRONMENTAL MATTERS.
(a) Except as set forth in the Company SEC Reports and Schedule 5.15
attached hereto, (i) the Company and its subsidiaries have conducted their
respective businesses in compliance with all applicable Environmental Laws (as
hereinafter defined); without limitation of the foregoing, the Company and its
subsidiaries have all permits, licenses and other approvals and authorizations
necessary for the operation of their respective businesses as presently
conducted, (ii) neither the Company nor any of its subsidiaries has received
any notice, demand letter or request for information from any federal, state,
local or foreign governmental entity or third
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party indicating that the Company or any of its subsidiaries may be in
violation of, or liable under, any Environmental Law in connection with the
ownership or operation of their businesses, (iii) there are no civil, criminal
or administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or to Company's knowledge threatened, against the Company
or any of its subsidiaries relating to any violation, or alleged violation, of
any Environmental Law or any potential liability under any Environmental Law,
(iv) no reports have been filed, or are required to be filed, by the Company or
any of its subsidiaries concerning the release of any Hazardous Substance (as
hereinafter defined), or the threatened or actual violation of any
Environmental Law, (v) there has been no environmental assessment or test which
is in the possession of the Company or any of its subsidiaries relating to the
activities of the Company or its subsidiaries which has not been delivered to
Parent prior to the date hereof, and (vi) neither the Company nor its
subsidiaries are subject to any material liability or expenditure relating to
any suit, settlement, court order, administrative order, regulatory
requirement, judgment or claim asserted or arising under any Environmental Law
including, without limitation, any material liability arising from conditions
on their respective properties.
(b) As used herein, "Environmental Law" means any federal, state, local or
foreign law, statute, ordinance, rule, rule of common law, regulation, code,
license, permit, authorization, approval, consent, order, judgment, decree,
injunction or requirement or any agreement with any governmental entity
relating to (i) the protection, preservation or restoration of the environment
(including, without limitation, air, surface water, groundwater, surface land,
subsurface land) or to human health or safety or (ii) the exposure to, or the
use, storage, treatment, generation, transportation, processing, handling,
release or disposal of Hazardous Substances, in each case as amended and as in
effect on the date hereof.
(c) As used herein, "Hazardous Substance" means any substance currently
listed, defined, designated or classified as hazardous, toxic, radioactive,
caustic or otherwise hazardous including petroleum, its derivatives, byproducts
and other hydrocarbons regulated under any Environmental Law.
SECTION 5.16 INTELLECTUAL PROPERTY.
(a) Schedule 5.16(a) sets forth a true and complete list and a brief
description, including a complete identification of each patent and patent
application and each trademark or copyright registration or application for
registration thereof, of all Intellectual Property (as herein defined) owned or
licensed by the Company and its subsidiaries which is material to the business
of the Company or its subsidiaries. Except as otherwise described in Schedule
5.16(a), in each case where a registration or patent or application for
registration or patent listed in Schedule 5.16(a) is held by assignment, the
assignment has been duly recorded with the United States Patent Office,
Trademark Office or Copyright Office or state trademark office from which the
original patent or registration issued or before which the application for
trademark or copyright registration is pending. Except as disclosed in
Schedule 5.16(a), to the knowledge of the Company, the rights of the Company or
any subsidiary, as the case may be, in or to such Intellectual Property do not
conflict with or infringe on the rights of any other person, and
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neither the Company nor any subsidiary has received any claim or written notice
from any person to such effect.
(b) Except as disclosed in Schedule 5.16(b): (i) all the Intellectual
Property which is owned by the Company and its subsidiaries is free and clear
of any mortgages, liens, pledges, charges or encumbrances of any nature
whatsoever and (ii) no actions have been made or asserted or are pending (nor,
to the best knowledge of the Company, has any such action been threatened)
against the Company or any subsidiary either (A) based upon or challenging or
seeking to deny or restrict the use by the Company or any subsidiary of any of
Intellectual Property or (B) alleging that any services provided, or products
manufactured or sold by the Company or any subsidiary are being provided,
manufactured or sold in violation of any patents or trademarks, or any other
rights of any person. To the best knowledge of the Company and except as
disclosed in Schedule 5.16(b), no person is using any patents, copyrights,
trademarks, service marks or trade names owned by the Company and its
subsidiaries or that infringe upon the Intellectual Property or upon the rights
of the Company or any subsidiary therein. Except as disclosed in Schedule
5.16(b), neither the Company nor any subsidiary has granted any license or
other right to any other person with respect to the Intellectual Property owned
by the Company and its subsidiaries. The consummation of the transactions
contemplated by this Agreement will not result in the termination or impairment
of any of the Intellectual Property owned by the Company and its subsidiaries.
(c) For purposes hereof, the term "Intellectual Property" shall mean all
computer software, patents and registrations for trademarks, trade names,
service marks and copyrights which are unexpired as of the date of this
Agreement and which are used in connection with the operation of the Company's
and its subsidiaries' businesses, as well as all applications pending on said
date for patents or for trademarks, trade name, service mark or copyright
registrations.
