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 December 31, 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 28, 2000, was $4,245.
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Number of shares of each class
of common stock outstanding as
of January 28, 2000 (including
156,250 shares of restricted stock
and excluding 2,837,709 treasury shares): 5,640,996 506,595
</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.
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.
CORPORATE DEVELOPMENTS (dollar amounts in 000's except per share information)
In October 1999, the registrant announced that its Board of Directors had
retained Robert W. Baird & Co. (Baird) to assist in evaluating and pursuing
various strategic alternatives intended to enhance shareholder value. Such
alternatives may include the sale of all or part of the Company, its
subsidiaries or its operating segments. It is currently expected that
the Board of Directors will be in a position to make decisions regarding certain
of these alternatives during the second quarter of 2000.
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 equipment 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.
<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. During 1999, the operations of this division
were merged into the Reading, Pennsylvania operations. 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. Elemec Systems, Ltd.
(Elemec), a manufacturer of specialized communications and integrated
entertainment systems, was acquired January 3, 1998. Elemec was merged with DAC
to form GTC's European operations, which was renamed GAI-Tronics Limited.
In November and December 1999, the registrant acquired the net assets of Irmel
S.r.l. and Red Alert, Inc. for a total of $4,467, including a deferred payment
of $884 due December 31, 2000 and acquisition costs of $253. Irmel, based in
Milan, Italy, designs and assembles public address and closed circuit television
systems, and expands GTC's European Operations. Red Alert, a manufacturer of
emergency telephone stanchions and other emergency communications equipment, was
merged into GTC's US operations.
The following table sets forth sales for the past three fiscal years from the
Industrial Segment.
<TABLE>
1999 1998 1997
------ ------ ------
<C> <C> <C>
$60,180 $64,033 $59,809
</TABLE>
<TABLE>
The approximate percentage of sales derived from the principal markets served
during 1999 and the approximate percentage of the Industrial Segment's backlog
as of December 31, 1999 represented by contracts with clients in such markets,
was as follows:
Percentage of Percentage of Backlog
Market for Products 1999 Sales as of December 31, 1999
------------------- ------------- -----------------------
<S> <C> <C>
U.S. Private Industry 58% 47%
Foreign Governments and
Businesses 36 48
U.S. Federal, State and Local
Governments and Agencies 6 5
</TABLE>
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.
<PAGE>
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 1999 and 1998, Motorola accounted
for 13% of total sales in both years. No other customer accounted for 10% or
more of such sales in 1999 and 1998.
A substantial part of the Industrial Segment's business is obtained from
customers to whom it has made previous sales. In 1999 and 1998, sales made to
customers who had made purchases within the last four years accounted for
approximately 86% and 94%, 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 December 31, 1999 and January 1, 1999, GTC had backlog from which it had
anticipated estimated future sales of approximately $8,841 and $11,730,
respectively. It is estimated that substantially all of the goods reflected in
the backlog at December 31, 1999 will be shipped in 2000. Also, the vast
majority of sales generated in 2000 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, Stento ASA,
Motorola, Federal Signal and Allen Tel Products. 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 $2,147, $2,480, and $2,237 during 1999, 1998 and 1997,
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.
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 December 31, 1999, the Industrial Segment had a total of 497 employees, of
which 245 employees were professional and technical personnel. In comparison,
the Industrial Segment had a total of 485 employees on January 1, 1999, of which
246 were professional and technical personnel.
<PAGE>
ACCESS PRODUCTS SEGMENT
XEL, based in Aurora, Colorado, designs and sells transmission 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
16% during 1999. 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 second quarter of 2000.
The following table sets forth sales for the past three fiscal years from the
Access Products Segment.
<TABLE>
1999 1998 1997
------ ------ ------
<C> <C> <C>
$21,149 $25,160 $27,568
</TABLE>
<TABLE>
The approximate percentage of sales derived from the principal markets served
during 1999 and the approximate percentage of the Access Products Segment's
backlog as of December 31, 1999 represented by contracts with clients in such
markets, was as follows:
Percentage of Percentage of Backlog
Market for Products 1999 Sales as of December 31, 1999
------------------- ------------- -----------------------
<S> <C> <C>
U.S. Private Industry 94% 100%
Foreign Governments and
Businesses 6 -
</TABLE>
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.
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 1999, GTE and US West accounted for
55% and 14%, respectively, of total sales. During 1998, GTE, US West and
Ameritech accounted for 58%, 16% and 11%, respectively, of total sales. No
other customer accounted for 10% or more of such sales in 1999 or 1998.
<PAGE>
Historically most of XEL's business has been obtained from customers to whom it
has made previous sales. In 1999 and 1998, sales made to customers who had made
purchases within the last four years accounted for nearly 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 December 31, 1999 and January 1, 1999, XEL had backlog from which it had
anticipated estimated future sales of approximately $684 and $3,953,
respectively. It is estimated that substantially all of the goods reflected in
the backlog at December 31, 1999 will be shipped in 2000. Also, the vast
majority of sales generated in 2000 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, Cisco Systems, Pulsecom, Teltrend,
and Tellabs. 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 $1,228, $477, and $1,781 during 1999, 1998 and 1997,
respectively, on company-sponsored product development charged to expense during
the periods. The Company also capitalized software development costs of $631 in
1999. The capitalized costs will be amortized over 3 years after completion of
the development effort. Delays in completing the products during 1999 had a
negative impact on XEL's results of operations. Several professional employees
within the company routinely engage in company-sponsored product development and
improvement on a full-time basis.
On December 31, 1999, the Access Products Segment had a total of 65 employees,
of which 58 employees were professional and technical personnel. In comparison,
the Access Products Segment had a total of 60 employees on January 1, 1999, of
which 53 were professional and technical personnel.
WIRELESS SEGMENT
SAFCO, based in Chicago, Illinois, provides products and services which focus on
measurement, analysis and predictive tools and engineering and technical
services 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.
Effective February 23, 1999, the registrant acquired all of the outstanding
stock of ComOpt AB (ComOpt), a developer of automatic frequency planning
software for wireless networks, for $4,098, including acquisition costs. Under
the terms of the agreement, the registrant will also pay ComOpt's former
shareholders additional amounts based upon the achievement of certain
performance goals. ComOpt was merged into the operations of SAFCO.
<PAGE>
The following table sets forth sales for the past three fiscal years from the
Wireless Segment.
<TABLE>
1999 1998 1997
------ ------ ------
<C> <C> <C>
$34,301 $30,089 $23,092
</TABLE>
The approximate percentage of sales derived from the principal markets served
during 1999 and the approximate percentage of the Wireless Segment's backlog as
of December 31, 1999 represented by contracts with clients in such markets, were
as follows:
<TABLE>
Percentage of Percentage of Backlog
Market for Products 1999 Sales as of December 31, 1999
------------------- ------------- -----------------------
<S> <C> <C>
U.S. Private Industry 46% 64%
Foreign Governments and
Businesses 54 36
</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.
