SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
__________
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended January 1, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
P.O. Box 1498, Reading, Pennsylvania 19603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 856-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $1.00 per share
(Title of Class)
Class B Common Stock, par value $1.00 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this From 10-K. [X]
<PAGE>
(Dollar amounts shown in thousands except for share information)
The aggregate market value of the registrant's Class B (voting) Common
Stock held by non-affiliates computed by reference to the NASDAQ
National Market System closing sale price for the registrant's Class A
(non-voting) Common Stock at January 29, 1999, was $4,444.
<TABLE>
<CAPTION>
Class A Class B
--------- --------
<S> <C> <C>
Number of shares of each class
of common stock outstanding as
of January 29, 1999 (including
156,250 shares of restricted stock
and excluding 2,862,441 treasury shares): 5,614,995 507,864
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
Salient 3 Communications, Inc. (the "registrant") is a leading
telecommunications equipment and services company with subsidiaries that
support public, private, and wireless network operators. The registrant
changed its name effective April 30, 1997 to distinguish its focus on
telecommunications equipment and services. Previously, the registrant
had operated in the technical services and real estate businesses as
well as telecommunications equipment.
The registrant was organized as a holding company in 1984. Prior
to forming the holding company, the registrant was an operating company
and owner of several subsidiaries. The Company was originally organized
in 1942 under its prior name, Gilbert Associates, Inc. The holding
company structure separates the administrative and financing activities
of the registrant from the activities of its operating subsidiaries.
CORPORATE DEVELOPMENTS (amounts in 000's except per share information)
In June, 1996 the registrant 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 registrant's desire to focus its
business on telecommunications and services. In accord with this
decision, during the first quarter of 1997, the registrant accounted for
its Technical Services and Real Estate Segments as discontinued
operations. During 1997, the registrant began to divest of the
businesses within these segments and completed the dispositions on July
24, 1998, when the registrant sold its Resource Consultants, Inc. (RCI)
subsidiary to the management of RCI and an investor group for $19,317.
The sale resulted in a $100 gain, or $.02 per share.
The registrant manufactures and provides telecommunications
equipment and services to the industrial, access products and wireless
communication markets. The registrant's primary subsidiaries consist of
GAI-Tronics Corporation (GTC) - Industrial Segment , XEL Communications,
Inc. (XEL) - Access Products Segment, and SAFCO Technologies, Inc.
(SAFCO) - Wireless Segment.
<PAGE>
INDUSTRIAL SEGMENT
GTC, based in Reading, Pennsylvania, is principally engaged in the
development, assembly and marketing of communication systems for
industrial operations. In serving such customers, GTC provides custom
services by adapting communication systems to operate under
extraordinary plant conditions such as excessive dust and explosive
atmospheres. GTC also designs emergency notification systems. The
Instrument Associates, Inc. (IA) division manufactures and designs land
mobile communications systems. DAC Ltd. (DAC), a wholly owned
subsidiary acquired April 30, 1997, is based in Burton Upon Trent,
England, and is a designer, manufacturer and marketer of ruggedized
communications systems for the mining, energy and transportation
industries in the United Kingdom, Europe, Australia and South Africa.
Effective January 3, 1998, the registrant acquired all of the
outstanding stock of Elemec Systems, Ltd. (Elemec) for $952, including
acquisition costs. Elemec was merged with DAC to form GTC's European
operations, which was renamed GAI-Tronics Limited.
The following table sets forth sales for the past three fiscal
years from the Industrial Segment.
<TABLE>
1998 1997 1996
------ ------ ------
<C> <C> <C>
$64,033 $59,809 $53,003
</TABLE>
<TABLE>
The approximate percentage of sales derived from the principal
markets served during 1998 and the approximate percentage of the
Industrial Segment's backlog as of January 1, 1999 represented by
contracts with clients in such markets, were as follows:
Percentage of Percentage of Backlog
Market for Products 1998 Sales as of January 1, 1999
------------------- ------------- ----------------------
<S> <C> <C>
U.S. Private Industry 57% 42%
Foreign Governments and
Businesses 37 53
U.S. Federal, State and Local
Governments and Agencies 6 5
</TABLE>
<PAGE>
GTC manufactures few of the basic components employed in its
equipment; instead, it primarily designs and assembles its products and
systems using standard or special components manufactured by others.
Several sources of supply exist for such components so that the
companies are not dependent upon any single supplier.
GTC maintains a substantial inventory of components to satisfy its
backlog of orders. The communications systems business requires keeping
a significant amount of inventory on hand because many of the orders are
highly customized for specialized uses. Also, some customers served
require products within a very short time frame. Therefore, maintaining
an adequate level of inventory is required to satisfy its customers.
GTC owns various patents and trademarks. However, such patents and
trademarks are of less significance to its operations than are
experience and reputation. Although GTC had sales to many customers in
1998 and 1997, Motorola accounted for 13% of total sales in both years.
No other customer accounted for 10% or more of such sales in 1998 and
1997.
A substantial part of the Industrial Segment's business is obtained
from customers to whom it has made previous sales. In 1998 and 1997,
sales made to customers who had made purchases within the last four
years accounted for approximately 94% and 78%, respectively, of total
sales. There is no assurance that sales to such customers will account
for a similar percentage of total sales in the future. Many of the
sales are made as a result of proposals submitted in response to
competitive bidding invitations.
As of January 1, 1999 and January 2, 1998, GTC had backlog from
which it had anticipated estimated future sales of approximately $11,730
and $11,398, respectively. It is estimated that substantially all of
the goods reflected in the backlog at January 1, 1999 will be shipped in
1999. Also, the vast majority of sales generated in 1999 will be from
orders received during the year.
GTC competes with a number of other organizations in all of its
product areas. Some of these competitors have larger total sales,
greater financial resources, larger research and development
organizations and facilities and a more diversified range of
telecommunications services and products. The substantial industry
competitors of GTC are believed to be Industroniks, Fitre, Motorola,
Federal Signal and ATI. Management believes that a history of quality,
reputation, experience and service are the most important factors in
being asked to submit bids and in purchasing decisions made by
customers.
GTC is continually modifying its products and attempting to further
expand its product lines. GTC spent $2,480, $2,237, and $2,000 during
1998, 1997 and 1996, respectively, on company-sponsored product
development. Several professional employees within the company
routinely engage in company-sponsored product development and
improvement on a full-time basis.
<PAGE>
It is critical that GTC continues to enhance functionality of
existing products, to develop new products that address technology
changes and to introduce these products in a timely fashion.
On January 1, 1999, the Industrial Segment had a total of 485
employees, of which 246 employees were professional and technical
personnel. In comparison, the Industrial Segment had a total of 518
employees on January 2, 1998, of which 287 were professional and
technical personnel.
ACCESS PRODUCTS SEGMENT
XEL, based in Aurora, Colorado, designs and sells transmissions
products to the access products market. XEL's products are used by their
customers in the telecommunications network to provide customer access
for voice and data services. Telephone companies' demand for products
that provide greater transmission speed have increased as a result of
Internet access and business needs. The majority of XEL's core
products do not include technology to provide for such high speed
transmission. As a result, XEL's sales declined 9% during 1998. XEL is
continuing the process of entering into new technology partnerships to
broaden its product offerings. The new products are expected to replace
declining analog product sales. XEL is currently developing its own new
product for the access market, to be released in the third quarter of
1999.
The following table sets forth sales for the past three fiscal
years from the Access Products Segment.
<TABLE>
1998 1997 1996
------ ------ ------
<C> <C> <C>
$25,160 $27,568 $35,543
</TABLE>
<TABLE>
The approximate percentage of sales derived from the principal
markets served during 1998 and the approximate percentage of the Access
Products Segment's backlog as of January 1, 1999 represented by
contracts with clients in such markets, were as follows:
Percentage of Percentage of Backlog
Market for Products 1998 Sales as of January 1, 1999
------------------- ------------- ---------------------
<S> <C> <C>
U.S. Private Industry 97% 100%
Foreign Governments and
Businesses 3 -
U.S. Federal, State and Local
Governments and Agencies - -
</TABLE>
<PAGE>
During 1998, XEL outsourced its manufacturing to U.S. Assemblies New
England, Inc. in Taunton, MA. Prior to that time XEL manufactured few
of the basic components employed in its equipment; instead, it primarily
designed products and systems using standard or special components manufactured
by others. Several sources of supply exist for such components so that
XEL and U.S. Assemblies are not dependent upon any single supplier.
Although XEL has outsourced the manufacturing of its products, it
maintains a substantial inventory of finished products to satisfy its
backlog of orders. Over the past year, XEL has significantly reduced
its inventory investment. However, the access products business
requires keeping a certain amount of inventory on hand because many
customers require products within a very short time frame. Therefore,
maintaining an adequate level of inventory is required to satisfy XEL's
customers.
Although XEL had sales to many customers in 1998, GTE, US West and
Ameritech accounted for 58%, 16% and 11%, respectively, of total sales.
During 1997, GTE, Pacific Bell and US West accounted for 50%, 12% and
11%, respectively, of total sales. No other customer accounted for 10%
or more of such sales in 1998 and 1997.
Historically most of XEL's business has been obtained from
customers to whom it has made previous sales. In 1998 and 1997, sales
made to customers who had made purchases within the last four years
accounted for approximately 100% of total sales. There is no assurance
that sales to such customers will account for a similar percentage of
total sales in the future. As the Company expands its partnership
relationships and develops its own products, it expects to expand its
customer base beyond the customers it has sold to over the past four
years.
As of January 1, 1999 and January 2, 1998, XEL had backlog from
which it had anticipated estimated future sales of approximately $3,953
and $5,644, respectively. It is estimated that substantially all of the
goods reflected in the backlog at January 1, 1999 will be shipped in
1999. Also, the vast majority of sales generated in 1999 will be from
orders received during the year.
XEL competes in an industry subject to rapid technological changes.
Some of its competitors have larger total sales, greater financial
resources, larger research and development organizations and facilities
and a more diversified range of telecommunications services and
products. Direct competitors of XEL in one or more of its markets
include Adtran, Conklin, Pulsecom, Teltrend, and Westell. Management
believes that a history of quality, reputation, experience and service
are the most important factors in being asked to submit bids and in
purchasing decisions made by customers.
XEL is continually modifying its products and attempting to further
expand its product lines. XEL spent $477, $1,781, and $2,481 during
1998, 1997 and 1996, respectively, on company-sponsored product
development. Several professional employees within the company
routinely engage in company-sponsored product development and
improvement on a full-time basis.
<PAGE>
On January 1, 1999, the Access Products Segment had a total of 60
employees, of which 53 employees were professional and technical
personnel. In comparison, the Access Products Segment had a total of
172 employees on January 2, 1998, of which 80 were professional and
technical personnel. The decrease in employees was due primarily to the
outsourcing of manufacturing at XEL during 1998.
