10-K 1 k10text.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 __________ FORM 10-K 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 28, 2001 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 Form 10-K. [X] The aggregate market value of the registrant's Class B (voting) common stock held by non-affiliates computed by reference to the closing sale price for the registrant's Class A (non-voting) common stock at February 28, 2002, as reported by the OTC Bulletin Board, was $286,000. Class A Class B ------- ------- Number of shares of each class of common stock outstanding as of February 28, 2002 (excluding 2,770,476 treasury shares): 5,939,993 274,831 PART I ITEM 1. BUSINESS. Throughout Item 1 through Item 9 of the Form 10-K, dollar amounts are reported in thousands, except for per share amounts. In October 1999, Salient 3 Communications, Inc. (the Company) 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 stockholder value. After extensive exploration and evaluation of various strategic alternatives, the board concluded that the dissolution and liquidation of the Company would enhance stockholder value and was in the best interests of the stockholders. Prior to this decision, the Company was a leading telecommunications equipment and services company with subsidiaries that supported public, private and wireless network operators. The Company manufactured and provided telecommunications equipment and services to the industrial, access products and wireless communications markets. The Company's primary subsidiaries consisted of GAI-Tronics Corporation (GTC) - Industrial Segment, XEL Communications, Inc. (XEL) - Access Products Segment, and SAFCO Technologies, Inc. (SAFCO) - Wireless Segment. The Company was organized as a holding company in 1984. Prior to forming the holding company, the Company 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 separated the administrative and financing activities of the Company from the activities of its operating subsidiaries. CORPORATE DEVELOPMENTS On April 17, 2000, the Board of Directors of the Company adopted a Plan of Dissolution and Liquidation (the Plan). Under the Plan, the Company will be liquidated by (1) the sale of its non-cash assets, (2) the payment of or providing for all of its claims, obligations and expenses, (3) the pro rata distribution of assets, primarily cash, to the stockholders, and (4) if required, the distribution of assets to one or more liquidating trusts established for the benefit of the stockholders. The Plan was approved by stockholders on July 21, 2000. Prior to June 30, 2000, seven stockholders, 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 and in favor of the sales of SAFCO and GTC. 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. In July 2000, the Company closed the sales of SAFCO and GTC. In December 2000, the Company closed the sale of XEL. Details of these sale transactions are included in the discussions of the industry segments below. On August 11, 2000, the Company filed a Certificate of Dissolution with the State of Delaware. Under Delaware law, the Company will continue to exist for a period of three years for the purpose of winding up its affairs. The Board of Directors and officers of the Company will continue to oversee the liquidation and dissolution. On September 8, 2000, the Company paid an initial liquidating distribution of $12 per share to holders of Class A (non-voting) and Class B (voting) common stock. On December 14, 2001, the Company paid an additional liquidating distribution of $2 per share. The Board of Directors will determine the timing and amount of all future distributions made to stockholders. 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 August 25, 2000, 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 stockholders upon liquidation and the per share exercise price applicable to each converted option or warrant. 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 and $1,639 in connection with the additional liquidating distribution on December 14, 2001. INDUSTRIAL SEGMENT GTC, based in Reading, Pennsylvania, was principally engaged in the development, assembly and marketing of communications systems for industrial operations. In serving such customers, GTC provided custom services by adapting communication systems to operate under extraordinary plant conditions such as excessive dust and explosive atmospheres. GTC also designed emergency notification systems and land mobile communications systems. GAI-Tronics Limited, a wholly-owned subsidiary based in Burton Upon Trent, England, was a designer, manufacturer and marketer of ruggedized communications systems for the mining, energy and transportation industries, and specialized communications and integrated entertainment systems. Irmel, a wholly-owned subsidiary acquired in November 1999, was based in Milan, Italy and designed and assembled public address and closed circuit television systems. On July 26, 2000, the Company completed the sale of GTC to Hubbell Incorporated for cash of $36,246, after consideration of certain closing balance sheet adjustments and employee-related expenses. This sale terminated all operations of the Company in the Industrial Segment. ACCESS PRODUCTS SEGMENT XEL, based in Aurora, Colorado, designed and sold transmission products to the access products market. XEL's products were used by its customers in the telecommunications network to provide customer access for voice and data services. XEL had entered into new technology partnerships to broaden its product offerings to include technology to provide high speed transmission. XEL completed development of its own new product for the access market in the second quarter of 2000. On December 29, 2000, the Company completed the sale of XEL to a company controlled by XEL's president, James S. Kennedy, for $4,900 in the form of a promissory note bearing interest payable monthly at 8%, with the principal due after 24 months. If XEL is resold to another party within 24 months, the Company would receive full payment on the note and 70% of all proceeds in excess of $5,000. If XEL is resold after 24 months but within 36 months, the Company would receive 50% of all proceeds over $5,000. If there is a default in payment of principal or interest on the promissory note, the Company has the right to retake control of XEL. This sale terminated all operations of the Company in the Access Products Segment. The sale of XEL excluded the building it occupies in Aurora, Colorado. The Company is independently attempting to sell this building to unrelated third parties. WIRELESS SEGMENT SAFCO, based in Chicago, Illinois, provided products and services which focus on measurement, analysis and predictive tools and engineering and technical services used by the wireless communication industry. The TEC Cellular division, based in Melbourne, Florida, provided radio frequency engineering consulting services and software applications to the wireless industry. On July 25, 2000, the Company completed the sale of SAFCO to Agilent Technologies, Inc. for $121,426 in cash, after consideration of certain closing balance sheet adjustments. The purchase price included $11,000 which had been placed into escrow for certain expenses and possible indemnification claims. The Company is entitled to receive distribution of the balance remaining in the escrow account, after reduction for any indemnification claims made by the buyer before August 29, 2001. During the fourth quarter of 2001, $443 was disbursed from the escrow account to cover expenses owed by the Company, $334 was disbursed to pay indemnification claims and $9,388 was distributed to the Company. Each of these disbursements included a share of interest earned by the account. A balance of $1,500 remained in the account to cover a potential obligation of the Company that was not finalized at December 28, 2001. This sale terminated all operations of the Company in the Wireless Segment. DISSOLUTION AND LIQUIDATION PROCESS After approval of the Plan and filing of the Certificate of Dissolution, the Company ceased to exist for the purpose of continuing business operations, but will continue for a period of three years, under Delaware law, for the purpose of winding up its affairs. The Board of Directors and officers of the Company will continue to oversee the liquidation and dissolution. During this period the Company will: (1) convert to cash as much of its non- cash assets as possible, (2) pay or make provision for the payment of all of its expenses and liabilities, (3) distribute its remaining assets, which should be primarily cash, to its stockholders, and (4) if required, transfer any remaining assets and obligations to a liquidating trust established for the benefit of stockholders. As discussed in each industry segment, all of the operating businesses were sold during 2000. The remaining non-cash assets consist primarily of notes receivable from sales of the operating businesses, sale proceeds held in escrow, the land and building occupied by XEL and land near Reading, Pennsylvania. Claims, liabilities and expenses, including operating costs, salaries, income taxes, payroll and local taxes and miscellaneous office expenses will continue to be incurred during the liquidation period. These liabilities and expenses will reduce the assets available for ultimate distribution to the stockholders. Before making distributions to stockholders, the Board of Directors is required by Delaware law to first make adequate provision for the payment, satisfaction and discharge of all the Company's obligations. Such obligations include (1) all claims and obligations, including all contingent, conditional or unmatured contractual claims known to the Company, (2) any claim against the Company which is the subject of a pending action, suit or proceeding to which the Company is a party, and (3) claims that have not been made known to the Company or that have not arisen, but that are likely to arise or become known based on facts known to the Company. The Company will reserve assets in a contingency reserve deemed by management and the Board of Directors to be adequate to provide for such liabilities and obligations when due. After considering these factors, the Board of Directors will determine the timing and amount of all future distributions made to stockholders. The valuation of assets and liabilities in liquidation necessarily requires many estimates and assumptions and there are substantial risks and 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, (1) the actual cash proceeds from the sale of the Company's subsidiaries and other assets, (2) the ultimate settlement amounts of its liabilities and obligations, including indemnifications provided in connection with subsidiary sale transactions, (3) actual costs incurred in connection with carrying out the Plan, including administrative costs during the liquidation period, and (4) the actual timing of distributions. Accordingly, it is not possible to predict with certainty the aggregate net values ultimately distributable to stockholders 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. If all of the Company's assets are not distributed within three years after filing the certificate of dissolution, the remaining assets, subject to the claims of creditors, will be transferred to a liquidating trust established for the benefit of stockholders. The Board of Directors is authorized to appoint trustees of the liquidating trust. Property transferred into a liquidating trust will thereafter be sold, used to pay creditors' claims or distributed to stockholders, as determined by the trustees. ITEM 2. PROPERTIES The physical properties owned and leased by the Company consist primarily of office and manufacturing space, land and furniture and equipment. The Company owns the office and manufacturing facility used by XEL and located in Aurora, Colorado. The entire facility is approximately 112,000 square feet. All of XEL's warehouse functions, warranty and service functions and executive and administrative functions are located there. The Company is attempting to sell this facility and XEL will find other suitable space for its business operations. The Company owns approximately 104 acres of undeveloped land near Reading, Pennsylvania. It consists of two parcels which are under option to a developer who owns adjacent property. The options expire in September 2002. The Company and the option holder have signed an agreement of sale for the land and expect to close the sale during the first quarter of 2002. The Company owns office furniture and equipment which it uses to carry out the Plan. The Company also leases office space and certain office equipment, for terms of three years or less. ITEM 3. LEGAL PROCEEDINGS The Company was named a defendant in a complaint filed in Delaware Chancery Court on August 29, 2000, and amended on February 26, 2001, by a group of former employees and current Class A stockholders, challenging the compensation packages granted by the Company to its senior management in connection with the dissolution of the Company. On November 1, 2001, the Delaware Chancery Court granted the Company's motion to dismiss the complaint. The Company is involved in various disputes arising in the ordinary course of business which have resulted in pending litigation. In the opinion of management of the Company, none of these matters will materially affect the Company's net assets in liquidation. 