SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. - 20549
_________________________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 29, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-12588
_________________________
SALIENT 3 COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2280922
(State of Incorporation) (IRS Employer
Identification No.)
P.O. Box 1498, Reading, Pennsylvania 19603
(Mailing address of principal executive offices) (Zip Code)
(610) 856-5500
________________________________________________________________________________
(Registrant's telephone number, including area code)
_________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Class A Class B
------- -------
Number of shares of each class of
common stock outstanding as of
September 29, 2000 (excluding 2,770,476
Class A treasury shares): 5,839,816 375,008
--------- -------
SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1.
Statement of Net Assets in Liquidation (Liquidation Basis)at
September 29, 2000 (unaudited)
Statement of Changes in Net Assets in Liquidation
(Liquidation Basis)for the three and six months ended
September 29, 2000 (unaudited)
Consolidated Condensed Balance Sheet (Going-Concern
Basis) at December 31, 1999
Consolidated Condensed Statements of Operations (Going-
Concern Basis)for the three month periods ended
March 31, 2000 and April 2, 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows (Going-
Concern Basis) for the three month periods ended
March 31, 2000 and April 2, 1999 (unaudited)
Notes to Financial Statements
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part I. Financial Information
Salient 3 Communications, Inc. and Subsidiaries
Statement of Net Assets in Liquidation (Liquidation Basis)
September 29, 2000
(Unaudited)
(000's except for share and per share information)
September 29,
2000
-------------
ASSETS
Cash and cash equivalents $ 38,438
Investments in liquidation 25,001
Other assets 4,990
------
Total Assets 68,429
------
LIABILITIES
Accrued and other liabilities $ 27,791
Income taxes 19,800
------
Total Liabilities 47,591
------
Net assets in liquidation $ 20,838
======
Number of common shares outstanding 6,214,824
=========
Net assets in liquidation per outstanding share $ 3.35
====
The accompanying notes are an integral part of this financial statement.
Salient 3 Communications, Inc.
Statement Of Changes In Net Assets In Liquidation (Liquidation Basis)
Three and Six Months Ended September 29, 2000
(Unaudited)
(000's)
Three Months Six Months
Ended Ended
Sept. 29, 2000 Sept. 29, 2000
-------------- --------------
Net assets in liquidation, beginning of period $ 94,144 $ 93,985
------ ------
Changes in estimated liquidation values
of assets and liabilities:
Investments in subsidiaries (823) (1,758)
Other assets 496 2,716
Accrued and other liabilities 1,641 515
Income taxes (38) (38)
------ ------
Net changes in estimated liquidation values 1,276 1,435
------ ------
Liquidating distribution to stockholders (74,582) (74,582)
------ ------
Net assets in liquidation, end of period $ 20,838 $ 20,838
====== ======
Supplemental Cash Information:
Changes in cash and cash equivalents
Exercise of stock options $ 588 $ 588
Net proceeds from sales of subsidiaries 136,835 136,835
Cash receipts for other assets 3,511 4,602
Payment of outstanding debt,
including accrued interest (18,791) (18,861)
Payment of accrued liabilities (7,158) (8,042)
Payment of income taxes (2,238) (2,238)
Liquidating distribution to stockholders (74,582) (74,582)
------ ------
Net changes in cash and cash equivalents $ 38,165 $ 38,302
====== ======
The accompanying notes are an integral part of this financial statement.