WIRELESS SEGMENT
SAFCO, based in Chicago, Illinois, provides products and services
which focus on measurement analysis and predictive tools used by the
wireless communication industry. Historically, a significant portion of
SAFCO's sales and operating profits have been earned in the fourth
quarter. The seasonality may or may not continue due to a number of
factors, including: the timing of new product introductions by SAFCO or
its competitors, market acceptance of SAFCO's products, the size of
customers' capital budgets and other competitive factors. These factors
cause the wireless business to be inherently unpredictable and sales and
profits may fluctuate significantly from quarter to quarter. TEC
Cellular, Inc. (TEC), purchased in the second quarter of 1997, provides
radio frequency engineering consulting services and software
applications to the wireless industry. TEC is based in Melbourne,
Florida and was merged into SAFCO during 1998.
The following table sets forth sales for the past three fiscal
years from the Wireless Segment.
<TABLE>
1998 1997 1996
------ ------ ------
<C> <C> <C>
$30,089 $23,092 $7,913
</TABLE>
The approximate percentage of sales derived from the principal
markets served during 1998 and the approximate percentage of the
Wireless Segment's backlog as of January 1, 1999 represented by
contracts with clients in such markets, were as follows:
<TABLE>
Percentage of Percentage of Backlog
Market for Products 1998 Sales as of January 1, 1999
------------------- ------------- ---------------------
<S> <C> <C>
U.S. Private Industry 39% 62%
Foreign Governments and
Businesses 61 38
U.S. Federal, State and Local
Governments and Agencies - -
</TABLE>
SAFCO manufactures few of the basic components employed in its
equipment; instead, it primarily designs and assembles its products and
systems using standard or special components manufactured by others.
Several sources of supply exist for such components so that the company
is not dependent upon any single supplier.
<PAGE>
SAFCO attempts to maintain a minimal level of inventory of
components to satisfy its backlog of orders. However, the wireless
business requires keeping a certain amount of inventory on hand because
many of the orders are highly customized. Also, some customers served
require products within a very short time frame. Therefore, maintaining
an adequate level of inventory is required to satisfy SAFCO's customers.
SAFCO owns various patents and trademarks. However, such patents
and trademarks are of less significance to the company's operations than
are experience and reputation.
Although SAFCO had sales to many customers in 1998, NEC - Brazil
accounted for 12% of total sales. During 1997, China International and
Motorola accounted for 12% and 10%, respectively, of total sales. No
other customer accounted for 10% or more of such sales in 1998 and 1997.
A part of SAFCO's business is obtained from customers to whom it
has made previous sales. In 1998 and 1997, sales made to customers who
had made purchases within the last four years accounted for
approximately 29% and 51%, respectively, of total sales. There is no
assurance that sales to such customers will account for a similar
percentage of total sales in the future. Many of the sales are made as
a result of proposals submitted in response to competitive bidding
invitations.
As of January 1, 1999 and January 2, 1998, SAFCO had backlog from
which it had anticipated estimated future sales of approximately $3,778
and $5,574, respectively. It is estimated that substantially all of the
goods reflected in the backlog at January 1, 1999 will be shipped in
1999. Also, the vast majority of sales generated in 1999 will be from
orders received during the year.
SAFCO competes in an industry subject to rapid technological
changes. Some of its competitors have larger total sales, greater
financial resources, larger research and development organizations and
facilities and a more diversified range of telecommunications services
and products. SAFCO competes with LCC, Rohde and Schwarz, Mobile System
International and Comarco. Management believes that a history of
quality, reputation, experience and service are the most important
factors in being asked to submit bids and in purchasing decisions made
by customers.
SAFCO is continually modifying its products and attempting to
further expand its product lines. SAFCO spent $2,421, $1,516, and $61
during 1998, 1997 and 1996, respectively, on company-sponsored product
development. Several professional employees within these companies
routinely engage in company-sponsored product development and
improvement on a full-time basis.
It is critical that SAFCO continues to enhance functionality of
existing products, to develop new products that address technology
changes and to introduce these products in a timely fashion. In the
development of new or expanded product offerings, specifically within
the wireless business, SAFCO's access to the technical design of air
interface devices is essential to the development of wireless
communication products. During 1997, certain product delays within the
Wireless Segment had a negative impact on the SAFCO's results of
operations.
<PAGE>
On January 1, 1999, the Wireless Segment had a total of 196
employees, of which 169 employees were professional and technical
personnel. In comparison, the Wireless Segment had a total of 191
employees on January 2, 1998, of which 159 were professional and
technical personnel.
MISCELLANEOUS
The registrant expects no material effect on the capital
expenditures, earnings and competitive position of the registrant and
its subsidiaries from its or their compliance with federal, state or
local laws or regulations controlling the discharge of materials into
the environment or otherwise relating to the protection of the
environment.
A portion of the revenue of the companies is derived from customers
or projects located outside the United States. All foreign revenues
were from sales to customers unaffiliated with the companies. A summary
of foreign revenue is stated in Note 14 to the consolidated financial
statements contained in Part II, Item 8 of this report. The countries
providing the largest portion of foreign revenues in 1998 were the
United Kingdom and Japan.
ITEM 2. PROPERTIES.
The physical properties owned and leased consist primarily of
office and manufacturing space and furniture and equipment.
GTC's manufacturing and office facilities are located near Reading,
Pennsylvania, and in Memphis, Tennessee. The facility near Reading,
Pennsylvania, which is used to design and assemble communications
systems, is owned by GTC and consists of approximately 103,000 square
feet and is located on a 17 acre tract of land owned by GTC. The
facility located in Memphis, Tennessee, which is used to design and
assemble land mobile radio communications devices is leased by GTC and
consists of approximately 50,000 square feet with the lease expiring in
2000.
GAI-Tronics Limited, located in Burton Upon Trent, United Kingdom,
leases a manufacturing and office facility of approximately 44,000
square feet. The lease expires in April 2000.
XEL owns its office and manufacturing facility located in Aurora,
Colorado. The entire facility is approximately 112,000 square feet.
All of XEL's telecommunication transmission product manufacturing was
performed there and XEL's executive and administrative functions are
located there. Due to the outsourcing of XEL's manufacturing operations
in 1998, this facility will be sold and XEL will find other suitable
space for its executive and administrative functions.
SAFCO leases approximately 20,000 square feet of office and
manufacturing space in Chicago, Illinois which expires in 2006. SAFCO
also leases approximately 20,000 square feet of office space in
Melbourne, Florida which expires in 2008.
<PAGE>
With the exception of the XEL facility, which is available for
sale, the registrant and its subsidiaries believe that their existing
facilities are suitable and adequate for their present purposes.
The registrant and its subsidiaries own the majority of the office
furniture and equipment used by them; however, they also lease a
substantial amount of equipment under agreements generally for terms not
in excess of five years.
ITEM 3. LEGAL PROCEEDINGS.
The registrant and its subsidiaries are involved in various
disputes which have resulted in pending litigation arising in the
ordinary course of business. In the opinion of the management of the
registrant, none of these disputes will materially affect the
registrant's financial position or results of operations.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter required to be reported pursuant to this item was
submitted to security holders in the fourth quarter of 1998.
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT.
The names, ages, positions and previous experience to the extent
required to be presented herein of all current executive officers of the
registrant are as follows:
Name Position and Previous Experience Age
Timothy S. Cobb Mr. Cobb has been Chairman of the Board of Directors 57
since July 1995. He was Chief Executive Officer
since March 1994 and President and
Chief Operating Officer since October 1993.
Mr. Cobb served as President of Gilbert/
Commonwealth, Inc. (former subsidiary of
registrant) from January 1991 to September
1993. He served as President of GTC
(subsidiary of registrant) from October 1988
to December 1990. Upon joining
the registrant, Mr. Cobb had 21 years
experience in the telecommunications industry,
culminating with his being President of the
major systems subsidiary of Ameritech in Chicago,
Illinois.
Paul H. Snyder Mr. Snyder has been Senior Vice President and 51
Chief Financial Officer since February 1997 and Vice
President and Chief Financial Officer from August 1995
to January 1997. From August 1994 to July 1995,
Mr. Snyder was Vice President and Chief Financial Officer
of The Dreyfus Corporation, a subsidiary of
Mellon Bank Corporation. From 1988 through 1994, he was
Senior Vice President and Chief Financial Officer of
Mellon PSFS, Mellon Bank Corporation's affiliate
in Philadelphia, Pennsylvania.
Thomas F. Hafer Mr. Hafer has been Senior Vice President since February 50
1997 and Vice President from September 1995 to January
1997. He has served as General Counsel and Corporate
Secretary since February 1994. Mr. Hafer was
President of Green Hills Management Co., (former division
of registrant) from September 1993 to July 1997.
None of the above officers has a family relationship with another
such officer. None of the officers was selected as a result of any
arrangement or understanding with any other person other than directors
of the registrant acting solely in their capacities as such.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS.
Private Placement
The registrant's Class A Common Stock is traded in the over-the-
counter market. Price quotations are available through the NASDAQ
National Market system under the symbol STCIA. The following tabulation
sets forth the high and low price quotations by quarter as reported by
the NASDAQ Stock Market and cash dividends declared on each share of
Class A and Class B Common Stock. Prices quoted represent high and low
closing sale prices on the NASDAQ National Market System.
<TABLE>
1998 1997 Dividends
High Low High Low 1998 1997
----- ---- ----- ---- ---- ----
<C> <C> <C> <C> <S> <C> <C>
$12.00 $11.00 $19.00 $14.00 First Quarter $.10 $.10
11.25 9.00 16.88 11.50 Second Quarter -- .10
10.00 7.75 15.63 12.25 Third Quarter -- .10
10.38 6.25 13.75 11.25 Fourth Quarter -- .10
</TABLE>
On January 28, 1998, the registrant eliminated the $.10 per share
quarterly dividend after the March 10, 1998, payment. The decision was based
on a review of the registrant's growth projections and the need to fund both
working capital and fixed asset requirements over the next few years.
At January 1, 1999, the approximate number of shareholders of Class A and
Class B common stock was 3,100 and 300, respectively
<TABLE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Financial Review
Salient 3 Communications, Inc. and Subsidiaries
Five Year Summary / Selected Financial Data
(000's except for share and per share information and number of employees)
Summary of Operations: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Telecommunications Sales $ 119,282 $ 110,469 $ 96,459 $ 51,848 $ 46,045
Net Loss from Continuing Operations (17,459) (1) (7,845) (2) (7,928) (3) (1,995) (4) (628)
Per Share of Common Stock (Basic):
Net Loss from
Continuing Operations (2.83) (1) (1.24) (2) (1.26) (3) (0.30) (4) (0.09)
Dividends to Stockholders 0.10 0.40 0.60 0.80 0.80
Basic Weighted Average
Shares Outstanding 6,158,587 6,305,384 6,299,127 6,592,174 7,002,834
Summary of Financial Position:
Total Assets $ 118,455 $ 147,497 $ 155,747 $ 135,589 $ 121,289
Long-Term Debt 10,616 11,245 26,549 1,436 -
Stockholders' Equity 77,989 97,860 97,620 102,481 99,514
Stockholders' Equity Per Share 12.74 15.20 15.37 16.30 14.30
Number of Employees 760 905 788 686 426
(1) Amount includes $18,684, or $2.99 per share, of non-recurring adjustments (See Note
9 to the Consolidated Financial Statements appearing elsewhere herein).
(2) Amount includes $6,150, or $0.97 per share, of charges from the write-off of
purchased in-process research and development associated with the TEC Cellular, Inc.
acquisition (See Note 2 to the Consolidated Financial Statements appearing elsewhere herein).
