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 1, 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
October 1, 1999 (including 156,250
shares of restricted stock
and excluding 2,850,550
Class A treasury shares): 5,620,377 514,373
<PAGE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item I.
Consolidated Condensed Balance Sheets at
October 1, 1999 (unaudited) and January 1, 1999
Consolidated Condensed Statements of Operations for the
nine and three month periods ended October 1, 1999
and October 2, 1998 (unaudited)
Consolidated Condensed Statements of Cash Flows
for the nine month periods ended October 1, 1999
and October 2, 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 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 1, 1999 and January 1, 1999
(Unaudited)
(000's)
October 1, January 1,
1999 1999
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 883 $ 2,582
Accounts receivable, net of allowance
for doubtful accounts of $1,780 and
$1,711, respectively 25,829 27,342
Inventories 16,969 15,070
Deferred income taxes 4,510 5,510
Other current assets 7,417 5,551
------ ------
Total current assets 55,608 56,055
------ ------
Property, plant and equipment, at cost 46,771 46,530
Less accumulated depreciation and
amortization 25,973 23,648
------ ------
20,798 22,882
------ ------
Deferred income taxes 6,040 6,940
Other assets 2,850 3,350
Software development costs 3,406 728
Goodwill 31,149 28,500
------- -------
Total Assets $ 119,851 $ 118,455
======= =======
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,938 $ 1,828
Accounts payable 8,406 7,200
Salaries and wages 1,462 987
Income taxes, currently payable 692 466
Estimated liability for contract losses 1,756 1,756
Other accrued liabilities 7,899 12,253
------ ------
Total current liabilities 22,153 24,490
------ ------
Long-term debt 13,846 10,616
Other long-term liabilities 5,164 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 73,555 72,978
Foreign currency translation adjustment 126 99
Deferred compensation-restricted stock (1,468) (1,610)
Treasury stock (41,357) (41,522)
------- -------
78,688 77,989
------- -------
Total Liabilities and Stockholders' Equity $ 119,851 $ 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)
Nine Months Ended Three Months Ended
--------------------------- ---------------------------
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 84,032 $ 86,227 $ 27,812 $ 28,480
Cost of goods sold 49,530 55,812 15,852 16,403
------ ------ ------ ------
Gross profit 34,502 30,415 11,960 12,077
Selling, general and administration 25,597 26,888 8,770 8,223
Research and development 6,440 8,109 2,088 2,713
Goodwill impairment and
restructuring charge - 18,190 - -
Goodwill amortization 1,243 1,144 433 339
------ ------ ------ ------
Operating profit(loss) 1,222 (23,916) 669 802
------ ------ ------ ------
Interest income and other 471 169 97 95
Interest expense 869 1,069 339 240
------ ------ ------ ------
Pre-tax income(loss)
from continuing operations 824 (24,816) 427 657
------ ------ ------ ------
Provision(Benefit) for
taxes on income(loss) 247 (4,880) 128 251
------ ------ ------ ------
Net income(loss) from
continuing operations 577 (19,936) 299 406
------ ------ ------ ------
Income(loss) from discontinued operations:
Technical Services Segment (less applicable
tax provision(benefit) of $643 for the
nine month period ended and $(90)
for the three month period ended,
respectively) - 1,050 - (147)
Gain on disposal of subsidiary
(less applicable income taxes
of $0 for the nine and three
month periods ended) - 100 - 100
------ ------ ------ ------
Net income(loss) from discontinued
operations - 1,150 - (47)
------ ------ ------ ------
Net income(loss) $ 577 $ (18,786) $ 299 $ 359
====== ====== ====== ======
<PAGE>
Per share of common stock
(basic and diluted):
Net income(loss) from
continuing operations $ 0.10 $ (3.21) $ 0.05 $ 0.07
Net income(loss) from discontinued
operations:
Technical Services Segment $ - $ 0.17 $ - $ (0.03)
Disposal of subsidiary $ - $ 0.02 $ - $ 0.02
---- ---- ---- ----
Net income(loss) per share $ 0.10 $ (3.02) $ 0.05 $ 0.06
==== ==== ==== ====
Cash dividends per share $ - $ 0.10 $ - $ -
Basic weighted average shares
outstanding 5,968,324 6,217,698 5,979,333 6,087,845
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) Nine Months Ended