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet (Going-Concern Basis)
December 31, 1999
(000's)
December 31,
1999
------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,687
Accounts receivable, net of allowance
for doubtful accounts of $1,556 27,239
Inventories 17,425
Deferred income taxes 4,940
Other current assets 7,302
------
Total current assets 58,593
------
Property, plant and equipment, at cost 42,777
Less accumulated depreciation and
amortization 24,973
------
17,804
------
Deferred income taxes 6,470
Other assets 2,850
Software development costs 4,068
Goodwill 34,762
-------
Total Assets $ 124,547
=======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 202
Accounts payable 9,946
Salaries and wages 1,428
Income taxes, currently payable 406
Deferred revenue 2,164
Other accrued liabilities 10,446
------
Total current liabilities 24,592
------
Long-term debt 13,647
Other long-term liabilities 6,990
Stockholders' equity:
Common stock 8,985
Capital in excess of par value 36,974
Warrants outstanding 1,755
Retained earnings 74,178
Foreign currency translation adjustment (14)
Deferred compensation-restricted stock (1,420)
Treasury stock (41,140)
------
79,318
-------
Total Liabilities and Stockholders' Equity $ 124,547
=======
The accompanying notes are an integral part of this financial statement.
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (Going-Concern Basis)
(Unaudited)
(000's except for share and per share information)
Three Months Ended
-------------------------
March 31, April 2,
2000 1999
--------- --------
Sales $ 25,015 $ 28,623
Cost of goods sold 14,668 16,975
------ ------
Gross profit 10,347 11,648
Selling, general and administration 9,616 8,607
Research and development 2,161 2,421
Goodwill amortization 507 376
------ ------
Operating profit(loss) (1,937) 244
------ ------
Interest and other income 91 94
Interest expense 329 241
------ ------
Pre-tax income(loss) (2,175) 97
------ ------
Provision(benefit) for
taxes on income(loss) (827) 29
------ ------
Net income(loss) $ (1,348) $ 68
====== ======
Net income(loss) per share of common
stock (basic and diluted) $ (0.23) $ 0.01
Basic weighted average shares
outstanding 5,989,073 5,952,391
The accompanying notes are an integral part of the financial statements.
Salient 3 Communications, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Going-Concern Basis)
(Unaudited) Three Months Ended
(000's) ------------------
March 31, April 2,
2000 1999
--------- --------
Cash flows from operating activities:
Net income (loss) $(1,348) $ 68
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,026 1,585
Reserve provisions 711 120
Deferred income tax provision (benefit) - 300
Changes in current assets and current liabilities
net of effects from acquisition:
Accounts receivable and unbilled revenue 3,696 5,321
Inventories (1,196) (607)
Other current assets (843) (434)
Accounts payable and salaries and wages (2,142) 493
Other accrued liabilities (572) (2,799)
Income taxes, currently payable (89) 158
Other, net 47 48
----- -----
Net cash provided by operating activities 290 4,253
----- -----
Cash flows from investing activities:
Payments for acquisition, net of cash acquired (351) (3,967)
Payments for property, plant and equipment (601) (859)
Software development costs (1,475) (563)
----- -----
Net cash used for investing activities (2,427) (5,389)
----- -----
Cash flows from financing activities:
Payments of long-term debt (183) (86)
Borrowings under note payable 2,995 230
Issuance of treasury stock in connection
with stock purchase plan 32 100
Payments to acquire treasury stock (103) (219)
Other, net (260) (194)
----- -----
Net cash provided by (used for) financing activities 2,481 (169)
----- -----
Net increase (decrease) in cash and cash equivalents 344 (1,305)
Cash and cash equivalents at beginning of period 1,687 2,582
----- -----
Cash and cash equivalents at end of period $ 2,031 $1,277
===== =====
Supplemental cash flow disclosures:
Interest paid $ 321 $ 209
=== ===
Income taxes paid, net of refunds received $ 150 $ (96)
=== ===
The accompanying notes are an integral part of the financial statements.
SALIENT 3 COMMUNICATIONS, INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 29, 2000
(UNAUDITED)
(000's except for share and per share information)
LIQUIDATION BASIS STATEMENTS
1. PLAN OF DISSOLUTION AND LIQUIDATION
On April 17, 2000, the Board of Directors of Salient 3 Communications, Inc. (the
Company) adopted a Plan of Dissolution and Liquidation (the Plan). Under the
Plan, the Company will be liquidated by (i) the sale of its non-cash assets,
(ii) the payment of or providing for all of its claims, obligations and
expenses, (iii) the pro rata distribution of assets, primarily cash, to the
shareholders, and (iv) if required, the distribution of assets to one or more
liquidating trusts established for the benefit of the shareholders. The Plan
was approved by shareholders on July 21, 2000.