(3) Amount includes $10,300, or $1.63 per share, of charges from the write-off of
purchased in-process research and development associated with the SAFCO acquisition
(See Note 2 to the Consolidated Financial Statements appearing elsewhere herein).
(4) Amount includes $2,500, or $0.40 per share, of charges from the write-off of
purchased in-process research and development associated with the XEL Corporation acquisition.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
(000's except for share and per share information)
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 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.
In order to emphasize the new direction of its business, the
Company changed its name in April, 1997 to Salient 3
Communications, Inc.
Results of Operations
1998 vs. 1997
The Company reported a net loss from continuing operations of
$17,459, or $2.83 per share for 1998, compared with a net loss of
$7,845 or $1.24 per share for 1997. Excluding adjustments, income
from continuing operations was $1,225 or $0.20 per share for 1998,
compared with a net loss of $1,695 or $0.27 per share for 1997.
The improvement was due primarily to higher sales and improved
gross margin for the Wireless Segment, cost reductions and
improved gross margin by the Access Products Segment, higher sales
by the Industrial Segment and reduced corporate interest expense.
Included in the results for 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. Also included in the results was pre-tax income of $267
resulting from reversal of the majority of a reserve for the
retention layer on certain insurance coverages ($2,167), offset in
part by a charge for retirement expenses associated with a former
officer ($1,200) and provisions to strengthen certain other
operating reserves ($700). This resulted in income of $180, net
of $87 income tax expense, or $.03 per share during the fourth
quarter.
<PAGE>
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 its Reading, Pennsylvania
headquarters operations. 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 cost of goods sold, and miscellaneous expenses of
$546, which were included in selling, general and administration.
The reversal of the insurance reserve was triggered by the
Company's transition to a different structure in its insurance
coverages, reflecting both its streamlined telecommunications
businesses and a favorable climate in the commercial insurance
markets. The net pre-tax impact of these adjustments was a
reduction of selling, general and administration expenses of $267.
Included in the results for 1997 was a $6,150 or $.97 per share
charge for purchased in-process research and development
associated with the TEC Cellular Inc. (TEC) acquisition (See Note
2 to the Consolidated Financial Statements appearing elsewhere
herein). 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.
Sales increased 8% for the year from $110,469 in 1997 to $119,282
in 1998. The increase in sales 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
(See Note 2 to the Consolidated Financial Statements), offset in
part by lower sales by the Access Products Segment.
<TABLE>
The following is a breakdown of sales by segment:
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Access Products $25,160 $27,568 $35,543
Industrial 64,033 59,809 53,003
Wireless 30,089 23,092 7,913
------- ------- ------
Total $119,282 $110,469 $96,459
======= ======= ======
</TABLE>
<PAGE>
The sales by segment 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). Sales for the land mobile
operations division of $8,196 and $10,747 for 1997 and 1996, were
reclassified from the Wireless Segment to the Industrial Segment.
Access Products sales declined by 9% in 1998 compared to 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 also a contributing factor to the sales decline. Industrial
sales increased 7% in 1998 compared to 1997, primarily because of
the Elemec acquisition and the second quarter 1997 acquisition of
DAC Ltd., offset in part by lower sales by the Reading,
Pennsylvania location. Wireless sales grew 30% year-over-year due
to the release of SAFCO Technologies' Voice Print(TM) product,
strong sales in Latin America and the TEC acquisition in April
1997.
Including the adjustments, the gross profit percentage decreased
from 40% in 1997 to 39% in 1998. Excluding the aforementioned
adjustments, the gross profit percentage increased from 40% in
1997 to 43% in 1998. The Wireless Segment has a higher gross
profit percentage than the Industrial and Access Products
Segments. Therefore, as a result of a higher percentage of sales
by the Wireless Segment and significant cost reductions in the
Access Products Segment, the Company's gross profit percentage
increased.
Selling, General and Administration
Selling, general and administration increased 12% in 1998 compared
to 1997. The increase in selling, general and administration
resulted primarily from acquisitions, offset in part by cost
reductions by the Access Products Segment.
As a percentage of sales, selling, general and administration was
32% and 31% in 1998 and 1997, respectively. The change stems
primarily from the increase in the percentage of business coming
from the Wireless Segment. The Wireless Segment has a higher
percentage of selling, general and administration to sales
compared to the Industrial and Access Products Segments.
Research and Development, Goodwill Amortization and Interest Expense
Research and development decreased 3% due to reductions at the
Access Products Segment, partially offset by the 1997 acquisitions
and the Elemec acquisition.
Goodwill amortization decreased 14% 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.
Interest expense declined 26% due to the proceeds from the sale of
discontinued operations, offset in part by payments for the
acquisitions.
<PAGE>
Provision for taxes on income
Excluding the aforementioned adjustments, the effective tax rate
was 27% for 1998 and 38% for 1997. The change in the effective
tax rate was due to the utilization of higher research and
development tax credits.
1997 vs. 1996
The Company reported a net loss from continuing operations of
$7,845, or $1.24 per share in 1997 compared to a loss of $7,928,
or $1.26 per share for 1996. 1997 and 1996 include a charge of
$6,150 or $.97 per share and $10,300 or $1.63 per share,
respectively, associated with purchased in-process research and
development (Note 2).
Excluding these adjustments, the net loss from continuing
operations was $1,695 or $0.27 per share for 1997, compared with
income of $2,372 or $0.38 per share for 1996. The loss from
continuing operations resulted primarily from product delays
within the Wireless Segment and reduced customer demand within the
Access Products Segment. Furthermore, higher interest expense and
goodwill amortization reduced results. Partially offsetting these
factors was a decline in corporate overhead expenditures from 1996
to 1997.
Sales increased 15% for the year from $96,459 in 1996 to $110,469
in 1997. The increase in sales was primarily due to the 1997
acquisitions and a full year of sales from the Company's 1996
SAFCO acquisition.
Access Products sales declined by 22% in 1997 compared to 1996,
due to a reduction in customer demand for analog channel units.
This was prompted by certain re-use programs now in place at some
Access Products customers. Industrial sales increased 13%
primarily from the second quarter 1997 acquisition of DAC Ltd. The
Wireless sales grew 192% year-over-year due to the inclusion of
TEC, acquired in April 1997, and the SAFCO acquisition, made by
the Company in September 1996.
The gross profit percentage increased from 39% in 1996 to 40% in
1997. The increase in gross profit percentage is primarily due to
higher margins realized from the acquired businesses - SAFCO and
TEC. Higher SAFCO and TEC margins were partially offset by lower
margins realized within the Access Products and Industrial
Segments. Lower margins within the Access Products Segment
reflect reduced sales and competitive pressures, while the
Industrial Segment's margins suffered from start up costs
associated with the introduction of new products.
<PAGE>
Selling, General and Administration
Selling, general and administration increased 36% in 1997 compared
to 1996, despite a $3,000 reduction in corporate overhead
expenditures. The increase in selling, general and administration
stems primarily from the 1997 acquisitions and the full year
impact of SAFCO, which was acquired in September 1996. Lower
corporate overhead resulted primarily from reduced payroll related
and professional services expenditures.
As a percentage of sales, selling, general and administration was
31% and 26% in 1997 and 1996, respectively. The change
stems primarily from the Wireless and Access Products
Segments. The Wireless Segment has a higher percentage of
selling, general and administration to sales compared to the
Industrial and Access Products Segments. Therefore, as a result
of the Wireless acquisition, the percentage of selling, general,
and administration to sales increased. In addition, product
delays within the Wireless Segment and reduced sales without a
corresponding decline in expense in the Access Products Segment
contributed to the change.
Research and Development, Goodwill Amortization and Interest Expense
Research and development, goodwill amortization and interest
expense increased 29%, 89% and 165%, respectively, in 1997
compared to 1996. The increases were primarily due to the
acquisitions.
Provision for taxes on income
Excluding the purchased in-process research and development
charge, the benefit for taxes on the loss was an effective rate of
38% for 1997. Excluding the purchased in-process research and
development charge, the provision for taxes on income was an
effective rate of 38% for 1996.
Income from 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 Company reported an after
tax gain of $100, or $.02 per share 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 (GHMC), to Brandywine Realty Trust, for
$40,000, substantially all in cash. The sale resulted in a $7,000
gain, net of income taxes of $5,362, or $1.11 per share. On June
24, 1997, the Company sold its SRA Technologies, Inc. (SRA)
subsidiary to Dames & Moore, Inc. for $8,800 in cash. The sale of
SRA resulted in a $1,080 gain, net of income taxes of $583, or
$.17 per share. The Company reduced its debt levels with the
sales proceeds.
<PAGE>
Liquidity and Capital Resources
Working capital decreased $8,273 in 1998. The decline in working
capital was due to the creation of current accrued liabilities
associated with the second quarter charge, 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 through 1999. In
addition, the Company eliminated the $0.10 per share quarterly
dividend after the March 10, 1998 payment. This action provides
additional funds to satisfy working capital requirements. The
Company does not expect to make any contingent payments to former
SAFCO Corporation shareholders during 1999.
Under the terms of a 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 that expire on June 30, 1999. The
Company expects to renew the lines on such 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 January 1,
1999. The agreement also contains a provision that limits the
working capital line to a defined borrowing base consisting of
eligible receivables and inventory amounts. As of January 1,
1999, the availability under the working capital line of credit
was $8,249, after reduction for outstanding borrowings of $1,828
and issued letters of credit aggregating $1,923.
The Company estimates that its total capital expenditures in 1999,
excluding acquisitions, will be approximately $4,600. 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 is currently developing its own
new product for the access market, to be released in the third
quarter of 1999.
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.
<PAGE>
In the second quarter of 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 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.
<PAGE>
This Form 10-K 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 revenues, capital
requirements, product diversity, operating profitability, expected
orders from contracts, market position, expected new technology
partnerships, revenue 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Management's Report on Responsibility for Financial Reporting
The accompanying consolidated financial statements and notes
thereto are the responsibility of, and have been prepared by, management
of the Company in accordance with generally accepted accounting
principles. Management believes the consolidated financial statements
reflect fairly the results of operations and financial position of the
Company in all material respects. The consolidated financial statements
include certain amounts that are based upon management's best estimates
and judgment regarding the ultimate outcome of transactions which are
not yet complete.
Management believes that the accounting systems and related systems
of internal control are sufficient to provide reasonable assurance that
assets are safeguarded, transactions are properly authorized and
included in the accounting records, and that those records provide a
reliable basis for preparation of the Company's consolidated financial
statements. Reasonable assurance is based upon the concept that the
cost of a system of internal control must be related to the benefits
derived. The Company maintains an internal audit function that
periodically assesses the effectiveness of the systems of internal
control and makes recommendations for possible improvement.
The Company's consolidated financial statements have been audited
by Arthur Andersen LLP, independent public accountants, as stated in
their report below. They have been elected to perform this function by
the stockholders of the Company. Management has made available to
Arthur Andersen LLP all of the Company's financial records and related
data, as well as the minutes of stockholders' and directors' meetings.
