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 July 2, 1999
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 2, 1999 (including 156,250
shares of restricted stock
and excluding 2,846,930
Class A treasury shares): 5,594,471 543,899
<PAGE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Pages
Item I.
Consolidated Condensed Balance Sheets at
July 2, 1999 (unaudited) and January 1, 1999
Consolidated Condensed Statements of Operations for the
six and three month periods ended July 2, 1999
and July 3, 1998 (unaudited)
Consolidated Condensed Statements of Cash Flows
for the six month periods ended July 2, 1998
and July 3, 1998 (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 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
July 2, 1999 and January 1, 1999
(Unaudited)
(000's)
July 2, January 1,
1999 1999
--------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,150 $ 2,582
Accounts receivable, net of allowance
for doubtful accounts of $1,837 and
$1,711, respectively 23,059 27,342
Inventories 17,000 15,070
Deferred income taxes 4,310 5,510
Other current assets 7,449 5,551
------ ------
Total current assets 52,968 56,055
------ ------
Property, plant and equipment, at cost 47,325 46,530
Less accumulated depreciation and
amortization 24,822 23,648
------ ------
22,503 22,882
------ ------
Deferred income taxes 6,540 6,940
Other assets 3,350 3,350
Software development costs 2,654 728
Goodwill 31,583 28,500
------- -------
Total Assets $ 119,598 $ 118,455
======= =======
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 5,776 $ 1,828
Accounts payable 7,893 7,200
Salaries and wages 1,100 987
Income taxes, currently payable 770 466
Estimated liability for contract losses 1,756 1,756
Other accrued liabilities 8,441 12,253
------ ------
Total current liabilities 25,736 24,490
------ ------
Long-term debt 10,436 10,616
Other long-term liabilities 5,233 5,360
Stockholders' equity:
Common stock 8,985 8,985
Capital in excess of par value 37,092 37,394
Warrants outstanding 1,755 1,665
Retained earnings 73,256 72,978
Foreign currency translation adjustment (54) 99
Deferred compensation-restricted stock (1,515) (1,610)
Treasury stock (41,326) (41,522)
------- -------
78,193 77,989
------- -------
Total Liabilities and Stockholders' Equity $ 119,598 $ 118,455
======= =======
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)
Six Months Ended Three Months Ended
--------------------------- ----------------------------
July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 56,220 $ 57,747 $ 27,597 $ 29,772
Cost of goods sold 33,678 39,408 16,703 21,795
------ ------ ------ ------
Gross profit 22,542 18,339 10,894 7,977
Selling, general and administration 16,827 18,666 8,220 9,204
Research and development 4,352 5,396 1,931 2,640
Goodwill impairment and
restructuring charge - 18,190 - 18,190
Goodwill amortization 810 805 434 335
------ ------ ------ ------
Operating profit (loss) 553 (24,718) 309 (22,392)
------ ------ ------ ------
Interest income and other 374 74 280 46
Interest expense 530 829 289 434
------ ------ ------ ------
Pre-tax income (loss)
from continuing operations 397 (25,473) 300 (22,780)
------ ------ ------ ------
Provision (Benefit) for taxes on income (loss) 119 (5,131) 90 (4,108)
------ ------ ------ ------
Net income (loss) from continuing operations 278 (20,342) 210 (18,672)
------ ------ ------ ------
Income from discontinued operations:
Technical Services Segment (less
applicable taxes of $733 for the
six month period ended and $490
for the three month period ended,
respectively) - 1,197 - 799
------ ------ ------ ------
Net income from discontinued operations - 1,197 - 799
------ ------ ------ ------
Net income (loss) $ 278 $ (19,145) $ 210 $ (17,873)
====== ====== ====== ======
<PAGE>
Per share of common stock (basic and diluted):
Net income (loss) from
continuing operations $ 0.05 $ (3.24) $ 0.04 $ (2.99)
Net income from discontinued operations:
Technical Services Segment $ - $ 0.19 $ - $ 0.13
---- ---- ---- ----
Net income (loss) per share $ 0.05 $ (3.05) $ 0.04 $ (2.86)
==== ==== ==== ====
Cash dividends per share $ - $ 0.10 $ - $ -
Basic weighted average shares outstanding 5,962,820 6,282,624 5,973,249 6,251,815
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) Six Months Ended
(000'S) ----------------------
July 2, July 3,
1999 1998
-------- -------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 278 $ (19,145)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 3,218 3,376
Goodwill write-off - 15,789