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 2001. 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 Company are as follows: Name Position and Previous Experience Age ---- -------------------------------- --- Timothy S. Cobb Mr. Cobb has been Chairman of the Board of Directors since July 1995. He has been Chief 60 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 Company) from January 1991 to September 1993. He served as President of GTC (former subsidiary of Company) from October 1988 to December 1990. Upon joining the Company, 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. He is a director of Central Vermont Public Service Corporation. Paul H. Snyder Mr. Snyder has been Senior Vice President and 54 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. Mr. Snyder became Senior Vice President and Chief Financial Officer of DecisionOne Corporation, a provider of multivendor computer maintenance services, in February 2001. Thomas F. Hafer Mr. Hafer has been Senior Vice President since February 53 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 Company) 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 Company acting solely in their capacities as such. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS. The Company's Class A common stock has been traded on the OTC Bulletin Board (OTCBB) under the symbol STCIA since June 7, 2001. Prior to that date it was traded on The Nasdaq Stock Market (Nasdaq). The following tabulation sets forth the high and low closing sale prices as reported by OTCBB and Nasdaq. 2001 2000 ------------ ------------ High Low High Low ---- --- ---- --- First Quarter $2.41 $1.53 $13.50 $6.63 Second Quarter 2.40 1.81 13.31 9.50 Third Quarter 2.35 2.25 14.06 2.38 Fourth Quarter 3.01 0.97 2.44 2.00 On September 8, 2000, the Company paid an initial liquidating distribution of $12.00 per share on each share of Class A and Class B common stock. On December 14, 2001, the Company paid an additional liquidating distribution of $2.00 per share. There were no other cash dividends declared during 2000 or 2001. At December 28, 2001, the approximate numbers of stockholders of Class A and Class B common stock were 3,000 and 12, respectively. 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) Liquidation Basis (1) Going-Concern Basis (1) --------------------------- ------------------------------------------------ Three Months As of As of Ended Years Ended Summary of Operations: Dec. 28, 2001 Dec. 29, 2000 Mar. 31, 2000 1999 1998 1997 ------------- ------------- ------------- ---- ---- ---- Telecommunications Sales N/A N/A $ 25,015 $ 115,630 $ 119,282 $ 110,469 Net Income (Loss) from Continuing Operations N/A N/A (1,348) 1,200 (17,459)(2) (7,845)(3) Per Share of Common Stock (Basic): Net Income (Loss) from Continuing Operations N/A N/A (0.23) 0.20 (2.83)(2) (1.24)(3) Dividends to Stockholders - - - - 0.10 0.40 Basic Weighted Average Shares Outstanding N/A N/A 5,989,073 5,973,328 6,158,587 6,305,384 Summary of Financial Position: Total Assets $ 21,587 $ 41,441 N/A $ 124,547 $ 118,455 $ 147,497 Long-Term Debt - - N/A 13,647 10,616 11,245 Net Assets in Liquidation 8,984 20,780 N/A N/A N/A N/A Net Assets in Liquidation Per Share $ 1.45 $ 3.34 N/A N/A N/A N/A Stockholders' Equity N/A N/A N/A 79,318 77,989 97,860 Stockholders' Equity Per Share N/A N/A N/A $ 12.90 $ 12.74 $ 15.20 Number of Employees 5 5 743 797 760 905 (1) 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 stockholders, and (iv) if required, the distribution of assets to one or more liquidating trusts established for the benefit of the stockholders. As a result, the Company adopted the liquidation basis of accounting effective April 1, 2000. All information presented prior to April 1, 2000 is reported on a going-concern basis. (See Note 1 to the Consolidated Financial Statements appearing elsewhere herein). (2) Amount includes $18,684 (net of tax benefit of $4,138), or $2.99 per share, of non-recurring adjustments primarily for restructuring and asset impairment. (3) Amount includes $6,150 (after-tax), 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.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. (000's except for share and per share information) LIQUIDATION BASIS 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 stockholders, and (iv) if required, the distribution of assets to one or more liquidating trusts established for the benefit of the stockholders. The Plan was approved by stockholders on July 21, 2000. On August 11, 2000, the Company filed a Certificate of Dissolution with the State of Delaware. Under Delaware law, the Company will continue to exist for a period of three years for the purpose of winding up its affairs. The Board of Directors and officers of the Company will continue to oversee the liquidation and dissolution. Prior to June 30, 2000, seven stockholders, 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 and in favor of the sales of SAFCO Technologies, Inc. (SAFCO) and GAI-Tronics Corporation (GTC). 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 at their estimated net realizable values and anticipated settlement amounts 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. An initial liquidating distribution of $12.00 per share was paid on September 8, 2000 to holders of Class A (non-voting) and Class B (voting) common stock. An additional liquidating distribution of $2.00 per share was paid on December 14, 2001. Sale of Assets On July 25, 2000, the Company completed the sale of SAFCO to Agilent Technologies, Inc. (Agilent) for $121,426 in cash, after consideration of certain closing balance sheet adjustments. The purchase price included $11,000 which was placed into escrow for certain expenses and possible indemnification claims under the representations and warranties sections of the purchase agreement. The Company was entitled to receive distribution of the balance remaining in the escrow account, after reduction for any indemnification claims made by the buyer before August 29, 2001. During the third quarter of 2001, Agilent submitted notification of an indemnification claim to the Company. During the fourth quarter of 2001, $443 was disbursed from the escrow account to cover expenses owed by the Company, $334 was disbursed to pay indemnification claims and $9,388 was distributed to the Company. Each of these disbursements included a share of interest earned by the account. A balance of $1,500 remained in the escrow account to cover a potential obligation of the Company that was not finalized with Agilent at December 28, 2001. Management estimates that the obligation, including settlement costs, will be settled for approximately $300. This obligation is not subject to the representations and warranties sections of the purchase agreement. On July 26, 2000, the Company completed the sale of GTC to Hubbell Incorporated (Hubbell) for cash of $36,246, after consideration of certain closing balance sheet adjustments. The Company provided certain indemnifications under the representations and warranties sections of the purchase agreement. During the third quarter of 2001, Hubbell submitted notification of an indemnification claim to the Company. As of December 28, 2001, it is not possible to predict the ultimate liability of the Company in connection with this indemnification claim. The Company believes that this claim, when resolved, will not have a material effect on the net assets in liquidation. The Company has purchased certain insurance to minimize its exposure on some, but not all, of the areas for which they are indemnifying Hubbell. On December 29, 2000, the Company completed the sale of XEL Communications, Inc. (XEL) to a company controlled by XEL's president for $4,900, in the form of a promissory note bearing interest payable monthly at 8%, with the principal due after 24 months. In connection with the sale, the Company loaned XEL $359 under a working capital line of credit that expired on March 31, 2001. The working capital loan, plus interest at 5% is due December 29, 2002. If XEL is resold to another party prior to December 30, 2002, the Company would receive full payment on the note and working capital loan and 70% of all proceeds in excess of $5,000. If XEL is resold after December 29, 2002 but prior to December 30, 2003, the Company would receive 50% of all proceeds over $5,000. If there is a default in payment of principal or interest on the promissory note, the Company has the right to retake control of XEL. The note and working capital loan are together valued at $1,900 in the statement of net assets in liquidation based on the estimated realization values of XEL's assets. The sale of XEL excluded the building it occupies in Aurora, Colorado. The Company is attempting to sell this building to an unrelated third party. Financial Condition 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. An initial liquidating distribution of $74,582 or $12.00 per share was paid on September 8, 2000. An additional liquidating distribution of $12,430 or $2.00 per share was paid on December 14, 2001. Before distributing assets to its stockholders, the Company is required by Delaware law to make provision for all known claims and obligations and any unasserted claims that are reasonably likely to arise after the certificate of dissolution became effective. The accrual for asserted and unasserted claims represents management's judgment as to the estimated amounts required to settle such claims, should they arise and should they have merit. Ultimate settlement amounts for such claims are expected to differ from estimates recorded as of December 28, 2001. Accordingly, it is not possible to predict with certainty the amount required for such claims. The value of net assets in liquidation is subject to adjustment as estimated values of assets and liabilities are reevaluated each period and as assets are sold or liabilities are settled for amounts different from estimates reported in previous periods. The estimated liquidation value of investments in liquidation was reduced by $1,557 during 2001. This amount includes $579 resulting from indemnification claims and reserves for unresolved claims related to the sales of SAFCO and GTC. An additional $978 relates to revisions of estimated obligations in connection with the sale of XEL and estimated net proceeds from the sale of XEL's building. Estimated income tax refunds increased by $2,524 due to revisions to estimates of the tax gains or losses on sales of the subsidiaries and changes in estimates of deductible expenses to be incurred during the liquidation period. The estimated liquidation value of other assets increased by $567, due to $880 of interest earned on short-term investments and notes receivable, less reductions in values of other assets of $313. Estimated accrued and other liabilities increased by $900 due to an extension of the estimated time period required to complete the liquidation process. Liquidity and Capital Resources On December 28, 2001, the Company had cash and cash equivalents of $12,800. The future cash needs of the Company will be dependent on the continuing implementation of the Plan. The Company believes that its cash and cash equivalents, its collection of deferred payments on sales of subsidiaries and its conversion of other assets to cash will be sufficient to fund its working capital requirements through the completion of the Plan. The Company estimates that its total capital expenditures during the liquidation period will be insignificant. Other 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 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 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. 