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 1999, Nextel and Motorola
accounted for 14% and 13%, respectively, of total sales. During 1998, NEC -
Brazil accounted for 12% of total sales. No other customer accounted for 10% or
more of such sales in 1999 or 1998.
A part of SAFCO's business is obtained from customers to whom it has made
previous sales. In 1999 and 1998, sales made to customers who had made
purchases within the last four years accounted for approximately 41% and 29%,
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 December 31, 1999 and January 1, 1999, SAFCO had backlog from which it had
anticipated estimated future sales of approximately $4,532 and $3,778,
respectively. It is estimated that substantially all of the goods reflected in
the backlog at December 31, 1999 will be shipped in 2000. Also, the vast
majority of sales generated in 2000 will be from orders received during the
year.
<PAGE>
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,
Agilent, 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 $2,469, $2,421, and $1,516 during 1999, 1998 and
1997, respectively, on company-sponsored product development charged to expense
during the periods. The Company also capitalized net software development costs
of $2,782 in 1999. The capitalized costs are being amortized over the greater
of the ratio of current revenues to total anticipated revenues or on a straight-
line basis over 2 years beginning after completion of development on each
product. Several professional employees within the Company 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 SAFCO's results of
operations.
On December 31, 1999, the Wireless Segment had a total of 220 employees, of
which 189 employees were professional and technical personnel. In comparison,
the Wireless Segment had a total of 196 employees on January 1, 1999, of which
169 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 1999 were the United Kingdom and Japan.
<PAGE>
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. The facility near Reading, Pennsylvania, which is used to design
and assemble communications systems, had been owned by GTC and consists of
approximately 103,000 square feet and is located on a 17 acre tract of land. In
December 1999, the registrant entered into a contract for the sale and leaseback
of the property. The lease expires in 2013.
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. The Company has committed to a ten-year lease for
a new facility which will be occupied in the second quarter of 2000. Irmel
S.r.l., located in Milan, Italy, leases a manufacturing and office facility of
approximately 27,000 square feet. The lease expires in November, 2002.
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, the Company plans to sell
this facility and XEL will find other suitable space for its executive and
administrative functions.
SAFCO leases approximately 39,000 square feet of office and manufacturing space
in Chicago, Illinois. The lease expires in 2006. SAFCO also leases
approximately 20,000 square feet of office space in Melbourne, Florida. The
lease expires in 2008.
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.
<PAGE>
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.
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 1999.
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 58
since July 1995. He has been 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 52
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 51
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.
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>
1999 1998 Dividends
High Low High Low 1999 1998
----- ----- ------ ------ ---- ----
<C> <C> <C> <C> <S> <C> <C>
$9.00 $6.38 $12.00 $11.00 First Quarter $ -- $.10
8.75 6.13 11.25 9.00 Second Quarter -- --
9.25 5.38 10.00 7.75 Third Quarter -- --
8.00 5.50 10.38 6.25 Fourth Quarter -- --
</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 December 31, 1999, the approximate number of shareholders of Class A and
Class B common stock was 2,900 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: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Telecommunications Sales $ 115,630 $ 119,282 $ 110,469 $ 96,459 $ 51,848
Net Income (Loss) from
Continuing Operations 1,200 (17,459) (1) (7,845) (2) (7,928) (3) (1,995) (4)
Per Share of Common Stock (Basic):
Net Income (Loss) from
Continuing Operations 0.20 (2.83) (1) (1.24) (2) (1.26) (3) (0.30) (4)
Dividends to Stockholders - 0.10 0.40 0.60 0.80
Basic Weighted Average
Shares Outstanding 5,973,328 6,158,587 6,305,384 6,299,127 6,592,174
Summary of Financial Position:
Total Assets $ 124,547 $ 118,455 $ 147,497 $ 155,747 $ 135,589
Long-Term Debt 13,647 10,616 11,245 26,549 1,436
Stockholders' Equity 79,318 77,989 97,860 97,620 102,481
Stockholders' Equity Per Share 12.90 12.74 15.20 15.37 16.30
Number of Employees 797 760 905 788 686
(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.
(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)
Results of Operations
1999 vs. 1998
Summary
The Company reported net income from continuing operations of $1,200, or $.20
per share, for 1999, compared with a net loss from continuing operations of
$17,459, or $2.83 per share, for 1998. Excluding non-recurring adjustments,
income from continuing operations was $1,204, or $.20 per share for 1999.
Excluding adjustments discussed below, income from continuing operations was
$1,225, or $.20 per share for 1998. Revenue declined 3% from 1998 to 1999,
and gross profit declined 4%. The decrease in gross profit was offset by a
decrease in research and development, due to capitalization of a larger amount
of software development costs in 1999. Excluding adjustments, net income from
continuing operations decreased 2%. Results for 1999 were negatively impacted
by approximately $290, or $.03 per share after taxes, of charges related to
the Company's decision to pursue strategic alternatives, including the
evaluation of converting to one class of stock.
The reduction of research and development expense in 1999 was due to the
Company's capitalizing more software under development than it had in 1998, as
development efforts at SAFCO (Wireless Segment) and XEL (Access Products
Segment) have become much more focused on products that will generate sales
over an extended period, versus performing research and providing maintenance
on existing products. The net amount capitalized, after related amortization,
was $3,340 in 1999, compared to $327 in 1998.
As part of a cost reduction initiative in the second quarter of 1999, the
Industrial Segment accrued for severance costs of $356 and wrote off $650 of
inventory in connection with the consolidation of the Instrument Associates
division of GAI-Tronics into its Reading, Pennsylvania facility. Also during
the second quarter of 1999, the Company determined that $1,000 of its reserves
was no longer required and could be reduced. The effect of these adjustments
was to increase cost of goods sold by $830 and reduce selling, general and
administration by $824.
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 resulted from 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.
During the years 1999, 1998 and 1997, the Company has purchased stock or
assets of several companies. The Industrial Segment includes the operations
of Red Alert, Inc., acquired in December 1999, Irmel S.r.l., acquired in
November 1999, Elemec Systems, Ltd., acquired in January 1998 and DAC Ltd.,
acquired in April 1997. The Wireless Segment includes the operations of
ComOpt AB, acquired in February 1999 and TEC Cellular, Inc., acquired in
April 1997. Each acquisition is included in the segment's operating results
since the date of acquisition. Note 2 to the Consolidated Financial
Statements provides additional information about these acquisitions.
Sales and Gross Profit
Sales decreased 3% for the year from $119,282 in 1998 to $115,630 in 1999.
Both the Industrial and the Access Products Segments experienced declines,
while sales in the Wireless Segment increased by 14%. Approximately 40% of
the increase in the Wireless Segment sales resulted from the ComOpt
acquisition in the first quarter of 1999.
