SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. - 20549
_________________________
FORM 10-Q
(Mark One)
* QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 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
April 3, 1998 (excluding 2,573,903
Class A treasury shares): 5,841,435 569,962
<PAGE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item I.
Consolidated Condensed Balance Sheets at
April 3, 1998 and January 2, 1998 (unaudited)
Consolidated Condensed Statements of Operations for the
three month periods ended April 3, 1998
and April 4, 1997 (unaudited)
Consolidated Condensed Statements of Cash Flows
for the three month periods ended April 3, 1998
and April 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 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
Part I. Financial Information
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
April 3, 1998 and January 2, 1998
(Unaudited)
(000's)
<CAPTION> April 3, January 2,
1998 1998
-------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,808 $ 2,979
Accounts receivable, net of
allowance for doubtful accounts of
$1,707 and $1,680, respectively 22,542 23,798
Inventories 21,285 20,128
Deferred income taxes 3,805 3,805
Other current assets 4,205 4,013
Net assets held for sale 16,555 16,195
------ ------
Total current assets 70,200 70,918
------ ------
Property, plant and equipment, at cost: 45,557 44,121
Less accumulated depreciation and
amortization 21,412 20,334
------ ------
24,145 23,787
------ ------
Deferred income taxes 6,910 7,010
Other assets 1,000 1,000
Goodwill 45,000 44,782
------- -------
Total Assets $ 147,255 $ 147,497
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 11,627 $ 8,557
Accounts payable 7,592 7,587
Salaries and wages 1,450 1,437
Income taxes, currently payable 2,442 3,384
Estimated liability for contract losses 1,470 1,470
Other accrued liabilities 8,422 8,332
------ ------
Total Liabilities 33,003 30,767
------ ------
Long-term debt 11,125 11,245
Other long-term liabilities 4,727 4,948
Self-insured retention 2,677 2,677
Stockholders' equity:
Common stock 8,985 8,985
Capital in excess of par value 37,835 37,835
Warrants outstanding 1,665 1,665
Retained earnings 88,013 89,929
Foreign currency translation adjustment (58) 52
Deferred compensation-restricted stock (2,388) (1,368)
Treasury stock (38,329) (39,238)
------ ------
95,723 97,860
------ ------
Total Liabilities and
Stockholders' Equity $ 147,255 $ 147,497
======= =======
The accompanying notes are an integral part of the consolidated condensed
financial statements.
</TABLE>
<PAGE>
<TABLE>
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
(000's except for share and per share information)
Three Months Ended
-------------------------------
April 3, 1998 April 4, 1997
------------- -------------
<S> <C> <C>
Telecommunications sales $27,975 $24,817
Cost of goods sold 17,426 15,422
------ ------
Gross profit 10,549 9,395
Selling, general and administration 10,128 7,476
Research and development 2,277 2,047
Goodwill amortization 470 351
----- -----
Operating loss (2,326) (479)
----- -----
Interest income 28 18
Interest expense 395 494
----- -----
Pre-tax loss from continuing operations (2,693) (955)
----- -----
Benefit for taxes on loss (1,023) (341)
----- -----
Net loss from continuing operations (1,670) (614)
----- -----
Income from discontinued operations:
Technical Services Segment (less
applicable taxes of $243 and $303,
respectively) 398 546
Real Estate Segment (less applicable
taxes of $179) - 323
----- -----
Net income from discontinued operations 398 869
----- -----
Total net income (loss) $(1,272) $ 255
===== =====
Per share of common stock (Basic and diluted):
Net loss from continuing operations $ (0.26) $ (0.10)
Net income from discontinued operations:
Technical Services Segment $ 0.06 $ 0.09
Real Estate Segment $ - $ 0.05
---- ----
Total earnings (loss) per share $ (0.20) $ 0.04
==== ====
Cash dividends per share $ 0.10 $ 0.10
Basic weighted average shares outstanding 6,313,434 6,316,451
The accompanying notes are an integral part of the consolidated condensed
financial statements.
