SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. - 20549
_________________________
FORM 10-Q/A
(Mark One)
* QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended July 3, 1998
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 No. 0-12588
_________________________
SALIENT 3 COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2280922
(State of Incorporation) (IRS Employer Identification No.)
P.O. Box 1498, Reading, Pennsylvania 19603
(Mailing address of principal executive offices) (Zip Code)
(610) 856-5500
______________________________________________________________________________
(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
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
Class A Class B
Number of shares of each class of
common stock outstanding as of
July 3, 1998 (excluding 2,691,194
Class A treasury shares):
5,712,233 581,873
<PAGE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Pages
Item I.
Consolidated Condensed Balance Sheets at
July 3, 1998 and January 2, 1998 (unaudited)
Consolidated Condensed Statements of Operations for the
six and three month periods ended July 3, 1998
and July 4, 1997 (unaudited)
Consolidated Condensed Statements of Cash Flows
for the six month periods ended July 3, 1998
and July 4, 1997 (unaudited)
Notes to Consolidated Condensed Financial Statements
Item II.
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Part I. Financial Information
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
July 3, 1998 and January 2, 1998
(Unaudited)
(000's)
July 3, January 2,
1998 1998
-------- ----------
ASSETS
[S] [C] [C]
Current assets:
Cash and cash equivalents $ 2,192 $ 2,979
Accounts receivable, net of allowance
for doubtful accounts of $1,729 and
$1,680, respectively 22,803 23,798
Inventories 15,886 20,128
Deferred income taxes 6,000 3,805
Other current assets 4,267 4,013
Net assets held for sale 17,461 16,195
------- -------
Total current assets 68,609 70,918
------- -------
Property, plant and equipment, at cost 46,270 44,121
Less accumulated depreciation and
amortization 22,455 20,334
------- -------
23,815 23,787
------- -------
Deferred income taxes 8,840 7,010
Other assets 1,000 1,000
Goodwill 29,199 44,782
------- -------
Total Assets $ 131,463 $ 147,497
======= =======
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 15,251 $ 8,557
Accounts payable 6,579 7,587
Salaries and wages 1,069 1,437
Income taxes, currently payable 1,248 3,384
Estimated liability for contract losses 1,470 1,470
Other accrued liabilities 10,966 8,332
------- -------
Total current liabilities 36,583 30,767
------- -------
Long-term debt 11,039 11,245
Other long-term liabilities 4,397 4,948
Self-insured retention 2,677 2,677
Stockholders' equity:
Common stock 8,985 8,985
Capital in excess of par value 37,737 37,835
Warrants outstanding 1,665 1,665
Retained earnings 70,141 89,929
Foreign currency translation adjustment 70 52
Deferred compensation-restricted stock (1,298) (1,368)
Treasury stock (40,533) (39,238)
------- -------
76,767 97,860
------- -------
Total Liabilities and Stockholders'
Equity $ 131,463 $ 147,497
======= =======
The accompanying notes are an integral part of the consolidated condensed
financial statements.