<TABLE>
The following is a breakdown of sales by segment:
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Access Products $21,149 $25,160 $27,568
Industrial 60,180 64,033 59,809
Wireless 34,301 30,089 23,092
------- ------- -------
Total $115,630 $119,282 $110,469
======= ======= =======
</TABLE>
<PAGE>
Access Products sales decreased by 16% in 1999 compared to 1998. Customer
demand for analog channel units continued the declines experienced in the past
two years. In addition, sales of partnership products declined 10%. Some of
the decreases resulted from customer reuse programs and customer evaluation of
their inventory stocking programs. This segment also suffered from delays in
completing development of its new integrated access product, which is now
planned for production in the second quarter of 2000. Industrial sales
declined 6% in 1999 compared to 1998. The decline was largely due to a
continued soft order flow from the segment's customers in oil related
industries. However, modest growth was seen in its European operations,
acquired in 1997 and 1998. Wireless sales increased 14% in 1999 over 1998.
The sales growth came from software-based products and engineering and testing
services. The acquisition of ComOpt in February 1999 also contributed to the
growth.
Including the adjustments, the gross profit percentage increased from 38% in
1998 to 41% in 1999. Excluding the adjustments, the gross profit percentage
remained constant at 42%. The Wireless Segment traditionally has a higher
gross profit margin than the other segments, but its overall profit margin
declined in 1999 due to significant revenue increases in its lower-margin
services business. However, the Industrial Segment increased its gross margin
by one percentage point and the Access Products Segment had a fractional
increase both due to the restructuring and other cost reduction efforts in
these segments.
Selling, General and Administration
Excluding the adjustments, selling, general and administration increased 1% in
1999 compared to 1998. Increases were caused by the ComOpt acquisition and
expansions of sales and marketing efforts, but these increases were largely
offset by cost reduction efforts in other areas.
As a percentage of sales, selling, general and administration increased from
30% in 1998 to 31% in 1999. The Wireless Segment, which normally has a higher
percentage of selling, general and administration to sales, reduced its
percentage as a result of the sales growth. However, the other segments saw
increases in their percentages due to the sales declines.
Research and Development, Goodwill Amortization and Interest Expense
Research and Development decreased 19% in 1999 compared to 1998, due to the
capitalization of software for external use in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Including costs
capitalized, the total expenditures for research and development increased 9%
in 1999 compared to 1998, as the company placed increased emphasis on new
product development.
Goodwill amortization increased 14% from 1998 to 1999 due to the acquisitions
of ComOpt and Irmel in 1999.
Interest expense declined 9% as proceeds from sale of a subsidiary in July
1998 were available to reduce short-term borrowings and fund other cash
requirements.
Provision for Taxes on Income
Excluding the adjustments, the effective tax rate was 37% in 1999 and 27% in
1998. The change in the effective tax rate was due to the utilization of
higher research and development tax credits in 1998, which are not available
in 1999 because capitalized development costs are not eligible for the credit.
<PAGE>
Results of Operations
1998 vs. 1997
Summary
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 the adjustments discussed above, income from
continuing operations was $1,225 or $0.20 per share for 1998. Excluding
adjustments discussed below, the Company incurred a net loss from continuing
operations 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 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. 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 and Gross Profit
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 DAC and TEC acquisitions in the second quarter of 1997, and the
Elemec acquisition in the first quarter of 1998, offset in part by lower
sales by the Access Products 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 38% in 1998. Excluding the aforementioned adjustments, the gross
profit percentage increased from 40% in 1997 to 42% 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.
<PAGE>
Selling, General and Administration
Excluding the adjustments, selling, general and administration increased 4% in
1998 compared to 1997. The increase resulted primarily from the DAC, TEC and
Elemec acquisitions, offset in part by cost reductions by the Access Products
Segment.
As a percentage of sales, selling, general and administration was 30% 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 increased 18% due to a significant commitment to new
product development in the Wireless Segment. The Elemec acquisition also
brought increases in the Industrial Segment.
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.
Provisions 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 in 1998.
Income from discontinued operations
As a result of a decision by the Board of Directors to focus its business on
telecommunications equipment and services, the Company adopted discontinued
operations treatment for its Technical Services and Real Estate Segments
during the first quarter of 1997.
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 increased $2,436 in 1999, from $31,565 in 1998 to $34,001 in
1999. The increase in working capital was due to the sale-leaseback of the
Industrial Segment's headquarters and manufacturing facility, offset by the
purchases of Irmel and Red Alert. Amounts generated from operations,
available cash and cash equivalents and an existing line of credit should
provide adequate working capital through 2000. The sale-leaseback transaction
generated a deferred gain of $1,784, which will be taken into income over the
lease term. $1,645 of the deferral is included in other long-term liabilities
at December 31, 1999.
Under the terms of a loan agreement, the Company has a maximum working capital
line of $12,000 and an acquisition line of $6,000 with First Union National
Bank that expire on June 30, 2000. 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 and taxes. The Company was in compliance with all
covenants at December 31, 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 December 31, 1999, the
availability under the working capital line of credit was $9,570, after
reduction for outstanding borrowings of $202 and issued letters of credit
aggregating $2,228. During 1999, $3,500 was borrowed against the acquisition
line in connection with the purchase of ComOpt.
The Company estimates that its total capital expenditures in 2000, excluding
acquisitions, will be approximately $3,300. No restrictions on cash transfers
between the Company and its subsidiaries exist.
Other
On October 27, 1999, the Company announced that the Board of Directors had
retained Robert W. Baird & Co. to assist in evaluating and pursuing various
strategic alternatives intended to enhance shareholder value. Such alternatives
may include the sale of all or part of the Company, its subsidiaries or its
operating segments. It is currently expected that the Board of Directors
will be in a position to make decisions regarding certain of these alternatives
during the second quarter of 2000.
Continued improvement in the Company's operations is dependent upon successful
product development. 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 nearing completion on development of a new product for the access market,
to be released in the second quarter of 2000.
The company currently sells to customers in certain Asian and Latin American
countries which have had currency problems in prior years that negatively
impacted their economies. If similar currency problems occur in future
periods, the Company expects that there could be some impact on the volume or
timing of products sold in those countries.
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 2001. SFAS 133 is not expected to
have a material impact on the Company's consolidated results of operations,
financial position or cash flows.
<PAGE>
The Company has recognized 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 have
been made compliant to ensure no material business interruption. The program
to identify and resolve Year 2000 issues encompassed 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. Risk assessments and inventories of systems determined
that most of its systems were Year 2000 compliant. The Company's assessments
and inventories considered both IT and non-IT systems and equipment.
Project plans were developed to identify the remaining systems/equipment that
needed remediation, as well as actions, resources needed, and timeframes to
perform the remediation. During 1999, remediation actions were taken to
obtain Year 2000 compliance for all identified problems. This entire process
was a dynamic one. Compliance assessments were ongoing, modifications to
individual project plans were made as needed, and the Company's overall
remediation status was monitored on a regular basis.
