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 October 2, 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
October 2, 1998 (including 111,250
shares of restricted stock and
excluding 2,861,321 Class A
treasury shares): 5,668,834 455,145
<PAGE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item I.
Consolidated Condensed Balance Sheets at
October 2, 1998 and January 2, 1998 (unaudited)
Consolidated Condensed Statements of Operations for the
three and nine month periods ended October 2, 1998
and October 3, 1997 (unaudited)
Consolidated Condensed Statements of Cash Flows
for the nine month periods ended October 2, 1998
and October 3, 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
October 2, 1998 and January 2, 1998
(Unaudited)
(000's)
October 2, January 2,
1998 1998
---------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 951 $ 2,979
Accounts receivable, net of allowance
for doubtful accounts of $1,655 and
$1,680, respectively 23,049 23,798
Inventories 15,866 20,128
Deferred income taxes 6,000 3,805
Other current assets 6,473 4,013
Net assets held for sale - 16,195
------- -------
Total current assets 52,339 70,918
------- -------
Property, plant and equipment, at cost 47,793 44,121
Less accumulated depreciation and
amortization 23,723 20,334
------- -------
24,070 23,787
------- -------
Deferred income taxes 8,840 7,010
Other assets 3,250 1,000
Goodwill 28,859 44,782
------- -------
Total Assets $ 117,358 $ 147,497
======= =======
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,344 $ 8,557
Accounts payable 6,750 7,587
Salaries and wages 1,285 1,437
Income taxes, currently payable 1,055 3,384
Estimated liability for contract losses 1,456 1,470
Other accrued liabilities 10,652 8,332
------- -------
Total current liabilities 23,542 30,767
------- -------
Long-term debt 10,953 11,245
Other long-term liabilities 4,395 4,948
Self-insured retention 2,677 2,677
Stockholders' equity:
Common stock 8,985 8,985
Capital in excess of par value 37,743 37,835
Warrants outstanding 1,665 1,665
Retained earnings 70,501 89,929
Foreign currency translation adjustment 204 52
Deferred compensation-restricted stock (1,219) (1,368)
Treasury stock (42,088) (39,238)
------- -------
75,791 97,860
------- -------
Total Liabilities and Stockholders' Equity $ 117,358 $ 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 information)
Nine Months Ended Three Months Ended
-------------------------- --------------------------
Oct. 2, 1998 Oct. 3, 1997 Oct. 2, 1998 Oct. 3, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Telecommunications sales $86,227 $77,296 $28,480 $27,919
Cost of goods sold 55,152 48,402 16,195 17,395
------ ------ ------ ------
Gross profit 31,075 28,894 12,285 10,524
------ ------ ------ ------
Selling, general and
administration 29,015 25,372 8,952 9,260
Purchased in-process
research and development - 6,150 - -
Goodwill impairment and
restructuring charge 18,190 - - -
Research and development 6,642 6,841 2,192 2,384
Goodwill amortization 1,144 1,266 339 457
------ ------ ------ ------
Operating profit (loss) (23,916) (10,735) 802 (1,577)
------ ------ ------ ------
Interest income 169 73 95 40
Interest expense 1,069 1,526 240 403
------ ------ ------ ------
Pre-tax income (loss)
from continuing operations (24,816) (12,188) 657 (1,940)
------ ------ ------ ------
Provision (benefit) for taxes
on income (loss) (4,880) (2,218) 251 (699)
------ ------ ------ ------
Net income (loss)
from continuing operations (19,936) (9,970) 406 (1,241)
------ ------ ------ ------
Income (loss) from discontinued
operations:
Technical Services Segment
(less applicable provision
(benefit) for taxes of
$643 and $698 for the nine month
periods ended and $(90) and $200
for the three month periods
ended, respectively) 1,050 1,214 (147) 354
Real Estate Segment
(less applicable income taxes of
$0 and $450 for the nine month
periods ended and $0 and $69
for the three month periods
ended, respectively) - 781 - 122
Gain on disposals of subsidiaries
(less applicable income taxes
of $0 and $5,945 for the nine
month periods ended
and $0 and $5,362 for the
three month periods ended,
respectively) 100 8,080 100 7,000
------ ------ ------ ------
Net income (loss) from
discontinued operations 1,150 10,075 (47) 7,476
------ ------ ------ ------
Total net income (loss) $(18,786) $ 105 $ 359 $ 6,235
====== ====== ====== ======
Per share of common stock (Basic and diluted):
Net income (loss)
from continuing operations $ (3.21) $ (1.58) $ 0.07 $ (0.20)
Net income (loss) from
discontinued operations:
Technical Services Segment $ 0.17 $ 0.20 $ (0.03) $ 0.05
Real Estate Segment $ - $ 0.12 $ - $ 0.03
Disposal of subsidiaries $ 0.02 $ 1.28 $ 0.02 $ 1.11