Prior to June 30, 2000, seven shareholders, who together control more than 51%
of the issued and outstanding Class B common stock, had agreed to vote their
shares in favor of the Plan. As a result, the Company adopted the liquidation
basis of accounting for the second quarter of 2000. Under the liquidation basis
of accounting, assets are stated at their estimated net realizable values and
liabilities are stated at their anticipated settlement amounts.
The valuation of assets and liabilities necessarily requires many estimates and
assumptions and there are substantial uncertainties in carrying out the
provisions of the Plan. The actual value of any liquidating distributions will
depend upon a variety of factors including, but not limited to, (i) the actual
proceeds from the sale of the Company's subsidiaries and other assets, (ii) the
ultimate settlement amounts of its liabilities and obligations, including
indemnifications provided in connection with subsidiary sale transactions, (iii)
actual costs incurred in connection with carrying out the Plan, including
administrative costs during the liquidation period, and (iv) the actual timing
of distributions. The initial liquidating distribution of $12.00 per share was
paid on September 8, 2000.
The valuations presented in the Statement of Net Assets in Liquidation represent
estimates, based on present facts and circumstances, of the net realizable
values of assets and the costs associated with carrying out the provisions of
the Plan based on the assumptions set forth in the accompanying notes. The
actual values and costs are expected to differ from the amounts shown herein and
could be higher or lower than the amounts recorded. Accordingly, it is not
possible to predict with certainty the aggregate net values ultimately
distributable to shareholders and no assurance can be given that the amount to
be received in liquidation will equal or exceed the price or prices at which the
Class A common stock has generally traded or is expected to trade in the future.
2. INVESTMENTS IN LIQUIDATION
Investments in subsidiaries are recorded at their estimated net realizable
values in liquidation. For subsidiaries where a definitive sale contract has
been negotiated, the estimated liquidation value represents the gross proceeds
identified in the sale contract, less estimated costs associated with the sale.
Where no sale contract has been negotiated, the estimated liquidation value is
based on management's estimate of the gross proceeds to be negotiated in a sale
contract, less estimated costs to be associated with the sale.
These valuations may not be reflective of actual amounts obtained when and if
the investments are sold. Because of the inherent uncertainty in closing
potential sale contracts, the amounts shown may materially differ from actual
amounts which may be received in the future. Additionally, the Company is
providing certain indemnifications to buyers under the representations and
warranties sections of the purchase agreements. It is not possible to predict
what claims could possibly be asserted by buyers or what values those potential
claims could have. The Company has purchased certain insurance to minimize its
exposure on some, but not all, of the areas for which they are indemnifying the
buyers.
On July 25, 2000, the Company completed the sale of SAFCO Technologies, Inc. to
Agilent Technologies, Inc. for $120,000 in cash, subject to certain closing
balance sheet adjustments. Those adjustments increased the purchase price by
$1,426 and are reflected in the net assets in liquidation as of September
29, 2000. $11,000 of the purchase price has been placed into escrow for certain
expenses and possible indemnification claims. On July 26, 2000, the Company
completed the sale of GAI-Tronics Corporation to Hubbell Incorporated for cash
of $40,000, subject to certain closing balance sheet adjustments. Those
adjustments and certain employee-related expenses reduced the proceeds by $3,754
and are reflected in the net assets in liquidation as of September 29, 2000.
Investments in liquidation include the estimated net realizable values resulting
from final adjustment of the sale prices for these subsidiaries and the
estimated value of XEL Communications, Inc., including its building.