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 and $1,639 in connection with the additional liquidating distribution on December 14, 2001. The estimated remaining liability for settlement of the LSAR's at December 28, 2001 is $1,527 and is included in accrued liabilities in the statement of net assets in liquidation. GOING-CONCERN BASIS 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, expanded 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 was part of the Company's Wireless Segment. Sales and Gross Profit The following is a breakdown of sales by segment for the first quarter of each year: 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 became available 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 a credit 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 Standards 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 acquisitions of ComOpt, Irmel and Red Alert, 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 availability of research and development tax credits in 2000. Capitalized software development costs are not eligible for the credit. Other In order to ensure continuing value in the Company and its operating subsidiaries, various members of management and key employees of the subsidiaries were offered incentives to continue employment through the completion of the subsidiary sale process. Portions of these incentives were guaranteed to the employees, subject to their continued employment through December 15, 2000, and were 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, were dependent on completion of sale transactions and were recognized in connection with the subsidiary sales. Results of Operations - 1999 For the year 1999, the Company reported net income of $1,200, or $.20 per share, on revenue of $115,630. Excluding non-recurring adjustments, net income was $1,204, or $.20 per share. 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. 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. The following is a breakdown of sales by segment for 1999: Access Products $ 21,149 Industrial 60,180 Wireless 34,301 ------- Total $115,630 ======= The 1999 operating results include the operations of several acquired companies since the dates of acquisition. The Industrial Segment includes the operations of Red Alert, Inc., acquired in December 1999, and Irmel S.r.l., acquired in November 1999. The Wireless Segment includes the operations of ComOpt AB, acquired in February 1999. Research and development costs of $4,219 were capitalized in 1999 as development efforts in the Wireless and Access Products Segments became much more focused on products that would generate sales over an extended period. Amortization of such costs was $879 in 1999. The effective tax rate was 37% in 1999. Forward-Looking Statements This Form 10-K contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company, including statements regarding the timing and outcome of the sale of the Company's assets, its dissolution and liquidation and the expected distributions therefrom. Such statements are only predictions and involve risks and uncertainties, and actual events or performance may differ materially from that expressed in any such forward-looking statements. Potential risks and uncertainties include, without limitation: ultimate values realizable for unsold assets, adjustments to subsidiary sale prices, collection of deferred payments on sales of assets, post-closing indemnification obligations relating to subsidiary sales, costs and expenses relating to the dissolution, including income taxes, and the nature and amount of any unknown contingent liabilities. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's only financial instruments with market risk exposure are short-term cash investments which total $12,942 at December 28, 2001. Based on this balance, a change of one percent in the interest rate would cause a change in interest income for the period of approximately $129. This interest amount, less a related tax effect, would have no effect on the net assets in liquidation per outstanding share since interest income on cash investments is not accrued in the statement of net assets in liquidation. These financial instruments are non-trading (not entered into for trading purposes) and carry interest at a market rate. The Company's objective in maintaining these variable rate investments is the flexibility obtained in having cash available for payment of accrued liabilities and distributions to stockholders without penalties. 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 for the quarter ended March 31, 2000 and the year 1999, presented on a going-concern basis, 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. As a result of adoption and approval of the plan of liquidation, financial statements for the periods subsequent to March 31, 2000 are presented on a liquidation basis. Accordingly, the carrying values of assets are presented at estimated realizable values and all liabilities are presented at estimated settlement amounts. Management believes these statements present fairly the estimated net assets in liquidation based on facts and circumstances available when the statements were prepared. It is not presently determinable whether the amounts realizable from the remaining assets or the amounts required to settle outstanding obligations will differ materially from the amounts shown in the liquidation basis financial statements. 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 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Salient 3 Communications, Inc.: We have audited the accompanying consolidated statements of operations, cash flows, and stockholders' equity for the fiscal year ended December 31, 1999 and for the three months ended March 31, 2000 of Salient 3 Communications, Inc. and Subsidiaries. In addition, we have audited the statements of net assets in liquidation as of December 28, 2001 and December 29, 2000, and the related statements of changes in net assets in liquidation for the fiscal year ended December 28, 2001 and the nine months ended December 29, 2000. 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 auditing standards generally accepted in the United States. 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. As described in Notes 1 and 2 to the consolidated financial statements, the stockholders of Salient 3 Communications, Inc. approved a plan of liquidation and the Company commenced liquidation shortly thereafter. As a result, the Company has changed its basis of accounting for the periods subsequent to March 31, 2000, from the going-concern basis to the liquidation basis. Accordingly, the carrying value of the remaining assets as of December 28, 2001 and December 29, 2000, are presented at estimated realizable values and all liabilities are presented at estimated settlement amounts. It is not presently determinable whether the amounts realizable from the remaining assets or the amounts due in the settlement of obligations will differ materially from the amounts shown in the accompanying financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Salient 3 Communications, Inc. and Subsidiaries for the fiscal year ended December 31, 1999 and for the three months ended March 31, 2000, their net assets in liquidation as of December 28, 2001 and December 29, 2000, and the changes in their net assets in liquidation for the fiscal year ended December 28, 2001 and for the nine months ended December 29, 2000, in conformity with accounting principles generally accepted in the United States applied on the bases described in the preceding paragraph. Arthur Andersen LLP Philadelphia, Pennsylvania March 15, 2002 SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES Statements of Net Assets in Liquidation (Liquidation Basis) December 28, 2001 and December 29, 2000 (000's except for share and per share information) December 28, December 29, 2001 2000 ------------ ------------ ASSETS Cash and cash equivalents $ 12,800 $ 18,426 Investments in liquidation 5,862 14,837 Income tax refunds receivable 140 3,980 Other assets 2,784 4,198 ------ ------ Total Assets 21,586 41,441 ------ ------ LIABILITIES Accrued and other liabilities 12,602 20,661 ------ ------ Net assets in liquidation $ 8,984 $ 20,780 ====== ====== Number of common shares outstanding 6,214,824 6,214,824 ========= ========= Net assets in liquidation per outstanding share $ 1.45 $ 3.34 ====== ====== The accompanying notes are an integral part of these financial statements.

SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES Statements of Changes In Net Assets In Liquidation (Liquidation Basis) For the Year 2001 and the Nine Months Ended December 29, 2000 (000's) Nine Months Ended 2001 December 29, 2000 ---- ----------------- Net assets in liquidation, beginning of period $ 20,780 $ 93,985 ------ ------ Changes in estimated liquidation values of assets and liabilities: Investments in liquidation (1,557) (11,527) Other assets 567 3,174 Accrued and other liabilities (900) 811 Income tax refunds receivable 2,524 8,919 ------ ------ Net changes in estimated liquidation values 634 1,377 ------ ------ Liquidating distributions to stockholders (12,430) (74,582) ------ ------ Net assets in liquidation, end of period $ 8,984 $ 20,780 ====== ====== Supplemental Cash Information: Changes in cash and cash equivalents Exercise of stock options $ - $ 588 Net proceeds from sales of subsidiaries 7,418 137,230 Cash receipts for other assets 1,981 5,852 Payment of outstanding debt, including accrued interest - (18,861) Payment of accrued liabilities (8,959) (14,876) Refunds (payment) of income taxes 6,364 (17,061) Liquidating distributions to stockholders (12,430) (74,582) ------ ------ Net changes in cash and cash equivalents $ (5,626) $ 18,290 ===== ====== The accompanying notes are an integral part of these financial statements.

SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Going-Concern Basis) For the Three Months Ended March 31, 2000 and the Year 1999 (000's except for share and per share information) For the Three Months Ended March 31, 2000 1999 -------------- ---- Telecommunications sales $ 25,015 $ 115,630 Cost of goods sold 14,668 68,007 ------ ------- Gross profit 10,347 47,623 Selling, general and administration 9,616 34,957 Research and development 2,161 8,717 Goodwill amortization 507 1,699 ------ ------ Operating income (loss) (1,937) 2,250 ------ ------ Interest and other income 91 873 Interest expense 329 1,211 ------ ------ Pre-tax income (loss) (2,175) 1,912 ------ ------ Provision (benefit) for taxes on income (loss) (827) 712 ------ ------ Net income (loss) $ (1,348) $ 1,200 ====== ====== Net income (loss) per share of common stock (basic and diluted) $ (0.23) $ 0.20 ====== ====== Basic weighted average shares outstanding 5,989,073 5,973,328 The accompanying notes are an integral part of these financial statements.

SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Going-Concern Basis) For the Three Months Ended March 31, 2000 and the Year 1999 (000's) For the Three Months Ended March 31, 2000 1999 -------------- ---- Cash flows from operating activities: Net income (loss) $ (1,348) $ 1,200 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,026 7,172 Reserve provisions 711 798 Deferred income tax provision - 1,230 Changes in current assets and current liabilities, net of effects from acquisitions and dispositions: Accounts receivable and unbilled revenue 3,696 273 Inventories (1,196) (2,169) Other current assets (843) (1,726) Accounts payable and accrued salaries and wages (2,142) 2,496 Other accrued liabilities (572) (3,663) Income taxes, currently payable (89) (60) Other, net 47 190 ----- ----- Net cash provided by operating activities 290 5,741 ----- ----- Cash flows from investing activities: Software development costs (1,475) (4,219) Payments for acquisitions, net of cash acquired (351) (7,550) Payments for property, plant and equipment (601) (3,442) Proceeds from sale of property, plant and equipment - 6,045 ----- ----- Net cash used for investing activities (2,427) (9,166) ----- ----- Cash flows from financing activities: Payments of long-term debt (183) (393) Borrowings (repayments) under note payable 2,995 (1,626) Proceeds from issuance of debt - 4,216 Proceeds from notes receivable - 500 Issuance of treasury stock in connection with stock purchase plan 32 254 Payments to acquire treasury stock (103) (292) Other, net (260) (129) ----- ----- Net cash provided by financing activities 2,481 2,530 ----- ----- Net increase (decrease) in cash and cash equivalents 344 (895) Cash and cash equivalents at beginning of period 1,687 2,582 ----- ----- Cash and cash equivalents at end of period $ 2,031 $ 1,687 ===== ===== Supplemental cash flow disclosures: Interest paid $ 321 $ 1,125 ===== ===== Income taxes paid, net of refunds received $ 150 $ 663 ===== ===== The accompanying notes are an integral part of these financial statements.

SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Going-Concern Basis) For the Three Months Ended March 31, 2000 and the Year 1999 (000's except for share information) Common Stock ------------------------------------------ Class A Class B -------------------- ------------------ Shares Amount Shares Amount --------- --------- --------- -------- 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 Conversion from Class B to Class A, net 12,441 12 (12,441) (12) --------- ----- ------- --- Balances at March 31, 2000 8,491,170 $ 8,491 494,130 $ 494 ========= ===== ======= === The accompanying notes are an integral part of these financial statements.

SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Going-Concern Basis) For the Three Months Ended March 31, 2000 and the Year 1999 (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 ---------- ----------- -------- ----------- -------------- --------- -------- 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) Net loss (1,348) Translation adjustment (63) Restricted stock amortization 47 Purchase of treasury stock 8,263 (103) Issuance of treasury stock in connection with stock purchase plan (5) (1,783) 37 ------ ----- ------ --- ----- --------- ------ Balances at March 31, 2000 $ 36,969 $ 1,755 $ 72,830 $ (77) $ (1,373) 2,844,189 $ (41,206) ====== ===== ====== === ===== ========= ====== The accompanying notes are an integral part of these financial statements.

SALIENT 3 COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (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 stockholders, and (iv) if required, the distribution of assets to one or more liquidating trusts established for the benefit of the stockholders. The Plan was approved by stockholders on July 21, 2000. On August 11, 2000, the Company filed a Certificate of Dissolution with the State of Delaware. Under Delaware law, the Company will continue to exist for a period of three years for the purpose of winding up its affairs. The Board of Directors and officers of the Company will continue to oversee the liquidation and dissolution. 2. BASIS OF ACCOUNTING: Prior to June 30, 2000, seven stockholders, 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 and in favor of the sales of SAFCO Technologies, Inc (SAFCO) and GAI-Tronics Corporation (GTC). 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 at their estimated net realizable values and anticipated settlement amounts 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. An initial liquidating distribution of $12.00 per share was paid on September 8, 2000 to holders of Class A (non- voting) and Class B (voting) common stock. An additional liquidating distribution of $2.00 per share was paid on December 14, 2001 to the holders of Class A (non-voting) and Class B (voting) common stock. The valuations presented in the Statements of Net Assets in Liquidation represent estimates, based on present facts and circumstances, of the net realizable values of assets and the anticipated settlement amounts for liabilities, including 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. Such differences may be material. Accordingly, it is not possible to predict with certainty the aggregate net values ultimately distributable to stockholders 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. In the Statements of Changes in Net Assets in Liquidation, the amounts reported for changes in estimated liquidation values of assets and liabilities represent (i) differences between actual and estimated proceeds on the sales of assets, (ii) differences between actual and estimated settlements made on outstanding obligations, and (iii) changes in management estimates of values for unsold assets and outstanding liabilities. 3. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of amounts on deposit in banks and cash invested temporarily in instruments with maturities of three months or less at time of purchase. The Company is subject to concentration of credit risk; however, it invests its excess cash with large banks where preservation of principal is the main concern. Estimated interest income on the Company's cash and short-term investments through the final liquidation date has not been reflected in the Statements of Net Assets in Liquidation. 4. INVESTMENTS IN LIQUIDATION: Investments in liquidation include the estimated net realizable values of subsidiary sale proceeds collectible after December 28, 2001 and December 29, 2000, less related unpaid costs of the sales, and the estimated net realizable value of the building occupied by XEL Communications, Inc. (XEL). The value of the building included in the financial statements at December 29, 2000 is net of a mortgage loan of $207. This loan was paid in January 2001. On July 25, 2000, the Company completed the sale of SAFCO to Agilent Technologies, Inc. (Agilent) for $121,426 in cash, after consideration of certain closing balance sheet adjustments. The purchase price included $11,000 which was placed into escrow for certain expenses and possible indemnification claims under the representations and warranties sections of the purchase agreement. The Company was entitled to receive distribution of the balance remaining in the escrow account, after reduction for any indemnification claims made by the buyer before August 29, 2001. During the third quarter of 2001, Agilent submitted notification of an indemnification claim to the Company. During the fourth quarter of 2001, $443 was disbursed from the escrow account to cover expenses owed by the Company, $334 was disbursed to pay indemnification claims and $9,388 was distributed to the Company. Each of these disbursements included a share of interest earned by the account. A balance of $1,500 remained in the escrow account to cover a potential obligation of the Company that was not finalized with Agilent at December 28, 2001. Management estimates that this obligation, including settlement costs, will be settled for approximately $300. This obligation is not subject to the representations and warranties sections of the purchase agreement. On July 26, 2000, the Company completed the sale of GTC to Hubbell Incorporated (Hubbell) for cash of $36,246, after consideration of certain closing balance sheet adjustments. The Company provided certain indemnifications under the representations and warranties sections of the purchase agreement. During the third quarter of 2001, Hubbell submitted notification of an indemnification claim to the Company. As of December 28, 2001, it is not possible to predict the ultimate liability of the Company in connection with this indemnification claim. The Company believes that this claim, when resolved, will not have a material effect on the net assets in liquidation. The Company has purchased certain insurance to minimize its exposure on some, but not all, of the areas for which they are indemnifying Hubbell. The gross proceeds noted above are before transaction-related expenses of approximately $10,600, including $1,200 not paid at December 29, 2000. On December 29, 2000, the Company completed the sale of XEL to a company controlled by XEL's president for $4,900, in the form of a promissory note bearing interest payable monthly at 8%, with the principal due after 24 months. In connection with the sale, the Company loaned XEL $359 under a working capital line of credit that expired on March 31, 2001. The working capital loan, plus interest at 5% per annum, is due December 29, 2002. In March 2001, XEL obtained a $1,000 bank line of credit. If XEL is resold to another party prior to December 30, 2002, the Company would receive full payment on the promissory note and working capital loan and 70% of all proceeds in excess of $5,000. If XEL is resold after December 29, 2002 but prior to December 30, 2003, the Company would receive 50% of all proceeds over $5,000. If there is a default in payment of the principal or interest on the promissory note, the Company has the right to retake control of XEL. The promissory note and working capital loan are together valued at $1,900 in the Statements of Net Assets in Liquidation based on the estimated realization values of XEL's net assets. The sale of XEL excluded the building it occupies in Aurora, Colorado. The Company is attempting to sell this building to an unrelated third party. 5. INCOME TAXES: All income tax accounts have been restated to reflect the liquidation basis of accounting. The estimated amount of income tax refunds receivable reflects federal and state income taxes, at statutory rates, which would become refundable if the assets are realized and liabilities settled at the amounts shown, net of amounts accrued for potential liabilities for adjustments of transactions reported on prior year tax returns. The estimated tax refunds at December 28, 2001 and December 29, 2000 primarily result from anticipated carrybacks of future tax losses that will arise from tax deductible costs of carrying out the plan of liquidation and settling other accrued liabilities. The estimate is subject to significant variation if, among other things, the actual values of assets sold vary from current estimates, the amounts or timing of settlement of liabilities differ from current estimates, or there are potential adjustments related to the sales and other transactions. 