SECTION 5.17 TITLE TO ASSETS. The Company and each of its subsidiaries has
good and marketable title in fee simple to all its real property and good title
to all its leasehold interests and other properties, as reflected in the most
recent balance sheet included in the Company Financial Statements, except for
properties and assets that have been disposed of in the ordinary course of
business since the date of such balance sheet, free and clear of all mortgages,
liens, pledges, charges or encumbrances of any nature whatsoever, except (a)
the lien of current taxes, payments of which are not yet delinquent, (b) such
imperfections in title and easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not interfere with the
present use of the property subject thereto or affected thereby, or otherwise
impair the Company's business operations (in the manner presently carried on by
the Company) or (c) as disclosed in the Company SEC Reports or Schedule 5.17
attached hereto. Copies of all leases under which the Company or any of its
subsidiaries leases any substantial amount of real or personal property have
been delivered or made available to Parent and are in good standing, valid and
effective in accordance with their respective terms, and, to the knowledge of
the Company, there is not, under any such leases, any existing default or event
which with notice or lapse of time or both would become a default other than
defaults under such leases which in the aggregate will not have a Material
Adverse Effect with respect to the Company.
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SECTION 5.18 FAIRNESS OPINION. As of the date of this Agreement, the
Company has received a preliminary verbal opinion from its financial advisor,
M.J. Whitman, Inc., as to the fairness from a financial point of view of the
Merger to the Company.
SECTION 5.19 AFFILIATE TRANSACTIONS. Schedule 5.19, taken together with the
Company's SEC Reports, sets forth a true and complete list and a brief
description of each transaction, agreement and understanding between the
Company or any of its subsidiaries on the one hand and its affiliates (which
shall include, without limitation, Victor Posner, any of his affiliates or
associates, any director or officer of the Company or its subsidiaries, or any
affiliate or associate of any such director or officer) on the other hand.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. Except
as otherwise contemplated by this Agreement, after the date hereof and prior to
the Closing Date or earlier termination of this Agreement, unless Parent shall
otherwise agree in writing, the Company shall, and shall cause each of its
subsidiaries, to:
(a) conduct its business in the ordinary and usual course of business and
consistent with past practice;
(b) not (i) amend or propose to amend its charter or by-laws, (ii) split,
combine or reclassify its outstanding capital stock or (iii) declare, set aside
or pay any dividend or distribution payable in cash, stock, property or
otherwise, except for the payment of dividends or distributions by a
wholly-owned subsidiary of the Company and except for the declaration and
payment of regular quarterly cash dividends not in excess of $0.15 per Share in
accordance with the Company's past dividend policy and with usual record and
payment dates; provided, however, that the Company's right to continue to pay
such quarterly dividends shall be contingent upon the Company's continued
compliance with Sections 7.2 and 7.3;
(c) not issue, sell or pledge, or agree to issue, sell or pledge any
additional shares of, or any options, warrants or rights of any kind to acquire
any shares of its capital stock of any class or any debt or equity securities
convertible into or exchangeable for such capital stock;
(d) use all reasonable efforts to preserve intact its business organizations
and goodwill, keep available the services of its officers and key employees,
and preserve the goodwill and business relationships with customers and others
having business relationships with the Company and not engage in any action,
directly or indirectly, with the intent to adversely impact the transactions
contemplated by this Agreement;
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(e) confer on a regular and frequent basis with one or more designated
representatives of Parent to report operational matters of materiality and the
general status of ongoing operations;
(f) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees;
(g) not adopt, enter into or amend any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, health care,
employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law;
(h) not enter into any other agreements, commitments or contracts that are
material to the Company and its subsidiaries taken as a whole, other than in
the ordinary course of business consistent with past practice, or otherwise
make any material change in (i) any existing agreement, commitment or
arrangement that is material to the Company and its subsidiaries taken as a
whole or (ii) the conduct of the business or operations of the Company and its
subsidiaries taken as a whole;
(i) not waive or release any rights that are material to the Company and its
subsidiaries taken as a whole or make any payments, direct or indirect, of any
liabilities of the Company or any of its subsidiaries that are material to the
Company and its subsidiaries taken as a whole before the same come due in
accordance with their terms;
(j) neither incur nor pay expenses arising out of, relating to or incidental
to the discussion, evaluation, negotiation, documentation and closing or
potential closing of the transactions contemplated hereby (including, without
limitation, the fees, disbursements and other expenses of lawyers, accountants,
actuaries, investment bankers and any other advisors thereto) and any filing or
other fees incurred in connection with such transactions other than litigation
related expenses (which shall include indemnification payments and expenses of
lawyers in connection therewith (at customary rates)) and other than reimbursed
Parent Transaction Expenses ("Company Transaction Expenses") in excess of
$1,100,000; or
(k) not transfer additional funds in excess of $1,000,000 to or for the
direct benefit of any of the Company's United Kingdom subsidiaries without the
prior consent of Parent, guaranty any additional indebtedness or other
obligations of any of the Company's United Kingdom subsidiaries or permit any
of the Company's United Kingdom subsidiaries to incur any additional
obligations guaranteed by the Company.
Notwithstanding the foregoing provisions of this Section 6.1, (i) the Company
shall be permitted to amend the terms of its non-qualified deferred
compensation plan in order to permit the deferral of bonuses paid from time to
time under the Company's Management Incentive Plan, and (ii) the Company's
wholly-owned subsidiary, Herr-Voss Corporation, shall be permitted to
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enter into an agreement with J&L Specialty Steel Corporation upon substantially
the terms previously approved by the Company's Board of Directors.
SECTION 6.2 CONTROL OF THE COMPANY'S OPERATIONS. Nothing contained in this
Agreement shall give to Parent, directly or indirectly, rights to control or
direct the Company's operations prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 6.3 ACQUISITION TRANSACTIONS.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company shall not, and shall not permit any
of its subsidiaries to, initiate, solicit, negotiate, encourage or provide
information to facilitate, and the Company shall, and shall cause its
subsidiaries to, cause any officer, director or employee of, or any attorney,
accountant or other agent retained by it, and any financial advisor or
investment banker retained by it, not to initiate, solicit, negotiate,
encourage or provide information to facilitate, any proposal or offer to
acquire all or any substantial part of the business and properties of the
Company or any capital stock of the Company, whether by merger, purchase of
assets, tender offer or otherwise, whether for cash, securities or any other
consideration or combination thereof (any such transactions being referred to
herein as "Acquisition Transactions"); provided, however, that such persons may
provide documents in the form filed with the SEC after informing Parent of
which documents will be provided and to whom.