3. INCOME TAXES
All income tax accounts have been restated to reflect the liquidation basis of
accounting. The estimated tax liability reflects income taxes, at statutory
rates, which would become payable if the assets are realized and liabilities
settled at the amounts shown. The estimate is subject to significant variation
if, among other things, the actual values of assets sold vary from current
estimates.
4. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities include estimates of costs to be incurred in
carrying out the Plan, provisions for known liabilities and provisions for
certain unasserted claims under warranties provided by the Company at September
29, 2000. The accrued costs include salaries and related expenses of officers
and employees assigned to effect the sale and carry out the Plan and legal and
accounting fees expected to be incurred during the period of liquidation. Other
liabilities include estimated future distributions to holders of limited stock
appreciation rights.
The actual costs incurred could vary significantly from the related accrued
expenses due to uncertainty related to the length of time required to complete
the Plan and the outcome of certain contingencies.
5. ADJUSTMENTS FROM GOING-CONCERN TO LIQUIDATION BASIS OF ACCOUNTING
Stockholders' equity, March 31, 2000 (Going-Concern Basis) $ 77,882
------
To increase investments to estimated net realizable values 79,080
To increase estimated income taxes (34,424)
To increase liabilities to anticipated settlement amounts (28,452)
To adjust other assets (101)
------
Total adjustments 16,103
------
Net assets in liquidation, March 31, 2000 (Liquidation Basis) $ 93,985
======
The increase in liabilities includes estimates of costs to be incurred in
carrying out the Plan and provisions for known liabilities, including Limited
Stock Appreciation Rights (Note 6). The estimated costs include legal and
accounting fees and salaries and related expenses of officers and employees who
will be assigned to complete the liquidation and dissolution.
The actual costs incurred could vary significantly from the related provisions
due to uncertainty related to the length of time required to complete the Plan,
the timing of sales of subsidiaries, and complexities which may arise in
disposing of the remaining assets and settling certain contingencies. Interest
income on the Company's cash and short-term investments through the final
liquidation date has not been reflected.
6. OPTIONS AND WARRANTS
In April 2000, the Board of Directors authorized immediate vesting of all
outstanding restricted stock, and, effective with the first subsidiary sale,
vesting of stock options granted under the 1989 Stock Option Plan and the 1996
Long Term Incentive Plan and extension of the exercise period to the record date
of the initial liquidating distribution. The Board also added a provision to
convert all unexercised options at the record date of the initial liquidating
distribution into Limited Stock Appreciation Rights (LSAR's). In addition, all
warrant holders were given the opportunity to convert their warrants into
LSAR's. These rights entitle the holder to receive cash payments for each share
equal to the difference between the aggregate per share liquidating distribution
payable to shareholders upon liquidation and the per share exercise price
applicable to each converted option or warrant. At June 30, 2000, there were
options and warrants outstanding for the purchase of 1,879,033 shares of the
Company's common stock. Options to purchase 76,190 shares were exercised in
August, 2000. In August, 2000, 1,097,200 options and 705,555 warrants were
converted into LSAR's. Holders of LSAR's were paid $1,866 in connection with
the initial liquidating distribution on September 8, 2000. The estimated
remaining liability for settlement of the LSAR's at September 29, 2000 is $3,066
and is included in accrued liabilities in the statement of net assets in
liquidation.
7. LINES OF CREDIT AND OTHER LONG TERM BORROWINGS
Under terms of a 1999 loan agreement with First Union National Bank, the Company
had a working capital line of credit of $12,000 and an acquisition line of
credit of $6,000. On June 30, 2000, the working capital line was reduced to
$10,000 and its availability was extended to September 30, 2000. The agreement
required the Company to pay a commitment fee of one-quarter of one percent on
the unused portion of the lines. The loan agreement contained a number of
financial and other covenants, the most restrictive of which prescribed a
limited ratio of funded debt to earnings before interest and taxes.
The acquisition line of credit expired on June 30, 2000 and the outstanding
balance of $3,267 was converted to a term loan. Monthly repayments of $58 plus
interest began in March 2000.