Total earnings (loss) per share $ (3.02) $ 0.02 $ 0.06 $ 0.99
Cash dividend per share $ 0.10 $ 0.30 $ - $ 0.10
Basic weighted average shares
outstanding 6,217,698 6,305,755 6,087,845 6,292,933
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 Cash Flows
(Unaudited)
(000's)
Nine Months Ended
--------------------------
October 2, October 3,
1998 1997
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(18,786) $ 105
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Gain on sale of subsidiary (100) (14,025)
Depreciation and amortization 4,921 5,547
Purchased in-process research and
and development write-off - 6,150
Goodwill write-off 15,789 -
Reserve provisions 317 277
Benefit from deferred income taxes (4,440) (1,650)
Restrictive stock expense 107 (26)
Changes in current assets and current liabilities
net of effects from acquisitions and dispositions:
Accounts receivable and unbilled revenue (481) 3,989
Inventories 4,416 (2,456)
Other current assets (292) (1,068)
Accounts payable and salaries and wages (1,487) (2,690)
Other accrued liabilities 1,700 (3,987)
Income taxes, currently payable (2,184) 5,023
------ ------
Net cash used for operating activities (520) (4,811)
------ ------
Cash flows from investing activities:
Payments for acquisitions (1,274) (19,302)
Payments for property, plant and equipment (4,010) (5,577)
Proceeds from sale of subsidiary 14,232 45,013
------ ------
Net cash used for investing activities 8,948 20,134
------ ------
Cash flows from financing activities:
Proceeds from issuance of debt - 19,900
Payment of debt (299) (35,231)
Borrowings (repayments) under note payable (6,213) 2,458
Issuance of treasury stock in connection
with stock option, award and purchase
plans 205 102
Payments to acquire treasury stock (3,104) (441)
Cash dividends paid (644) (1,915)
Other, net (401) 530
------ ------
Net cash used for financing activities (10,456) (14,597)
------ ------
Net increase (decrease) in cash and cash equivalents (2,028) 726
Cash and cash equivalents at beginning of period 2,979 1,482
------ ------
Cash and cash equivalents at end of period $ 951 $ 2,208
======= ======
Supplemental cash flow disclosures:
Interest paid $ 1,084 $ 2,145
====== ======
Income taxes paid, net of refunds received $ 1,992 $ 1,603
====== ======
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 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 Nine Months Ended
Oct. 2, 1998 Oct. 3, 1997 Oct. 2, 1998 Oct. 3, 1997
------------ ------------ ------------ ------------
Revenues:
Technical Services $ 5,591 $15,191 $48,251 $51,284
Real Estate - 696 - 5,026
------ ------ ------ ------
$ 5,591 $15,887 $48,251 $56,310
====== ====== ====== ======
2. During the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards No. 130,
which specifies reporting requirements for
comprehensive income. The Company has evaluated the impact
of SFAS 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", at the end of
1998 and expects to report three reportable business segments
- - wireless, access products 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 excluding
111,250 shares of restricted stock. No preferred stock was
outstanding as of October 2, 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 third
quarter of 1998 and 1997 were 6,089,997 and 6,332,588,
respectively. Dilutive shares outstanding for the nine month
period ending October 2, 1998 and October 3, 1997 were
6,223,542 and 6,356,775, respectively. These additional
shares had no impact to the Company's earnings per share
calculation.
5. In the second quarter of 1998, the Company recorded $23,089
in 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 October 2,
1998:
April 3, Oct. 2,
1998 Amounts 1998
Type of Cost Balance Additions Utilized Balance
--------------------------------------------------------------------------
Employee separations $ - $1,075 ($441) $ 634
Facility closings - 1,185 - 1,185
Other - 141 - 141
--------------------------------------------------------------------------
Total $ - $2,401 ($441) $1,960
====== ====== ====== ======
6. The components of inventories as of the balance sheet dates
were as follows:
Oct. 2, 1998 Jan. 2, 1998
------------ ------------
Raw material and components $ 8,930 $12,465
Work in process 2,408 2,500
Finished goods 4,528 5,163
------ ------
$15,866 $20,128
====== ======
7. Other accrued liabilities included an accrual for workers'
compensation of $1,525 and $1,913 at October 2, 1998 and
January 2, 1998, respectively. Also included in other
accrued liabilities at October 2, 1998 was an accrual for
$1,100 that relates to employee separations, facility
closings and other costs, as discussed in Note 5.