(b) Notwithstanding the provisions of paragraph (a) above, following
delivery of the notice required by paragraph (c) below, the Company may, in
response to an unsolicited written proposal with respect to an Acquisition
Transaction furnish (subject to a confidentiality agreement reasonably
acceptable to the Company) confidential or non-public information concerning
its business, properties or assets to a financially capable corporation,
partnership, person or other entity or group (a "Potential Acquirer") or
negotiate with such Potential Acquirer if based upon advice of its outside
legal counsel, the Company's Board of Directors determines in good faith that
the failure to provide such confidential or non-public information to such
Potential Acquirer or negotiate with such Potential Acquirer would constitute a
breach of its fiduciary duty to the Company's shareholders.
(c) In the event the Company shall determine to provide any information or
negotiate as described in paragraph (b) above, or shall receive any offer of
the type referred to in paragraph (b) above, it shall promptly inform Parent
that information is to be provided, that negotiations are to take place or that
an offer has been received and shall furnish to Parent the identity of the
person receiving such information or the proponent of such offer, if
applicable, and, if an offer has been received, a description of the material
terms thereof.
(d) The Company may terminate this Agreement pursuant to Section 9.1 (c) in
order to enter into a definitive agreement for an Acquisition Transaction which
meets the requirements
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set forth above with a Potential Acquirer with which it is permitted to
negotiate pursuant to paragraph (b) above, but only if (i) the Company's Board
of Directors shall have duly determined that such Acquisition Transaction would
yield a higher value to the Company's shareholders than the Merger and that the
execution of such definitive agreement is in the best interests of the Company
and its shareholders and (ii) such definitive agreement is no less favorable
to the Company and its shareholders than this Agreement including, without
limitation, as to conditions to closing.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 ACCESS TO INFORMATION.
(a) The Company and its subsidiaries shall afford to Parent and Subsidiary
and their respective accountants, counsel, financial advisors and other
representatives (the "Parent Representatives") full access during normal
business hours throughout the period prior to the Effective Time to all of
their respective properties, books, contracts, commitments and records
(including, but not limited to, tax returns) and, during such period, shall
furnish promptly to Parent or the Parent Representatives (i) a copy of each
report, schedule and other document filed by any of them with the SEC in
connection with the transactions contemplated by this Agreement or which may
have a material effect on their respective businesses, properties or personnel
and (ii) such other information concerning the Company's business as Parent or
Subsidiary shall reasonably request; provided that no investigation pursuant to
this Section 7.1 shall amend or modify any representations or warranties made
herein or the conditions to the obligations of the respective parties to
consummate the Merger. Parent and its subsidiaries shall hold and shall use
their reasonable best efforts to cause the Parent Representatives to hold in
strict confidence all non-public documents and information furnished to Parent
and Subsidiary in connection with the transactions contemplated by this
Agreement, except that (i) Parent and Subsidiary may disclose such information
as may be necessary in connection with seeking the Parent Required Statutory
Approvals and (ii) each of Parent and Subsidiary and the Company may disclose
any information that it is required by law or judicial or administrative order
to disclose.
(b) In the event that this Agreement is terminated in accordance with its
terms, Parent and the Parent Representatives shall promptly redeliver to the
other all non-pubic written material provided pursuant to this Section 7.1 and
shall not retain any copies, extracts or other reproductions in whole or in
part of such written material. In such event, all documents, memoranda, notes
and other writings prepared by Parent or the Parent Representatives based on
the information in such material shall be destroyed (and Parent and the Parent
Representatives shall use their best efforts to cause their advisors and
representatives to similarly destroy their documents, memoranda and notes), and
such destruction (and best efforts) shall be certified in writing by an
authorized officer supervising such destruction.
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SECTION 7.2 PROXY STATEMENT. The Company shall file with the SEC as soon as
is reasonably practicable after the date hereof the Proxy Statement. Parent
shall promptly furnish to the Company all information, and take such other
actions, as may reasonably be requested in connection with any action by the
Company in connection with the preceding sentence. The information provided
and to be provided by Parent and the Company, respectively, for use in the
Proxy Statement shall be true and correct in all material respects without
omission of any material fact which is required to make such information not
false or misleading as of the date thereof and in light of the circumstances
under which given or made.
SECTION 7.3 SHAREHOLDERS' APPROVALS. The Company shall, as promptly as
practicable, submit this Agreement and the transactions contemplated hereby for
the approval of its shareholders at a meeting of shareholders and, subject to
the fiduciary duties of the Board of Directors of the Company under applicable
law, shall use its reasonable best efforts to obtain shareholder approval and
adoption (the "Company Shareholders' Approval") of this Agreement and the
transactions contemplated hereby. Such meeting of shareholders shall be held
as soon as practicable following the date upon which the Company has cleared
all comments, if any, from the SEC with respect to the Proxy Statement.
Subject to the fiduciary duties of the Board of Directors of the Company under
applicable law, the Company shall, through its Board of Directors, recommend to
its shareholders approval of this Agreement and the transactions contemplated
by this Agreement.
SECTION 7.4 PROVISION FOR EXPENSES AND FEES. Except as provided in Sections
7.9, 7.10 and 9.2, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses.