Reserve provisions 452 5,434
Deferred income tax provision (benefit) 1,600 (4,025)
Restricted stock expense 95 70
Changes in current assets and current liabilities
net of effects from acquisitions:
Accounts receivable and unbilled revenue 4,417 321
Inventories (2,095) 43
Other current assets (1,872) (189)
Accounts payable and salaries and wages 664 (1,667)
Other accrued liabilities (4,015) 1,664
Income taxes, currently payable 304 (2,060)
----- -----
Net cash provided by (used for) operating activities 3,046 (389)
----- -----
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (3,967) (952)
Payments for property, plant and equipment (1,848) (3,200)
Software development costs (2,052) (151)
----- -----
Net cash used for investing activities (7,867) (4,303)
----- -----
<PAGE>
Cash flows from financing activities:
Payment of debt (173) (218)
Borrowings under note payable 3,948 6,694
Issuance of treasury stock in connection
with stock purchase plan 143 205
Payments to acquire treasury stock (250) (1,598)
Cash dividends paid - (644)
Other, net (279) (534)
----- -----
Net cash provided by financing activities 3,389 3,905
----- -----
Net decrease in cash and cash equivalents (1,432) (787)
Cash and cash equivalents at beginning of period 2,582 2,979
----- -----
Cash and cash equivalents at end of period $ 1,150 $ 2,192
===== =====
Supplemental cash flow disclosures:
Interest paid $ 503 $ 803
===== =====
Income taxes paid, net of refunds received $ 52 $ 1,708
===== =====
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. 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 Consolidated Condensed Balance Sheets
and Statements of Operations were reclassified to conform with current period
presentation. 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 1, 1999 for further information.
2. Net income per share of common stock was determined using the average number
of Class A and Class B shares outstanding excluding 156,250 shares of restricted
stock. No preferred stock was outstanding as of July 2, 1999.
Dilutive shares outstanding were determined on the assumption that all
outstanding options, warrants and shares of restricted stock with a strike
price below the average stock price for the period would be exercised and the
related shares issued. Dilutive shares outstanding for the second quarter of
1999 and 1998 were 5,981,258 and 6,252,972, respectively. These additional
shares had an immaterial effect on the Company's earnings per share
calculation.
3. In the second quarter of 1999, the Company accrued for severance costs of
$356 and wrote off $650 of inventory in connection with the consolidation of its
Instruments Associates division into its GAI-Tronics, Reading, Pennsylvania
facility. Also during the quarter, the Company determined that $1,000 of its
reserves was no longer required and could be reduced. The effect of these
adjustments was to increase cost of goods sold by $830 and reduce selling,
general and administration by $824.
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
included: (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 its 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) as a result of updated cash flow analysis.
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 included 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.
<TABLE>
The following table displays a rollforward of the liabilities for the
restructuring charge from January 1, 1999 to July 2, 1999:
January 1, July 2,
1999 Amounts 1999
Type of Cost Balance Additions Utilized Balance
-------------------- ------- --------- -------- -------
<S> <C> <C> <C> <C>
Employee separations $ 515 $ - $ (515) $ -
Facility closings 798 - (555) 243
Other 141 - (54) 87
----- ---- ----- ---
Total $1,454 $ - $(1,124) $ 330
===== ==== ===== ===
</TABLE>
4. The components of inventories as of the balance sheet dates were as follows:
<TABLE>
July 2, 1999 Jan. 1, 1999
------------ ------------
<S> <C> <C>
Raw material and components $10,169 $ 9,632
Work in process 2,222 2,408
Finished goods 8,191 6,885
Reserves (3,582) (3,855)
------ ------
$17,000 $15,070
====== ======
</TABLE>
5. Other accrued liabilities included an accrual primarily for workers'
compensation of $1,276 and $1,602 at July 2, 1999 and January 1, 1999,
respectively. Also included in other accrued liabilities was software
licensing revenue that is recognized proportionally over the contract term. At
July 2, 1999 and January 1, 1999, the Company deferred $1,397 and $1,429,
respectively.