Interest charges were based, at the Company's option, on the bank's prime rate
or a function of LIBOR. The loan was collateralized by substantially all of the
Company's tangible and intangible assets.
As a result of the completion of the sales of SAFCO Technologies, Inc. and GAI-
Tronics Corporation discussed above, the working capital and acquisition lines
of credit were repaid on July 27, 2000 and subsequently cancelled. In addition,
a note payable of $10,000 was repaid with the proceeds of these sales.
8. CONTINGENCIES
The Company has received notice of a complaint filed in Delaware Chancery Court
on August 29, 2000, by a group of former employees and current Class A
shareholders, challenging the compensation packages granted by the Company to
its senior management in connection with the dissolution of the Company. The
Company intends to vigorously defend against the complaint and believes that the
Company's Board acted appropriately and within its discretion in structuring the
benefits provided to management.
GOING-CONCERN BASIS STATEMENTS
9. GENERAL
The going-concern basis financial statements furnished herein reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial position and results of operations for the interim
periods. Such adjustments are of a normal recurring nature. The accompanying
financial statements are presented in accordance with the requirements of Form
10-Q and consequently do not include all of the disclosures normally required by
generally accepted accounting principles or those normally made in the Company's
annual Form 10-K filing. Accordingly, the reader of this Form 10-Q may wish to
refer to the Company's Form 10-K for the year ended December 31, 1999 for
further information.
10. EARNINGS PER SHARE
Net income (loss) per share of common stock was determined using the average
number of Class A and Class B shares outstanding excluding 156,250 shares of
restricted stock for 1999. No preferred stock was outstanding as of March 31,
2000.
Dilutive shares outstanding were determined on the assumption that all
outstanding options, warrants and shares of restricted stock with a strike price
below the average stock price for the period would be exercised and the related
shares issued. Dilutive shares outstanding for the first quarter of 2000 and
1999 were 6,083,780 and 5,954,827, respectively. These additional shares had an
immaterial effect on the Company's earnings per share calculation.
11. SPECIAL ADJUSTMENTS
In connection with the Company's actions to sell its subsidiaries, various
members of management and key employees have been offered incentives to continue
employment through the completion of the sale process. Portions of these
incentives are guaranteed to the employees subject to continued employment
through December 15, 2000, and the cost will be recognized over the related
service period. Other incentives, including sale bonuses and severance, are
dependent on completion of sale transactions and will be recognized if and when
there is a triggering event.
In the first quarter of 2000, the Company accrued for retention bonuses of $266
and severance costs of $100. The Company also eliminated reserves of $326 due
to collection of a note receivable and receipt of credits from an insurance
company in connection with its conversion to a stock company. The net effect of
these adjustments was a $40 increase in selling, general and administration
expense.
12. INVENTORIES
The components of inventories as of December 31, 1999 were as follows:
Raw material and components $ 9,760
Work in process 2,995
Finished goods 6,430
Reserves (1,760)
------
$17,425
======
13. OTHER ACCRUED LIABILITIES
Other accrued liabilities included an accrual for workers' compensation of
$1,187 and current maturities of long-term debt of $1,115 at December 31, 1999.
14. SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs associated with the development of software for
external use in accordance with Statement of Financial Accounting Standards No.
86 "Accounting for Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed." Costs are being amortized in relation to revenue from the products,
but no less than on a straight line basis over 2 to 3 years. Capitalized
software development costs and associated amortization expense were $1,475 and
$435 respectively, in the quarter ended March 31, 2000 and $563 and $66
respectively, in the quarter ended April 2, 1999.
15. ACQUISITIONS
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. In March 2000, the Company paid an additional $351 to ComOpt's
former shareholders based upon the achievement of certain performance goals.
The additional payment increased goodwill. ComOpt is part of the Company's
Wireless Segment and was merged into the operations of SAFCO Technologies, Inc.