<PAGE>
<TABLE>
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
(000's except for share and per share information)
Six Months Ended Three Months Ended
---------------------------- ----------------------------
July 3, 1998 July 4, 1997 July 3, 1998 July 4, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Telecommunications sales $57,747 $49,377 $29,772 $24,560
Cost of goods sold 38,957 31,007 21,531 15,585
------ ------ ------ ------
Gross profit 18,790 18,370 8,241 8,975
Selling, general and administration 20,063 16,112 9,935 8,636
Purchased in-process
research and development - 6,150 - 6,150
Research and development 4,450 4,457 2,173 2,410
Goodwill impairment and
restructuring charge 18,190 - 18,190 -
Goodwill amortization 805 809 335 458
------ ------- ------ ------
Operating loss (24,718) (9,158) (22,392) (8,679)
------ ------ ------ ------
Interest income 74 33 46 15
Interest expense 829 1,123 434 629
------ ------ ------ ------
Pre-tax loss from continuing operations (25,473) (10,248) (22,780) (9,293)
------ ------ ------ ------
Benefit for taxes on loss (5,131) (1,519) (4,108) (1,178)
------ ------ ------ ------
Net loss from continuing operations (20,342) (8,729) (18,672) (8,115)
------ ------ ------ ------
Income from discontinued operations:
Technical Services Segment (less
applicable taxes of $733 and $498
for the six month periods ended
and $490 and $195 for the three
month periods ended, respectively) 1,197 860 799 314
Gain on disposal of a Technical
Services Company (less applicable
income taxes of $583) - 1,080 - 1,080
Real Estate Segment (less applicable
taxes of $381 for the six month period
ended and $202 for the three month
period ended, respectively) - 659 - 336
------ ------ ------ ------
Net income from discontinued operations 1,197 2,599 799 1,730
------ ------ ------ ------
Total net loss $(19,145) $(6,130) $(17,873) $(6,385)
====== ====== ====== ======
Per share of common stock (Basic and diluted):
Net loss from continuing operations $ (3.24) $ (1.38) $ (2.99) $ (1.28)
Net income from discontinued operations:
Technical Services Segment $ 0.19 $ 0.31 $ 0.13 $ 0.22
Real Estate Segment $ - $ 0.10 $ - $ 0.05
---- ---- ---- ----
Total earnings (loss) per share $ (3.05) $ (0.97) $ (2.86) $ (1.01)
==== ==== ==== ====
Cash dividends per share $ 0.10 $ 0.20 $ - $ 0.10
Basic weighted average shares outstanding 6,282,624 6,312,166 6,251,815 6,307,880
The accompanying notes are an integral part of the consolidated condensed
financial statements.
</TABLE>
<PAGE>
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(000,s)
Six Months Ended
------------------------------
July 3, 1998 July 4, 1997
------------ ------------
Cash flows from operating activities:
Net loss $(19,145) $(6,130)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Gain on sale of subsidiary - (1,663)
Depreciation and amortization 3,321 3,826
Purchased in-process research and
and development write-off - 6,150
Goodwill write-off 15,789 -
Reserve provisions 269 116
Benefit from deferred income taxes (4,025) 500
Restrictive stock expense 70 44
Changes in current assets and current liabilities
net of effects from acquisitions and dispositions:
Accounts receivable and unbilled revenue 321 4,197
Inventories 4,396 (3,539)
Other current assets (189) (62)
Accounts payable and salaries and wages (1,345) (723)
Other accrued liabilities 1,664 (4,334)
Income taxes, currently payable (2,060) (1,721)
----- -----
Net cash used for operating activities (934) (3,339)
----- -----
Cash flows from investing activities:
Payments for acquisitions (1,274) (19,302)
Payments for property, plant and equipment (2,484) (3,817)
Proceeds from sale of subsidiary - 7,213
----- ------
Net cash used for investing activities (3,758) (15,906)
----- ------
Cash flows from financing activities:
Proceeds from issuance of debt - 19,900
Payment of debt (218) (8,123)
Borrowings under note payable 6,694 9,044
Issuance of treasury stock in connection
with stock option, award and purchase
plans 205 83
Payments to acquire treasury stock (1,598) (384)
Cash dividends paid (644) (1,278)
Other, net (534) 323
----- ------
Net cash provided by financing activities 3,905 19,565
----- ------
Net (decrease) increase in cash and cash equivalents (787) 320
Cash and cash equivalents at beginning of period 2,979 1,482
----- -----
Cash and cash equivalents at end of period $ 2,192 $ 1,802
===== =====
Supplemental cash flow disclosures:
Interest paid $ 803 $ 1,562
====== =====
Income taxes paid, net of refunds received $ 1,708 $ 1,164
===== =====
The accompanying notes are an integral part of the consolidated condensed
financial statements.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(000's except for share and per share information)
1. In the first quarter of 1997, the Company accounted for
both its Technical Services and Real Estate Segments as
discontinued operations.
The results for technical services and the real estate
segment have been classified as discontinued operations for
all periods presented in the Consolidated Condensed
Statements of Operations and Balance Sheets. The assets and
liabilities of the discontinued operations have been
classified in the Consolidated Condensed Balance Sheets as
"Net assets held for sale." Discontinued operations have
not been segregated in the Consolidated Condensed Statements
of Cash Flows and, therefore, amounts for certain captions
will not agree with the respective Consolidated Condensed
Statements of Operations.