6. OTHER ASSETS: Other assets include a note receivable relating to the 1998 sale of a former subsidiary to management of the subsidiary and an investor group. The note has an unpaid principal balance of $2,475 at December 28, 2001 and $2,750 at December 29, 2000 and bears interest at 8%. Principal payments of $366, $456 and $1,653 are due in July 2002, 2003 and 2004, respectively. The note is subordinate to the buyer's obligations under a credit agreement with a commercial bank. At December 28, 2001, the note plus accrued interest is valued at $1,969 in the Statements of Net Assets in Liquidation. Other assets also include other interest receivables and real estate. 7. 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 asserted and unasserted claims at December 28, 2001 and December 29, 2000. The balances consist of the following: Dec. 28, Dec. 29, 2001 2000 ----------- ---------- Compensation and benefits $ 3,512 $ 8,172 Liquidation period expenses 4,527 4,121 Unfunded retirement obligations for former employees 53 1,490 Accrued distributions to LSAR holders (Note 9) 1,527 3,056 Accrual for asserted and unasserted claims (Note 11) 2,983 3,822 -------- -------- $12,602 $20,661 ======== ======== Compensation and benefits include salaries of officers and employees assigned to effect the sales and carry out the Plan, and payments under the Special Incentive Plan approved by the stockholders to provide incentives to executives who contributed materially to the successful sale of the operating businesses. Liquidation period expenses include office costs, insurance, and costs of legal, accounting and other services expected to be incurred during the liquidation period. 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 (Note 11). 8. ADJUSTMENTS FROM GOING-CONCERN TO LIQUIDATION BASIS OF ACCOUNTING: Stockholders' equity, March 31, 2000 (Going-Concern Basis) $ 77,883 -------- 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 (102) ------- Total adjustments 16,102 -------- 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 9). 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. 9. 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 stockholders upon liquidation and the per share exercise price applicable to each converted option or warrant. At March 31, 2000, there were options and warrants outstanding for the purchase of 1,905,495 shares of the Company's common stock. Options to purchase 5,750 shares were granted after that date and 32,300 options expired or were forfeited. 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 and $1,639 in connection with the additional liquidating distribution on December 14, 2001. The estimated remaining liability for settlement of the LSAR's is included in accrued and other liabilities in the Statements of Net Assets in Liquidation (Note 7). 10. LINES OF CREDIT AND OTHER LONG TERM BORROWINGS: Under the 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. 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. 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. As a result of the completion of the sales of SAFCO and GTC 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, which related to the 1996 purchase of SAFCO, was repaid with the proceeds of these sales. 11. CONTINGENCIES: The Company was named a defendant in a complaint filed in Delaware Chancery Court on August 29, 2000, and amended on February 26, 2001, by a group of former employees and current Class A stockholders, challenging the compensation packages granted by the Company to its senior management in connection with the dissolution of the Company. On November 1, 2001, the Delaware Chancery Court granted the Company's motion to dismiss the complaint. Before distributing assets to its stockholders, the Company is required by Delaware law to make provision for all known claims and obligations and any unasserted claims that are reasonably likely to arise after the certificate of dissolution became effective. The accrual for asserted and unasserted claims represents management's judgment as to the estimated amounts required to settle such claims, should they arise and should they have merit. Ultimate settlement amounts for such claims are expected to differ from estimates recorded as of December 28, 2001. Accordingly, it is not possible to predict with certainty the amount required for such claims. However, management believes that the outcome will not have a material adverse effect on the Company's net assets in liquidation. GOING-CONCERN BASIS STATEMENTS 12. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BUSINESS DESCRIPTION: The Company was a leading telecommunications equipment and services company with subsidiaries that operated in the industrial, access products, and wireless markets. The Industrial Segment developed, assembled, and marketed communications systems for industrial operations. The Access Products Segment designed and marketed voice and data transmission system products. The Wireless Segment's products and services focused 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 fiscal year included 52 weeks and ended on December 31, 1999. The three months ended March 31, 2000 consisted of 13 weeks. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions have been eliminated. RECOGNITION OF REVENUE: The Company recognized revenue upon shipment of goods and accrued costs associated with the training and installation for its products upon shipment. The Company recognized revenue on contracts entered into for radio frequency engineering as the work was performed. Costs and expenses were charged to operations as incurred. Losses, estimated to be sustained upon completion of contracts, were charged to income in the year such estimates were determinable. The Company recognized software license fees for perpetual licenses upon delivery of the product. If any portion of the fees related to maintenance or support services, it was deferred and recognized over the contract term, generally one to three years. Software license fees for fixed-term licenses were recognized ratably over the term of the license. At December 31, 1999, the Company deferred $2,164 of software licensing revenue. INSURANCE PROGRAMS: Through 1997, the Company's overall workers compensation and general liability insurance coverages have contained, 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. INVENTORIES: Inventories, which consist of material, labor and overhead, were determined on the first-in, first-out (FIFO) method and were stated at the lower of cost or market. PROPERTY, PLANT AND EQUIPMENT: For financial reporting purposes, the Company provided 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 used 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 were charged to expense as incurred. Renewals and improvements were capitalized. Upon retirement or other disposition of plant and equipment, the cost of the item and related accumulated depreciation were removed from the accounts and any gain or loss was 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 capitalized software development costs incurred after the establishment of technological feasibility until the product was available for general release. Costs incurred prior to the establishment of technological feasibility were charged to research and development expense as incurred. In the three months ended March 31, 2000, and the year 1999, the Company capitalized $1,475 and $4,219, respectively, of software development costs. Costs were 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 $435 in the first quarter of 2000, and $879 in 1999. GOODWILL: Goodwill was 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 $507 in the first quarter of 2000, and $1,699 in the year 1999. Goodwill related to a pre-1970 acquisition in the amount of $540 was not being amortized and, in the opinion of management, there had been no decrease in value. The Company periodically reviewed goodwill to assess recoverability, and impairments were recognized in operating results if a permanent diminution in value had occurred. The Company's primary financial indicator for assessing recoverability of goodwill was whether a subsidiary was projected to generate sufficient income and cash flow on an undiscounted basis. INCOME TAXES: The Company utilized the liability method of accounting for income taxes. Under this method, deferred income taxes were 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, were expensed as incurred. STATEMENTS OF CASH FLOWS: For purposes of the consolidated statements of cash flows, the Company considered all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The ultimate results could differ from those estimates. 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 the first quarter of 2000, and the year 1999 were 6,083,780 and 5,983,158, respectively. These additional shares had an insignificant effect on the net income per share for the three months ended March 31, 2000 and the year 1999. 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. 13. 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 purchase price 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 was being amortized on a straight-line basis over 15 years. Irmel, based in Milan, Italy, expanded 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 was being amortized on a straight-line basis over 10 years. Under the terms of the agreement, the Company will also pay ComOpt's former stockholders additional amounts based upon the achievement of certain performance goals. Any additional payments will increase goodwill. ComOpt was part of the Company's Wireless Segment and was merged into the operations of SAFCO Technologies, Inc. The following unaudited consolidated pro-forma results of operations for the year 1999 includes Irmel, Red Alert and ComOpt as if they had been acquired at the beginning of the year: 1999 ------ Telecommunications sales $ 119,261 Net income $ 452 Net income per share of common stock $ 0.08 The pro-forma statements of operations include adjustments for interest expense and amortization of goodwill. 14. INCOME TAXES: Income tax provisions (benefits) consisted of the following: Three Months Ended March 31, 2000 1999 ------------------- ------ Current: Federal $ (740) $ (680) State and foreign (87) 162 ---------- ---------- (827) (518) ---------- ---------- Deferred: Federal - 910 State - 320 ---------- ---------- - 1,230 ---------- ---------- $ (827) $ 712 ========== ========== A reconciliation of the statutory income tax rate to the effective tax rate follows: Three Months Ended March 31, 2000 1999 ----------------- ---- Federal statutory tax rate (34.0)% 34.0% State and foreign taxes (2.6) (2.4) Amortization and write-off of goodwill 1.7 8.5 Foreign sales corporation - (1.8) Application of annualized effective tax rate (2.8) - Other, net (0.3) (1.1) ------ ------ Effective tax rate (38.0)% 37.2% ====== ====== 15. POSTRETIREMENT BENEFITS: Substantially all regular, full-time employees of the Company and its subsidiaries were participants in various defined contribution retirement plans. Employer contributions under these plans were generally at the discretion of the Company, based upon profits and employees' voluntary contributions to the plans. Company contributions charged to operations in the first quarter of 2000 and the year 1999, totaled $401 and $1,321, respectively. The Company maintained a contributory defined benefit pension plan for employees of GAI-Tronics Limited, a second tier U.K. subsidiary. Benefits were payable based on years of service and an employee's compensation during the last ten years of employment. Contributions were 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 net periodic pension cost of the plan for the year ended December 31, 1999. Discount rate 4.50% Salary escalation 2.50% Expected return on plan assets 7.00% Components of Net Periodic Pension Cost: Service cost $ 245 Interest cost 247 Expected return (381) Amortization of unrecognized loss 18 ------- Net periodic pension cost $ 129 ======= 16. 