T. S. Cobb
Chairman, President
and Chief Executive Officer
P. H. Snyder
Senior Vice President and Chief Financial Officer
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors, Salient 3 Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
Salient 3 Communications, Inc. and Subsidiaries as of January 1, 1999
and January 2, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three
fiscal years in the period ended January 1, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Salient 3
Communications, Inc. and Subsidiaries as of January 1, 1999 and January
2, 1998, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended January 1, 1999, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
January 25, 1999
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years 1998, 1997, and 1996
(000's except for share and per share information)
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Telecommunications sales $119,282 $110,469 $96,459
Cost of goods sold 72,612 66,639 59,202
------- ------- ------
Gross profit 46,670 43,830 37,257
Selling, general and
administration 38,275 34,061 25,099
Purchased in-process
research and development - 6,150 16,800
Goodwill impairment and
restructuring charge 18,190 - -
Research and development 8,820 9,098 7,038
Goodwill amortization 1,485 1,726 915
------- -------- ------
Operating loss (20,100) (7,205) (12,595)
------- -------- ------
Interest income 301 135 298
Interest expense 1,336 1,805 681
------- -------- ------
Pre-tax loss from
continuing operations (21,135) (8,875) (12,978)
------- -------- ------
Benefit for taxes on loss (3,676) (1,030) (5,050)
------- -------- ------
Net loss from continuing
operations (17,459) (7,845) (7,928)
------- -------- ------
Income from discontinued
operations:
Technical Services Segment
(less applicable income
taxes of $643, $939, and $2,197) 1,050 1,628 3,555
Real Estate Segment
(less applicable income
taxes of $0, $450, and $928) - 781 1,499
Gains on disposals of subsidiaries
(less applicable income taxes of
$0, $5,945, and $510) 100 8,080 990
----- ------ ------
Net income from
discontinued operations 1,150 10,489 6,044
----- ------ -----
Net income (loss) $(16,309) $ 2,644 $(1,884)
====== ===== =====
<PAGE>
Per share of common stock
(Basic and diluted):
Net loss from continuing
operations $(2.83) $(1.24) $(1.26)
Net income from
discontinued operations:
Technical Services Segment 0.17 0.26 0.56
Real Estate Segment - 0.12 0.24
Disposals of subsidiaries 0.02 1.28 0.16
---- ---- ----
Net income (loss) per share $(2.65) $ 0.42 $(0.30)
==== ==== ====
Basic weighted average
shares outstanding 6,158,587 6,305,384 6,299,127
NOTE: The income (loss) per share is computed independently for each item.
Therefore the total net income (loss) per share may not equal the sum of
individual items.
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
For the years 1998, 1997, and 1996
(000's)
1998 1997 1996
--------- ---------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $(16,309) $ 2,644 $ (1,884)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Gain on sale of subsidiaries (100) (14,025) -
Disposition of United Energy Services
Corporation - - (1,500)
Depreciation and amortization 6,535 7,105 5,770
Purchased research & development write-off - 6,150 16,800
Goodwill write-off 15,789 - -
Reserve provisions 4,318 808 222
Benefit from deferred income taxes (2,050) (849) (3,880)
Changes in current assets and current
liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable and unbilled revenue (4,257) (1,697) 828
Inventories 15 (2,963) (2,794)
Other current assets (1,055) (271) 605
Accounts payable and salaries and wages (1,639) 581 (101)
Other accrued liabilities 3,684 (3,757) (3,827)
Income taxes, currently payable (2,773) (266) 1,435
Estimated liability for contract losses (385) (56) (232)
Other, net 143 (8) 106
----- ------- ------
Net cash provided by (used for) operating activities 1,916 (6,604) 11,548
----- ------- ------
Cash flows from investing activities:
Payments for acquisitions, net of cash
acquired (952) (19,302) (22,162)
Proceeds from sale of subsidiaries 15,505 45,013 -
Payments for property, plant and equipment (5,631) (8,142) (7,766)
Proceeds from sale of property, plant
and equipment - - 1,102
------ ------ ------
Net cash provided by (used for) investing activities 8,922 17,569 (28,826)
------ ------ ------
<PAGE>
Cash flows from financing activities:
Payments of long-term debt (635) (35,338) (1,689)
Borrowings (repayments) under note payable (6,729) 8,557 -
Proceeds from issuance of debt - 19,900 14,800
Issuance of treasury stock in connection
with stock purchase plan 546 161 341
Payments to acquire treasury stock (3,655) (547) (857)
Cash dividends paid (642) (2,553) (3,785)
Other, net (120) 352 (1,169)
------ ------ ------
Net cash provided by (used for) financing activities (11,235) (9,468) 7,641
====== ====== ======
Net increase (decrease) in cash and
cash equivalents (397) 1,497 (9,637)
Cash and cash equivalents at beginning
of year 2,979 1,482 11,119
------ ------ ------
Cash and cash equivalents at end of year $ 2,582 $ 2,979 $ 1,482
====== ====== ======
Supplemental cash flow disclosures:
Interest paid $ 1,318 $ 2,405 $ 586
====== ====== ======
Income taxes paid, net of refunds received $ 2,086 $ 7,420 $ 1,030
====== ====== ======
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets January 1, 1999 and January 2, 1998
(000's except for share information)
January 1, January 2,
1999 1998
---------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,582 $ 2,979
Accounts receivable, net of allowance
for doubtful accounts of $1,711 in 1998 and
$1,680 in 1997 27,342 23,798
Inventories 15,070 20,128
Deferred income taxes 5,510 3,805
Other current assets 5,864 4,013
Net assets held for sale - 16,195
------ ------
Total current assets 56,368 70,918
------ ------
Property, plant and equipment, at cost:
Land 3,172 3,172
Buildings 9,773 9,800
Furniture and equipment 34,299 31,149
------ ------
47,244 44,121
Less accumulated depreciation and
amortization 23,947 20,334
------ ------
23,297 23,787
------ ------
Deferred income taxes 6,940 7,010
Other assets 3,350 1,000
Goodwill 28,500 44,782
------- -------
Total Assets $ 118,455 $ 147,497
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 1, 1999 and January 2, 1998
(000's except for share information)
January 1, January 2,
1999 1998
---------- ----------
LIABILITIES
Current liabilities:
<S> <C> <C>
Notes payable $ 1,828 $ 8,557
Accounts payable 7,200 7,587
Salaries and wages 987 1,437
Income taxes, currently payable 466 3,384
Estimated liability for contract losses 1,756 1,470
Other accrued liabilities 12,253 8,332
------ ------
Total current liabilities 24,490 30,767
------ ------
Long-term debt 10,616 11,245
Other long-term liabilities 4,850 4,948
Self-insured retention 510 2,677
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, nonvoting, par value
$1 per share, 1,000,000 shares
authorized, 0 shares outstanding - -
Class A common stock, nonvoting, par
value $1 per share
Issued: 1998, 8,477,365 shares;
1997, 8,404,288 shares 8,477 8,404
Class B common stock, voting, par value
$1 per share
Issued and outstanding:
1998, 507,935 shares;
1997, 581,012 shares 508 581
Capital in excess of par value 37,394 37,835
Warrants outstanding 1,665 1,665
Retained earnings 72,978 89,929
Foreign currency translation adjustment 99 52
Deferred compensation-restricted stock (1,610) (1,368)
Class A common stock held in treasury,
at cost:
1998, 2,862,370 shares;
1997, 2,547,390 shares (41,522) (39,238)
------- -------
77,989 97,860
------- -------
Total Liabilities and Stockholders' Equity $118,455 $147,497
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years 1998, 1997 and 1996
(000's except for share information)
Common Stock
-------------------------------------------
Class A Class B
------------------- -----------------
Shares Amount Shares Amount
--------- ------- ------- ------
<S> <C> <C> <C> <C>
Balances at December 29, 1995 8,532,528 $ 8,532 452,772 $ 453
Conversion from Class A to
Class B, net (15,716) (15) 15,716 15
--------- ----- ------- ----
Balances at January 3, 1997 8,516,812 $ 8,517 468,488 $ 468
Conversion from Class A to
Class B, net (112,524) (113) 112,524 113
--------- ------ ------- ----
Balances at January 2, 1998 8,404,288 $ 8,404 581,012 $ 581
Conversion from Class B to
Class A, net 73,077 73 (73,077) (73)
--------- ------ ------- ----
Balances at January 1, 1999 8,477,365 $ 8,477 507,935 $ 508
========= ====== ======= ====
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years 1998, 1997 and 1996
(000's except for share information)
Foreign Deferred Class A
Capital in Currency Compensation- Treasury Stock
Excess of Warrants Retained Translation Restricted -----------------------
Par Value Outstanding Earnings Adjustment Stock Shares Amount
--------- ----------- -------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 29, 1995 $ 38,492 $ - $ 95,507 $ - $ - 2,696,476 $(40,503)
Net loss (1,884)
Cash dividends paid, $.60 per
share (3,785)
Issuance of restricted stock (86) (431) (34,500) 517
Restricted stock amortization 144
Issuance of warrants 1,180
Purchase of treasury stock 69,418 (857)
Issuance of treasury stock in
connection with stock
purchase plan (315) (98,257) 656
--------- ------ ------- --------- ------ ---------- --------
Balances at January 3, 1997 38,091 1,180 89,838 - (287) 2,633,137 (40,187)
Net income 2,644
Cash dividends paid, $.40 per
share (2,553)
Translation adjustment 52
Issuance of restricted stock (116) (1,079) (80,000) 1,195
Restricted stock amortization (2)
Issuance of warrants 485
Purchase of treasury stock 41,120 (547)
Issuance of treasury stock in
connection with stock
purchase plan (140) (46,867) 301
--------- ------ ------ ------- ------ ---------- --------
Balances at January 2, 1998 37,835 1,665 89,929 52 (1,368) 2,547,390 (39,238)
Net loss (16,309)
Cash dividends paid, $.10 per
share (642)
Translation adjustment 47
Issuance of restricted stock (212) (427) (45,000) 639
Restricted stock amortization 142
Restricted stock forfeitures 6 43 3,250 (49)
Purchase of treasury stock 393,230 (3,655)
Issuance of treasury stock in
connection with stock
purchase plan (235) (36,500) 781
-------- ------- ------ ------- ------ ---------- --------
Balances at January 1, 1999 $ 37,394 $ 1,665 $ 72,978 $ 99 $(1,610) 2,862,370 $(41,522)
======== ======= ====== ======= ====== ========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(000's except for share and per share information)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION: The Company is a leading
telecommunications equipment and services company
with subsidiaries that operate in the industrial,
access products, and wireless markets. The
Industrial Segment develops, assembles, and markets
communications systems for industrial operations.
The Access Products Segment designs and markets
voice and data transmission system products. The
Wireless Segment's products and services focus on
the measurement analysis and predictive tools used
by the wireless communication industry.
FISCAL YEAR: The Company uses a 52-53 week fiscal
year ending on the Friday nearest December 31. The
1998 and 1997 fiscal years included 52 weeks each
and ended on January 1, 1999, and January 2, 1998,
respectively. The 1996 fiscal year included 53
weeks and ended on January 3, 1997.
PRINCIPLES OF CONSOLIDATION: The consolidated
financial statements include the accounts of the
Company and its subsidiaries. All material
intercompany transactions have been eliminated.