</TABLE>
<PAGE>
<TABLE>
Salient 3 Communications, In. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(000's)
Three Months Ended
----------------------
April 3, April 4,
1998 1997
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (1,272) $ 255
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Items not affecting cash 1,999 2,102
Changes in current assets and current liabilities (1,262) (1,457)
----- -----
Net cash provided by (used for)
operating activities (535) 900
----- -----
Cash flows from investing activities:
Payments for acquisitions (952) (2,204)
Payments for property, plant and equipment (1,493) (1,667)
----- -----
Net cash used for investing activities (2,445) (3,871)
----- -----
Cash flows from financing activities:
Proceeds from issuance of debt - 1,000
Borrowings under note payable 3,070 2,224
Issuance of treasury stock in connection
with stock option, award and purchase
plans 160 3
Payments to acquire treasury stock (308) (65)
Cash dividends paid (644) (639)
Other, net (469) (318)
----- -----
Net cash provided by financing activities 1,809 2,205
----- -----
Net decrease in cash and cash equivalents (1,171) (766)
Cash and cash equivalents at beginning of period 2,979 1,482
----- -----
Cash and cash equivalents at end of period $ 1,808 $ 716
===== =====
Supplemental cash flow disclosures:
Interest paid $ 366 $ 904
===== =====
Income taxes paid, net of refunds received $ 88 $ 892
===== =====
The accompanying notes are an integral part of the consolidated condensed
financial statements.
</TABLE>
<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 adopted
discontinued operations treatment for both its Technical
Services and Real Estate Segments.
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
April 3, 1998 April 4, 1997
------------- -------------
Revenues:
Technical Services $20,587 $17,711
Real Estate - 2,150
------ ------
$20,587 $19,861
====== ======
The Company has elected to allocate interest not specifically
associated with any segment based upon a ratio of net assets.
Interest expense allocated to discontinued operations was not
material in 1998 and 1997.
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 SFAS 130 and has determined that due to immateriality the
Company is currently not subject to SFAS 130. The Company
will 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.
4. Net income per share of common stock was determined using the
average number of Class A and Class B shares outstanding. The
effect on net income per share resulting from dilution upon
exercise of outstanding stock options, warrants and
restricted stock is not material, and therefore is not shown.
No preferred stock was outstanding as of April 3, 1998.
5. 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.
6. The components of inventories as of the balance sheet dates
are as follows:
April 3, 1998 Jan. 2, 1998
------------- ------------
Raw materials and components $13,152 $12,465
Work in process 2,449 2,500
Finished goods 5,684 5,163
------ ------
$21,285 $20,128
====== ======
7. Other accrued liabilities includes an accrual relating
primarily to workers' compensation of $1,950 and $2,128 at
April 3, 1998 and January 2, 1998, respectively.
8. 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.
9. 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. 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 yearend stock price, would
be issued. Dilutive shares outstanding for the first quarter
of 1998 and 1997 were 6,322,251 and 6,412,395, 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. As of April 3, 1998, the Company had 1,466,254
outstanding options and warrants with a strike price above
the first quarter stock price.
11. During the first quarter of 1997, the Company paid $1,000 to
the former principals of Instruments 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 terms of a 1996 loan agreement, the Company has a
working capital line of credit of $18,000 and an acquisition
line of $50,000, of which up to $5,000 can be used for
additional working capital. The loan 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.
Although the Company was not in compliance with one of its loan
covenants as of April 3, 1998, it received a compliance waiver
from its lenders.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
(000's except for share and per share information)
Results of 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 adopted discontinued operations treatment for its
technical services and real estate segments.
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 group and was merged into GAI-Tronics Corporation's
European operations.
The Company reported a loss from continuing operations for the
first quarter of 1998 of $1,670, or $0.26 per share compared to a
loss of $614, or $0.10 per share for the same period of 1997. The
loss from continuing operations resulted primarily from reduced
margins at the industrial unit, product delays within the wireless
unit and reduced customer demand for wireline products.
Sales increased 13% for the period from $24,817 in 1997 to $27,975
in 1998. The increase in sales was primarily due to the
acquisitions in the second quarter of 1997 (Note 9) and the Elemec
acquisition.
The following is a breakdown of sales by telecommunications group:
1998 1997
---- ----
Wireline $ 6,713 $ 9,504
Industrial 16,675 13,316
Wireless 4,588 1,997
------ ------
Total $ 27,976 $ 24,817
====== ======
The sales by telecommunication group have been restated in
anticipation of 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 wireline sales declined by 29% in 1998 compared to 1997, due
to a reduction in customer demand for analog channel units,
prompted by re-use programs at some wireline customers, and the
decision at the end of the first quarter of 1997 to exit the
contract manufacturing business. Industrial sales increased 25%
primarily from the second quarter 1997 acquisition of DAC Ltd. and the
Elemec acquisition. The wireless sales grew 130% period-over-period
due to the inclusion of TEC CELLULAR, Inc. (TEC), acquired in April
1997, and improved sales by SAFCO.
The gross profit percentage was 38% for both 1998 and 1997.
Higher wireless margins were offset by lower margins realized
within the wireline and industrial groups. Lower margins within
the wireline group reflect reduced sales and competitive
pressures, while the industrial group's margins suffered from
product mix.