In addition to its own Year 2000 compliance, the Company believed that its
business could potentially be adversely impacted if its key suppliers and
customers did not achieve timely and successful Year 2000 compliance with
their systems/equipment. The Company has contacted its key business partners
to assess their Year 2000 readiness. All of the Year 2000 compliance programs
were completed by the end of 1999. The total cost of achieving Year 2000
compliance was not material. All modification costs were expensed as
incurred.
On January 1, 1999, several member countries of the European Union established
fixed conversion rates between their existing sovereign currencies and adopted
the Euro as their new common legal currency. The Company will continue to
evaluate issues involving introduction of the Euro. Based on current
information, the Company does not expect that the Euro conversion will have a
material adverse effect on its business, results of operations, cash flow or
financial condition.
This Form 10-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 2000 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,
demand and market acceptance risks of current and new products and services,
technology change, risks of product development and commercialization
difficulties, and the outcome of the process to evaluate and pursue various
strategic alternatives intended to enhance shareholder value. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's only financial instruments with market risk exposure are
revolving credit borrowings and variable rate term loans, which total $3,702
at December 31, 1999. Based on this balance, a change of one percent in the
interest rate would cause a change in the interest expense for the year of
approximately $37. This interest amount, less a related tax effect, would
change net income per share by less than $.01 per share.
These financial instruments are non-trading in nature (not entered into for
trading purposes) and carry interest at either the bank's prime interest rate
or a function of London Interbank Offering Rate (LIBOR). The Company's
objective in maintaining these variable rate borrowings is the flexibility
obtained regarding early repayment without penalties and lower overall cost as
compared with fixed rate borrowings.
<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'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 December 31, 1999 and January 1,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
December 31, 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 December 31, 1999 and January 1,
1999, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
January 24, 2000
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years 1999, 1998, and 1997
(000's except for share and per share information)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Telecommunications sales $ 115,630 $ 119,282 $ 110,469
Cost of goods sold 68,007 73,492 66,639
------- ------- -------
Gross profit 47,623 45,790 43,830
Selling, general and administration 34,957 35,480 34,061
Research and development 8,717 10,735 9,098
Purchased in-process research and development - - 6,150
Goodwill impairment and restructuring charge - 18,190 -
Goodwill amortization 1,699 1,485 1,726
------- ------- -------
Operating income (loss) 2,250 (20,100) (7,205)
------- ------- -------
Interest and other income 873 301 135
Interest expense 1,211 1,336 1,805
------- ------- -------
Pre-tax income (loss) from continuing operations 1,912 (21,135) (8,875)
Provision (benefit) for taxes on income (loss) 712 (3,676) (1,030)
------- ------- -------
Net income (loss) from continuing operations 1,200 (17,459) (7,845)
------- ------- -------
Income from discontinued operations:
Technical Services Segment (less applicable income taxes of
$643 in 1998 and $939 in 1997) - 1,050 1,628
Real Estate Segment (less applicable income taxes of
$450 in 1997) - - 781
Gains on disposals of subsidiaries (less applicable
income taxes of $5,945 in 1997) - 100 8,080
------- ------- -------
Net income from discontinued operations - 1,150 10,489
------- ------- -------
Net income (loss) $ 1,200 $ (16,309) $ 2,644
======= ======= =======
Per share of common stock (basic and diluted):
Net income (loss) from continuing operations $ 0.20 $ (2.83) $ (1.24)
Net income from discontinued operations:
Technical Services Segment - 0.17 0.26
Real Estate Segment - - 0.12
Disposals of subsidiaries - 0.02 1.28
---- ---- ----
Net income (loss) per share $ 0.20 $ (2.65) $ 0.42
==== ==== ====
Basic weighted average shares outstanding 5,973,328 6,158,587 6,305,384
Note: The net income (loss) per share is computed independently for each item.
Therefore the total net income (loss) per share may not equal the sum of the 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 Flows
For the years 1999, 1998, and 1997
(000's)
1999 1998 1997
------ ------ ------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 1,200 $ (16,309) $ 2,644
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Gain on sale of subsidiaries - (100) (14,025)
Depreciation and amortization 7,172 6,535 7,105
Purchased research & development write-off - - 6,150
Goodwill write-off - 15,789 -
Reserve provisions 798 4,318 808
Deferred income tax provision (benefit) 1,230 (2,050) (849)
Changes in current assets and current liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable and unbilled revenue 273 (4,257) (1,697)
Inventories (2,169) 15 (2,963)
Other current assets (1,726) (512) 83
Accounts payable and salaries and wages 2,496 (1,639) 581
Other accrued liabilities (3,663) 3,684 (3,757)
Income taxes, currently payable (60) (2,773) (266)
Estimated liability for contract losses - (385) (56)
Other, net 190 143 (8)
----- ----- -----
Net cash provided by (used for) operating activities 5,741 2,459 (6,250)
----- ----- -----
Cash flows from investing activities:
Software development costs (4,219) (543) (539)
Payments for acquisitions, net of cash acquired (7,550) (952) (19,302)
Proceeds from sale of subsidiaries - 15,005 45,013
Payments for property, plant and equipment (3,442) (5,631) (7,957)
Proceeds from sale of property, plant and equipment 6,045 - -
----- ----- ------
Net cash provided by (used for) investing activities (9,166) 7,879 17,215
----- ----- ------
Cash flows from financing activities:
Payments of long-term debt (393) (635) (35,338)
Borrowings (repayments) under note payable (1,626) (6,729) 8,557
Proceeds from issuance of debt 4,216 - 19,900
Proceeds from notes receivable 500 500 -
Issuance of treasury stock in connection
with stock purchase plan 254 546 161
Payments to acquire treasury stock (292) (3,655) (547)
Cash dividends paid - (642) (2,553)
Other, net (129) (120) 352
----- ------ -----
Net cash provided by (used for) financing activities 2,530 (10,735) (9,468)
----- ------ -----
Net increase (decrease) in cash and cash equivalents (895) (397) 1,497
Cash and cash equivalents at beginning of year 2,582 2,979 1,482
----- ----- -----
Cash and cash equivalents at end of year $ 1,687 $ 2,582 $ 2,979
===== ===== =====
Supplemental cash flow disclosures:
Interest paid $ 1,125 $ 1,318 $ 2,405
===== ===== =====
Income taxes paid, net of refunds received $ 663 $ 2,086 $ 7,420
===== ===== =====
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and January 1, 1999
(000's except for share information)
December 31, January 1,
1999 1999
------------ ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,687 $ 2,582
Accounts receivable, net of allowance
for doubtful accounts of $1,556 in 1999 and
$1,711 in 1998 27,239 27,342
Inventories 17,425 15,070
Deferred income taxes 4,940 5,510
Other current assets 7,302 5,551
------ ------
Total current assets 58,593 56,055
------ ------
Property, plant and equipment, at cost:
Land 1,994 3,172