RECOGNITION OF REVENUE: The Company recognizes
revenue upon shipment of goods and accrues costs
associated with the training and installation for
its products upon shipment. The Company recognizes
revenue on contracts entered into for radio
frequency engineering as the work is performed.
Costs and expenses are charged to operations as
incurred. Losses, estimated to be sustained upon
completion of contracts, are charged to income in
the year such estimates are determinable. Software
licensing revenue is recognized proportionally over
the contract term. At January 1, 1999 and January
2, 1998, the Company deferred $1,429 and $561,
respectively, of software licensing revenue.
INSURANCE PROGRAMS: Over the years, the Company's
overall workers compensation and general liability
insurance coverages have, and in some cases do,
contain provisions for significant deductibles and
funding on a claims paid basis. Accruals, which
relate primarily to workers' compensation,
aggregate $1,602 and $2,128 at January 1, 1999, and
January 2, 1998 respectively, and are included in
other accrued liabilities on the consolidated
balance sheets.
<PAGE>
INVENTORIES: Inventories, which consist of
material, labor and overhead, are determined on the
first-in, first-out (FIFO) method and are stated at
the lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT: For financial
reporting purposes, the Company provides for
depreciation and amortization of property, plant
and equipment, including assets under capital
leases, on the straight-line method over the
estimated useful lives of the various classes of
assets. For income tax purposes, the Company uses
accelerated depreciation where permitted. Useful
lives of depreciable assets, by class, are as
follows:
Buildings 40 years
Furniture and equipment 3 to 10 years
Costs of maintenance and repairs are charged to
expense as incurred. Renewals and improvements are
capitalized. Upon retirement or other disposition
of plant and equipment, the cost of the item and
related accumulated depreciation are removed from
the accounts and any gain or loss is included in
income.
In 1998 and 1997, the Company capitalized $175 and
$543, respectively, of 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. As of January 1,
1999, $299 has been amortized.
GOODWILL: Goodwill is being amortized by charges
to operations on a straight-line basis over periods
of 20 to 40 years, and such amortization amounted
to $1,485 in 1998, $1,726 in 1997 and $915 in 1996.
Accumulated amortization amounted to $6,588 at
January 1, 1999, and $5,103 at January 2, 1998.
The Company periodically reviews goodwill to assess
recoverability, and impairments would be recognized
in operating results if a permanent diminution in
value were to occur. The Company's primary
financial indicator for assessing recoverability of
goodwill is whether a subsidiary is projected to
generate sufficient income and cash flow on an
undiscounted basis. During 1998 the Company
recorded a $15,789 impairment of goodwill (See Note 9).
<PAGE>
INCOME TAXES: The Company utilizes the liability
method of accounting for income taxes. Under this
method, deferred income taxes are determined based
on the difference between the financial statement
and tax bases of assets and liabilities using
enacted tax rates.
RESEARCH AND DEVELOPMENT: Expenditures relating to
the development of new products and processes,
including significant improvements, refinements and
engineering support to existing products, are
expensed as incurred.
STATEMENTS OF CASH FLOWS: For purposes of the
consolidated statements of cash flows, the Company
considers all highly liquid investments with a
maturity of three months or less at the time of
purchase to be cash equivalents.
ESTIMATES: The preparation of financial statements
in conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements. Also, estimates are made for reported
amounts of revenues and expenses during the
reporting period. The ultimate results could
differ from those estimates.
DISCONTINUED OPERATIONS: In the first quarter of
1997, the Company elected discontinued operations
treatment for both its technical services and real
estate segments.
The results of operations for technical services
and the real estate segments have been classified
as discontinued operations for all periods
presented in the Consolidated Statements of
Operations and Balance Sheets. The assets and
liabilities of the discontinued operations have
been classified in the Consolidated Balance Sheets
as "Net assets held for sale." Discontinued
operations have not been segregated in the
Consolidated Statements of Cash Flows and,
therefore, amounts for certain captions will not
agree with the respective Consolidated Statements
of Operations.
<PAGE>
<TABLE>
The following is a summary of sales by discontinued
segment:
1998 1997 1996
--------- --------- ---------
Sales:
<S> <C> <C> <C>
Technical Services $48,251 $69,463 $84,888
Real Estate - 5,026 8,767
--------- --------- ---------
$48,251 $74,489 $93,655
========= ========= =========
</TABLE>
The Company allocated interest not specifically
associated with any segment based upon a ratio of
net assets. Interest expense allocated to
discontinued operations was not material in 1998,
1997 and 1996.
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
average stock price for the period, would be
exercised and the related shares issued. Dilutive
shares outstanding for 1998, 1997 and 1996 were
6,184,471, 6,393,234 and 6,308,307, respectively.
Since these additional shares had an antidilutive
impact on the Company's loss from continuing
operations, the adoption of SFAS 128 had no impact
to the Company's earnings per share calculation.
Options and warrants to purchase 1,373,505 shares
as of January 1, 1999, at prices ranging from
$10.38 to $18.00, were outstanding, but were not
included in the computation of diluted earnings per
share because the exercise price was greater than
the average market price.
NAME CHANGE: On April 30, 1997, the Company
changed its name from Gilbert Associates, Inc. to
Salient 3 Communications, Inc. as part of its
strategy to solely focus on telecommunications.
2. ACQUISITIONS/DISPOSITIONS:
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 that is recorded in other
assets. The sale resulted in an after tax gain of
$100, or $0.02 per share. Proceeds of the sale
were used to pay down outstanding bank debt.
<PAGE>
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 its European operations - GAI-
Tronics Limited.
On July 31, 1997, the Company sold its real estate
complex, Green Hills Corporate Center, to
Brandywine Realty 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. (SRA) subsidiary to Dames and
Moore, Inc. for $8,800 in cash. The sale of SRA
resulted in a $1,080 gain, net of income taxes of
$583, or $.17 per share. Proceeds were used to
reduce the Company's outstanding debt.
On April 21, 1997, the Company acquired all of the
outstanding capital stock of TEC Cellular, Inc.
(TEC) for $14,139 including acquisition costs of
$75. Also, the Company issued seven year warrants
exercisable to purchase 100,000 shares of the
Company's stock at $18 per share, which were valued
at $485. The acquisition was accounted for as a
purchase and cost was assigned to the net assets
acquired based on their fair values at the date of
acquisition. The acquired assets had a fair value
of $9,607 at that date, and the Company assumed
liabilities of $1,430, which resulted in goodwill
of $6,447. TEC is part of the Company's Wireless
Segment and was merged into SAFCO Technologies,
Inc.
In conjunction with the TEC acquisition, the
Company recorded a $6,150 after-tax charge, or $.97
per share, for purchased research and development
costs. The purchased in-process research and
development had not yet reached technological
feasibility and the technology had no alternative
future use as of the date of closing.
On April 30, 1997, the Company acquired all of the
outstanding stock of DAC Ltd. (DAC) for $5,351,
including acquisition costs. The acquisition was
accounted for as a purchase and cost was assigned
to the net assets based on their fair values at the
date of acquisition. The acquired assets had a
fair value of $5,006 at that date, and the Company
assumed liabilities of $1,979, which resulted in
goodwill of $2,324. DAC is part of the Company's
Industrial Segment and its European operations -
GAI-Tronics Limited.
<PAGE>
The following unaudited consolidated pro-forma
statements of operations for the years 1998 and
1997 include Elemec, TEC, and DAC as if they had
been acquired at the beginning of each of the
respective periods:
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Sales $119,282 $116,077
Net loss from continuing operations $(17,459) $ (7,570)
Net loss from continuing operations
per share of common stock $ (2.83) $ (1.20)
</TABLE>
The pro-forma statements of operations include
adjustments for interest expense and amortization
of goodwill.
During the first quarter of 1997, the Company paid
an earnout of $1,000 to the former principals of
Instrument Associates, Inc. pursuant to the 1993
purchase agreement.
On September 30, 1996, the Company acquired the
assets of SAFCO Corporation's Electronic Systems
Division (ESD). The Company paid $20,000 in cash
plus $700 of acquisition costs, issued $10,000 in
notes payable and issued seven year warrants
exercisable to purchase 555,555 shares of the
Company's stock at $18 per share. The warrants
were valued at $1,180. The acquisition was
accounted for as a purchase and cost was assigned
to the net assets acquired based on their fair
values at the date of acquisition. The acquired
assets had a fair value of $24,506 at that date,
and the Company assumed liabilities of $3,031,
which resulted in goodwill of $10,405.
Under the terms of the agreement, the Company will
also pay SAFCO Corporation's shareholders
additional incremental amounts through 1999 based
upon the achievement of certain sales and operating
income levels. Any additional payments will
increase goodwill. The Company paid former
shareholders $1,204 during the first quarter of
1997.
In connection with the ESD acquisition, $10,300,
net of $6,500 income tax benefit, or $1.63 per
share, of in-process research and development costs
were expensed during the fourth quarter of 1996.
The purchased in-process research and development
had not yet reached technological feasibility and
the technology had no alternative future use as of
the date of closing.
<PAGE>
3. INCOME TAXES:
At January 1, 1999, a federal and state income tax
refund of $709 was recorded in other current assets.
Income tax benefits from continuing operations
consist of the following:
<TABLE>
1998 1997 1996
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $ (2,809) $ (1,793) $ (1,860)
State and foreign 768 (328) (50)
-------- -------- --------
(2,041) (2,121) (1,910)
-------- -------- --------
Deferred:
Federal (1,155) 881 (2,140)
State (480) 210 (1,000)
-------- ------- -------
(1,635) 1,091 (3,140)
-------- ------- -------
$ (3,676) $ (1,030) $ (5,050)
======== ======= =======
</TABLE>
The tax effects of temporary differences which comprise the deferred income tax
assets and liabilities are as follows:
<TABLE>
January 1, 1999 January 2, 1998
----------------- -----------------
Deferred income tax assets:
<S> <C> <C>
Goodwill $ 6,268 $ 4,895
Retirement liabilities 1,972 1,778
Inventory obsolescence reserves 1,507 810
Reserves for contract disallowances
and bad debts 1,244 1,166
Inventory 682 451
Workers' compensation reserves 562 671
Deferred revenue 559 193
Closure of United Energy Services Corp. 547 527
Warranty reserve 292 231
Self-insured retention 199 990
Other 1,196 1,037
---------- ----------
15,028 12,749
---------- ----------
<PAGE>
Deferred income tax liabilities:
Depreciation 1,119 741
State income taxes 694 538
Cash to accrual 106 183
Prepaid insurance 187 209
Deferred installment sale gain 125 156
Other 347 107
---------- ----------
2,578 1,934
---------- ----------
Net deferred income tax asset $12,450 $10,815
========== ==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and
tax planning strategies in making this assessment.
Based upon the projections for future taxable
income over the periods which the deferred tax
assets are deductible, management believes it is
more likely than not the Company will realize the
benefit of these deductible differences at January
1, 1999 and January 2, 1998.