(000's) -----------------------
October 1, October 2,
1999 1998
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 577 $ (18,786)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Gain on sale of subsidiary - (100)
Depreciation and amortization 5,106 4,921
Goodwill write-off - 15,789
Reserve provisions 598 5,482
Deferred income tax provision (benefit) 1,900 (4,440)
Restricted stock expense 142 107
Changes in current assets and current liabilities
net of effects from acquisitions and disposition:
Accounts receivable and unbilled revenue 1,561 (481)
Inventories (2,124) 63
Other current assets (1,840) (42)
Accounts payable and salaries and wages 1,539 (1,809)
Other accrued liabilities (4,560) 1,700
Income taxes, currently payable 226 (2,184)
----- -----
Net cash provided by operating activities 3,125 220
----- -----
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (3,967) (952)
Payments for property, plant and equipment (2,343) (4,630)
Proceeds from sale of subsidiary - 13,732
Software development costs (3,069) (442)
Proceeds from sale of property, plant
and equipment 1,012 -
----- -----
Net cash provided by (used for) investing activities (8,367) 7,708
----- -----
<PAGE>
Cash flows from financing activities:
Proceeds from issuance of debt 3,500 -
Payment of debt (259) (299)
Borrowings (Repayments) under note payable 110 (6,213)
Proceeds from notes receivable 500 500
Issuance of treasury stock in connection
with stock purchase plan 143 205
Payments to acquire treasury stock (281) (3,104)
Cash dividends paid - (644)
Other, net (170) (401)
----- -----
Net cash provided by (used for) financing activities 3,543 (9,956)
----- -----
Net decrease in cash and cash equivalents (1,699) (2,028)
Cash and cash equivalents at beginning of period 2,582 2,979
----- -----
Cash and cash equivalents at end of period $ 883 $ 951
===== =====
Supplemental cash flow disclosures:
Interest paid $ 804 $ 1,084
===== =====
Income taxes paid, net of refunds received $ 230 $ 1,992
===== =====
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 and 111,250 shares
of restricted stock for 1999 and 1998, respectively. No preferred stock was
outstanding as of October 1, 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 third quarter of
1999 and 1998 were 5,986,853 and 6,089,997, respectively. Dilutive shares
outstanding for the nine month periods ended October 1, 1999 and October 2,
1998 were 5,976,257 and 6,223,542. 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.
<PAGE>
<TABLE>
The following table displays a rollforward of the liabilities for the
restructuring charge from January 1, 1999 to October 1, 1999:
January 1, October 1,
1999 Amounts 1999
Type of Cost Balance Additions Utilized Balance
-------------------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Employee separations $ 515 $ - $ (515) $ -
Facility closings 798 - (596) 202
Other 141 - (54) 87
----- ----- ----- -----
Total $1,454 $ - $(1,165) $ 289
===== ===== ===== =====
</TABLE>
4. The components of inventories as of the balance sheet dates were as follows:
<TABLE>
Oct. 1, 1999 Jan. 1, 1999
------------ ------------
<S> <C> <C>
Raw material and components $ 8,803 $ 9,632
Work in process 2,472 2,408
Finished goods 7,103 6,885
Reserves (1,409) (3,855)
------ ------
$16,969 $15,070
====== ======
</TABLE>
5. Other accrued liabilities included an accrual primarily for workers'
compensation of $1,146 and $1,602 at October 1, 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
October 1, 1999 and January 1, 1999, the Company deferred $1,685 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 $1,017 and $265, respectively, in the quarter ended October 1,
1999 and $291 and $59, respectively, in the quarter ended October 2, 1998.
Capitalized software development costs and associated amortization expense were
$3,069 and $391, respectively, for the nine months ended October 1, 1999 and
$442 and $198, respectively, for the nine months ended October 2, 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 1999 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 $6,000. The agreement contains a number of financial and other
covenants that, among other things, require maintenance of a certain ratio of
funded debt to earnings before interest, taxes, depreciation and amortization
and require 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 October 1, 1999.