6. The Company capitalizes costs associated with the development of software for
external use in accordance with Statement of Financial Accounting Standards No.
86 "Accounting for Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed." Costs are being amortized on a straight line basis over 2 to 3
years. Capitalized software development costs and associated amortization
expense were $1,489 and $63, respectively, in the quarter ended July 2, 1999
and $21 and $105, respectively, in the quarter ended July 3, 1998. Capitalized
software development costs and associated amortization expense were $2,052 and
$126, respectively, for the six months ended July 2, 1999 and $151 and $139,
respectively, for the six months ended July 3, 1998.
7. Effective February 23, 1999, the Company acquired all of the outstanding
stock of ComOpt AB (ComOpt) for $4,098, including acquisition costs. The Company
recorded goodwill of $3,892, which is being amortized on a straight-line basis
over 10 years. Under the terms of the agreement, the Company will also pay
ComOpt's former shareholders additional amounts based upon the achievement of
certain sales and operating income levels. Any additional payments will
increase goodwill. ComOpt is part of the Company's Wireless Segment and was
merged into SAFCO Technologies, Inc. operations.
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 Segment and was merged into GAI-Tronics
Corporation's European operations.
8. Under the terms of a 1998 loan agreement with First Union National Bank, the
Company has a working capital line of credit of $12,000 and an acquisition line
of credit 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
and requires the Company to pay a commitment fee of one-quarter of one percent
on the unused portion of the lines. The agreement also contains a provision
that limits the working capital line of credit to a defined borrowing base
consisting of eligible receivables and inventory amounts. The Company was in
compliance with its debt covenants at July 2, 1999.
Lines of credit are available through August 31, 1999 to fund both short-term
cash needs as well as future acquisitions. The Company is in the process of
negotiating a new loan agreement. As of July 2, 1999, the Company had an
available working capital line of credit of $9,251, reduced by outstanding
borrowings of $5,776, and issued letters of credit aggregating $2,026.
9. The Company has three reportable segments: Industrial, Access Products and
Wireless. The Industrial Segment develops, assembles and markets
communication systems for industrial operations. Industrial communication
products are designed to operate under extraordinary plant conditions and
provide emergency notification. In addition, the segment includes land mobile
radio communications devices. The Access Products Segment designs and markets
voice and data transmission system products. The access products provide
access to telecommunications services and automated monitoring and maintenance
of telecommunications network performance. The Wireless Segment's products
and services focus on the measurement and analysis of signal strength, data
communications and radio frequency transmitted between the wireless phone and
cellsites. The Wireless Segment also provides radio frequency engineering
design services.
Each reportable segment operates as a separate, standalone business unit with
its own management.
The Company evaluates segment performance based on profit or loss from
continuing operations before income tax, goodwill amortization and corporate
overhead allocation. Profit or loss from continuing operations is determined
in accordance with generally accepted accounting principles described in the
summary of significant accounting policies. Intersegment sales are not
significant.