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, 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 authorized the Company to extend loans to officers and other key employees for the purpose of acquiring Company stock. The loans bore market rate interest, due quarterly, with principal payments generally due in 10 equal annual installments. All loans were fully repaid during the year 2000. 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 date a distribution under the Rights Plan takes place. The threshold for triggering a 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. On December 8, 2001, the Board of Directors terminated the Shareholder Rights Plan. 17. STOCK OPTION, AWARD AND PURCHASE PLANS: The 1996 Long Term Incentive Plan provided 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 were available for future grants. The Long Term Incentive Plan also provided for grants of restricted stock. These shares vested over a three to ten year period, depending upon certain financial achievements. The value of the shares at the time of issuance was recorded in stockholders' equity and amortized over the vesting period. Through 1999, $475 had 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 provided 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-paid 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, 31,010 options were granted under the plan. The options were granted with a twenty year term. At December 31, 1999, options to purchase 48,810 shares were available for issue. 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: Weighted Number of Number of Option Price Average Price Shares Shares Per Share Per Share Exercisable --------- ------------ ---------- ----------- 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 Granted 3,500 $ 7.00-$12.50 $ 9.49 Exercised - - - Expired (34,750) $ 6.50-$12.75 $ 9.60 --------- Outstanding at Mar. 31, 2000 1,199,940 $ 5.50-$16.00 $11.05 502,619 ========= The weighted average price per share of exercisable options at March 31, 2000 was $12.91. The weighted average option lives remaining at March 31, 2000 and December 31, 1999 were approximately 8 years. The Company had 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: Three Months Ended March 31, 2000 1999 -------------------- --------- Net income (loss) $(1,457) $721 Net income (loss) per share of common stock $(0.24) $0.12 The fair value was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2000 and 1999, respectively: risk free interest rates of 6.5% and 5.8%; dividend yields of 0.0% and 0.0%; volatility factors of 31.3% and 20.0%; and average stock option expected life of 5 and 5.6. The weighted average fair value of stock options granted was $3.79 and $2.64 per share in 2000 and 1999, 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 received 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 2000, no shares were issued under this plan. As of December 31, 1999, 68,866 shares had been issued, and 131,134 shares remain available for future grants. 18. SPECIAL CHARGES: In connection with the Company's actions to sell its subsidiaries, various members of management and key employees were 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 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. 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. 19. OPERATING LEASES: The Company leased, as lessee, facilities, data processing equipment, office equipment and automobiles. Total rental expense under operating lease agreements amounted to $679 in the first quarter of 2000 and $1,700 in 1999. 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 was 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. 20. FINANCIAL INSTRUMENTS: Financial instruments which potentially subject the Company to the concentration of credit risk, as defined by SFAS No. 105, consisted principally of accounts receivable. Concentration of credit risk with respect to receivables was limited, as the majority of the balance represents billings for work performed or products sold to various financially secure companies. 21. 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. 22. 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 were designed to operate under extraordinary plant conditions and provide emergency notification. In addition, the segment included land mobile radio communications devices. The Access Products Segment designed and marketed voice and data transmission system products. The access products provided 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 from continuing operations was determined in accordance with generally accepted accounting principles described in the summary of significant accounting policies. Intersegment sales were not significant. Identifiable assets were those assets used in the operations of a reportable segment and excluded goodwill and deferred taxes. Corporate assets included land, deferred income taxes and other corporate assets. Information about the Company's operations by segment for the three months ended March 31, 2000, and the year 1999 is as follows: Industrial Access Products Wireless Consolidated --------------------------------------------------------------------------------------- Three months ended March 31, 2000: Telecommunications sales $13,614 $3,392 $8,009 $25,015 ====== ====== ====== ====== Segment profit (loss) $ (24) $ (612) $ 214 $ (422) ====== ====== ====== General interest expense (294) General corporate expenses (1,043) Goodwill amortization (507) Interest and other income 91 --------- Pre-tax loss $(2,175) ===================================================================================== Identifiable assets $28,719 $13,894 $24,080 $ 66,693 ====== ====== ====== Corporate assets 21,625 Goodwill 34,606 --------- Total assets, March 31, 2000 $122,924 ===================================================================================== Depreciation $ 436 $ 150 $ 488 ===== ====== ====== Capital expenditures $ 302 $ 162 $ 228 ===== ====== ====== Reconciliation of Other Significant Items: Geographic Information Sales Long Lived Assets ----------------------------- ------ ----------------- United States $ 17,742 $ 23,382 United Kingdom 2,610 904 Japan 1,027 64 Israel 644 - Italy 639 295 Brazil 562 70 Other foreign countries 1,791 564 ---------- ---------- $ 25,015 $ 25,279 ====== ====== Sales to Major Customers: Sales to a customer of the Company's Access Products Segment represented approximately $2,224, or 9% of the Company's consolidated sales. Sales to a customer of the Company's Industrial and Wireless Segments represented approximately $2,458, or 10% of the Company's consolidated sales.

Industrial Access Products Wireless Consolidated ---------------------------------------------------------------------------------- Year ended December 31, 1999: Telecommunications sales $ 60,180 $21,149 $34,301 $115,630 ====== ====== ====== ======= Segment profit (loss) $ 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 ===== ====== ====== 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 represented approximately $11,701, or 10% of the Company's consolidated sales. Sales to a customer of the Company's Industrial and Wireless Segments represented approximately $12,364, or 11% of the Company's consolidated sales.

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 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and present positions of the directors and executive officers of Salient 3 Communications, Inc. as well as other relevant information are set forth below: Year In Which First Became Name Age Position With Company Director ---- --- --------------------- ------------- John W. Boyer, Jr. . . . 73 Director 1984 Timothy S. Cobb . . . . . 60 Chairman of the Board, President 1993 and Chief Executive Officer Dennis E. Foster . . . . 61 Director 1998 Thomas F. Hafer . . . . . 53 Senior Vice President, General Counsel ---- and Secretary Robert E. LaBlanc . . . . 68 Director 1997 Donald E. Lyons . . . . 72 Director 1989 Paul H. Snyder . . . . . 54 Senior Vice President, Chief 1995 Financial Officer and Director Dennis F. Strigl . . . . 55 Director 1998 Donald K. Wilson, Jr. . 66 Director 1990

Mr. Boyer retired in May 1993 as Chairman of Philadelphia Suburban Corporation whose principal subsidiary, Philadelphia Suburban Water Company, is a regulated water utility. Mr. Boyer served in various senior executive positions with that company since 1981. He is a director of The Rittenhouse Trust Company. Mr. Cobb has been Chairman of the Board since July 1995, Chief Executive Officer of the Company since March 1994 and President and Chief Operating Officer of the Company since October 1993. He served as President of Gilbert/Commonwealth, Inc., then a subsidiary of the Company, from January 1991 to September 1993 and as President of GAI-Tronics, a subsidiary of the Company, from June 1988 to December 1990. He is a director of Central Vermont Public Service Corporation. Mr. Foster retired in 2000 as Vice Chairman of ALLTEL Communications, Inc., which provides telecommunications and information services. He had assumed that position when it merged with 360 Degree Communications Company, formerly Sprint Corporation's cellular and wireless division, in 1998. Mr. Foster had been President and Chief Executive Officer of 360 Degree Communi- cations Company since January 1996. Mr. Foster joined Sprint in 1992 as Senior Vice President of operations for its local telecommunications division and became President and Chief Operating Officer of its cellular and wireless division in March 1993. Prior to joining Sprint, Mr. Foster held management positions in the areas of marketing, regulatory and corporate strategic planning, as well as operational assignments with AT&T and GTE. He serves on the board of ALLTEL Corporation, NiSource Corporation and Yellow Corporation and is a trustee of the University of Findlay in Ohio. Mr. Hafer was appointed Vice President of the Company in September 1995 and Senior Vice President in February 1997. He has served as General Counsel and Corporate Secretary of the Company since February 1994. Mr. Hafer served as President of Green Hills Management Company, a division of the Company, from September 1993 until July 1997. He served as Vice President of Green Hills Management Company from February 1991 through September 1993. Mr. LaBlanc has served as President of Robert E. LaBlanc Associates, Inc., an information technologies consulting and investment banking firm, since 1981. Prior to that, he was Vice Chairman of Continental Telecom, Inc., a major telecommunications services company now merged with GTE. Mr. LaBlanc began his career in the former Bell System and served as telecommunications analyst and general partner with Salomon Brothers, Inc., before joining Continental. He is a director of Chartered Semiconductor Manufacturing Ltd., Storage Technology Corporation, The Titan Corporation, and two families of Prudential Mutual Funds. For five years prior to his retirement in 1987, Mr. Lyons served as Chief Executive Officer and President of the Power Systems Group of Combustion Engineering, Inc., a supplier of technology, equipment and services to the power and process industries. Mr. Lyons served as Chairman of the Board of CANISCO Resources, Inc. from 1996 to 1999. He also chaired the Atomic Industrial