Lines of credit are available through June 30, 2000 to fund both short-term
cash needs as well as future acquisitions. As of October 1, 1999, the Company
had an available working capital line of credit of $9,747, reduced by
outstanding borrowings of $1,938, and issued letters of credit aggregating
$2,021.
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.
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
---------------------- ---------------------
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1999 1998 1999 1998
------------------------------------------------------------------------------
Sales
-----
<S> <C> <C> <C> <C>
Industrial $ 14,829 $ 15,030 $ 45,330 $ 49,110
Access Products 4,642 5,178 15,334 18,690
Wireless 8,341 8,272 23,368 18,427
------ ------ ------ ------
27,812 28,480 84,032 86,227
------ ------ ------ ------
Segment Profit (Loss)
---------------------
Industrial 1,085 1,204 3,431 4,829
Access Products (244) (201) (843) 289
Wireless 1,320 1,147 2,496 (1,561)
General interest expense (326) (277) (822) (1,048)
General corporate expenses (1,072) (972) (3,016) (3,261)
Goodwill amortization (433) (339) (1,243) (1,144)
Goodwill impairment,
restructuring and other
charges - - (650) (23,089)
UESC reserve reversal - - 1,000 -
Interest income and other 97 95 471 169
-------- -------- --------- ---------
Pre-tax income (loss) from
continuing operations $ 427 $ 657 $ 824 $ (24,816)
==============================================================================
</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 for $19,317, substantially all in cash.
The sale price included a $2,750 note with an 8% interest rate and principal
payments due through 2004, that is recorded in other assets. The sale resulted
in an after tax gain of $100, or $.02 per share. Proceeds of the sale were
used to pay down outstanding bank debt.
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 $5,591 and $48,251 for the three
and nine month periods ended October 2, 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 third
quarter of 1999 of $299, or $0.05 per share compared to $406 or $.07 per
share for the same period of 1998. The decrease was primarily due to
higher selling, general and administration expenses in the Industrial
and Access Products Segments and lower gross margins in the Wireless
Segment, offset in part, by lower research and development expenses in
the Wireless and Access Products Segments.
The reduction in research and development expense in the third quarter
of 1999 was due to the Company's capitalizing more software under
development than it had in the third quarter of 1998 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 $2,678 and $752 for the nine and three month periods
in 1999, respectively, compared to $244 and $232 for the nine and three
month periods in 1998, respectively.
Included in the results for the first nine months 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 second quarter of 1999, 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).
For the nine month period ended October 1, 1999, the Company
reported net income from continuing operations of $581 or $0.10 per
share before adjustments, versus a loss of $1,072 or $0.17 per
share from continuing operations and before the one time charges in
1998. The improvement was primarily due to increased sales and
lower net reported research and development expenses in the Wireless
Segment, and reduced interest and corporate expense, offset in part
by the impact of lower sales in the Industrial and Access Products
Segments.
Sales decreased 3% and 2% for the nine and three month periods in
1999, respectively, compared to the same periods in 1998. For the
nine month period, 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. For the
three month period, the decrease in sales was due to a decline in
sales in the Access Products and Industrial Segments.
<TABLE>
The following is a breakdown of sales by segment:
Year to Date Third Quarter
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Industrial $45,330 $49,110 $14,829 $15,030
Access Products 15,334 18,690 4,642 5,178
Wireless 23,368 18,427 8,341 8,272
------ ------ ------ ------
Total $84,032 $86,227 $27,812 $28,480
====== ====== ====== ======
</TABLE>
Wireless sales increased 27% and 1% for the nine and three month
periods in 1999, respectively, compared to the same periods in
1998. For the nine month period, the increase in wireless sales
was due to strong sales growth in North America, Latin America and
Europe, and the ComOpt acquisition in February, 1999. Significant
sales growth was realized across both test and measurement products
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. For the three month period, revenue from the
Segment's Asian markets, except for Japan, was disappointing and
was the primary reason that revenue failed to significantly exceed
prior year.
Industrial sales declined 8% and 1% for the nine 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 impacted Industrial
sales.