<TABLE>
Three Months Ended Six Months Ended
---------------------- ---------------------
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
-----------------------------------------------------------------------------------
Sales
<S> <C> <C> <C> <C>
Industrial $ 14,377 $ 17,406 $ 30,501 $ 34,080
Access Products 4,141 6,799 10,692 13,512
Wireless 9,079 5,567 15,027 10,155
-------- -------- -------- --------
27,597 29,772 56,220 57,747
-------- -------- -------- --------
Segment Profit (Loss)
Industrial 133 2,127 2,346 3,625
Access Products (581) 564 (599) 490
Wireless 1,828 (646) 1,176 (2,708)
General interest expense (274) (406) (496) (771)
General corporate expenses (1,002) (1,041) (1,944) (2,289)
Goodwill amortization (434) (335) (810) (805)
Goodwill impairment,
restructuring and other
charges (650) (23,089) (650) (23,089)
UESC reserve reversal 1,000 - 1,000 -
Interest income 280 46 374 74
-------- -------- --------- ---------
Pre-tax income (loss) from
continuing operations $ 300 $(22,780) $ 397 $(25,473)
=====================================================================================
</TABLE>
10. In the first quarter of 1997, the Company accounted for both 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.
The 1998 results for the Technical Services Segment have been classified as
discontinued operations in the Consolidated Condensed Statements of Operations.
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.
Sales for the Technical Services Segment were $22,073 and $42,660 for the three
and six month periods ended July 3, 1998. The Real Estate Segment was sold in
1997.
11. The Company will adopt the Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities"(SFAS 133),
in the first quarter of 2001. SFAS 133 is not expected to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
<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
The Company reported net income from continuing operations for the
second quarter of 1999 of $210, or $0.04 per share compared to a
loss of $18,672 or $2.99 per share for the same period of 1998.
Included in the results for the second quarter of 1998 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. As part of a cost reduction initiative in the
second quarter of 1999, the Industrial Segment accrued for
severance costs of $356 and wrote off $650 of inventory in
connection with the consolidation of its Instrument Associates
division into its GAI-Tronics, Reading, Pennsylvania facility.
Also during the quarter, the Company determined that $1,000 of its
reserves was no longer required and could be reduced. The effect
of these adjustments was to increase cost of goods sold by $830 and
reduce selling, general and administration by $824.
The restructuring and asset impairment charges of $18,190 in 1998
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.
Excluding the one time charges and adjustments, the Company
reported net income from continuing operations for the second
quarter of 1999 of $214, or $0.04 per share compared to $192 or
$0.03 per share for the same period of 1998. The improvement was
primarily due to increased sales by the Wireless Segment, lower
research and development expense and reduced interest expense,
offset in part, by lower sales and lower gross margins by the
Industrial and Access Products Segments.
The reduction of research and development expense in the second
quarter of 1999 was due to the Company capitalizing more software
under development than it had in prior periods as development
efforts at SAFCO (Wireless Segment) and XEL (Access Products
Segment) have become much more focused on products that will
generate sales over an extended period, versus performing research
and providing maintenance on existing products. The net amount
capitalized, after related amortization, was $1,426 in the quarter
and $1,926 in the six months, compared to $12 for the first six
months of 1998.
For the six month period ended July 2, 1999, the Company reported
net income from continuing operations of $282 or $0.05 per share
before adjustments, versus a loss of $1,478 or $0.24 per share from
continuing operations and before the one time charges in 1998. The
improvement was primarily due to increased sales and higher gross
margins in the Wireless Segment, lower research and development
expense, and reduced interest and corporate expense, offset in part
by lower sales by the Industrial and Access Products Segments.
Sales decreased 3% and 7% for the six and three month periods in
1999, respectively, compared to the same periods in 1998. The
decrease in sales was due to a decline in sales in the Industrial
and Access Products Segments, offset by a significant increase in
sales in the Wireless Segment.
The following is a breakdown of sales by segment:
Year to Date Second Quarter
1999 1998 1999 1998
---- ---- ---- ----
Industrial $30,501 $34,080 $14,377 $17,406
Access Products 10,692 13,512 4,141 6,799
Wireless 15,027 10,155 9,079 5,567
------ ------ ------ ------
Total $56,220 $57,747 $27,597 $29,772
====== ====== ====== ======
Wireless sales increased 48% and 63% for the six and three month
periods in 1999, respectively, compared to the same periods in
1998. The increase in wireless sales was due to strong sales
growth in North America, Latin America, Asia and Europe, and the
ComOpt acquisition in February, 1999. Significant sales growth was
realized across both product sales and engineering services. New
wireless network buildouts, increased subscriber loading on
existing networks, and wireless technology change-overs continue to
drive demand for the Company's products and services.