A reconciliation of the statutory income tax rate
to the effective tax rate follows:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate (34.0)% (34.0)% (34.0)%
Purchased research and development
write-off - 23.6 -
State and foreign taxes (0.9) (1.0) (5.3)
Amortization and write-off of goodwill 18.6 2.9 1.3
Research and development credit (1.2) (1.1) -
Foreign sales corporation (0.6) (1.3) -
Other, net 0.7 (0.7) (0.9)
---- ---- ----
Effective tax rate (17.4)% (11.6)% (38.9)%
==== ==== ====
</TABLE>
<PAGE>
4. LONG-TERM DEBT:
Long-term debt consists of the following obligations:
<TABLE>
January 1, January 2,
1999 1998
--------- ---------
<S> <C> <C>
Acquisition line of credit(see below) $ $ -
Note payable, interest due quarterly at 7%,
principal due 2001 10,000 10,000
Mortgage obligation, $21 due monthly
to 2001 including interest at 8.5% 656 849
Note payable, interest and principal due
at maturity, with maturity date of
1998 and interest rate of 6% - 250
Capital lease obligations, with monthly
payments not exceeding $20
with maturity dates from 1998 to 2002 and
interest rates ranging from 8.4% to 14.5% 282 474
------- --------
10,938 11,573
Less current maturities (322) (328)
------- -------
$10,616 $11,245
======= =======
</TABLE>
The aggregate maturities of long-term debt,
including the capital lease obligations, are as
follows:
1999 $ 322
2000 360
2001 10,254
2002 2
-------
Total $10,938
=======
In connection with the aforementioned capital
leases and mortgage obligation, the Company has
pledged as collateral the following:
January 1, 1999
---------------
Land and building $5,003
Equipment 611
Less accumulated depreciation (785)
-------
$4,829
=======
Long term debt recorded at January 1, 1999
approximates fair market value.
<PAGE>
Under 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 requires maintenance of certain financial
covenants, and the Company pays a commitment fee of
one-quarter of one percent on the unused portion of
the lines. As of January 1, 1999, approximately
$8,000 was available under the working capital line
of credit based on outstanding borrowings ($1,828),
and outstanding letters of credit. As of January
1, 1999, there were no borrowings under the
acquisition line of credit. The loan 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
agreement also contains a provision that limits the
working capital line to a defined borrowing base
consisting of eligible receivables and inventory
amounts. As of January 1, 1999, the borrowing base
was in excess of $12,000. The Company was in
compliance with its loan covenants as of January 1,
1999.
The working capital line of credit is available
through June 30, 1999. The Company expects to
renew the line on such date. At January 1, 1999
and January 2, 1998, $1,923 and $1,464,
respectively, was committed for stand-by letters of
credit.
The acquisition line of credit is available through
June 30, 1999. Any balance outstanding at that
time will convert to a term loan and be amortized
in equal principal payments over the following 60
months.
Interest charges are based, at the Company's
option, on the bank's prime rate or a function of
LIBOR. The loan is collateralized by substantially
all of the Company's tangible and intangible
assets.
5. INVENTORIES:
Inventories consist of the following:
<TABLE>
January 1, January 2,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials and components $ 9,632 $ 13,522
Work in process 2,408 2,576
Finished goods 6,885 6,220
Reserves (3,855) (2,190)
-------- --------
$15,070 $20,128
======== ========
</TABLE>
<PAGE>
6. POSTRETIREMENT BENEFITS:
Substantially all regular, full-time employees of
the Company and its subsidiaries are participants
in various defined contribution retirement plans.
Employer contributions under these plans are
generally at the discretion of the Company, based
upon profits and employees' voluntary contributions
to the plans. Company contributions charged to
operations in 1998, 1997, and 1996, totaled
$1,442, $1,536, and $1,212, respectively.
In 1996, the Company completed arrangements with an
insurance carrier to assume the liability for
certain five thousand dollar postretirement death
benefit obligations. In early 1995, the Company
discontinued this plan for most employees.
The Company maintains a contributory defined
benefit pension plan for employees of GAI-Tronics
Limited, a second tier U.K. subsidiary. Benefits
are payable based on years of service and an
employee's compensation during the last ten years
of employment. Contributions are intended to
provide not only for benefits attributed to service
to date but also for those expected to be earned in
the future.
The following table sets forth the funded status of
the plan and the amounts recognized in the
financial statements as of January 1, 1999 and
January 2, 1998 and for the year and nine months
then ended, respectively.
<TABLE>
For the nine
months ended
January 2,
1998 1998
---- ----
<S> <C> <C>
Discount rate 4.50% 6.50%
Salary escalation 2.50% 4.50%
Expected return on plan assets 9.00% 10.00%
Change in Benefit Obligation:
Benefit obligation, beginning balance $ 4,157 $ 3,294
Service cost 222 116
Interest cost 269 170
Participant contributions 80 55
Actuarial loss 1,058 552
Benefits paid (126) (31)
Currency translation adjustment 53 1
------- -------
Benefit obligation, ending balance $ 5,713 $ 4,157
======= =======
<PAGE>
Change in Plan Assets:
Future value, beginning balance $ 4,358 $ 3,812
Actual return 994 423
Employer contribution 159 99
Participant contributions 80 55
Benefits paid (126) (31)
Currency translation adjustment 55 -
------- -------
Future value, ending balance $ 5,520 $ 4,358
======= =======
Funded Status $ (193) $ 201
Unrecognized net actuarial loss 857 387
Currency translation adjustment 3 -
------- -------
Prepaid benefit $ 667 $ 588
======= =======
Components of Net Periodic Pension Cost:
Service cost $ 222 $ 116
Interest cost 269 170
Expected return (401) (258)
------- -------
Net periodic pension cost $ 90 $ 28
======= =======
</TABLE>
7. CAPITAL STOCK:
Except for voting privileges, shares of Class A and
Class B common stock are identical. Class B
stockholders must be either directors of the
Company, or active employees of the Company or its
subsidiaries. They may not sell or transfer such
stock without having first extended an offer of
sale to the Company.
An amendment to the Company's Certificate of
Incorporation was approved during the second
quarter of 1996 to reduce the number of authorized
shares from 24,000,000 shares to 11,000,000 shares,
10,000,000 shares of which are common stock and
1,000,000 shares of which are preferred stock. No
shares of preferred stock were outstanding as of
January 1, 1999.
In 1996, the Board of Directors adopted a Stock
Purchase Assistance Plan. The plan authorizes the
Company to extend loans to officers and other key
employees for the purpose of acquiring Company
stock. The loans bear market rate interest, due
quarterly, with principal payments generally due in
10 equal annual installments. As of January 1,
1999, and January 2, 1998, loans aggregating $966
and $1,218, respectively, were outstanding and are
reflected as an element of treasury stock.
<PAGE>
On October 30, 1996, the Board of Directors adopted
a Shareholder Rights Plan and declared a
distribution of one Nonvoting Common Stock Right
for each outstanding share of Class A Common Stock
and one Voting Common Stock Right for each
outstanding share of Class B Common Stock to
stockholders of record at the close of business on
November 14, 1996 and for each share of Company
Common Stock issued (including shares distributed
from Treasury) by the Company thereafter and prior
to the Distribution Date. The threshold for
triggering subsequent distribution of the Rights is
ten days following the acquisition by a person of
20% of the Company's stock. Each Nonvoting and
Voting Common Stock Right entitles the registered
holder, subject to the terms of the Rights
Agreement, to purchase from the Company one one-
thousandth of a share (a "Unit") of Series A and
Series B, respectively, Junior Participating
Preferred Stock, par value $1.00 per share, at a
Purchase Price of $60.00 per Unit, subject to
adjustment.
8. STOCK OPTION, AWARD AND PURCHASE PLANS:
In 1997, the Shareholders of the Company increased
the number of stock options, stock appreciation
rights and restricted stock available under the
1996 Long Term Incentive Plan by 600,000. The
maximum number of shares which may be issued under
the Plan for all purposes is 1,100,000. During
1998, 257,750 stock options were granted, at fair
market value, with terms not exceeding ten years
and vesting over a three year period.
As part of the Plan, 45,000 and 80,000 shares of
restricted stock were granted during 1998 and 1997,
respectively. These shares vest over a three to
ten year period, depending upon certain financial
achievements. The value of the shares at the time
of issuance is recorded in stockholders' equity and
$285 has been expensed through 1998. As of January
1, 1999, 156,250 restricted shares were
outstanding.
At January 1, 1999, an aggregate of 169,200
options, rights, and restricted shares are
available for future grants.
In 1997, the Shareholders of the Company increased
the number of options available under the
Directors' Stock Option Plan by 75,000. The
Directors' Stock Option Plan provides for the
granting of 125,000 stock options at an exercise
price of 75% of market value at date of grant.
Participating directors pre-pay the additional 25%
of the exercise price from a portion of their
annual retainers allocated for that purpose, as an
alternative to cash payments of such amounts.
During 1998, 15,780 options were granted under the
plan. The options are granted with a twenty year
term. At January 1, 1999, options to purchase
79,820 shares are available for issue.
The 1989 Stock Option Plan provides for issuance of
stock options to purchase an aggregate of 250,000
shares of Class B common stock at a price not less
than 75% of the fair market value at the date of
grant, and with terms not exceeding ten years.
Options to purchase 69,250 Class B shares were
granted at fair market value during 1998, with
terms not exceeding ten years and vesting over a
three year period. At January 1, 1999, options to
purchase 15,200 shares are available for future
grants.
<PAGE>
A summary of stock option activity related to the
plans mentioned above and other plans under which
the Company is no longer granting options is as
follows:
<TABLE>
Weighted Number of
Number of Option Price Average Price Shares
Shares Per Share Per Share Exercisable
--------- ------------ ---------- -----------
Outstanding at
<S> <C> <C> <C> <C>
Dec. 29, 1995 280,924 $12.00-$26.50 $16.40 95,475
Granted 185,500 $ 9.00-$13.25 $12.15
Exercised - - -
Expired (64,625) $12.50-$26.50 $18.88
-------
Outstanding at
Jan. 3, 1997 401,799 $ 9.00-$23.20 $13.42 81,000
Granted 518,300 $11.25-$16.00 $13.81
Exercised - - -
Expired (79,000) $11.25-$23.20 $16.94
-------
Outstanding at
Jan. 2, 1998 841,099 $ 9.00-$21.00 $13.61 150,267
Granted 342,780 $ 6.85-$11.25 $ 9.44
Exercised - - -
Expired (129,349) $12.00-$21.00 $14.54
-------
Outstanding at
Jan. 1, 1999 1,054,530 $ 6.85-$17.50 $12.14 157,714
=========
</TABLE>
The weighted average price per share of exercisable
options at January 1, 1999 is $13.19. The weighted
average option lives remaining at January 1, 1999,
January 2, 1998 and January 3, 1997 are
approximately 8, 9 and 6 years, respectively.
The Company has elected to continue to follow the
Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and
related interpretations to account for its stock
options.
<PAGE>
The following pro forma amounts, in accordance with
the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), were
determined as if the Company had accounted for its
stock options using the fair value method as
described in that statement:
<TABLE>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net loss from
continuing operations $(17,905) $(8,110) $(8,031)
Net loss from continuing
operations per share of
common stock $(2.91) $(1.29) $(1.27)
</TABLE>
The fair value was estimated at the date of grant
using the Black-Scholes option pricing model with
the following weighted average assumptions for
1998, 1997 and 1996, respectively: risk free
interest rates of 4.5%, 6.2% and 6.3%; dividend
yields of 0.1%, 2.9% and 3.2%; volatility factors
of 24.4%, 19.2% and 17.7%; and average stock option
expected life of 5.2, 5.2 and 5 years.