Access Products sales declined 18% and 10% for the nine and three
month periods in 1999, respectively, compared to the same periods
in 1998. The decline was due to a continued low level of core
product orders and disappointing sales of the Company's partnership
multiple access platform, XPP. At the end of the third quarter and
into the first few weeks of the fourth quarter, core product orders
began to increase, indicating that certain customers' re-use
programs may be winding down.
Excluding the one time charges in 1998, and the adjustments in 1999, the
consolidated gross profit percentages were 42% and 43% for the nine and
three month periods in 1999, compared to 40% and 42% for the same
periods in 1998. The increase in the nine month period was primarily
due to a higher percentage of Wireless sales which have a higher gross
margin. The increase in the third quarter was due to improved gross
margins in both the Access Products and Industrial Segments.
Selling, General and Administration
Selling, general and administration expense decreased 5% in the nine
months and increased 7% in the third quarter of 1999 compared to the
same periods in 1998. For the nine month period, the decrease arose
primarily from the adjustment in the first nine months 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. For the quarter, the increase was due to increases at all
three Segments and higher corporate expenses. As a percentage of sales,
selling, general and administration expense was 31% and 32% for the nine
and three month periods ended October 1, 1999, respectively, compared to
31% and 29% for comparable periods in 1998. For the nine month period,
the percentage was flat, primarily because of 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, offset by higher
percentages in the Industrial and Access Products Segments. For the
three month period, the percentage increased due to higher corporate
expenses and a higher percentage in the Access Products Segment.
Research and Development, Goodwill Amortization and Interest Expense
Research and development decreased 21% and 23% for the nine and three
month periods ended October 1, 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 9% and 28% for the nine and three month
periods ended October 1, 1999, compared to the same periods in 1998
because of the additional goodwill generated in the ComOpt acquisition,
offset by the lower base associated with the write-off of goodwill as
part of a charge during the second quarter of 1998.
Interest expense declined 19% for the nine month period and increased
41% for the three month period ended October 1, 1999, compared to the
same periods in 1998. For the nine month period, the decrease was due
to the receipt of proceeds from the sale of a subsidiary included in
discontinued operations in July, 1998, offset in part by the purchase of
ComOpt. For the three month period, the increase was due to the
purchase of ComOpt, cash used for capitalized software development,
offset in part by the receipt of proceeds in July, 1998 from the sale of
a subsidiary included in discontinued operations.
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 increased $1,890 in the first nine months of 1999. The
increase in working capital was primarily due to the sale of real estate
for its net book value of $1,012 and a principal payment on the note
receivable relating to the sale of the Real Estate Segment. Amounts
generated from operations, available cash and cash equivalents and an
existing line of credit should provide adequate working capital. 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 $6,000 with First Union National Bank that expire on June 30,
2000. 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 October 1, 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 October 1, 1999, the availability under
the working capital line of credit was $9,747, before reductions for
outstanding borrowings of $1,938 and issued letters of credit
aggregating $2,021.
The Company estimates that its total capital expenditures in 1999,
excluding acquisitions, will be approximately $3,200. No restrictions
on cash transfers between the Company and its subsidiaries exist.
Other
On October 27, 1999, the Company announced that the Board of
Directors has retained Robert W. Baird & Co. to assist in
evaluating and pursuing various strategic alternatives intended to
enhance shareholder value.
The Company expects to provide no further announcements on this process
until conclusions are reached, which are not expected until next year.
The Company is also continuing to consider, in the same timeframe, the
previously announced proposed change in the Company's capital structure
to one class of common stock.
During the quarter, the Company entered into a letter of intent to
acquire a small European designer (under $5,000 in revenue) of a
complementary communication technology which should, if the acquisition
is completed as expected in the fourth quarter, dramatically expand this
Segment's worldwide addressable market.
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.
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 has
contacted its key business partners to assess their Year 2000 readiness.
The Company believes that its Year 2000 compliance programs are
substantially complete and any unresolved issues will not significantly
affect normal business operations in 2000. The total cost of achieving
Year 2000 compliance has not been and is not expected to be material.
All modification costs are being 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 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 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: November 12, 1999
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