SECTION 7.5 AGREEMENT TO COOPERATE; ADDITIONAL ACTIONS.
(a) Subject to the terms and conditions herein provided, each of the parties
hereto shall use all reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including using its
reasonable efforts to obtain all necessary or appropriate waivers, consents and
approvals to effect all necessary filings and submissions and to lift any
injunction or other legal bar to the Merger (and, in such case, to proceed with
the Merger as expeditiously as possible), subject, however, to the requisite
votes of the shareholders of the Company.
(b) Without limitation of the foregoing, each of Parent and the Company
undertakes and agrees to file as soon as practicable after the date hereof a
Notification and Report Form under the HSR Act with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division"). Each of Parent and the Company shall (i) use its
best efforts to comply as expeditiously as possible with all lawful requests of
the FTC or the Antitrust Division for additional information and documents and
(ii) not extend any waiting period under the HSR Act or enter into any
agreement with the FTC or the Antitrust Division
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not to consummate the transactions contemplated by this Agreement, except with
the prior consent of the other parties hereto.
(c) If, at any time after the Effective Time, the Surviving Corporation
shall determine or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in the Surviving Corporation the
right, title or interest in, to or under any of the rights, properties or
assets of either of the Constituent Corporations acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of the Constituent Corporations or otherwise, all such
deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of the Constituent Corporations or otherwise, all
such other actions and things as may be necessary or desirable to vest, perfect
or confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out
this Agreement.
(d) The Surviving Corporation shall take appropriate action by resolution of
its Board of Directors or other formal and binding corporate action to limit to
$250,000 annually, the payment of management fees to, and salaries and bonuses
for officers or directors (other than full time employees) of, an affiliate or
associate (other than subsidiaries) or interested shareholders (as those terms
are defined in Section 2552 of the BCL), provided that the foregoing shall not
prohibit or limit dividends duly declared and paid by the Surviving
Corporation, payments in the ordinary course of business on commercially
reasonable terms, and the repayment by the Surviving Corporation of amounts
advanced on behalf of, or contributed to, the Surviving Corporation together
with commercially reasonable interest, dividend or other similar payments
thereon. This Section 7.5(d) shall not restrict or otherwise prohibit a merger
between Parent and Subsidiary.
SECTION 7.6 PUBLIC STATEMENTS. The parties shall use reasonable efforts to
consult with each other prior to issuing any press release or any written
public statement with respect to this Agreement or the transactions
contemplated hereby and shall not issue any such press release or written
public statement prior to such reasonable efforts.
SECTION 7.7 NOTIFICATION OF CERTAIN MATTERS. Each of the Company, Parent
and Subsidiary agrees to give prompt notice to each other of, and to use their
respective reasonable best efforts to prevent or promptly remedy, (a) the
occurrence or failure to occur or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to
be untrue or inaccurate in any material respect at the date hereof or the
Effective Time and (b) any material failure on its part to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 7.7 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
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SECTION 7.8 DIRECTORS' AND OFFICERS' INDEMNIFICATION. The certificate of
incorporation and by-laws (or equivalent governing instruments) of the
Surviving Corporation and each of its subsidiaries shall contain provisions no
less favorable with respect to indemnification than are set forth in the
articles of incorporation and by-laws of the Company and its subsidiaries,
which provisions shall not be amended, repealed or otherwise modified for a
period of four years after the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who at the Effective Time
were directors, officers, agents or employees of the Company or any of its
subsidiaries or who were otherwise entitled to indemnification pursuant to the
articles of incorporation and by-laws (or equivalent governing instruments) of
the Company or any of its subsidiaries. The Parent shall cause to be
maintained in effect for three years after the Effective Time the current
policies of the directors' and officers' liability insurance maintained by the
Company and its subsidiaries with respect to matters occurring prior to the
Effective Time to the extent available; provided, however, that Parent may
substitute therefor policies of at least the same coverage containing terms and
conditions that are not less advantageous than the existing policies; provided,
further, however that the Surviving Corporation shall not be required to pay
premiums for such insurance in excess of $370,000 per three-year period or a
proportionate amount thereof for a lesser period.
SECTION 7.9 INDEMNIFICATION OF BROKERAGE. Parent and Subsidiary, on the one
hand, and the Company, on the other hand, each agree to indemnify and save the
other harmless from any claim or demand for commission or other compensation by
any broker, finder, agent or similar intermediary claiming to have been
employed by or on behalf of Parent or Subsidiary or any of their affiliates, on
the one hand, or by the Company or any of its affiliates, on the other hand,
and to bear the cost of legal expenses incurred in defending any such claim or
demand.
SECTION 7.10 INDEMNIFICATION BY THE COMPANY. (a) In addition to all other
sums due hereunder or provided for in this Agreement, the Company agrees to
indemnify and hold harmless Parent and Subsidiary and the respective officers,
directors, agents, employees, subsidiaries, partners, advisors, representatives
and controlling persons of each of the foregoing (each, an "indemnified party")
to the fullest extent permitted by law from and against any and all losses,
claims, damages, expenses (including reasonable fees, disbursements and other
charges of counsel) or other liabilities ("Liabilities") resulting from any
legal, administrative or other actions brought by any person or entity
(including actions brought by the Company or any equity or debt holders of the
Company or derivative actions brought by any person claiming through the
Company or in the Company's name), proceedings or investigations (whether
formal or informal), or written threats thereof, based upon, relating to or
arising out of this Agreement, the transactions contemplated hereby, or any
indemnified party's role therein or in the transactions contemplated hereby;
provided, that the Company shall not be liable under this Section 7.10 to an
indemnified party to the extent that it is finally judicially determined that
such Liabilities resulted primarily from the willful malfeasance of such
indemnified party; and provided, further, that if and to the extent that such
indemnification is unenforceable for any reason other than the immediately
preceding proviso, the Company shall make the maximum contribution to the
payment and satisfaction of such indemnified Liabilities that shall be
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permissible under applicable laws. In connection with the obligation of the
Company to indemnify for Liabilities as set forth above, the Company further
agrees to reimburse each indemnified party for all such expenses (including
reasonable fees, disbursements and other charges of counsel) as they are
incurred by such indemnified party provided that each such indemnified party
shall have undertaken to repay any such amounts in the event that it is finally
judicially determined that the Company is not liable under this Section 7.10
for such Liabilities.