The weighted average fair value of stock options
granted was $2.96, $2.90 and $2.39 per share in
1998, 1997 and 1996, respectively.
Under the Stock Bonus Purchase Plan, certain
employees and directors may use up to 50% of their
annual incentive compensation and directors fees,
respectively, to purchase shares of common stock at
fair market value. Employees purchasing shares
will receive a stock bonus as determined by the
Board of Directors each year. The Company may
grant an aggregate of 200,000 shares under this
plan. During 1998, no shares were issued under
this plan. To date, 54,580 shares have been
issued, and 145,420 shares remain available for
future grants as of January 1, 1999.
9. SPECIAL CHARGES:
In the fourth quarter of 1998, the Company recorded
income of $267 resulting from a reversal of the
majority of a reserve for the retention layer on
certain insurance coverages ($2,167), offset in
part by a charge for retirement expenses associated
with a former officer ($1,200) and provisions to
strengthen certain other operating reserves ($700).
The net $267 benefit after an income tax expense of
$87 was $180 or $0.03 per share. The reversal of
the insurance reserve was triggered by the
Company's transition to a different structure in
its insurance coverages, reflecting both its
streamlined telecommunications businesses and a
favorable climate in the commercial insurance
markets. The net pre-tax impact of these
adjustments was a reduction of selling, general and
administrative expenses of $267.
In the second quarter of 1998, the Company recorded
$23,089 as a result of charges for restructuring
and asset impairment ($18,190), inventory write-
downs ($4,353), and other miscellaneous expenses
($546). The $23,089 charge after an income tax
benefit of $4,225 was $18,864 or $3.02 per share
for the second quarter. The restructuring and
asset impairment charges of $18,190 include: (a)
$2,401 relating to severance and other costs for
approximately 140 manufacturing employees due to
outsourcing the manufacturing process at XEL
Communications, Inc. (XEL), as well as the
consolidation of manufacturing of the Instrument
Associates Division of GAI-Tronics into 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 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
January 2, 1998 to January 1, 1999.
<TABLE>
January 2, January 1,
1998 Amounts 1999
Type of Cost Balance Additions Utilized Balance
- ------------ ------- -------- -------- -------
<S> <C> <C> <C> <C>
Employee separations $ - $1,075 $(560) $ 515
Facility closings - 1,185 (387) 798
Other - 141 - 141
----- ----- ----- -----
Total $ - $2,401 $(947) $1,454
===== ===== ===== =====
</TABLE>
<PAGE>
During the third quarter of 1996, the Company
settled a claim filed by a former employee, for
which it had reserved approximately $2,200. The
actual settlement was approximately $1,500.
Accordingly, the Company reversed the remaining
$700 reserve to income in the third quarter,
increasing net income by $435, or $.07 per share.
10. OPERATING LEASES:
The Company leases, as lessee, facilities, data
processing equipment, office equipment and
automobiles under leases expiring during the next
ten years. Total rental expense under operating
lease agreements amounted to $1,800 in 1998, $1,500
in 1997, and $1,100 in 1996. Minimum future
rentals under noncancelable operating leases with
initial or remaining terms in excess of one year at
January 1, 1999 were as follows:
1999 $ 1,775
2000 1,175
2001 920
2002 659
2003 506
2004 and thereafter 1,731
----------
Total minimum rentals $ 6,766
==========
11. FINANCIAL INSTRUMENTS:
Letters of credit and performance bonds are issued
by the Company during the ordinary course of
business through major domestic banks and insurance
companies. The Company has outstanding letters of
credit and performance bonds, not reflected in the
consolidated financial statements, in the amount of
$1,923 at January 1, 1999 and $1,464 at January 2,
1998.
Financial instruments which potentially subject the
Company to the concentration of credit risk, as
defined by SFAS No. 105, consist principally of
accounts receivable. Concentration of credit risk
with respect to receivables is limited, as the
majority of the balance represents billings for
work performed or product sold for various
financially secure companies.
12. COMMITMENTS AND CONTINGENCIES:
In July 1998, the Company sold its RCI subsidiary
to the management of RCI and an investor group.
Pursuant to the Stock Purchase Agreement, the
Company agreed to indemnify, defend and hold
harmless, the buyers of RCI against certain
litigation, claims or judgment brought or continued
against the Company arising out of the actions or
operations of its former RCI subsidiary.
Various other lawsuits, claims and contingent
liabilities arise in the ordinary course of the
Company's business. While the ultimate disposition
of any of these contingencies is not determinable
at this time, management believes that there are no
current outstanding liabilities that will
materially affect the Company's financial position
or results of operations.
<PAGE>
<TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a tabulation of the unaudited quarterly financial data for each
of the four quarters of the years 1998 and 1997:
QUARTER ENDED
------------------------------------------------------------------
April 3, 1998 July 3, 1998 Oct. 2, 1998 Jan. 1, 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telecommunications sales $27,975 $29,772 $28,480 $33,055
Gross profit 10,549 8,241 12,285 15,595
Pre-tax income (loss) from
continuing operations (2,693) (22,780) 657 3,681
Net income (loss) from
continuing operations (1,670) (18,672) 406 2,477
Net income (loss) from
discontinued operations 398 799 (147) -
Gain on disposals of
discontinued operations - - 100 -
Net income (loss) (1,272) (17,873) 359 2,477
Per share of common stock:
Net income (loss) from
continuing operations $(0.26) $(2.99) $0.07 $0.41
Net income (loss) from
discontinued operations 0.06 0.13 (0.03) -
Gain on disposals of
discontinued operations - - 0.02 -
------- ------- ------- -------
Net income (loss) per share $(0.20) $(2.86) $0.06 $0.41
======= ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
QUARTER ENDED
------------------------------------------------------------------
April 4, 1997 July 4, 1997 Oct. 3, 1997 Jan. 2, 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telecommunications sales $24,817 $24,560 $27,919 $33,173
Gross profit 9,395 8,975 10,524 14,936
Pre-tax income (loss) from
continuing operations (955) (9,293) (1,940) 3,313
Net income (loss) from
continuing operations (614) (8,115) (1,241) 2,125
Net income from
discontinued operations 869 650 476 414
Gain on disposals of
discontinued operations - 1,080 7,000 -
Net income (loss) 255 (6,385) 6,235 2,539
Per share of common stock:
Net income (loss) from
continuing operations $(0.10) $(1.28) $(0.20) $0.34
Net income from
discontinued operations 0.14 0.10 0.08 0.06
Gain on disposals of
discontinued operations - 0.17 1.11 -
------- ------- ------- -------
Net income (loss) per share $ 0.04 $(1.01) $ 0.99 $0.40
======= ======= ======= ======
NOTES:
The results of operations for the quarter ended January 1, 1999 include income
of $180, net of income tax expense of $87, or $.03 per share, relative to the
reversal of a reserve for the retention layer on certain insurance coverages,
offset in part by a charge for retirement expenses associated with a former
officer and provisions for other operating reserves.
The results of operations for the quarter ended July 3, 1998 include a charge
of $18,864, net of income tax benefit of $4,225, or $3.02 per share, relative to
a charge for goodwill impairment, restructuring costs, inventory reserves and
other miscellaneous expenses.
The results of operations for the quarter ended July 4, 1997 include a charge
of $6,150, or $0.97 per share, relative to the write-off of purchased in-
process research and development associated with the TEC transaction.
The results of operations for the quarter ended January 3, 1997 include a
charge of $10,300, net of income tax benefit of $6,500, or $1.63 per share,
relative to the write-off of purchased in-process research and development
associated with the SAFCO transaction.
Income (loss) per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly income (loss) per share does
not equal the total computed for the year.
</TABLE>
<PAGE>
14. SEGMENT INFORMATION:
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. In previous years, the land mobile operations were
reflected in the Wireless Segment. 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. Identifiable assets are those assets used in the
operations of a reportable segment and exclude goodwill and
deferred taxes. General corporate assets include land, deferred
income taxes, goodwill and other corporate assets. Depreciation
and capital expenditures will not agree with the Statement of
Consolidated Cash Flows because discontinued operations have not
been segregated in the Statement of Consolidated Cash Flows.
<PAGE>
<TABLE>
Information about the Company's operations by segment for the
years 1998, 1997 and 1996 is as follows:
Industrial Access Products Wireless Consolidated
- ------------------------------------------------------------------------------------------------
Year ended January 1, 1999:
<S> <C> <C> <C> <C>
Telecommunications sales $ 64,033 $25,160 $30,089 $119,282
======== ======= ======= ========
Segment profit $ 6,011 $ 325 $ 2,427 $ 8,763
======== ======= =======
General interest expense (1,294)
General corporate expenses (4,598)
Goodwill amortization (1,485)
Goodwill impairment, restructuring and other charges (23,089)
Net insurance reserve reversal and other 267
Interest income 301
---------
Pre-tax loss from
continuing operations $(21,135)
================================================================================================
Identifiable assets $ 34,994 $15,052 $17,947 $ 67,993
======== ======= =======
Corporate assets 21,962
Goodwill 28,500
---------
Total assets, January 1, 1999 $118,455
==============================================================================================
Depreciation $ 2,047 $ 1,066 $ 1,530
======= ======= =======
Capital expenditures $ 3,262 $ 218 $ 2,007
======= ======= =======
Reconciliation of Other Significant Items:
Geographic Information Revenue Long Lived Assets
- ---------------------- -------- ------------------
United States $ 76,413 $ 25,010
United Kingdom 10,527 1,096
Japan 5,262 -
Brazil 4,996 109
China 2,920 99
Taiwan 2,285 -
Other foreign countries 16,879 333
-------- --------
$119,282 $ 26,647
======== ========
Revenue from Major Customers:
Revenue from a customer of the Company's Access Products Segment
represents approximately $14,605, or 12% of the Company's
consolidated revenue. Revenue from a customer of the Company's
Industrial and Wireless Segments represents approximately $11,058,
or 9% of the Company's consolidated revenue.
</TABLE>
<PAGE>
<TABLE>
Industrial Access Products Wireless Consolidated
- ------------------------------------------------------------------------------------------------
Year ended January 2, 1998:
<S> <C> <C> <C> <C>
Telecommunications sales $ 59,809 $27,568 $23,092 $110,469
======== ======= ======= =========
Segment profit (loss) $ 5,815 $(1,550) $ 580 $ 4,845
======== ======== =======
General interest expense (1,660)
General corporate expenses (4,319)
Goodwill amortization (1,726)
Purchased in-process research and development (6,150)
Interest income 135
---------
Pre-tax loss from
continuing operations $ (8,875)
================================================================================================
Identifiable assets $ 33,986 $18,183 $17,370 $ 69,539
======== ======= =======
Net assets held for sale 16,195
Corporate assets 16,981
Goodwill 44,782
---------
Total assets, January 2, 1998 $147,497
================================================================================================
Depreciation $ 1,515 $ 1,062 $ 962
======== ======= =======
Capital expenditures $ 3,442 $ 1,169 $ 2,777
======== ======= =======
Reconciliation of Other Significant Items:
Geographic Information Revenue Long Lived Assets
- ---------------------- -------- ------------------
United States $ 76,957 $ 23,767
China 7,671 63
United Kingdom 5,953 798
Brazil 1,895 -
Other foreign countries 17,993 159
-------- --------
$110,469 $ 24,787
======== ========
Revenue from Major Customers:
Revenue from a customer of the Company's Access Products Segment
represents approximately $13,870, or 13% of the Company's
consolidated revenue. Revenue from a customer of the Company's
Industrial and Wireless Segments represents approximately $10,014,
or 9% of the Company's consolidated revenue.