Buildings 4,353 9,773
Furniture and equipment 36,430 33,585
------ ------
42,777 46,530
Less accumulated depreciation and
amortization 24,973 23,648
------ ------
17,804 22,882
------ ------
Deferred income taxes 6,470 6,940
Other assets 2,850 3,350
Software development costs 4,068 728
Goodwill 34,762 28,500
------- -------
Total Assets $ 124,547 $ 118,455
======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and January 1, 1999
(000's except for share information)
December 31, January 1,
1999 1999
------------ ----------
LIABILITIES
Current liabilities:
<S> <C> <C>
Notes payable $ 202 $ 1,828
Accounts payable 9,946 7,200
Salaries and wages 1,428 987
Income taxes, currently payable 406 466
Estimated liability for contract losses 1,756 1,756
Deferred revenue 2,164 1,429
Other accrued liabilities 8,690 10,824
------ ------
Total current liabilities 24,592 24,490
------ ------
Long-term debt 13,647 10,616
Other long-term liabilities 6,990 5,360
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: 1999, 8,478,729 shares; 1998, 8,477,365 shares 8,479 8,477
Class B common stock, voting, par value $1 per share
Issued and outstanding: 1999, 506,571 shares;
1998, 507,935 shares 506 508
Capital in excess of par value 36,974 37,394
Warrants outstanding 1,755 1,665
Retained earnings 74,178 72,978
Foreign currency translation adjustment (14) 99
Deferred compensation-restricted stock (1,420) (1,610)
Class A common stock held in treasury, at cost:
1999, 2,837,709 shares; 1998, 2,862,370 shares (41,140) (41,522)
------ ------
79,318 77,989
------ ------
Total Liabilities and Stockholders' Equity $ 124,547 $ 118,455
======= =======
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 1999, 1998 and 1997
(000's except for share information)
Common Stock
--------------------------------------------------------
Class A Class B
----------------------- ------------------------
Shares Amount Shares Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
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
Conversion from Class B to
Class A, net 1,364 2 (1,364) (2)
--------- ----- ------- ---
Balances at December 31, 1999 8,478,729 $ 8,479 506,571 $ 506
========= ===== ======= ===
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 1999, 1998 and 1997
(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 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)
Net income 1,200
Translation adjustment (113)
Restricted stock amortization 190
Issuance of warrants 90
Purchase of treasury stock 34,657 (292)
Issuance of treasury stock in
connection with stock
purchase plan (420) (59,318) 674
------ ----- ------ ----- ----- --------- ------
Balances at December 31, 1999 $ 36,974 $ 1,755 $ 74,178 $ (14) $(1,420) 2,837,709 $(41,140)
====== ===== ====== ===== ===== ========= ======
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 1999, 1998 and 1997 fiscal years included 52 weeks
each and ended on December 31, 1999, January 1, 1999 and January 2, 1998,
respectively.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its subsidiaries. All material intercompany
transactions have been eliminated. Certain 1998 and 1997 information has been
reclassified to conform with 1999 presentation.
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. The Company recognizes software license fees for
perpetual licenses upon delivery of the product. If any portion of the fees
relate to maintenance or support services, it is deferred and recognized over
the contract term, generally one to three years. Software license fees for
fixed-term licenses are recognized ratably over the term of the license. At
December 31, 1999 and January 1, 1999, the Company deferred $2,164 and $1,429,
respectively, of software licensing revenue.
INSURANCE PROGRAMS: Through 1997, 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.
Subsequent to 1997, the Company's insurance coverages do not contain
provisions for significant deductibles and funding on a claims paid basis.
Accruals, which relate primarily to workers' compensation, aggregate $1,187
and $1,602 at December 31, 1999, and January 1, 1999 respectively, and are
included in other accrued liabilities on the consolidated balance sheets.
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.
<PAGE>
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.
SOFTWARE DEVELOPMENT COSTS: In accordance with Statement of Financial
Accounting Standards No. 86 "Accounting for Cost of Computer Software to be
Sold, Leased, or Otherwise Marketed," the Company capitalizes software
development costs incurred after the establishment of technological
feasibility until the product is available for general release. Costs
incurred prior to the establishment of technological feasibility are charged
to research and development expense as incurred. In 1999 and 1998, the
Company capitalized $4,219 and $543, respectively, of software development
costs. Costs are amortized over the greater of the ratio of current revenues
to total anticipated revenues or on a straight-line basis over the estimated
useful lives of the products (2 to 3 years) beginning with the initial release
to customers. Such amortization amounted to $879 in 1999, $216 in 1998 and
$83 in 1997. As of December 31, 1999 and January 1, 1999, accumulated
amortization was $1,178 and $299, respectively.
GOODWILL: Goodwill is being amortized by charges to operations on a straight-
line basis over periods of 10 to 20 years for acquisitions since 1996 and over
40 years for earlier acquisitions, and such amortization amounted to $1,699 in
1999, $1,485 in 1998 and $1,726 in 1997. Accumulated amortization amounted to
$8,287 at December 31, 1999, and $6,588 at January 1, 1999. Goodwill related
to a pre-1970 acquisition in the amount of $540 is not being amortized and, in
the opinion of management, there has been no decrease in value.
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).
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.
<PAGE>
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, and the 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 accounted
for both its technical services and real estate segments as discontinued
operations. All operating units included in these segments were sold during
1997 and 1998 (See Note 2).
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. 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.
<TABLE>
The following is a summary of sales by discontinued segment:
1998 1997
--------- ---------
Sales:
<S> <C> <C>
Technical Services $48,251 $69,463
Real Estate - 5,026
--------- ---------
$48,251 $74,489
========= =========
</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 and 1997.
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
1999, 1998 and 1997 were 5,983,158, 6,184,471 and 6,393,234, respectively.
These additional shares had no effect on the net income per share for 1999 and
had an antidilutive impact on the Company's loss from continuing operations
for 1998 and 1997.
Options and warrants to purchase 1,818,555 shares as of December 31, 1999, at
prices ranging from $7.63 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 for the year.
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.
NEW ACCOUNTING STANDARDS: The Financial Accounting Standards Board has issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of this statement are effective for fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
believe that adoption of this statement will materially affect its
consolidated results of operations.
<PAGE>
2. ACQUISITIONS/DISPOSITIONS:
In November and December 1999, the Company acquired the net assets of Irmel
S.r.l. and Red Alert, Inc., respectively, for a total of $4,467, including a
deferred payment of $884 due December 31, 2000 and acquisition costs of $253.