Industrial sales declined 11% and 17% for the six and three month
periods in 1999, respectively, compared to the same periods in
1998. The decline in sales was due largely to a continuing soft
order flow from the Segment's customers in oil related industries.
While the price per barrel of crude oil has increased significantly
over the last several months, the increased capital spending that
normally follows a higher oil price has not yet occurred.
For the six and three month periods ended July 2, 1999, the Access
Products Segment's sales declined by 21% and 39% compared to the
comparable periods in 1998. The decrease in sales was due to the
continued decline in revenue of the legacy product line and
continuing issues with the Company's partnership multiple access
platform, XPP, impeded its ability to offset the decline.
Excluding the one time charges in 1998, and the adjustments in 1999, the
consolidated gross profit percentage was 42% for both the six and three
month periods in 1999, compared to 39% and 41% for the same periods in
1998. The increase was primarily due to increased sales and higher
gross margins in the Wireless Segment, offset in part, by lower gross
margins in the Access Products Segment.
Selling, General and Administration
Selling, general and administration expense decreased 10% and 11% in the
first half and second quarter of 1999 compared to the same periods in
1998. As a percentage of sales, selling, general and administration
expense was 30% for the six and three month periods ended July 2, 1999,
compared to 32% and 31% for comparable periods in 1998. The decrease
arose primarily from the adjustment in the second quarter of 1999 which
reduced selling, general and administration costs by $824, combined with
a non-recurring charge in the second quarter of 1998 that increased
costs by $546.
Research and Development, Goodwill Amortization and Interest Expense
Research and development decreased 19% and 27% for the six and three
month periods ended July 2, 1999, compared to the same periods in 1998
due to the capitalization of software for external use in accordance
with Statement of Financial Accounting Standard No. 86 "Accounting for
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Goodwill amortization increased 1% and 30% for the six and three month
periods ended July 2, 1999, compared to the same periods in 1998 because
of the additional goodwill generated in the ComOpt acquisition, offset
by the write-off of goodwill as part of a charge during the second
quarter of 1998.
Interest expense declined 36% and 33% for the six and three month
periods ended July 2, 1999, compared to the same periods in 1998 due to
the receipt of proceeds from the sale of discontinued operations in
July, 1998, offset in part by the purchase of ComOpt.
Provision for taxes on income
The effective tax rate was 30% for 1999 and 38% for 1998 excluding one
time charges. The change in the effective tax rate was due to the
utilization of higher research and development tax credits.
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 and services. 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. During 1997, the Company began the divestiture
of the businesses within these segments and completed the dispositions
during 1998.
Discontinued operations in 1998 were represented by the Company's former
subsidiary, Resource Consultants, Inc., which was sold in July, 1998.
Liquidity and Capital Resources
Working capital decreased $4,333 in the first half of 1999. The decline
in working capital was primarily due to the purchase of ComOpt. Amounts
generated from operations, available cash and cash equivalents and an
existing line of credit should provide adequate working capital through
1999. The Company is in the process of negotiating a new loan
agreement. The Company does not expect to make any contingent payments
to former SAFCO Corporation shareholders during 1999.
Under the terms of the current loan agreement, the Company has a maximum
working capital line of credit of $12,000 and an acquisition line of
credit of $12,000 with First Union National Bank that expire on August
31, 1999. The Company expects to renew the lines of credit on that
date. The agreement contains a number of financial and other covenants,
the most restrictive of which requires a certain ratio of funded debt to
earnings before interest, taxes, depreciation and amortization. The
Company was in compliance with all covenants at July 2, 1999. The
agreement also contains a provision that limits the working capital line
of credit to a defined borrowing base consisting of eligible receivables
and inventory amounts. As of July 2, 1999, the availability under the
working capital line of credit was $9,251, before reductions for
outstanding borrowings of $5,776 and issued letters of credit
aggregating $2,026.