Forum in Washington, D.C. and served on the Advisory Board of the Institute of Nuclear Power Operations. Mr. Snyder was appointed Vice President of the Company in September 1995 and Senior Vice President in February 1997. He has been Chief Financial Officer of the Company since August 1995. He served as Vice President and Chief Financial Officer of The Dreyfus Corporation from August 1994 until joining the Company. For more than five years prior to joining Dreyfus, Mr. Snyder served as Senior Vice President and Chief Financial Officer of Mellon PSFS. Mr. Snyder became Senior Vice President and Chief Financial Officer of DecisionOne Corporation, a provider of multivendor computer maintenance services, in February 2001. Mr. Strigl has served as President and Chief Executive Officer of Verizon Wireless since April 2000 and Executive Vice President of Verizon Communications since June 2000. Prior to that, he served as President and Chief Executive Officer of Bell Atlantic Mobile since 1991 and as Group President and Chief Executive Officer of Bell Atlantic Global Wireless Group since 1997. He joined Bell Atlantic Mobile in 1989, serving as Vice President-Product Management for Network Services and later as Vice President-Operations and Chief Operating Officer, and a member of the Board of Directors of New Jersey Bell. Mr. Strigl is a director of Anadigics, Inc. and the Executive Committee of the Cellular Telecommunications Industry Association, serving as Chairman of the latter for 1996-1997. Mr. Wilson is currently a partner of Green, Wilson, & Associates, management consultants, in Hartford, Connecticut. From 1994 until the end of 1998, Mr. Wilson was a consultant with American Phoenix Corporation of Connecticut, an insurance brokerage company. In 1994, he retired as Executive Vice President of The Hartford Steam Boiler Inspection and Insurance Company, which he had served in various capacities since 1962 and which is engaged in insurance underwriting, investments and engineering. He is also a director of Spencer Turbine Company in Windsor, Connecticut. The terms of office for all directors will expire at the completion of the Company's dissolution and liquidation. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Company's directors, officers and persons who own more than 10% of a registered class of the Company's equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of the Company's common shares. These persons are also required to furnish the Company with copies of Section 16(a) forms they file. To our knowledge, based solely on the review of such reports furnished to us and written representations from these individuals that no other reports were required, during fiscal 2001 such individuals complied with all Section 16(a) filing requirements. ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION Dollar amounts in Item 11 are in actual dollars and are not rounded. Summary of Cash and Certain Other Compensation The following table shows, for fiscal 2001, 2000, and 1999, the cash compensation paid by the Company, as well as other compensation paid, accrued or awarded for those years, to the Company's Chief Executive Officer and to each of the remaining most highly compensated Executive Officers whose total annual salary and bonus exceeded $100,000 in fiscal 2001 (collectively, the "Executive Officers"). Summary Compensation Table Long-Term Compensation ------------------------------- Awards Payouts Annual --------------------- --------- Compensation Restricted Securities Name and ---------------- Stock Underlying LTIP All Other Principal Position Year Salary Bonus Awards(2) Options (3) Payouts(4) Compensation ------------------ ---- ------ ----- --------- ----------- ---------- ------------ T. S. Cobb. . . . . . . 2001 $ 0 $918,000(1)$ 0 0 $ 295,500 $737,688(5) President & Chief 2000 300,000 50,000(1) 0 0 1,419,221 882,887(6) Executive Officer 1999 390,000 0 0 0 0 28,723 T. F. Hafer. . . . . . . 2001 163,077 573,750(1) 0 0 92,400 317,924(5) Sr. Vice President, General 2000 206,725 62,708(1) 0 0 731,041 67,700(6) Counsel & Secretary 1999 215,000 0 0 0 0 23,723 P. H. Snyder. . . . . . . 2001 163,077 573,750(1) 0 0 107,000 324,804(5) Sr. Vice President & 2000 214,926 64,167(1) 0 0 739,291 68,739(6) Chief Financial Officer 1999 220,000 0 0 0 0 23,723 ____________

(1) The payments in 2001 represent amounts the Executive Officers are entitled to receive under the Company's Special Incentive Plan as a result of the completion of the sales of the Company's subsidiaries. As of December 28, 2001, the Company has accrued $200,000 as the estimated remaining amount payable for sale bonus awards. The Executive Officers are eligible to receive an aggregate of 90% of the award pool. The amounts indicated for 2000 were paid under the Company's Annual Incentive Plan. (2) In connection with the adoption of the Plan in April 2000, the Board of Directors authorized full vesting of all restricted stock. At December 28, 2001, Mr. Cobb held 80,500 shares, which had been awarded as restricted stock, with an aggregate value (after the $14 per share of liquidating distributions) of $78,085; Mr. Snyder held 30,300 shares valued at $29,391 and Mr. Hafer held 30,300 shares valued at $29,391. (3) In July 2000, all outstanding stock options were fully vested. In August 2000, all options were converted to Limited Stock Appreciation Rights (LSAR) entitling the holder to receive cash payments 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. At December 28, 2001, Mr. Cobb, Mr. Hafer and Mr. Snyder held 252,000, 78,700 and 84,000 LSARs respectively. (4) Payouts under the Long-Term Incentive Plans (LTIP) during 2001 consisted of liquidating distributions on LSARs. Payouts under the LTIP during 2000 include the following: Mr. Cobb Mr. Hafer Mr. Snyder -------- --------- ---------- Restricted stock vesting $777,328 $292,584 $292,584 Deferred dividends on restricted stock 24,950 8,750 8,750 Benefit equalization plan 479,443 382,957 382,957 Liquidating distribution on LSARs 137,500 46,750 55,000 --------- ------- ------- $1,419,221 $731,041 $739,291 ========= ======= ======= (5) Includes: (a) for Mr. Cobb, Mr. Snyder, and Mr. Hafer, non-compete payments of $560,338, $312,904 and $306,024, respectively; (b) for Mr. Cobb, severance of $177,350; (c) for Mr. Snyder, and Mr. Hafer, Company contributions of $11,900 to each of their accounts under the Company's Retirement Savings Plan. (6) Includes: (a) for Mr. Cobb, Mr. Snyder, and Mr. Hafer, non-compete payments of $858,462, $47,231 and $46,192, respectively; (b) for Mr. Cobb, Mr. Snyder, and Mr. Hafer, Company contributions of $11,900 to each of their accounts under the Company's Retirement Savings Plan and $1,275 to each of their accounts in the Company's Stock Purchase Program; (c) for Mr. Cobb, Mr. Snyder, and Mr. Hafer, taxable expense reimbursements of $11,250, $8,333 and $8,333, respectively. Stock Options No stock options were granted to Executive Officers during 2001. Aggregate Option Exercises and Year-End Values No stock options were exercised by Executive Officers during 2001. In August 2000, all outstanding stock options were converted to LSARs (see Note 3 to Summary Compensation Table). Compensation Committee Interlocks There were no Executive Development Committee interlocks in 2001. Employment Contracts and Termination of Employment and Change in Control Arrangements Effective January 1, 2000, the Executive Officers entered into individual employment agreements with the Company. Mr. Cobb serves as president and chief executive at an initial base salary of $390,000 per year. Mr. Hafer serves as senior vice president, general counsel and secretary at an initial base salary of $215,000 per year. Mr. Snyder serves as senior vice president and chief financial officer at an initial base salary of $220,000 per year. In addition, each of Messrs. Hafer, Snyder and Cobb are eligible to receive target annual incentive compensation equal to 35%, 35% and 75%, respectively, of his base salary, with the maximum annual incentive compensation to be equal to 70%, 70% and 150%, respectively, of his base salary. The initial term of each Executive Officer's employment agreement is two years and is automatically extended for successive one-year periods, beginning on January 1, 2002, and each January 1 thereafter, unless the Company terminates the agreement by written notice to the executive at least 90 days beforehand, or there is a change of control of the Company, in which case the term is automatically extended for two years beginning on the date of the change in control. A change in control is defined in the employment agreements to include a sale of substantially all of the Company's assets, which occurred by virtue of the sale of the Company's subsidiaries, or approval of the dissolution and the plan of liquidation, which occurred in July 2000. Within two years after a change in control, if the Company terminates any of the three executives without cause, other than due to death or disability, or the executive terminates his employment for good reason, the Company will provide him with: . cash lump sum payment of: - any unpaid base salary through his termination date; - for Mr. Cobb only, as severance payment, an amount equal to the sum of his base salary plus his target annual bonus for the year of termination; . as a non-compete payment, an amount equal to two times his base salary plus his target annual bonus, each for the year of termination, payable in twenty-four equal monthly installments starting as soon as practicable after his termination date; . continuing benefits under the Company's welfare benefit plans and programs for two years following termination, plus an additional year for Mr. Cobb; . outplacement services for twelve months, not to exceed 15% of his base salary; and . any other compensation or benefits owed under his employee agreement or any of the Company's plans or programs, including for Mr. Hafer, a benefit equalization plan equal to the benefit that would be payable to Mr. Snyder if his employment were terminated at such time. The employment agreements also provide that, if any payment(s) the Company makes to an executive, whether under his employment agreement or otherwise, cause that executive to incur an excise tax under Section 4999 of the Internal Revenue Code (relating to parachute payments made in connection with a change in control), the Company will make an additional tax "gross- up" payment to him such that, after the payment of all taxes due with respect to both the initial payments(s) and the tax "gross-up" payment (including any related penalties or interest), the executive receives a net payment equal to the amount he would have received had the excise tax under Section 4999 of the Internal Revenue Code not applied. Each executive originally agreed in his employment agreement not to compete with the Company for one year after his termination date in any geographic area where the Company's businesses are operated. Additionally, each executive has agreed not to solicit the Company's employees for one year after his termination date and to maintain the confidentiality of the Company's information. Effective as of June 1, 2000, the employment agreements were amended, with the consent of each of the three executives. The amendments extend the promises not to compete and not to solicit employees to two years following termination of the executive's employment and expand them to prohibit competition with, and solicitation of employees of, the Company and the businesses of the