The Company anticipates improvements in results of operations,
especially in the second half of the year, lead by new product
releases and increased engineering revenue within the wireless
unit. The industrial group implemented price increases during the
quarter and efforts are underway to reduce material costs in order
to improve gross profit. During the quarter, the Company
completed its study of the current business model of XEL
Communications, Inc., its wireline subsidiary. Based on the
results of that study, management is exploring strategic options
for XEL that could increase returns on investment and
profitability. In addition, the Company is also evaluating
expense levels and its business models at its other subsidiaries.
Final decisions on possible changes are expected by the end of the
second quarter and the Company may incur a restructuring charge at
that time, related to the implementation of certain profit
improvement initiatives.
Selling, General and Administration
Selling, general and administration increased 35% in the current
period compared to the same period in 1997. The increase in
selling, general and administration stems primarily from
acquisitions and higher spending at SAFCO.
As a percentage of sales, selling, general and administration was
36% and 30% in the first quarter of 1998 and 1997, respectively.
The unfavorable relationship stems primarily from the wireline and
wireless units. The wireline unit had reduced sales without a
corresponding decline in expenses. The wireless unit has a higher
percentage of selling, general and administration to sales
compared to the industrial and wireline units. Therefore, as a
result of the wireless acquisition in the second quarter of 1997,
the percentage of selling, general, and administration to sales
increased.
Research and Development, Goodwill Amortization and Interest
Expense
Research and development, and goodwill amortization increased 11%,
and 34% respectively, in 1998 compared to 1997. The increases are
primarily due to the acquisitions.
Interest expense declined 20% in the first quarter 1998 compared
to 1997, due to the proceeds from the sales of discontinued
operations, offset in part by payments for the acquisitions.
Provision for taxes on income
The provision for taxes on income was an effective rate of 38% and
36% for the first quarter of 1998 and 1997, respectively. The
increase relates to higher state taxes.
Income from discontinued operations
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.
The Company expects that the remaining subsidiary included in
discontinued operations, Resource Consultants, Inc. (RCI), will
remain profitable until the disposition is completed. During the
first quarter of 1998, the Company signed a Letter of Intent with
RCI management and an investor group. The exact timing of the
disposition is uncertain but is expected to occur near the end of
the second quarter. The Company expects that the sale of this
subsidiary could generate after-tax proceeds of approximately
$16,000 - $18,000.
Liquidity and Capital Resources
Working capital decreased $2,954 in 1998. The decline in working
capital is due to the purchase of Elemec and the final dividend
payment. Amounts generated from operations, available cash and
cash equivalents, anticipated cash proceeds from the RCI sale 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 CoreStates Bank, N.A., are available
through June 30, 1998 to fund both short-term cash needs as well
as future acquisitions. The Company expects to renew the lines of
credit on such date. As of April 3, 1998, the Company had
available an $18,000 working capital line of credit as reduced by
outstanding borrowings of $11,627 and issued letters of credit
aggregating $1,100. Although the Company was not in compliance
with one of its loan covenants at April 3, 1998, it received a
compliance waiver from its lenders.
The Company estimates that its total capital expenditures in 1998,
excluding acquisitions, will be approximately $6,500. 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: the effect of general economic conditions,
the impact of competitive products, services and pricing, and
demand and market acceptance risks of current and new products and
services; with respect to RCI, its dependence on the U.S.
government as a customer; 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, and the
Company's ability to complete its divestiture program in the time
frame and in the price range indicated. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
(1) The registrant filed Form 8-K on January 28, 1998
to announce the elimination of the $0.10 per share
quarterly dividend.
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: May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-END> APR-03-1998
<CASH> 1,808,000
<SECURITIES> 0
<RECEIVABLES> 24,249,000
<ALLOWANCES> 1,707,000
<INVENTORY> 21,285,000
<CURRENT-ASSETS> 70,200,000
<PP&E> 45,557,000
<DEPRECIATION> 21,412,000
<TOTAL-ASSETS> 147,255,000
<CURRENT-LIABILITIES> 33,003,000
<BONDS> 0
0
0
<COMMON> 8,985,000
<OTHER-SE> 86,738,000
<TOTAL-LIABILITY-AND-EQUITY> 147,255,000
<SALES> 27,975,000
<TOTAL-REVENUES> 28,003,000
<CGS> 17,426,000
<TOTAL-COSTS> 17,426,000
<OTHER-EXPENSES> 12,875,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 395,000
<INCOME-PRETAX> (2,693,000)
<INCOME-TAX> (1,023,000)
<INCOME-CONTINUING> (1,670,000)
<DISCONTINUED> 398,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,272,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