The acquisitions were accounted for as purchases and cost was assigned to the
net assets acquired based on their estimated fair values at the dates of
acquisition. The acquisitions resulted in goodwill of $4,068 which is being
amortized on a straight-line basis over 15 years. Irmel, based in Milan,
Italy, expands the Industrial Segment's European Operations and Red Alert was
merged into its US operations.
Effective February 23, 1999, the Company acquired all of the outstanding stock
of ComOpt AB (ComOpt) for $4,098, including acquisition costs. The Company
recorded goodwill of $3,892, which is being amortized on a straight-line basis
over 10 years. Under the terms of the agreement, the Company will also pay
ComOpt's former shareholders additional amounts based upon the achievement of
certain performance goals. Any additional payments will increase goodwill.
ComOpt is part of the Company's Wireless Segment and was merged into the
operations of SAFCO Technologies, Inc.
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.
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.
<PAGE>
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.
The following unaudited consolidated pro-forma results of operations for the
years 1999 and 1998 include Irmel, Red Alert, ComOpt and Elemec as if they had
been acquired at the beginning of each of the respective periods:
<TABLE>
1999 1998
------ ------
<S> <C> <C>
Telecommunications sales $ 119,261 $ 123,856
Net income (loss) from continuing operations $ 452 $ (18,663)
Net income (loss) from continuing operations
per share of common stock $ 0.08 $ (3.03)
</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. The Company also paid an earnout of $1,204 to the former
shareholders of SAFCO Corporation pursuant to the 1996 acquisition.
3. INCOME TAXES:
At December 31, 1999 and January 1, 1999, federal and state income tax refunds
of $1,838 and $709, respectively, were recorded in other current assets.
Income tax provisions (benefits) from continuing operations consist of the
following:
<TABLE>
1999 1998 1997
------ ------ ------
Current:
<S> <C> <C> <C>
Federal $ (680) $(2,809) $(1,793)
State and foreign 162 768 (328)
------- ------- -------
(518) (2,041) (2,121)
------- ------- -------
Deferred:
Federal 910 (1,155) 881
State 320 (480) 210
------- ------- -------
1,230 (1,635) 1,091
------- ------- -------
$ 712 $(3,676) $(1,030)
======= ====== ======
</TABLE>
<PAGE>
The tax effects of temporary differences which comprise the deferred income
tax assets and liabilities are as follows:
<TABLE>
December 31, January 1,
1999 1999
------------- ------------
Deferred income tax assets:
<S> <C> <C>
Goodwill $ 5,588 $ 6,268
Retirement liabilities 1,717 1,972
Reserves for contract disallowances
and bad debts 1,179 1,244
Inventory obsolescence reserves 994 1,507
Deferred revenue 980 559
Inventory 735 682
Deferred gain on sale/leaseback 658 -
Workers' compensation reserves 297 562
Warranty reserve 186 292
Closure of United Energy Services Corp. 112 547
Other 1,794 1,395
------ ------
$14,240 $15,028
------ ------
December 31, January 1,
1999 1999
------------ ------------
Deferred income tax liabilities:
Capitalized software development $ 921 $ 122
Depreciation 691 1,119
State income taxes 620 694
Unbilled revenue 273 45
Deferred installment sale gain 94 125
Prepaid insurance 79 187
Other 152 286
------ ------
2,830 2,578
------ ------
Net deferred income tax asset $11,410 $12,450
====== ======
</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 in which the
deferred tax assets are deductible, management believes it is more likely than
not that the Company will realize the benefit of these deductible differences
at December 31, 1999 and January 1, 1999.
<PAGE>
A reconciliation of the statutory income tax rate to the effective tax rate
follows:
<TABLE>
1999 1998 1997
---- ---- ----
<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 (2.4) (0.9) (1.0)
Amortization and write-off of goodwill 8.5 18.6 2.9
Research and development credit - (1.2) (1.1)
Foreign sales corporation (1.8) (0.6) (1.3)
Other, net (1.1) 0.7 (0.7)
------ ------ ------
Effective tax rate 37.2% (17.4)% (11.6)%
==== ==== ====
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following obligations:
<TABLE>
December 31, January 1,
1999 1999
--------- ---------
<S> <C> <C>
Acquisition line of credit (see below) $ 3,500 $ -
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% 446 656
Capital lease obligations, with monthly
payments not exceeding $32, with
maturity dates from 1999 to 2002 and
interest rates ranging from 7.5% to 10.4% 816 282
------ ------
14,762 10,938
Less current maturities (1,115) (322)
------- ------
$13,647 $10,616
====== ======
</TABLE>
The aggregate maturities of long-term debt, including the capital lease
obligations, are as follows:
2000 $ 1,115
2001 11,225
2002 906
2003 700
2004 700
2005 116
------
Total $14,762
======
<PAGE>
In connection with the aforementioned capital leases and mortgage obligation,
the Company has pledged certain property, plant and equipment with a net book
value of $5,416.
Long term debt recorded at December 31, 1999 approximates fair market value.
Under terms of a 1999 loan agreement with First Union National Bank, the
Company has a working capital line of credit of $12,000 and an acquisition
line of credit of $6,000. The agreement 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 December 31, 1999,
approximately $10,000 was available under the working capital line of credit
based on outstanding borrowings ($202), and outstanding letters 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 and taxes. 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 December 31, 1999, the
borrowing base was in excess of $12,000. The Company was in compliance with
its loan covenants as of December 31, 1999.
The working capital line of credit is available through June 30, 2000. The
Company expects to renew the line on such date. At December 31, 1999 and
January 1, 1999, $2,228 and $1,923, respectively, were committed for stand-by
letters of credit.
The acquisition line of credit is available through June 30, 2000. Any
balance outstanding at that time, excluding the current outstanding balance of
$3,500, will convert to a term loan and be amortized in equal principal
payments over the following 60 months. Monthly repayments on the current
outstanding balance of the acquisition line of $58 plus interest will begin in
March of 2000 and continue through 2005.
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>
December 31, January 1,
1999 1999
---------- ----------
<S> <C> <C>
Raw materials and components $ 9,760 $ 9,632
Work in process 2,995 2,408
Finished goods 6,430 6,885
Reserves (1,760) (3,855)
------ ------
$17,425 $15,070
====== ======
</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
1999, 1998, and 1997, totaled $1,321, $1,442, and $1,536, respectively.
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 as of December
31, 1999 and January 1, 1999, respectively.