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.
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. In conjunction with the
acquisition, the Company recorded a $6,150 after-tax charge
for purchased in-process research and development. 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.
9. 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 $18,000, substantially all in cash
and subject to final closing adjustments. The sale price
also included a $2,750 note that was recorded in other assets.
The sale resulted in a gain of $100. 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.
10. Under the terms of the loan agreement, effective August 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. The agreement also contains a provision that
limits the working capital line to a defined borrowing base
consisting of eligible receivables and inventory amounts.
Lines of credit are available through June 30, 1999 to fund both
short-term cash needs as well as future acquisitions. As of
October 2, 1998, the Company had an available working line of
credit of $10,489, reduced by outstanding borrowings of $2,344,
and issued letters of credit aggregating $2,000. The Company
was in compliance with its debt covenants at October 2, 1998.
<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
For the quarter, the Company had income of $406 or $.07 per share
from continuing operations for 1998 compared to a loss of $1,241
or $.20 per share for 1997. The improvement was due to higher
sales and improved gross margin at the wireless group, and cost
reductions and improved gross margin by the access product group,
offset in part by lower sales by the industrial group.
For the nine months ended October 2, 1998, the Company lost
$19,936 or $3.21 per share from continuing operations. Included
in the results were 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 during the second quarter.
The restructuring and asset impairment charges of $18,190 included
$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 Corporation into the Company's Reading,
Pennsylvania headquarters. These charges also included 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 Company's business transition included inventory
write-downs at the Company's SAFCO Technologies, Inc. and XEL
subsidiaries and Instrument Associates Division of $4,353, which
were included in costs of goods sold, and miscellaneous expenses of
$546, which were included in selling, general and administration.
For the nine months ended October 3, 1997, the Company lost $9,970
or $1.58 per share from continuing operations. Included in the
results, was a $6,150 or $.97 per share charge for purchased in-
process research and development associated with the TEC Cellular
Inc. (TEC) acquisition (Note 8). 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
$1,072 or $.17 per share from continuing operations for the first
nine months of 1998 compared to a loss of $3,820 or $.61 per share
for the same period in 1997. The improvement was due to higher
sales and improved gross margin for the wireless group, cost
reductions and improved gross margin by the access product group,
higher sales by the industrial group and reduced corporate
interest expense.
Sales increased 12% and 2% for the nine and three month periods in
1998, respectively, compared to the same periods in 1997. The
increase in sales in the nine month period was primarily due to
strong sales from the wireless segment, the acquisitions in the
second quarter of 1997, and the Elemec acquisition in the first
quarter of 1998 (Note 8). The increase in sales for the quarter
was primarily due to strong sales from the wireless group, offset
in part by lower sales by the access products and industrial
groups.
The following is a breakdown of sales by telecommunications group:
Year to Date Third Quarter
1998 1997 1998 1997
---- ---- ---- ----
Industrial $49,110 $44,318 $15,030 $16,202
Access product 18,690 20,723 5,178 5,921
Wireless 18,427 12,255 8,272 5,796
------ ------ ------ ------
Total $86,227 $77,296 $28,480 $27,919
====== ====== ====== ======
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, access
products and industrial.
The higher industrial sales in the nine month period ended October
2, 1998 were due primarily to the DAC and Elemec acquisitions.
The decline in sales for the three month period was due to a
decrease in sales at the Reading location of GAI-Tronics.
For the nine and three month periods ended October 2, 1998, the
access product sales declined by 13% and 10% compared to the
comparable periods in 1997, due to a reduction in customer demand
for analog channel units, offset in part by new partnership
revenue. The decision at the end of the first quarter of 1997 to
exit the contract manufacturing business was a contributing factor
to the sales decline for the nine month period.