(b) NOTIFICATION. Each indemnified party under this Section 7.10 will,
promptly after the receipt of notice of the commencement of any action or other
proceeding against such indemnified party in respect of which indemnity may be
sought from the Company under Section 7.10, notify the Company in writing of
the commencement thereof. The omission of any indemnified party so to notify
the Company of any such action shall not relieve the Company from any liability
that it may have to such indemnified party unless the Company is materially
prejudiced thereby. In case any such action or other proceeding shall be
brought against any indemnified party and it shall notify the Company of the
commencement thereof, the Company shall be entitled to participate therein and,
to the extent that it may wish, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, that any
indemnified party may, at its own expense, retain separate counsel to
participate in such defense. Notwithstanding the foregoing, in any action or
proceeding in which both the Company and an indemnified party is, or is
reasonably likely to become, a party, such indemnified party shall have the
right to employ separate counsel at the Company's expense and to control its
own defense of such action or proceeding if, in the reasonable opinion of
counsel to such indemnified party, there are or may be legal defenses available
to such indemnified party or to other indemnified parties that are different
from or additional to those available to the Company which, if the Company and
such indemnified party were to be represented by the same counsel, would
constitute a conflict of interest for such counsel or materially prejudice the
prosecution of the defenses available to such indemnified party; provided,
however, that in no event shall the Company be required to pay fees and
expenses under this Section 7.10 for more than one firm of attorneys
representing the indemnified parties (together, if appropriate, with one firm
of local counsel per jurisdiction) in any one legal action or group of related
legal actions. In the event that an indemnified party exercises the right to
retain separate counsel pursuant to the provisions of the immediately preceding
sentence, the indemnified party shall take all steps reasonably required to
cause such separate counsel to cooperate with the Company and its counsel in
the defense of the pending action. The Company shall not be liable for any
settlement of such action or proceeding effected without its prior written
consent, not to be unreasonably withheld. The Company agrees that the Company
will not, without the prior written consent of Parent, not to be unreasonably
withheld, settle, compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding relating to any matter
subject to indemnification hereunder unless such settlement, compromise or
consent includes an unconditional release of Parent and each other indemnified
party from all Liabilities and Parent and each other indemnified party are not
obligated to take or forego taking any action, including the payment of money,
thereunder. The rights accorded to indemnified parties hereunder shall be in
addition to any rights that any indemnified party may have at common law, under
federal and state securities laws, by separate agreement or otherwise.
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SECTION 7.11 CORRECTIONS TO THE PROXY STATEMENT. Prior to the date of
approval of the Merger by the shareholders of the Company, each of the Company,
Parent and Subsidiary shall correct promptly any information provided by it to
be used in the Proxy Statement that shall have become false or misleading in
any material respect and shall take all steps necessary to file with the SEC
and have cleared by the SEC and delivered to the shareholders of the Company,
as necessary, any amendment or supplement to the Proxy Statement so as to
correct the same and to cause the Proxy Statement as so corrected to be
disseminated to the shareholders of the Company to the extent required by
applicable law.
ARTICLE VIII
CONDITIONS
SECTION 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) this Agreement and the transactions contemplated hereby shall have been
approved and adopted by the requisite vote of the shareholders of the Company
under applicable law and applicable listing requirements;
(b) the waiting period applicable to the consummation of the Merger under the
HSR Act shall have expired or been terminated;
(c) no preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the Merger shall have
been issued and remain in effect (each party agreeing to use its reasonable
efforts to have any such injunction, order or decree lifted);
(d) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States which would prevent the consummation of the Merger
or make the consummation of the Merger illegal; and
(e) all material governmental waivers, consents, orders and approvals
required for the consummation of the Merger and the transactions contemplated
hereby, and all material consents from lenders required to consummate the
Merger, shall have been obtained and be in effect at the Effective Time.
SECTION 8.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER.
Unless waived by the Company, the obligation of the Company to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the following additional conditions:
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(a) Parent and Subsidiary shall have performed in all material respects
their agreements contained in this Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of Parent and
Subsidiary contained in this Agreement shall be true and correct in all
material respects on and as of the date made and on and as of the Closing Date
as if made at and as of such date, and the Company shall have received a
certificate of the Chairman of the Board, Chief Executive Officer, President or
a Vice President of Parent and of the President, Chief Executive Officer or a
Vice President of Subsidiary to that effect;
(b) the Company shall have received an opinion from Paul, Weiss, Rifkind,
Wharton & Garrison counsel to Parent and Subsidiary, dated the Closing Date,
reasonably satisfactory to the Company and covering the due incorporation of
Parent and Subsidiary, the binding nature of this Agreement, the effectiveness
of the Merger and such other matters as may be reasonably requested by the
Company; and
(c) The Company shall have received from M.J. Whitman, Inc. (or other
nationally recognized investment banking firm) an opinion, dated as of a date
on or immediately prior to the date on which the Proxy Statement is first
distributed to the Company's shareholders, to the effect that the Merger is
fair from a financial point of view to the Company and such opinion shall not
have been withdrawn.