</TABLE>
<PAGE>
<TABLE>
Industrial Access Products Wireless Consolidated
- ------------------------------------------------------------------------------------------------
Year ended January 3, 1997:
<S> <C> <C> <C> <C>
Telecommunications sales $ 53,003 $35,543 $7,913 $ 96,459
======== ======= ====== =========
Segment profit $ 7,357 $ 1,709 $3,173 $ 12,239
======== ======= =======
General interest expense (541)
General corporate expenses (7,259)
Goodwill amortization (915)
Purchased in-process research and development (16,800)
Interest income 298
---------
Pre-tax loss from
continuing operations $(12,978)
================================================================================================
Identifiable assets $ 25,044 $19,964 $11,564 $ 56,572
======== ======= =======
Net assets held for sale 45,996
Corporate assets 16,586
Goodwill 36,593
---------
Total assets, January 3, 1997 $155,747
================================================================================================
Depreciation $ 1,007 $ 996 $ 133
======= ======= =======
Capital expenditures $ 4,197 $ 885 $ 210
======= ======= =======
Reconciliation of Other Significant Items:
Geographic Information Revenue Long Lived Assets
- ---------------------- -------- -----------------
United States $ 77,112 $ 19,560
China 1,971 -
Saudi Arabia 1,920 -
South Korea 1,250 -
Other foreign countries 14,206 224
-------- --------
$ 96,459 $ 19,784
======== ========
Revenue from Major Customers:
Revenue from a customer of the Company's Access Products Segment
represents approximately $17,254, or 18% of the Company's
consolidated revenue. Revenue from a customer of the Company's
Industrial and Wireless Segments represents approximately $11,398,
or 12% of the Company's consolidated revenue.
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
Other than portions of Item 10, which are included in Item 4A
hereof, this part (i.e. Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security
Ownership of Certain Beneficial Owners and Management; Item 13 - Certain
Relationships and Related Transactions) is incorporated by reference to
the registrant's 1999 definitive proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The financial statements filed herewith under Part II,
Item 8, include the consolidated balance sheets at
January 1, 1999 and January 2, 1998, and the consolidated
statements of operations, stockholders' equity and cash
flows for the years 1998, 1997 and 1996 of Salient 3
Communications, Inc. and its subsidiaries.
(b) The registrant did not file any Form 8-K during the
fourth quarter of 1998.
(c) Exhibits.
3.1 Amended Certificate of Incorporation of Salient 3
Communications, Inc. as currently in effect.
Incorporated by reference to Exhibit 3(i) to the
Quarterly Report of the registrant on Form 10-Q
for the period ended July 4, 1997 (File No. 0-
12588).
3.2 Amended By-laws of Salient 3 Communications, Inc.
as currently in effect. Incorporated by reference
to Exhibit 3(ii) to the Quarterly Report of the
registrant on Form 10-Q for the period ended July
4, 1997 (File No. 0-12588).
The following Exhibits 10.1 through 10.5 are
compensatory plans or arrangements required to be
filed as exhibits to this Annual Report on Form
10-K pursuant to Item 14(c):
10.1 Salient 3 Communications, Inc. Equity Award Plan.
Incorporated by reference to Exhibit 4 to
Registration Statement on Form S-8 filed by
registrant under the Securities Act of 1933 (File
No. 33-15289).
10.2 1989 Stock Option Plan. Incorporated by reference
to Exhibit 4(a) to Registration Statement on Form
S-8 filed by registrant under the Securities Act
of 1933 (File No. 33-32288).
10.3 Salient 3 Communications, Inc. Stock Bonus
Purchase Plan. Incorporated by reference to
Exhibit 4 to Registration Statement on Form S-8
filed by registrant under the Securities Act of
1933 (File No. 33-37793).
10.4 Salient 3 Communications, Inc. Benefit
Equalization Plan, effective January 1, 1989.
Incorporated by reference to Exhibit 10(g) of
Annual Report of the registrant on Form 10-K for
the fiscal year ended January 1, 1993 (File No. 0-
12588).
10.5 Salient 3 Communications, Inc. split dollar life
insurance policy for a former officer of the
registrant. Incorporated by reference to Exhibit
10(h) of Annual Report of the registrant on Form
10-K for the fiscal year ended January 1, 1993
(File No. 0-12588).
10.6 Salient 3 Communications, Inc. Long Term Incentive
Plan. Incorporated by reference to Exhibit 4 to
Registration Statement on Form S-8 filed by the
registrant under Securities Act of 1933 (File No.
333-55963).
10.7 Salient 3 Communications, Inc. Directors' Stock
Option Plan. Incorporated by reference to
Exhibit 4 to registration Statement on Form S-8
filed by the registrant under Securities Act of
1933 (File No. 333-55967).
16 Change in independent accountants. Incorporated
by reference to Form 8-K filed on May 6, 1996.
21 A complete list of the registrant's subsidiaries.
23.1 Consent of Arthur Andersen LLP, registrant's
independent public accountants, to the use of
their reports on the consolidated financial
statements and financial data schedule.
27 Financial Data Schedule for the year ended January 1, 1999.
99.1 Annual Report on Form 11-K, pursuant to Section
15(d) of the Securities Exchange Act of 1934, of
the Stock Purchase Program for Employees of
Salient 3 Communications, Inc. and its
subsidiaries for the year ended December 31, 1998.
(To be filed by amendment.)
(d) Financial Statement Schedule, as required, are filed
herewith.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders and Board of Directors of Salient 3 Communications, Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in this Form
10-K, and have issued our report thereon dated January 25, 1999. Our
audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule referred to in Item 14(d) in this Form
10-K is the responsibility of the Company's management and is presented
for the purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
January 25, 1999
<PAGE>
<TABLE>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years 1998, 1997 and 1996
Column A Column B Column C Column D Column E Column F
Balance at Additions Balance at
Beginning Charged to Other End of
Description of Period Costs and Expenses Deductions Changes Period
_____________________________________________________________________________________________________
1998:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $1,680 $ 300 $ (27) (A) $ 55 (F) $1,711
===== ===== ===== (351) (C) =====
=====
Estimated liability for
contract losses $1,470 $ 300 $ 14 (B) $ - $1,756
===== ===== ===== ===== =====
Inventory reserves $2,190 $ 493 $ 668 $ 16 (F) $3,855
===== 4,353 (E) 2,880 (E) 351 (C) =====
===== ===== =====
Restructuring reserves $ - $ 2,401 (E) $ 947 (E) $ - $1,454
===== ===== ===== ===== =====
1997:
Allowance for doubtful accounts $1,565 $ 76 $ 154 (A) $ 358 (D) $1,680
===== ===== ===== (165) (C) =====
=====
Estimated liability for
contract losses $1,539 $ - $ 69 (B) $ - $1,470
===== ===== ===== ===== =====
Inventory reserves $1,363 $ 513 $ 367 $ 516 (D) $2,190
===== ===== ===== 165 (C) =====
=====
<PAGE>
1996:
Allowance for doubtful accounts $1,876 $ 103 $ 414 (A) $ - $1,565
===== ===== ===== ===== =====
Estimated liability for
contract losses $1,911 $ - $ 372 (B) $ - $1,539
===== ===== ===== ===== =====
Inventory reserves $ 936 $ 376 $ 249 $ 300 (C) $1,363
===== ===== ===== ===== =====
(A) Uncollectible accounts written off.
(B) Contract losses realized.
(C) Reclassification of reserves.
(D) Acquisition of DAC and TEC.
(E) Second quarter 1998 non-recurring charge.
(F) Acquisition of Elemec.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this 19th day of March, 1999.
SALIENT 3 COMMUNICATIONS, INC.
By /s/T. S. Cobb
T. S. Cobb
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
Chairman, President and Chief
Executive Officer
(Principal Executive
/s/T. S. Cobb Officer) and Director March 19, 1999
- --------------
T. S. Cobb
Senior Vice President and Chief
Financial Officer
(Principal Financial
and Accounting Officer)
/s/P. H. Snyder and Director March 19, 1999
- -----------------
P. H. Snyder
/s/J. W. Boyer, Jr. Director March 19, 1999
- --------------------
J. W. Boyer, Jr.
/s/D. E. Lyons Director March 19, 1999
- ----------------
D. E. Lyons
/s/D. K. Wilson, Jr. Director March 19, 1999
- ---------------------
D. K. Wilson, Jr.
/s/R. E. LaBlanc Director March 19, 1999
- ------------------
R. E. LaBlanc
<PAGE>
/s/D. E. Foster Director March 19, 1999
- -----------------
D. E. Foster
/s/D. F. Strigl Director March 19, 1999
- -----------------
D. F. Strigl
<PAGE>
<EX-21>
EXHIBIT 21
SUBSIDIARIES
The following list includes all significant subsidiaries of
the registrant and their state or jurisdiction of incorporation.
The registrant owns 100% of the outstanding voting stock of all of
the subsidiaries listed. The consolidated financial statements
include the registrant and all subsidiaries. Except as noted
below, none of the subsidiaries does business under a trade name
different from its corporate name.
State or
Jurisdiction in
which
Name of Subsidiary Incorporated
------------------ ---------------
GAI-Tronics Corporation * Delaware
XEL Communications, Inc. Colorado
SAFCO Technologies, Inc. Illinois
* GAI-Tronics Corporation, in addition to doing business under
its corporate name, does business under the Instrument
Associates, Inc. (IA) trade name and GAI-Tronics Limited.
<PAGE>
<EX-23>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Salient 3 Communications, Inc.:
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8
(File Nos. 333-55963, 333-55967, 33-55139, 33-11693, 33-15289, 33-
32288, 33-37792, 33-37793, 33-37795, 33-43113, 33-44939 and 33-
71242).
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-END> JAN-01-1999
<CASH> 2582000
<SECURITIES> 0
<RECEIVABLES> 29053000
<ALLOWANCES> 1711000
<INVENTORY> 15070000
<CURRENT-ASSETS> 56368000
<PP&E> 47244000
<DEPRECIATION> 23947000
<TOTAL-ASSETS> 118455000
<CURRENT-LIABILITIES> 24490000
<BONDS> 0
0
0
<COMMON> 8985000
<OTHER-SE> 69004000
<TOTAL-LIABILITY-AND-EQUITY> 118455000
<SALES> 119282000
<TOTAL-REVENUES> 119583000
<CGS> 72612000
<TOTAL-COSTS> 72612000
<OTHER-EXPENSES> 66770000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1336000
<INCOME-PRETAX> (21135000)
<INCOME-TAX> (3676000)
<INCOME-CONTINUING> (17459000)
<DISCONTINUED> (1150000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16309000)
<EPS-PRIMARY> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