The following is a summary of revenue by discontinued
segment:
Three Months Ended Six Months Ended
July 3, 1998 July 4, 1997 July 3, 1998 July 4, 1997
------------ ------------ ------------ ------------
Revenues:
Technical Services $22,073 $18,382 $42,660 $36,093
Real Estate - 2,180 - 4,330
------ ------ ------ ------
$22,073 $20,562 $42,660 $40,423
====== ====== ====== ======
2. During the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards No. 130 (SFAS
130), which specifies reporting requirements for
comprehensive income. The Company has evaluated the impact
of 130 and has determined that it is not material. The
Company will also adopt the Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), at the end of
1998 and expects to report three reportable business segments
- - wireless, wireline and industrial.
3. The financial statements furnished herein reflect all
adjustments which are, in the opinion of management,
necessary for a fair presentation of financial position and
results of operations for the interim periods. Such
adjustments are of a normal recurring nature. The
accompanying financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not
include all of the disclosures normally required by generally
accepted accounting principles or those normally made in the
Company's annual Form 10-K filing. Accordingly, the reader
of this Form 10-Q may wish to refer to the Company's Form 10-
K for the year ended January 2, 1998 for further information.
4. Net income per share of common stock was determined using the
average number of Class A and Class B shares outstanding. No
preferred stock was outstanding as of July 3, 1998.
During the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS
128), which requires companies to report both basic and
dilutive earnings per share. Dilutive shares outstanding
were determined on the assumption that all outstanding
options, warrants and shares of restricted stock with a
strike price below the respective period-end stock price,
would be issued. Dilutive shares outstanding for the second
quarter of 1998 and 1997 were 6,252,972 and 6,335,961, respectively.
Dilutive shares outstanding for the six month period ending July 3,
1998 and July 4, 1997 were 6,284,663 and 6,374,057, respectively.
Since these additional shares had an antidilutive impact on the
Company's loss from continuing operations, the adoption of SFAS 128
had no impact to the Company's earnings per share calculation.
5. In the second quarter of 1998, the Company recorded $23,089
as a result of charges for restructuring and asset impairment
($18,190), inventory write-downs ($4,353), and other
miscellaneous expenses ($546). The $23,089 charge after an
income tax benefit of $4,225 was $18,864 or $3.02 per share
for the second quarter. The restructuring and asset
impairment charges of $18,190 include: (a) $2,401 relating to
severance and other costs for approximately 140 manufacturing
employees due to outsourcing the manufacturing process at XEL
Communications, Inc. (XEL), as well as the consolidation of
manufacturing of the Instrument Associates Division of GAI-
Tronics into the Company's Reading, Pennsylvania headquarters
and (b) an asset impairment charge of $15,789 relating to the
write-down of the carrying value of goodwill related to XEL
($10,987 with no tax benefit) and the Instrument Associates
Division of GAI-Tronics (pretax charge of $4,802). The
Company also re-evaluated its product offerings and decided
to discontinue certain low margin product lines. As a
result, other expenses of the transition include inventory
write-downs at the Company's SAFCO and XEL subsidiaries and
Instrument Associates Division of $4,353, which are included
in cost of goods sold, and miscellaneous expenses of $546,
which are included in selling, general and administration.
The following table displays a rollforward of the liabilities
for the restructuring charge from April 3, 1998 to July 3,
1998:
April 3, July 3,
1998 Amounts 1998
Type of Cost Balance Additions Utilized Balance
-------------------- ------- --------- -------- -------
Employee separations $ - $1,075 $ (150) $ 925
Facility closings - 1,185 - 1,185
Other - 141 - 141
----- ----- ------ -----
Total $ - $2,401 $ (150) $2,251
===== ===== ====== =====
6. During 1997, several key employees were issued an aggregate
of 80,000 shares of restricted stock in the Company. The
value of this stock is recorded as deferred compensation in
the stockholders' equity section of the consolidated
condensed balance sheets, and will be expensed over the
vesting period. The vesting period will not exceed 10 years
and may be accelerated depending upon the achievement of
certain objectives.