16. SEGMENT INFORMATION
The Company had three reportable segments: Industrial, Access Products and
Wireless. The Industrial Segment developed, assembled and marketed
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 focused on the measurement and analysis of signal strength, data
communications and radio frequency transmitted between the wireless phone and
cellsites. The Wireless Segment also provided radio frequency engineering
design services.
Each reportable segment operated as a separate, standalone business unit with
its own management.
The Company evaluated segment performance based on profit or loss from
continuing operations before income tax, goodwill amortization and corporate
overhead allocation. Profit or loss is determined in accordance with generally
accepted accounting principles described in the summary of significant
accounting policies. Intersegment sales are not significant.
Three Months Ended
----------------------
Mar. 31, Apr. 2,
2000 1999
----------------------------------------------------
Sales
-----
Industrial $ 13,614 $ 16,124
Access Products 3,392 6,552
Wireless 8,009 5,947
------ ------
25,015 28,623
------ ------
Segment Profit (Loss)
---------------------
Industrial (24) 2,213
Access Products (612) (18)
Wireless 214 (652)
General interest expense (294) (222)
General corporate expenses (1,043) (941)
Goodwill amortization (507) (377)
Interest income and other 91 94
-------- --------
Pre-tax income (loss) $ (2,175) $ 97
======================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(000's except for share and per share information)
Introduction
On April 17, 2000, the Company's Board of Directors adopted a Plan of
Dissolution and Liquidation ("the Plan"). Under the Plan, the Company
will be liquidated by (i) the sale of its non-cash assets, (ii) the
payment of or providing for all of its claims, obligations and expenses,
(iii) the pro rata distribution of assets, primarily cash, to the
shareholders, and (iv) if required, the distribution of assets to one or
more liquidating trusts established for the benefit of the shareholders.
The Plan was approved by shareholders on July 21, 2000.
The Company is a Delaware corporation and Delaware law requires that the
Company stay in existence as a non-operating entity for three years from
August 11, 2000, the date the Company filed a certificate of dissolution
in Delaware.
Prior to June 30, 2000, seven shareholders, who together control more
than 51% of the issued and outstanding Class B common stock, had agreed
to vote their shares in favor of the Plan. As a result, the Company
adopted the liquidation basis of accounting for the second quarter of
2000. Under the liquidation basis of accounting, assets are stated at
their estimated net realizable values and liabilities are stated at their
anticipated settlement amounts.
On July 25, 2000, the Company completed the sale of SAFCO Technologies,
Inc. to Agilent Technologies, Inc. for $120,000 in cash, subject to
certain closing balance sheet adjustments. Those adjustments increased
the purchase price by $1,426 and are reflected in the net assets in
liquidation as of September 29, 2000. $11,000 of the purchase price has
been placed into escrow for certain expenses and possible indemnification
claims. On July 26, 2000, the Company completed the sale of GAI-Tronics
Corporation to Hubbell Incorporated for cash of $40,000, subject to
certain closing balance sheet adjustments. Those adjustments and certain
employee-related expenses reduced the proceeds by $3,754 and are
reflected in the net assets in liquidation as of September 29, 2000.
Liquidity and Capital Resources
On September 29, 2000, the Company had cash and cash equivalents of
$38,438. The future cash needs of the Company will be dependent on the
implementation of the Plan. Available cash and cash equivalents are
expected to provide adequate working capital until the sale of the
remaining operating subsidiary is completed.
Pursuant to the Plan, after payment or provision for payment of the
Company's indebtedness and other obligations, the cash proceeds of any
asset sales, together with other available cash, will be distributed from
time to time pro rata to the holders of the common stock. The record
dates with respect to each distribution will be selected by the Board of
Directors. The initial liquidating distribution of $12.00 per share was
paid on September 8, 2000.
The Company believes that its cash and cash equivalents will be
sufficient to fund its working capital requirements through the
completion of the Plan. The Company also expects to be able to meet the
working capital requirements of its remaining operating subsidiary prior
to the sale of the subsidiary.