<TABLE>
1999 1998
------- -------
Discount rate 4.50% 4.50%
Salary escalation 2.50% 2.50%
Expected return on plan assets 7.00% 9.00%
Change in Benefit Obligation:
<S> <C> <C>
Benefit obligation, beginning balance $ 5,713 $ 4,157
Service cost 245 222
Interest cost 247 269
Participant contributions 101 80
Actuarial loss 330 1,058
Benefits paid (163) (126)
Currency translation adjustment (157) 53
----- -----
Benefit obligation, ending balance $ 6,316 $ 5,713
===== =====
Change in Plan Assets:
Fair value, beginning balance $ 5,520 $ 4,358
Actual return 1,004 994
Employer contribution 204 159
Participant contributions 101 80
Benefits paid (163) (126)
Currency translation adjustment (152) 55
----- -----
Fair value, ending balance $ 6,514 $ 5,520
===== =====
Funded Status - over (under) funded $ 198 $ (193)
Unrecognized net actuarial loss 525 857
Currency translation adjustment (1) 3
----- -----
Prepaid benefit cost $ 722 $ 667
===== =====
Components of Net Periodic Pension Cost:
Service cost $ 245 $ 222
Interest cost 247 269
Expected return (381) (401)
Amortization of unrecognized loss 18 -
----- -----
Net periodic pension cost $ 129 $ 90
===== =====
</TABLE>
<PAGE>
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.
As of December 31, 1999 and January 1, 1999, there were 11,000,000 authorized
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 December 31, 1999.
A Stock Purchase Assistance 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 December 31, 1999, and
January 1, 1999, loans aggregating $1,131 and $966, respectively, were
outstanding and are reflected as an element of treasury stock.
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:
The 1996 Long Term Incentive Plan provides for the granting of 1,100,000 stock
options, stock appreciation rights and shares of restricted stock. During
1999, 215,100 stock options were granted, at fair market value, with terms not
exceeding ten years and vesting over a three year period. At December 31,
1999, an aggregate of 1,950 options, rights, and restricted shares are
available for future grants.
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
amortized over the vesting period. Through 1999, $475 has been expensed. No
shares of restricted stock were granted during 1999. As of December 31, 1999,
156,250 restricted shares were outstanding.
The Directors' Stock Option Plan provides for the granting of 125,000 stock
options at an exercise price of 75% of market value at the 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 1999 and 1998, 31,010
and 15,780 options, respectively, were granted under the plan. The options
are granted with a twenty year term. At December 31, 1999, options to
purchase 48,810 shares are available for issue.
<PAGE>
The 1989 Stock Option Plan provided 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 11,200 Class B shares were granted
at fair market value during 1999, with terms not exceeding ten years and
vesting over a three year period. Authority to issue additional options
expired in 1999.
A summary of stock option activity related to the plans mentioned above is as
follows:
<TABLE>
Weighted Number of
Number of Option Price Average Price Shares
Shares Per Share Per Share Exercisable
--------- ------------ ---------- -----------
<C> <C> <C> <C> <C>
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
Granted 257,310 $ 5.50-$ 9.13 $ 7.34
Exercised - - -
Expired (80,650) $ 7.00-$17.50 $14.02
---------
Outstanding at
Dec. 31, 1999 1,231,190 $ 5.50-$16.00 $11.01 440,545
=========
</TABLE>
The weighted average price per share of exercisable options at December 31,
1999 is $12.84. The weighted average option lives remaining at December 31,
1999, January 1, 1999 and January 2, 1998 are approximately 8, 8 and 9 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. 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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) from
continuing operations $ 721 $(17,905) $(8,110)
Net income (loss) from continuing
operations per share of
common stock $0.12 $(2.91) $(1.29)
</TABLE>
<PAGE>
The fair value was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions for 1999,
1998 and 1997, respectively: risk free interest rates of 5.8%, 4.5% and 6.2%;
dividend yields of 0.0%, 0.1% and 2.9%; volatility factors of 20.0%, 24.4% and
19.2%; and average stock option expected life of 5.6, 5.2 and 5.2 years.
The weighted average fair value of stock options granted was $2.64, $2.96 and
$2.90 per share in 1999, 1998 and 1997, 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 1999, 14,286 shares were issued under this
plan. To date, 68,866 shares have been issued, and 131,134 shares remain
available for future grants as of December 31, 1999.
9. SPECIAL CHARGES
In the second quarter of 1999, the Company accrued for severance costs of $356
and wrote off $650 of inventory in connection with the consolidation of its
Instrument Associates division into its GAI-Tronics, Reading, Pennsylvania
facility. Also during the quarter, the Company determined that $1,000 of its
reserves was no longer required and could be reduced. The effect of these
adjustments was to increase cost of goods sold by $830 and reduce selling,
general and administration by $824.
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 resulted from 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 an
increase in cost of goods sold of $200 and a reduction of selling, general and
administrative expenses of $467.
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.
<PAGE>
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 1999
Type of Cost Balance Additions Payments 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>
The following table displays a rollforward of the liabilities for the
restructuring charge from January 1, 1999 to December 31, 1999.
<TABLE>
January 1, December 31,
1999 1999
Type of Cost Balance Additions Payments Balance
- ------------ ------- --------- -------- -------
<S> <C> <C> <C> <C>
Employee separations $ 515 $ - $ (515) $ -
Facility closings 798 - (682) 116
Other 141 - (141) -
----- ----- ----- -----
Total $1,454 $ - $(1,338) $ 116
===== ===== ===== =====
</TABLE>
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 $1,700 in
1999, $1,800 in 1998, and $1,500 in 1997. Minimum future rental commitments
under noncancelable operating leases with initial or remaining terms in excess
of one year at December 31, 1999 were as follows:
2000 $2,243
2001 2,116
2002 1,880
2003 1,442
2004 1,452
2005 and thereafter 13,188
------
Total minimum rentals $22,321
======
In December 1999, the Company entered into a contract for the sale and
leaseback of the Industrial Segment's headquarters and manufacturing facility.
The property had a net book value of $3,534 at the sale date. A gain on the
sale of $1,784 was deferred and is being amortized into income over the lease
term as a reduction of rent expense. The initial lease term is 14 years with
a 2-year renewal option. The minimum annual rental cost approximates $677.
At December 31, 1999, other long-term liabilities included $1,645 which
represents the non-current portion of the unamortized gain.
<PAGE>
11. FINANCIAL INSTRUMENTS:
Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks. The Company has outstanding letters of
credit, not reflected in the consolidated financial statements, in the amount
of $2,228 at December 31, 1999 and $1,923 at January 1, 1999.
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 products sold to 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 judgments 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.
The Company has retained an investment firm to assist in evaluating and
pursuing strategic alternatives intended to enhance shareholder value. In
order to ensure continuing value in the Company and its operating
subsidiaries, various members of management and key employees have been
offered incentives to continue employment through the completion of this
process. A portion of these incentives are guaranteed to the employees
subject to continued employment through December 15, 2000, and will be
recognized over the related service period. Other incentives, including sale
bonuses and severance, are dependent on the ultimate direction and resolution
of the strategic alternatives, and will be recognized if and when there is a
triggering event.