7. The components of inventories as of the balance sheet dates
were as follows:
July 3, 1998 Jan. 2, 1998
------------ ------------
Raw material and components $8,293 $12,465
Work in process 2,123 2,500
Finished goods 5,470 5,163
------ ------
$15,886 $20,128
====== ======
8. Other accrued liabilities includes an accrual relating
primarily to workers' compensation of $1,835 and $2,128 at
July 3, 1998 and January 2, 1998, respectively. Also
included in other accrued liabilities at July 3, 1998 was an
accrual for $2,251 that relates to employee separations,
facility closings and other costs, as discussed in Note 5.
9. Effective January 3, 1998, the Company acquired all of the
outstanding stock of Elemec Systems, Ltd. (Elemec) for $952,
including acquisition costs. Elemec is part of the Company's
industrial telecommunications business and was merged into
GAI-Tronics Corporation's European operations.
On April 21, 1997, the Company acquired all of the
outstanding capital stock of TEC CELLULAR, Inc. (TEC) for
$14,139, including acquisition costs, plus seven year
warrants exercisable to purchase 100,000 shares of the
Company stock at $18 per share. TEC is part of the Company's
wireless telecommunication business and is a division of
SAFCO Technologies, Inc.
On April 30, 1997, the Company acquired all of the
outstanding stock of DAC Ltd. (DAC) for $5,351, including
acquisition costs. DAC is part of the Company's industrial
telecommunication business and was merged into GAI-Tronics
Corporation's European operations.
10. On July 24, 1998, the Company completed the last of its
planned divestitures with the sale of its Resource
Consultants, Inc. (RCI) subsidiary to the management of RCI and an
investor group for approximately $18,000, substantially all
in cash. The Company expects to report a gain of less than
$100 on the transaction. Proceeds of the sale were used to
pay down outstanding bank debt.
On July 31, 1997, the Company sold its real estate complex,
Green Hills Corporate Center to Brandywine Reality Trust for
$40,000, substantially all in cash. The sale resulted in a
$7,000 gain, net of $5,362 of income taxes, or $1.11 per
share. Proceeds were used to reduce the Company's
outstanding debt.
On June 24, 1997, the Company sold its SRA Technologies, Inc.
subsidiary to Dames & Moore, Inc. for $8,800 in cash. The
sale of SRA resulted in a $1,080 gain, net of income taxes of
$583, or $0.17 per share. Proceeds were used to reduce the
Company's outstanding debt.
11. During the first quarter of 1997, the Company paid $1,000 to
the former principals of Instrument Associates, Inc. pursuant
to the 1993 purchase agreement.
The Company also paid former shareholders of SAFCO
Corporation $1,204 in the first quarter of 1997, as part of
the 1996 asset purchase agreement.
12. Under the terms of a prior loan agreement which expired on
August 7, 1998, the Company had a working capital line of
credit of $18,000 and an acquisition line of $50,000. The
agreement contained a number of financial and other covenants
that, among other things, required maintenance of a certain ratio of
funded debt to earnings before interest, taxes, depreciation and
amortization. The Company was in compliance with its debt
covenants at July 3, 1998.
Under the terms of the new loan agreement, effective August
8, 1998, the Company has a working capital line of $12,000
and an acquisition line of $12,000. The agreement contains a
number of financial and other covenants that, among other
things, requires maintenance of a certain ratio of funded debt
to earnings before interest, taxes, depreciation and amortization.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
(000's except for share and per share information)
Results of Operations
For the six months ended July 3, 1998, the Company lost $20,342 or
$3.24 per share from continuing operations. Included in the
results are expenses of $23,089 resulting from charges for
restructuring and asset impairment ($18,190), inventory write-
downs ($4,353), and other miscellaneous expenses ($546). The
$23,089 charge after an income tax benefit of $4,225 was $18,864
or $3.02 per share for the second quarter.
The restructuring and asset impairment charges of $18,190 include
$2,401 relating to severance and other costs of outsourcing the
manufacturing process at XEL Communications, Inc. (XEL), as well
as the consolidation of manufacturing of the Instrument Associates
Division of GAI-Tronics into the Company's Reading, Pennsylvania
headquarters. As disclosed in the first quarter 10-Q, the Company
has been evaluating various strategic alternatives for XEL and,
during the second quarter, decided to outsource its manufacturing
so as to improve the focus of the business on sales, marketing,
new product development and additional partnerships with leading
telecommunications technology firms. Exiting the manufacturing
side of the business during the third quarter of 1998 will allow
the Company to decrease its investment in XEL by selling its
building and capital equipment. No additional losses are expected
to be incurred when this sale is undertaken. Additionally, it is
expected that outsourcing could result in an improvement in XEL's
gross margins for core products. To enhance the future
profitability of the Instrument Associates division of GAI-
Tronics, the manufacturing function located in Memphis, Tennessee
will be combined in the first quarter of 1999 with GAI-Tronics'
manufacturing facility in Reading, Pennsylvania. No additional
loss is expected to be recorded when this combination occurs.