Under the terms of a loan agreement, the Company had a maximum working
capital line of credit of $10,000 as of June 30, 2000 with First Union
National Bank. An acquisition line of credit expired June 30, 2000 and
the outstanding balance of $3,267 was converted to a term loan. In
conjunction with the completion of the sales of SAFCO Technologies, Inc.
and GAI-Tronics Corporation, the working capital line of credit
borrowings and the acquisition term loan were repaid on July 27, 2000 and
subsequently cancelled. In addition, a note payable of $10,000 was
repaid with the proceeds of the sales.
The Company estimates that its total capital expenditures in 2000,
excluding acquisitions and assuming its operating businesses would be
owned for the entire year, would be approximately $3,300. No
restrictions on cash transfers between the Company and its subsidiaries
exist.
Results of Operations - First Quarter of 2000 versus First Quarter of 1999.
Summary
The Company reported a net loss for the first quarter of 2000 of $1,348,
or $.23 per share compared to net income of $68, or $.01 per share for
the same period of 1999. Sales decreased 13% for the quarter from
$28,623 in 1999 to $25,015 in 2000. The decline in net income was due to
decreased sales and gross margins in the Industrial and Access Products
Segments. The Wireless Segment reported improved operating income for
the first quarter of 2000.
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. 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), a Swedish wireless software company, for
$4,098, including acquisition costs. ComOpt is part of the Company's
Wireless Segment.
Sales and Gross Profit
The following is a breakdown of sales by segment:
2000 1999
---- ----
Access Products $ 3,392 $ 6,552
Industrial 13,614 16,124
Wireless 8,009 5,947
------ ------
Total $25,015 $28,623
====== ======
Access Products sales declined by 48% in 2000 compared to 1999, due to a
continuing reduction in customer demand for analog channel units and a
slowdown of orders for partnership products. Contributing to the decreases
were 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 decreased 16% in
2000 compared to 1999, primarily because of lower sales by the Reading,
Pennsylvania location due to sluggish capital spending by domestic crude oil
related industries. Sales declines in the European operations were offset by
sales by Irmel, acquired in December 1999. Wireless sales grew 35% year-over-
year due to improved hardware sales, increased demand for engineering services
and the ComOpt acquisition in February, 1999.
The consolidated gross profit percentage increased from 40.7% in 1999 to 41.4%
in 2000. The increase was due to a larger percentage of sales from the
Wireless Segment, which traditionally has higher gross profit percentages from
its software-based products. Both the Access Products and Industrial Segments
experienced declines in gross profit percentages due to their sales declines.
Selling, General and Administration
Selling, general and administration increased 12% in 2000 compared to 1999.
As a percentage of sales, selling, general and administration was 38% and 30%
in 2000 and 1999, respectively. The increases came from the Wireless Segment,
which normally has higher operating costs than the other segments, and the
Industrial Segment, where the cost increases relate to the acquisitions and to
increased selling expense. In addition, the first quarter of 2000 includes
charges of $266 for retention bonuses and $100 for severance costs and credits
of $326 for elimination of reserves due to collection of a note receivable and
receipt of credits from an insurance company in connection with its conversion
to a stock company.
Research and Development, Goodwill Amortization and Interest Expense
Research and development decreased 11% due to capitalization of software
development costs, net of amortization, of $1,040 during the first quarter of
2000 compared to $500 during the first quarter of 1999. Costs are capitalized
for the development of software for external use in accordance with Statement
of Financial Accounting Standard No. 86 "Accounting for Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed." The Wireless and Access
Products Segments are responsible for most of the capitalized costs.
Goodwill amortization increased 35% due to the amortization of goodwill
related to the acquisitions of ComOpt, Irmel and Red Alert.
Interest expense increased 37% due to additional borrowings for the
acquisition of ComOpt, an increase in short-term borrowings in 2000 and
interest rate increases.