SECTION 8.3 CONDITIONS TO OBLIGATIONS OF PARENT AND SUBSIDIARY TO EFFECT THE
MERGER. Unless waived by Parent and Subsidiary, the obligations of Parent and
Subsidiary to effect the Merger shall be subject to the fulfillment at or prior
to the Closing Date of the additional following conditions:
(a) the Company shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects on and as of the
date made and on and as of the Closing Date as if made at and as of such date,
and Parent shall have received a Certificate of the President and Chief
Operating Officer or of a Vice President of the Company to that effect;
(b) Parent shall have received an opinion from Titus & McConomy LLP, counsel
to the Company, dated the Closing Date, reasonably satisfactory to Parent and
covering the due incorporation of the Company and its subsidiaries, the binding
nature of this Agreement, the effectiveness of the Merger and such other
matters as may be reasonably requested by Parent;
(c) Not more than 10% of the outstanding Shares are Dissenting Shares; and
(d) The aggregate amount of Company Transaction Expenses and litigation,
indemnification and all other costs arising out of or related to this Agreement
or the transactions contemplated hereby, incurred or paid on or before the
Closing Date, excluding amounts considered to be Parent Transaction Expenses,
does not exceed $1,600,000; provided that
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amounts paid by Parent or Subsidiary and reimbursed by the Company shall only
be counted once.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 TERMINATION.
This Agreement may be terminated and the Merger contemplated hereby may be
abandoned at any time prior to the Effective Time, whether before or after
adoption by the shareholders of the Company:
(a) By the mutual written consent of Parent, Subsidiary and the Company;
(b) By Parent, Subsidiary or the Company:
(i) if a court of competent jurisdiction or other Governmental Entity of
the United States shall have issued an order or taken any other action
permanently restraining, enjoining or otherwise prohibiting the Merger and such
order or other action shall have become final and nonappealable; or
(ii) if the Effective Time shall not have occurred on or before December
31, 1996; provided, however, that the right to terminate this Agreement under
this Section 9.1(b)(ii) shall not be available to any party whose failure to
fulfill materially any covenant or obligation under this Agreement has been the
cause of, or resulted in, the failure of the Effective Time to occur on or
before such date;
(c) by the Company if, simultaneously with such termination, the Company
executes a definitive agreement in accordance with Section 6.3(d);
(d) by Parent or Subsidiary if the Company's Board of Directors determines
not to give, withdraws, modifies or changes its approval or recommendation of
this Agreement or the transactions contemplated hereby;
(e) by Parent, Subsidiary or the Company if the Company's shareholders fail
to approve this Agreement and the transactions contemplated hereby;
(f) by Parent or Subsidiary if there has been a material breach of any
representation, warranty, covenant or agreement of the Company contained in
this Agreement, which breach is incurable or has not been cured by the Company
within 30 days after written notice from Parent;
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(g) by the Company if there has been a material breach of any
representation, warranty, covenant or agreement of Parent or Subsidiary
contained in this Agreement, which breach is incurable or has not been cured by
Parent or Subsidiary, as the case may be, within 30 days after written notice
from the Company;
(h) by Parent or Subsidiary if the aggregate amount of Company Transaction
Expenses and litigation, indemnification and all other costs arising out of or
related to this Agreement or the transactions contemplated hereby, incurred or
paid on or before the Closing Date, excluding amounts considered to be Parent
Transaction Expenses, exceeds $1,600,000; provided that amounts paid by Parent
or Subsidiary and reimbursed by the Company shall only be counted once; and
(i) by Parent or Subsidiary if any event has occurred since the date hereof,
that has had, or would be reasonably likely to have, a Material Adverse Effect
with respect to the Company.
SECTION 9.2 FEES AND EXPENSES.
(a) If this Agreement is terminated by Parent or Subsidiary pursuant to
Section 9.1(b)(ii), (d) or (f)(other than as a result of a material breach by
the Company which is directly attributable to a Material Adverse Effect with
respect to the Company which was not caused by or directly resulted from the
intentional action or inaction by the Company or any of its subsidiaries and
which would also constitute grounds for termination of this Agreement pursuant
to Section 9.1(i)) or by the Company pursuant to Section 9.1(c), then the
Company shall promptly, but in no event later than one business day after the
date of termination of this Agreement, pay Parent a termination fee of
$1,500,000 and reimburse Parent for all of the expenses of Parent and its
affiliates arising out of, relating to or incidental to the discussion,
evaluation, negotiation, documentation and closing or potential closing of the
transactions contemplated hereby (including, without limitation, the fees,
disbursements and other expenses of lawyers, accountants, actuaries, investment
bankers and any other advisors thereto) and any filing or other fees incurred
in connection with such transactions ("Parent Transaction Expenses") (up to a
maximum amount of $500,000 in the aggregate; provided, that neither this
limitation, nor any limitation on the reimbursement of Parent Transaction
Expenses contained elsewhere in this Agreement, shall limit or in any way
affect the amount of payments to Parent, Subsidiary or any indemnified person
pursuant to indemnification provisions contained elsewhere in this Agreement).