The restructuring and asset impairment charges of $18,190 also
include an asset impairment charge of $15,789 relating to the
write-down of the carrying value of goodwill related to XEL
($10,987 with no tax benefit) and the Instrument Associates
Division of GAI-Tronics (pretax charge of $4,802). The charge
results from the decreasing demand for and profitability of XEL's
analog product line which has been its primary business since
acquisition and Instrument Associates' decreasing sales and profit
margins as orders from its key customers have declined. In re-
evaluating XEL, it was determined that future expected cash flows
would not support the related goodwill carrying value and that an
impairment had occurred. During the quarter, the Company also re-
evaluated the profitability prospects for Instrument Associates.
While the Company remains committed to Instrument Associates' land
mobile radio business, it was determined that projected cash flows
did not fully support this subsidiary's carrying goodwill value and
$4,802 of a total balance of $5,853 in goodwill was written off.
During the second quarter, the Company also re-evaluated its
product offerings and decided to discontinue certain low margin
product lines. As a result, other expenses of the Company's
business transition include inventory write-downs at the Company's
SAFCO and XEL subsidiaries and Instrument Associates Division of
$4,353, which are included in costs of goods sold, and
miscellaneous expenses of $546, which are included in selling, general
and administration.
For the six months ended July 4, 1997, the Company lost $8,729 or
$1.38 per share from continuing operations. Included in the
results, is a $6,150 or $.97 per share charge for purchased in-
process research and development associated with the TEC Cellular
Inc. (TEC) acquisition (Note 9). The purchased in-process
research and development had not yet reached technological
feasibility and had no alternative future use as of the date of
acquisition.
Excluding the one time charges in 1998 and write-off of purchased
in-process research and development in 1997, the Company lost
$1,478 or $.24 per share from continuing operations for the first
six months of 1998 compared to a loss of $2,579 or $.41 per share
for the same period in 1997. The improvement was due to cost
reductions realized by the wireline group which was marginally
profitable from operations, the DAC acquisition in the second
quarter of 1997 (Note 9) and reduced interest expense.
For the quarter, the Company lost $18,672 or $2.99 per share from
continuing operations for 1998 compared to a loss of $8,115 or
$1.28 per share for 1997. Excluding the charges and write-off of
purchased in-process research and development, the Company had
income of $192 or $.03 per share from continuing operations in
1998 compared to a loss of $1,965 or $.31 per share for 1997. The
improvement was due to higher sales at the wireless group, and
improved sales and cost reductions realized by the wireline group.
Sales increased 17% and 21% for the six and three month periods in
1998, respectively, compared to the same periods in 1997. The
increase in sales was primarily due to the acquisitions in the
second quarter of 1997, the Elemec acquisition in the first
quarter of 1998 (Note 9), and the wireline group's returning to a
more normal sales level compared to the sharp decline experienced
in the second quarter of 1997.
The following is a breakdown of sales by telecommunications group:
Year to Date Second Quarter
1998 1997 1998 1997
---- ---- ---- ----
Industrial $34,080 $28,115 $17,406 $14,799
Wireline 13,512 14,802 6,799 5,298
Wireless 10,155 6,460 5,567 4,463
------ ------ ------ ------
Total $57,747 $49,377 $29,772 $24,560
====== ====== ====== ======
The sales by telecommunications group have been restated in
connection with the Company's adoption of the Statement of
Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131).
The Company will adopt SFAS 131 at the end of 1998 and expects to
report three reportable business segments - wireless, wireline and
industrial.
The higher industrial sales in both the six and three month
periods of 1998 were due primarily due to the DAC and Elemec
acquisitions.