Provision for taxes on income
The effective tax rate was 38% for 2000 and 30% for 1999. The change in the
effective tax rate was due to the anticipated reduction in utilization of
research and development tax credits in 2000. Capitalized software
development costs are not eligible for the credit.
Other
In April 2000, the Board authorized immediate vesting of all outstanding
restricted stock, and, effective with the first subsidiary sale, vesting of
stock options granted under the 1989 Stock Option Plan and the 1996 Long Term
Incentive Plan and extension of the exercise period to the record date of the
initial liquidating dividend. The Board also added a provision to convert all
unexercised options at the record date of the initial liquidating dividend
into Limited Stock Appreciation Rights. These rights will entitle the holder
to receive cash payments for each share equal to the difference between the
aggregate per share liquidating distribution payable to stockholders upon
liquidation and the per share exercise price applicable to each converted
option. The estimated liability for settlement of the limited stock
appreciation rights prior to the initial liquidating distribution was $4,932.
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 the sale
process. Portions of these incentives are guaranteed to the employees subject
to continued employment through December 15, 2000, and are being recognized
over the related service period, including $266 charged to selling, general
and administration during the first quarter of 2000. Other incentives,
including sale bonuses and severance, are dependent on completion of sale
transactions and will be recognized if and when there is a triggering event.
Continued improvement in operations of the Company's Access Products business
is dependent upon successful release of a new product for the access market,
which the Company began selling in the second quarter of 2000. 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.
During the past few years, the Company has carried out a program to identify,
assess and address issues associated with the Year 2000 problem and its
potential effects on information technology ("IT") systems. The program
considered effects on internal IT systems as well as IT systems of business
partners, including suppliers and customers. The Company has experienced no
significant problems with such issues, and anticipates that no such problems
will surface. Costs of the Year 2000 program were charged to expense as
incurred, and such costs were not material.
Statements made in this Form 10Q which are historical, including statements
regarding the timing and outcome of the sale of the Company's assets, its
dissolution and liquidation and the expected distribution therefrom, are
forward-looking statements and as such are subject to a number of risks and
there can be no assurance that the expectations or results reflected in those
statements will be realized or achieved. Such risks include, without
limitation, purchase price adjustments and post-closing indemnification
obligations. Please see the Company's 1999 Form 10K (and other reports filed
pursuant to the Securities Exchange Act of 1934) for additional disclosure
regarding such risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had no financial instruments with market risk exposure at
September 29, 2000.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on July 21, 2000,
the shareholders approved the sales of GAI-Tronics Corporation and SAFCO
Technologies, Inc., approved the plan of liquidation and dissolution,
approved the special incentive plan, elected three directors and approved
the retention of the current independent auditors.
The results of the voting were as follows:
For Director Granted Withheld
Timothy S. Cobb 418,727 38,597
Robert E. LaBlanc 419,727 37,597
Dennis F. Strigl 419,727 37,597
BROKER
Other proposals FOR AGAINST ABSTAIN NON-VOTES
Approval of the sale of
GAI-Tronics Corporation 447,060 9,542 3,161 -
Approval of the sale of
SAFCO Technologies, Inc. 449,721 9,542 500 -
Approval of the plan of
liquidation and dissolution 447,059 12,704 - -
Approval of the special
incentive plan 384,882 57,990 16,891 -
Ratification of appointment
of Arthur Andersen LLP
as independent auditors 452,619 4,014 3,130 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(1) The registrant filed Form 8-K on August 1, 2000 which announced
the completion of the sales of both SAFCO Technologies, Inc. and
GAI-Tronics Corporation and the shareholders approval of the Plan
of Dissolution and Liquidation of the Company.
(2) The registrant filed Form 8-K on August 15, 2000 which announced
the declaration of the initial liquidating distribution.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salient 3 Communications, Inc.
/s/Paul H. Snyder
Paul H. Snyder
Senior Vice President and
Chief Financial Officer
Date: November 13, 2000