(b) If this Agreement is terminated pursuant to Section 9.1(e) the Company
shall promptly, but in no event later than one business day after the date of
termination of this Agreement, reimburse Parent for all of its Parent
Transaction Expenses (up to a maximum amount of $500,000 in the aggregate),
and, in addition, if on or prior to the date that is nine months from the date
that this Agreement is terminated pursuant to such Section 9.1(e), the Company
announces any transaction described in the definition of "Acquisition Proposal"
or a series of such transactions, then the Company shall pay to the Purchaser a
termination fee equal to $1,500,000.
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(c) If this Agreement is terminated pursuant to Section 9.1(b)(i), (h) or
(i), the Company shall promptly, but in no event later than one business day
after the date of termination of this Agreement, reimburse Parent for all of
its Parent Transaction Expenses (up to a maximum amount of $500,000 in the
aggregate).
(d) In the event that any party (the "plaintiff") brings a legal action
against any other party (the "defendant") for the collection of any termination
fees or Parent Transaction Expenses under this Section 9.2 and thereafter the
plaintiff collects any portion of such fees or Parent Transaction Expenses from
the defendant, the defendant shall also reimburse the plaintiff for all
out-of-pocket costs, fees and expenses, including, without limitation, the fees
and disbursements of counsel and the expenses of litigation, incurred by the
plaintiff in connection with such legal action. If, however, the plaintiff
does not collect any such fees in such legal action, the plaintiff shall
reimburse all out-of-pocket costs, fees and expenses, including, without
limitation, the fees and disbursements of counsel and the expenses of
litigation incurred by the defendant in connection with such legal action.
(e) All amounts payable under this Section 9.2 shall be paid in immediately
available funds to an account or accounts designated by the relevant party.
(f) In order to assure the prompt payment by the Company of any Parent
Transaction Expenses which are payable under this Section 9.2, not later than
July 1, 1996 the Company shall have deposited $154,000 in an escrow account
(the "Escrow Account") with pursuant to an escrow agreement among the Company,
Parent and Arthur Andersen LLP, as escrow agent in form and substance
satisfactory to the parties thereto (the "Escrow Agreement"). On August 1,
1996 and August 31, 1996, the Company shall deposit the additional sums of
$150,000 and $196,000, respectively, into the Escrow Account. Subject to the
terms and conditions of the Escrow Agreement, any interest earned upon the
Escrow Account shall be paid to the Company.
SECTION 9.3 PROCEDURE FOR AND EFFECT OF TERMINATION. In the event that this
Agreement is terminated and the Merger is abandoned by Parent or Subsidiary, on
the one hand, or by the Company, on the other hand, pursuant to Section 9.1,
written notice of such termination and abandonment shall forthwith be given to
the other parties and this Agreement shall terminate and the Merger shall be
abandoned without any further action. If this Agreement is terminated as
provided herein, no party hereto shall have any liability or further obligation
to any other party under the terms of this Agreement except as provided herein
and with respect to the willful breach by any party hereto and except that the
provisions of Section 9.2 and this Section 9.3, Sections 7.1(b), 7.4, 7.8, 7.9,
7.10 and Article X shall survive the termination of this Agreement. Nothing in
this Section 9.3 shall relieve any party from liability for any breach of this
Agreement.
SECTION 9.4 AMENDMENT. This Agreement may not be amended except by action
taken by the respective Boards of Directors of each of the parties hereto or
duly authorized committee thereof and then only by an instrument in writing
signed on behalf of each of the parties hereto and in compliance with
applicable law.
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SECTION 9.5 WAIVER. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts or the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties in this Agreement shall not survive the Merger,
and after the Effective Time of the Merger neither the Company, Parent,
Subsidiary or their respective officers or directors shall have any further
obligation with respect thereto. Notwithstanding the immediately preceding
sentence, the Surviving Corporation's obligations set forth in Section 7.8
shall continue in full force and effect following the Effective Time.
SECTION 10.2 BROKERS. The Company represents and warrants that no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
(except for the fee payable to the investment banking firm described in Section
8.2(c)) or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. Parent and Subsidiary represent and warrant that no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent or
Subsidiary.
SECTION 10.3 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via overnight
courier or facsimile to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) If to Parent or Subsidiary to:
c/o Three Cities Research, Inc.
157 East 57th Street
New York, NY 10022
Attention: J. William Uhrig
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with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019
Attention: Neale M. Albert
(b) If to the Company, to:
Salem Corporation
P.O. Box 2222
Pittsburgh, PA 15230
Attention: A.A. Fornataro
President
with copies to:
Titus & McConomy LLP
Four Gateway Center, 20th Floor
Pittsburgh, PA 15222
Attention: Paul H. Titus
and
Marco B. Loffredo, Jr.
9999 NE Second Avenue
Miami Shores, FL 33138
SECTION 10.4 INTERPRETATION; MATERIAL ADVERSE EFFECT.
(a) The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this
Agreement. In this Agreement, unless a contrary intention appears, (a) the
words "herein," "hereof" and "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular Article, Section
or other subdivision and (b) reference to any Article or Section means such
Article or Section hereof. No provision of this Agreement shall be interpreted
or construed against any party hereto solely because such party or its legal
representative drafted such provision.
(b) For purposes of this Agreement, the term "Material Adverse Effect" with
respect to any person shall mean a material adverse effect on the business,
assets, properties, condition (financial or other) or results of operations of
such person and its subsidiaries taken as a whole.
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SECTION 10.5 MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof.
SECTION 10.6 THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING
VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN
SUCH COMMONWEALTH.
SECTION 10.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 10.8 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and except for the rights of
indemnified parties under Sections 7.8 and 7.10, nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
IN WITNESS WHEREOF, Parent, Subsidiary and the Company have caused this
Agreement to be singed by their respective officers as of the date first
written above.
SALEM GROUP, INC.