The quarterly increase in the wireline group resulted from new
partnership revenue and core product sales returning to a more
normal level compared to the sharp decline experienced in the
second quarter of 1997. For the six month period ended July 3,
1998, the wireline sales declined by 9% compared to the comparable
period in 1997, due to a reduction in customer demand for analog
channel units, offset in part by new partnership revenue and the
decision at the end of the first quarter of 1997 to exit the
contract manufacturing business.
For the quarter, wireless sales increased 25% due to the strength
of its test and measurement products. For the year to date, the wireless
group's sales increased 57%, due to sales of its test and
measurement products and the TEC acquisition in the second quarter
of 1997.
Excluding the one time charges, the gross profit percentage was
40% and 42% for the six and three month periods in 1998,
respectively, compared to 37% for the same periods in 1997. The
wireless group has a higher gross profit percentage than the industrial
and wireline groups. Therefore, as a result of higher sales by the wireless
group and the wireless acquisition in the second quarter of 1997, the
Company's gross profit percentage increased for the six months ended
July 3, 1998. For the quarter, higher margins within the wireline group
reflect increased sales and cost reductions, while the industrial group's
margins increased from more favorable product mix.
The Company anticipates improvements in results of operations in
the second half of the year, led by new product releases and
increased engineering revenue within the wireless group.
Selling, General and Administration
Selling, general and administration increased 25% and 15% in the
first half and second quarter of 1998 compared to the same periods
in 1997. The increase in selling, general and administration
stems primarily from acquisitions and $546 relating to the one
time charge.
As a percentage of sales, selling, general and administration was
35% and 33% in the first half and second quarter of 1998 compared
to 33% and 35%, respectively, in the same periods in 1997. The
unfavorable relationship for the six months ended July 3, 1998,
stems primarily from the one time charge of $546, and
the increase in the percentage of business coming from the
wireless group. The wireless group has a higher percentage of selling,
general and administration to sales compared to the industrial and
wireline groups. The favorable relationship in the second quarter stems
primarily from improvements in the wireline and wireless groups, offset
in part by the $546 relating to the one time charge. The wireline unit
increased sales while cost reduction initiatives reduced its selling,
general and administration expense. The wireless group increased
sales without a corresponding increase in expenses.
Research and Development, Goodwill Amortization and Interest
Expense
For the quarter, research and development decreased 10% primarily
due to reductions at the wireline group. Year to date, research
and development was flat due to the reductions at the wireline
group, offset by the second quarter 1997 acquisitions and the Elemec
acquisition.
For the quarter, goodwill amortization decreased 27% due to the
asset impairment and related write-off of XEL's and Instrument
Associates' goodwill, offset in part by the Elemec acquisition.
Year to date, goodwill amortization was flat due to the write-off
of all of XEL's and a portion of Instrument Associates' goodwill,
offset by the 2nd quarter 1997 acquisitions and the Elemec
acquisition.
Interest expense declined 26% and 31% in the first half and second
quarter of 1998 compared to the same periods of 1997, due to the
proceeds from the sales of discontinued operations, offset in part
by payments for the acquisitions.
Provision for taxes on income
Excluding the aforementioned charges, the effective tax rate was
38% in the first half and second quarter of 1998 compared to 37%
in the same periods of 1997.
Income from discontinued operations
In June 1996, the Company announced that its Board of Directors
had authorized management to explore strategic options for its
remaining subsidiaries within the technical services and real
estate segments. The decision was reached because of the
Company's desire to focus its business only on telecommunications
equipment.
In accord with this decision, during the first quarter of 1997,
the Company accounted for its technical services and real estate
segments as discontinued operations.
On July 24, 1998, the Company completed the last of its planned
divestitures with the sale of its Resource Consultants, Inc. (RCI)
subsidiary to the management of RCI and an investor group for
approximately $18,000, substantially all in cash. The Company
expects to report a gain of $100 on the transaction. Proceeds of
the sale were used to pay down outstanding bank debt.
On July 31, 1997, the Company sold its real estate complex, Green
Hills Corporate Center (GHMC), to Brandywine Realty Trust, for
$40,000, substantially all in cash. The sale resulted in a $7,000
gain, net of income taxes of $5,362, or $1.11 per share. On June
24, 1997, the Company sold its SRA Technologies, Inc. (SRA)
subsidiary to Dames & Moore, Inc. for $8,800 in cash. The sale of
SRA resulted in a $1,080 gain, net of income taxes of $583, or
$0.17 per share. The Company reduced its debt levels with the
sales proceeds.