The Company estimates that its total capital expenditures in 1999,
excluding acquisitions, will be approximately $3,500. No restrictions
on cash transfers between the Company and its subsidiaries exist.
Other
Continued improvement in the Company's operations is dependent upon
successful product releases within the Wireless Segment. Continued lack
of demand for the analog products within the Access Products Segment
could depress results; however, the Company is continuing the process of
entering into new technology partnerships which are expected to offset
declining analog product sales. Additionally, the Company recently
introduced its new "Shark" multiple access platform at the "SuperComm"
communications trade show in Atlanta, Georgia. "Shark" is expected to
begin shipping in the fourth quarter of 1999.
The Company announced on April 28, 1999 that its Board of Directors had
agreed to call for a vote of shareholders on changing the Company's
capital structure to one class of common stock, all with equal voting
rights. The Board has engaged an investment banker for advice on key
issues related to the proposed change and expects the vote will be taken
at a shareholders meeting to be held no later than at the Annual Meeting
in 2000.
The currency problems with certain Asian countries and in Brazil 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 products sold in those countries.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The Company will adopt
SFAS 133 during the first quarter of 2000. SFAS 133 is not expected to
have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
The Company recognizes the issues associated with the Year 2000 problem.
The Company relies on information technology ("IT") systems to support
many key operations of its business. The Company believes that these
systems must be made compliant to ensure no material business
interruption. The program to identify and resolve Year 2000 issues
encompasses the following phases: risk assessment, inventory of affected
technology and critical third party suppliers, development of project
plans and monitoring of projects, and contingency planning. Initial
risk assessment and inventories of systems have been conducted and the
Company has determined that most of its systems are Year 2000 compliant.
The Company's assessments and inventories are considering both IT and
non-IT systems and equipment.
Project plans have been developed to identify the remaining
systems/equipment that need remediation, as well as actions, resources
needed, and timeframes to perform the remediation. This entire process
is a dynamic one. Compliance assessments are ongoing, modifications to
individual project plans are made as needed, and the Company's overall
remediation status is monitored on a regular basis.
In addition to its own Year 2000 compliance, the Company believes that
its business could potentially be adversely impacted if its key
suppliers and customers do not achieve timely and successful Year 2000
compliance with their systems/equipment. As such, the Company is in the
process of contacting its key business partners to assess their Year
2000 readiness. The Company expects its Year 2000 compliance programs
to be completed by the end of the third quarter of 1999. The total cost
of achieving Year 2000 compliance is not expected to be material. All
modification costs are being expensed as incurred.
On January 1, 1999, several member countries of the European Union
established fixed conversion rates between their existing sovereign
currencies and adopted the Euro as their new common legal currency. The
Company will continue to evaluate issues involving introduction of the
Euro. Based on current information, the Company does not expect that
the Euro conversion will have a material adverse effect on its business,
results of operations, cash flow or financial condition.
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 1999
sales, capital requirements, product diversity, operating profitability,
expected orders from contracts, market position, expected new technology
partnerships, sales from new products, 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",
"would position", "expected", "does not expect" 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 27, 1999,
the shareholders elected two directors and approved the retention of the current
independent auditors.
The results of the voting were as follows:
For Director Granted Withheld
- --------------------- ------- --------
Paul H. Snyder 402,157 36,141
Donald K. Wilson, Jr. 421,657 16,641
BROKER
Other proposals FOR AGAINST ABSTAIN NON-VOTES
- ---------------------------- --- ------- ------- ---------
Ratification of appointment
of Arthur Andersen LLP
as independent auditors 424,677 9,966 3,654 -
<PAGE>
Part II. Other Information
Item 6. 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 11, 1999
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