<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 1999 and 1998:
QUARTER ENDED
--------------------------------------------------------------------------------------------------------------
April 2, 1999 July 2, 1999 Oct. 1, 1999 Dec. 31, 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telecommunications sales $28,623 $27,597 $27,812 $31,598
Gross profit 11,648 10,894 11,960 13,121
Pre-tax income 97 300 427 1,088
Net income 68 210 299 623
Per share of common stock:
Net income $0.01 $0.04 $0.05 $0.10
</TABLE>
<TABLE>
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 10,362 7,977 12,077 15,374
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
===== ===== ===== =====
NOTES:
The results of operations for the quarter ended July 2, 1999 include a charge for severance expenses of
$356 and a write off of inventory of $650 associated with the consolidation of the Instrument Associates
division of GAI-Tronics, and a $1,000 reduction of reserves which were no longer required.
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.
Net income (loss) per share is computed independently for each of the quarters presented. Therefore, the
sum of the quarterly net income (loss) per share does not equal the total computed for the year.
</TABLE>
<PAGE>
<TABLE>
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. 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. Corporate
assets include land, deferred income taxes and other corporate assets. Depreciation and capital expenditures
for 1998 and 1997 will not agree with the Consolidated Statements of Cash Flows because discontinued
operations have not been segregated in the Consolidated Statements of Cash Flows.
Information about the Company's operations by segment for the years 1999, 1998 and 1997 is as follows:
Industrial Access Products Wireless Consolidated
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999:
<S> <C> <C> <C> <C>
Telecommunications sales $ 60,180 $21,149 $34,301 $115,630
====== ====== ====== =======
Segment profit $ 4,006 $ (829) $ 4,600 $ 7,777
====== ====== ======
General interest expense (1,117)
General corporate expenses (4,272)
Goodwill amortization (1,699)
Restructuring and other charges (650)
Reversal of reserves 1,000
Interest and other income 873
------
Pre-tax income $ 1,912
=================================================================================================================
Identifiable assets $ 28,733 $13,909 $26,165 $ 68,807
====== ====== =======
Corporate assets 20,978
Goodwill 34,762
-------
Total assets, December 31, 1999 $124,547
=================================================================================================================
Depreciation $ 1,967 $ 699 $ 1,887
===== ====== =====
Capital expenditures $ 878 $ 441 $ 2,189
===== ====== =====
<PAGE>
Reconciliation of Other Significant Items:
Geographic Information Sales Long Lived Assets
- ----------------------- ----- -----------------
United States $ 75,376 $22,886
United Kingdom 9,084 851
Japan 4,589 64
Mexico 3,638 -
Brazil 3,116 70
China 1,716 64
Other foreign countries 18,111 787
---------- ----------
$115,630 $24,722
======= ======
Sales to Major Customers:
Sales to a customer of the Company's Access Products Segment represents approximately $11,701, or 10% of the
Company's consolidated sales. Sales to a customer of the Company's Industrial and Wireless Segments
represents approximately $12,364, or 11% of the Company's consolidated sales.
</TABLE>
<PAGE>
<TABLE>
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 Sales Long Lived Assets
- ---------------------- -------- -------------------
United States $ 76,413 $ 25,323
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 $ 26,960
======= ======
Sales to Major Customers:
Sales to a customer of the Company's Access Products Segment represents approximately $14,605, or 12% of the
Company's consolidated sales. Sales to a customer of the Company's Industrial and Wireless Segments
represents approximately $11,058, or 9% of the Company's consolidated sales.
</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 Sales 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
======= ======
Sales to Major Customers:
Sales to a customer of the Company's Access Products Segment represents approximately $13,870, or 13% of the
Company's consolidated sales. Sales to a customer of the Company's Industrial and Wireless Segments
represents approximately $10,014, or 9% of the Company's consolidated sales.
</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 an amendment to this form 10-K
to be filed.
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 December 31, 1999
and January 1, 1999, and the consolidated statements of
operations, stockholders' equity and cash flows for the years
1999, 1998 and 1997 of Salient 3 Communications, Inc. and its
subsidiaries.
(b) The registrant did not file any Form 8-K during the fourth
quarter of 1999.
(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).
<PAGE>
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).
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 December 31,
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, 1999. (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 24, 2000. 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 24, 2000
<PAGE>
<TABLE>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years 1999, 1998 and 1997
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
- -----------------------------------------------------------------------------------------------------
1999:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $1,711 $ 251 $ 585 (A) $ 42 (H) $1,556
===== ===== ===== 137 (C) =====
=====
Estimated liability for
contract losses $1,756 $ - $ - $ - $1,756
===== ===== ===== ===== =====
Inventory reserves $3,855 $ 547 $ 2,832 $ 201 (G) $1,760
===== ===== ===== (11)(C) =====
=====
Restructuring reserves $1,454 $ - $ 1,338 $ - $ 116
===== ===== ===== ===== =====
1998:
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) 2,880 351 (C) =====
===== ===== =====
Restructuring reserves $ - $ 2,401 (E) $ 947 $ - $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) =====
=====
(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.
(G) Acquisition of Irmel.
(H) Acquisition of ComOpt.
</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 17th day of March,
2000.
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 17, 2000
- ---------------
T. S. Cobb
Senior Vice President and Chief
Financial Officer
(Principal Financial
and Accounting Officer)
/s/P. H. Snyder and Director March 17, 2000
- -----------------
P. H. Snyder
/s/J. W. Boyer, Jr. Director March 17, 2000
- --------------------
J. W. Boyer, Jr.
/s/D. E. Lyons Director March 17, 2000
- -----------------
D. E. Lyons
/s/D. K. Wilson, Jr. Director March 17, 2000
- --------------------
D. K. Wilson, Jr.
/s/R. E. LaBlanc Director March 17, 2000
- -----------------
R. E. LaBlanc
/s/D. E. Foster Director March 17, 2000
- ----------------
D. E. Foster
/s/D. F. Strigl Director March 17, 2000
- ----------------
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 GAI-Tronics Limited name.
<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, 333-55965, 333-55967,
333-09635, 333-09639, 33-55139, 33-15289, 33-32288, 33-37792, 33-37793,
33-37795, 33-43113 and 33-71242).
Arthur Andersen LLP
Philadelphia, Pennsylvania
March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1687000
<SECURITIES> 0
<RECEIVABLES> 28795000
<ALLOWANCES> 1556000
<INVENTORY> 17425000
<CURRENT-ASSETS> 58593000
<PP&E> 42777000
<DEPRECIATION> 24973000
<TOTAL-ASSETS> 124547000
<CURRENT-LIABILITIES> 24592000
<BONDS> 0
0
0
<COMMON> 8985000
<OTHER-SE> 70333000
<TOTAL-LIABILITY-AND-EQUITY> 124547000
<SALES> 115630000
<TOTAL-REVENUES> 116503000
<CGS> 68007000
<TOTAL-COSTS> 68007000
<OTHER-EXPENSES> 45373000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1211000
<INCOME-PRETAX> 1912000
<INCOME-TAX> 712000
<INCOME-CONTINUING> 1200000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1200000
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