Liquidity and Capital Resources
Working capital decreased $8,125 in 1998. The decline in working
capital was due to the creation of short term reserves associated
with the one time charges, stock repurchases, and the purchase of
Elemec. Amounts generated from operations, available cash and cash
equivalents and lines of credit should provide adequate working capital
through 1998. In addition, the Company announced on January 28, 1998,
the elimination of the $0.10 per share quarterly dividend after the
March 10, 1998 payment. Elimination of the dividend will provide
additional funds to satisfy working capital requirements. The
Company does not expect to make any contingent payments to former
XEL and SAFCO Corporation shareholders during 1998.
Lines of credit agented by First Union National Bank, are
available through June 30, 1999 to fund both short-term cash needs
as well as future acquisitions. As of July 3, 1998, the Company
had working capital lines of credit available of $23,000,
reduced by outstanding borrowings of $15,251 and issued letters of
credit aggregating $931. The Company was in compliance with its
debt covenants at July 3, 1998.
Under the terms of the new loan agreement, effective August 8,
1998, the Company has a working capital line of $12,000 and an
acquisition line of $12,000. The agreement contains a number of
financial and other covenants that, among other things, requires a
certain ratio of funded debt to earnings before interest, taxes,
depreciation and amortization.
The Company estimates that its total capital expenditures in 1998,
excluding acquisitions, will be approximately $5,500. No
restrictions on cash transfers between the Company and its
subsidiaries exist.
Other
In the second quarter of 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). The Company assessed SFAS 130 during the
first quarter of 1998, and determined that SFAS 130 would have no
material effect on the Company.
The currency problems with certain Asian countries have had a
negative impact to their economies. The Company currently sells
to customers located in some of these countries and, although the
current financial conditions will most likely reduce the amount of
products sold, the Company does not expect a material impact on
operations.
The Company has assessed the Year 2000 issue and it is not
expected to have a significant impact on ongoing results of
operations.
This Form 10-Q contains certain statements of a forward-looking
nature relating to future events or the future financial
performance of the Company. Such statements are only predictions
and involve risks and uncertainties, and actual events or
performance may differ materially as expressed in any such forward
looking statements. Potential risks and uncertainties include,
without limitation: projections regarding 1998 subsequent
revenues, transaction gains, product diversity, decreased
investment, operating profitability, expected orders from
contracts, market position, expected new technology partnerships,
the effect of general economic conditions in the United States and
Asia, the impact of competitive products, services and pricing, and
demand and market acceptance risks of current and new products and
services; and with respect to the Telecommunications business, the
uncertain effect of the Telecommunications Act of 1996, technology change,
and risks of product development and commercialization
difficulties. Further information on factors that could affect
the Company's future financial performance can be found in the
Company's other filings with the Securities and Exchange
Commission. Words used in this report such as "positioned",
"yields", "should generate", "appears", "viewed", "could
potentially", "would position", "expected", and "should allow"
indicate the presence of forward looking statements.
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on April 29, 1998,
the shareholders elected three directors, approved changes to the Long Term
Incentive Plan, approved changes to the Directors' Stock Option
Plan, approved changes to the Direct Stock Purchase Plan, and approved the
retention of the current independent auditors.
The results of the voting were as allows:
For Director Granted Withheld
John W. Boyer, Jr. 526,415 16,760
Dennis E. Foster 530,532 12,643
Donald E. Lyons 526,415 16,760
BROKER
Other proposals FOR AGAINST ABSTAIN NON-VOTES
Approval of an increase in the
number of shares available
under the Long Term
Incentive Plan 512,046 30,651 478 -
Approval of an increase in the
number of shares available
under the Directors'
Stock Option Plan 509,538 32,680 957 -
Approval of an increase in the
number of shares available
under the Direct Stock
Purchase Plan 529,126 13,089 960 -
Ratification of appointment
of Arthur Andersen LLP
as independent auditors 529,126 13,089 960 -
<PAGE>
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
SIGNATURES
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.
Salient 3 Communications, Inc.
/s/Paul H. Snyder
Paul H. Snyder
Senior Vice President and
Chief Financial Officer
Date: August 19, 1998
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