By: /s/ J. WILLIAM UHRIG
-----------------------------
Name: J. William Uhrig
Title: President
SC ACQUISITION CORPORATION
By: /s/ J. WILLIAM UHRIG
-----------------------------
Name: J. William Uhrig
Title: President
SALEM CORPORATION
By: /s/ A.A. FORNATARO
-----------------------------
Name: A.A. Fornataro
Title: President and Chief
Operating Officer
By: /s/ MARCO B. LOFFREDO, JR.
-----------------------------
Name: Marco B. Loffredo, Jr.
Title: Chairman of the Board
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EXHIBIT A
ARTICLES OF MERGER - DOMESTIC BUSINESS CORPORATION
DSCB:15-1926 (REV 90)
In compliance with the requirements of 15 Pa.C.S. Section
1926 (relating to articles of merger or consolidation), the undersigned
business corporations, desiring to effect a merger, hereby state that:
1. The name of the corporation surviving the merger is: Salem Corporation
2. The surviving corporation is a domestic business corporation and the
address of its current registered office in this Commonwealth is (the
Department is hereby authorized to correct the following information
to conform to the records of the Department):
Arch Street, Carnegie, PA 15106, Allegheny County
3. The name and address of the registered office in this Commonwealth or
name of its commercial registered office provider and the county of
venue of each other domestic corporation and qualified foreign
corporation which is a party to the plan of merger is as follows:
SC Acquisition Corporation, c/o Corporation Service Company, Dauphin
County
4. (CHECK, AND IF APPROPRIATE COMPLETE, ONE OF THE FOLLOWING):
--- The plan of merger shall be effective upon filing the
Articles of Merger in the Department of State.
--- The plan of merger shall be effective on: (date) at (hour)
5. The manner in which the plan of merger was adopted by each domestic
corporation is as follows:
Salem Corporation - Adopted by the directors and shareholders pursuant
to 15 Pa.C.S. Section 1924(a)
SC Acquisition Corporation - Adopted by action of the shareholders
pursuant to 15 Pa.C.S. Section 1905
<PAGE> 213
6. (CHECK, AND IF APPROPRIATE, COMPLETE ONE THE FOLLOWING):
--- The plan of merger as set forth in full in Exhibit A is
attached hereto and made a part hereof.
--- Pursuant to 15 Pa.C.S. Section 1901 (relating to omission of
certain provisions from filed plans) the provisions, if any,
of the plan of merger that amend or constitute the operative
Articles of Incorporation of the surviving corporation as in
effect subsequent to the effective date of the plan are set
forth in full in Exhibit A attached hereto and made a part
hereof. The full text of the plan of merger is on file at
the principal place of business of the surviving corporation,
the address of which is:
Arch Street, Carnegie, PA 15106, Allegheny County
IN TESTIMONY WHEREOF, the undersigned corporation or each
undersigned corporation has caused these Articles of Merger to be signed by a
duly authorized officer thereof this _______ day of
______________________________, 1996.
SALEM CORPORATION SC ACQUISITION CORPORATION
By:_______________________ By:__________________________
Title: Title:
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EXHIBIT 20.1
FOR IMMEDIATE RELEASE
SALEM CORPORATION BOARD
APPROVES THREE CITIES FUND MERGER
PITTSBURGH, PENNSYLVANIA, JUNE 28, 1996 - Salem Corporation (AMEX:SBS)
today announced that it has signed a definitive agreement to merge with a
wholly-owned subsidiary of Salem Group, Inc., a newly formed company controlled
by an investor group represented by Three Cities Research, Inc. Under the
agreement Salem Corporation's shareholders will receive $25.00 a share in cash.
The merger agreement is not subject to due diligence or the raising of
financing and was approved by Salem Corporation's Board of Directors. The
agreement will be presented to the company's shareholders for approval as soon
as possible.
Salem Group, Inc., a Delaware corporation, will be controlled by Three
Cities Fund - II L.P. (TCF-II), a $245 million special situation growth fund
capitalized in February of this year and managed by the New York-based private
investment firm of Three Cities Research, Inc. (TCR). TCR intends to retain
the current management of Salem Corporation in Salem Group.
A.A. Fornataro, President, Chief Operating Officer, and a Director of
Salem Corporation, stated: "Management of the company is pleased to be working
with TCR. The proposed transaction is both consistent with the Board's stated
criteria and, in management's opinion, in the best interests of all
shareholders as well as other stakeholders of the company."
TCR is an investment advisor with an established record in the
successful investment of equity capital in medium-sized companies in basic
industries such as distribution, component
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Salem Corporation
Page 2
manufacturing, textiles, specialty retailing and industrial services. Since
1976, as an active private equity investor TCR has completed over 60
investments involving nearly $400 million of equity capital.
Salem Corporation, a Pennsylvania corporation which was organized in
1945, is in the business of designing, engineering and installing heavy
industrial equipment primarily for the metals, coal and other minerals
industries. The company presently operates in four business segments: metal
processing equipment, industrial furnaces, minerals processing equipment and
automation controls and systems.
FOR FURTHER INFORMATION, PLEASE CONTACT:
FOR THREE CITIES FUND - II LP: FOR SALEM CORPORATION:
John Walker/John P. Kehoe George A. Douglas
Kehoe, White, Savage & Co., Inc. Controller and Treasurer
(212) 888-1616 Salem Corporation
(412) 276-5700
or
Paul H. Titus
Lindsey D. Alton
Titus & McConomy LLP
Four Gateway Center, 20th Floor
Pittsburgh, PA 15222
(412) 642-2000
(Counsel to Salem Corporation)