For the quarter, the wireless group's sales increased 43% due to
the strength in sales of its test and measurement products. Year
to date, the wireless group's sales increased 50%, 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 consolidated gross profit
percentage was 41% and 43% for the nine and three month periods in
1998, respectively, compared to 37% and 38% for the same periods
in 1997. The wireless group has a higher gross profit percentage
than the industrial and access product groups. Therefore, as a
result of a higher percentage of sales by the wireless group, the
Company's gross profit percentage increased for the nine months
ended October 2, 1998. For the quarter, higher sales from the
wireless group, coupled with significant cost reductions from the
access product group resulted in improved gross margins.
Selling, General and Administration
Selling, general and administration increased 14% for the nine
month period ended October 2, 1998, and decreased 3% in the third
quarter of 1998 compared to the same period in 1997. The
increase in selling, general and administration for the nine month
period resulted primarily from acquisitions and $546 relating to
the one time charge recorded in the second quarter of 1998. The
decrease in selling, general and administration for the third
quarter resulted from reduced costs at the holding company and cost
reductions by the access product group.
As a percentage of sales, selling, general and administration was
34% and 31% for the first nine months and the third quarter of
1998 compared to 33% in the same periods in 1997. The unfavorable
relationship for the nine months ended October 2, 1998, resulted
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 access
product groups. The favorable relationship in the third quarter
stemmed primarily from reduced costs at the holding company, cost
reductions in the access product group and increased revenues by
the wireless groups.
Research and Development, Goodwill Amortization and Interest
Expense
Year to date, research and development decreased 3% due to
reductions at the access product group, partially offset by the
2nd quarter 1997 acquisitions and the Elemec acquisition. For the
quarter, research and development decreased 8% primarily due to
reductions at the access product group.
Year to date, goodwill amortization decreased 10% due to the
write-off of all of XEL's and a portion of Instrument Associates'
goodwill, offset partially by the second quarter 1997 acquisitions
and the Elemec acquisition. For the quarter, goodwill
amortization decreased 26% due to the asset impairment and related
write-off of XEL's and Instrument Associates' goodwill, offset in
part by the Elemec acquisition.
Interest expense declined 30% and 40% for the first nine months
and third 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% for the first nine months and the third quarter of 1998
compared to 37% and 36%, respectively, in the same periods of
1997. The higher tax rate was due to lower than expected research
and development credits in 1998.
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.
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
$18,000, substantially all in cash. The Company reported a gain
of $100 on the transaction. Proceeds of the sale were used to pay
down outstanding debt.
On July 31, 1997, the Company sold its real estate complex, Green
Hills Corporate Center (GHCC), 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 $11,354 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 an existing line of credit should provide
adequate working capital. In addition, the Company previously
announced elimination of the $0.10 per share quarterly dividend
after the March 10, 1998 payment. Elimination of the dividend
provides 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.
Under the terms of the loan agreement, the Company has a maximum
working capital line of $12,000 and an acquisition line of $12,000
with First Union National Bank. 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 agreement
also contains a provision that limits the working capital line to
a defined borrowing base consisting of eligible receivables and
inventory amounts.
Lines of credit are available through June 30, 1999 to fund both
short-term cash needs as well as future acquisitions. As of
October 2, 1998, the Company had an available working capital line
of credit of $10,489, reduced by outstanding borrowings of $2,344,
and issued letters of credit aggregating $2,000. The Company was
in compliance with its debt covenants at October 2, 1998.
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 expects that
there could be some impact from the currency problems on the
volume or timing of the products sold in those countries.
The Company recognizes the issues associated with the year 2000
problem and need to ensure that its operations will not be adversely
impacted by year 2000 software failures. Comprehensive reviews of
all systems and applications, including key suppliers and vendors,
are being conducted, implementation plans to resolve any issues are
being formulated and certain corrective actions have been
commenced. The Company expects its year 2000 compliance programs
to be completed by the end of 1999. The total cost of achieving
year 2000 compliance is not deemed to be material. All modification
costs are expensed as incurred.
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, capital requirements, 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, Asia and Latin America, 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, 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
such as "estimates", "positioned", "yields", "should generate",
"appears", "viewed", "could potentially", "would position",
"expected", "does not expect" and "should allow" indicate the
presence of forward looking statements.
<PAGE>
Part II. Other Information
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
(1) The registrant filed Form 8-K on July 24, 1998 for
the sale of Resource Consultants, including Pro
Forma Unaudited Consolidated Condensed Financial
Statements.
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: November 13, 1998
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