Company's subsidiaries, whether or not such subsidiaries continue to be subsidiaries of the Company. Mr. Cobb's employment was terminated September 30, 2000 and Mr. Hafer's and Mr. Snyder's employment was terminated October 31, 2000. Mr. Hafer and Mr. Snyder have been re-engaged in their former positions at revised compensation levels to oversee the liquidation and dissolution. In 1989, the Board of Directors adopted a Benefit Equalization Plan which provides supplemental retirement income to several retired officers of the Company and its subsidiaries. In 1997, the Board added Messrs. Cobb, Snyder and Hafer to the Plan. Payments under the Plan will be made to those three Executive Officers only to the extent that income from Social Security, the Company-paid portions of Company retirement plans, and the value of any restricted stock which has vested by the passage of time do not equal 50% of an individual's average annual salary for the three highest paid years. The plan is unfunded and terminates for a participant upon termination of employment for any reason other than retirement, death or disability. However, if a participant is terminated for any reason within three years following a change in control, (as defined in the plan) then he will be entitled to receive a lump sum payment, in lieu of any other benefits under the plan, equal to the actuarial present value of the payment to which he would have otherwise become entitled had he retired upon the date of such termination. That lump sum payment will not be reduced to reflect its commencement prior to the participant's normal retirement date under the plan (age 65). Pursuant to Mr. Hafer's employment agreement with the Company, upon termination of his employment with the Company for any reason following a change in control, Mr. Hafer will be entitled to a benefit under the plan equal to the benefit that would be payable to Mr. Snyder under the plan if he were terminated at the time of Mr. Hafer's termination. Following the change in control and termination of these executives, Mr. Cobb, Mr. Hafer and Mr. Snyder were paid $479,443, $382,957 and $382,957, respectively, under this plan in 2000. In December 1999, the Board of Directors adopted the Special Incentive Plan in order to provide incentives for the Company's executives who are in positions to contribute materially to the successful sale of the Company's business. The plan was amended on May 16, 2000 in order to qualify for an exemption from the limitations of Section 162(m) of the Internal Revenue Code and was approved by the stockholders on July 21, 2000. The Executive Officers are eligible to receive sale bonus awards based on the aggregate net proceeds the Company receives from sales of its subsidiaries, less certain indebtedness and other liabilities. The final amount of the sale bonus awards is uncertain, pending receipt of amounts held in escrow and collectible under promissory notes and the determination of the cost of all obligations during the period of dissolution. During 2001, Mr. Cobb, Mr. Snyder and Mr. Hafer received payments of $918,000, $573,750 and $573,750, respectively, under the Plan. As of December 28, 2001, the Company has accrued $200,000 as the estimated remaining amount payable for sale bonus awards. The Executive Officers are eligible to receive an aggregate of 90% of the award pool. Director Compensation Each Board member, other than officers of the Company, receives an annual retainer of $18,000; committee chairmen receive an additional $5,000. Each such director also receives $1,000 for each committee or Board meeting attended. In 1996 the Board adopted, and the stockholders approved, the Directors' Stock Option Plan. Under the terms of that plan, each non-employee Board member may elect to receive stock options in lieu of all or a specified portion of his annual retainer to be earned during that year. In July 2000, all outstanding options were fully vested and the options were exercised prior to the Company filing its certificate of dissolution. ITEM 12. BENEFICIAL OWNERSHIP OF EQUITY SECURITIES BY CERTAIN PERSONS As of February 15, 2002, the number and percentage of equity securities of the Company beneficially owned by (i) each of the directors, (ii) each Executive Officer named in the Summary Compensation Table, (iii) all Executive Officers and directors of the Company as a group and (iv) all holders of more than five percent (5%) of the Class B common stock are set forth in the following table: Class B Percentage Class A Percentage Individuals Common Stock of Class(1) Common Stock Of Class(1) ----------- ------------ ----------- ------------ ----------- J. W. Boyer, Jr. . . . . . 810 * % 14,400 * T. S. Cobb . . . . . . . . 128,001 46.6 4,455 * D. E. Foster . . . . . . . 4,836 1.8 4,430 * T. F. Hafer . . . . . . . . 40,551(2) 14.8 --- --- R. E. LaBlanc . . . . . . . --- --- --- --- D. E. Lyons . . . . . . . . 4,238 1.5 13,775 * P. H. Snyder . . . . . . . 57,239 20.8 --- --- D. F. Strigl . . . . . . . 3,732 1.4 8,860 * D. K. Wilson, Jr. . . . . . 2,585 * 17,975 * All Executive Officers, directors as a group (nine persons) 241,992(2) 88.1 63,895 1.1 (1) Asterisks indicate beneficial ownership of less than 1% of the outstanding shares of the class. (2) Includes shares for Mr. Hafer from contributions to the Payroll Stock Ownership portion of the Retirement Savings Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There were no transactions with management or other related parties during 2001. 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 statements of net assets in liquidation (liquidation basis) as of December 28, 2001 and December 29, 2000, the statements of changes in net assets in liquidation (liquidation basis) for the year 2001 and the nine months ended December 29, 2000, and the consolidated statements of operations, stockholders' equity and cash flows (going-concern basis) for the three months ended March 31, 2000 and year 1999 of Salient 3 Communications, Inc. and its subsidiaries. (b) The Company did not file any Form 8-K during the fourth quarter of 2001. (c) Exhibits. 2 Plan of Dissolution and Liquidation approved by the stockholders on July 21, 2000. Incorporated by reference to Annex F to the Proxy Statement for the Annual Meeting of Stockholders held July 21, 2000. 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 Company 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 Company on Form 10-Q for the period ended July 4, 1997 (File No. 0-12588). 10.1 Stock Purchase Agreement dated as of June 6, 2000 between Salient 3 Communications, Inc. and Hubbell Incorporated. Incorporated by reference to Annex A to the Proxy Statement for the Annual Meeting of Stockholders held July 21, 2000. 10.2 Stock Purchase Agreement dated as of May 11, 2000 between Agilent Technologies, Inc. and Salient 3 Communications, Inc. Incorporated by reference to Annex C to the Proxy Statement for the Annual Meeting of Stockholders held July 21, 2000. 10.3 Escrow Agreement dated as of July 25, 2000 between Chase Manhattan Bank and Trust Company, NA, Agilent Technologies, Inc. and Salient 3 Communications, Inc. Incorporated by reference to Annex D to the Proxy Statement for the Annual Meeting of Stockholders held July 21, 2000. The following Exhibits 10.4 through 10.7 are compensatory plans or arrangements required to be filed as exhibits to this Annual Report on Form 10-K pursuant to Item 14(c): 10.4 Salient 3 Communications, Inc. Employment Agreement with Timothy S. Cobb, effective January 1, 2000. Incorporated by reference to Exhibit 10.1 of the Quarterly Report of the Company on Form 10-Q for the fiscal period ended June 30, 2000 (File No. 0-12588). 10.5 Salient 3 Communications, Inc. Employment Agreement with Paul H. Snyder, effective January 1, 2000. Incorporated by reference to Exhibit 10.2 of the Quarterly Report of the Company on Form 10-Q for the fiscal period ended June 30, 2000 (File No. 0-12588). 10.6 Salient 3 Communications, Inc. Employment Agreement with Thomas F. Hafer, effective January 1, 2000. Incorporated by reference to Exhibit 10.3 of the Quarterly Report of the Company on Form 10-Q for the fiscal period ended June 30, 2000 (File No. 0-12588). 10.7 Salient 3 Communications, Inc. Special Incentive Plan, effective December 7, 1999. Incorporated by reference to Annex I to the Proxy Statement for the Annual Meeting of Stockholders held July 21, 2000. 21 The Company had no subsidiaries at the close of business on December 28, 2001. All previously owned subsidiaries were sold on or before that date. 99.1 Salient 3 Communications, Inc. letter to Securities and Exchange Commission regarding audit assurance by Arthur Andersen LLP. 99.2 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, 2001. (To be filed by amendment.) (d) Financial Statement Schedule II, Valuation and Qualifying Accounts and Reserves is set forth below. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To 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 March 15, 2002. 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 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 March 15, 2002 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the three months ended March 31, 2000 and the year 1999 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 --------- ------------------ ---------- --------- ----------- Three months ended March 31, 2000: Allowance for doubtful accounts $1,556 $ 462 $ 57(A)$ 3 (B) $1,964 ===== ===== ===== ===== ===== Estimated liability for contract losses $1,756 $ - $ - $ - $1,756 ===== ===== ===== ===== ===== Inventory reserves $1,760 $ 249 $ 64 $ (11) (B) $1,934 ===== ===== ===== ===== ===== Restructuring reserves $ 116 $ - $ 116 $ - $ - ===== ===== ===== ===== ===== 1999: Allowance for doubtful accounts $1,711 $ 251 $ 585(A)$ 42 (D) $1,556 ===== ===== ===== 137 (B) ===== ===== Estimated liability for contract losses $1,756 $ - $ - $ - $1,756 ===== ===== ===== ===== ===== Inventory reserves $3,855 $ 547 $ 2,832 $ 201 (C) $1,760 ===== ===== ===== (11)(B) ===== ===== Restructuring reserves $1,454 $ - $ 1,338 $ - $ 116 ===== ===== ===== ===== ===== (A) Uncollectible accounts written off. (B) Reclassification of reserves. (C) Acquisition of Irmel. (D) Acquisition of ComOpt.

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 25th day of March, 2002. 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 Company 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 25, 2002 ------------------ T. S. Cobb Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/P. H. Snyder and Director March 25, 2002 ------------------ P. H. Snyder /s/J. W. Boyer, Jr. Director March 25, 2002 ------------------- J. W. Boyer, Jr. /s/D. E. Lyons Director March 25, 2002 ------------------- D. E. Lyons /s/D. K. Wilson, Jr. Director March 25, 2002 -------------------- D. K. Wilson, Jr. /s/R. E. LaBlanc Director March 25, 2002 ------------------- R. E. LaBlanc /s/D. E. Foster Director March 25, 2002 ------------------ D. E. Foster /s/D. F. Strigl Director March 25, 2002 ------------------ D. F. Strigl EXHIBIT 99.1 March 25, 2002 Securities and Exchange Commission 450 5th Street, NW Washington, DC 20549 Ladies and Gentlemen: Pursuant to Securities and Exchange Commission Release Nos. 33-8070, 34- 45590, 35-27503, 39-2395, IA-2018, IC-25464, FR-62, and File No. S7-03-02, this letter is to confirm that Salient 3 Communications, Inc. has received assurance from its independent public accountants, Arthur Andersen LLP ("Arthur Andersen"), that Arthur Andersen's audit of our financial statements as of December 28, 2001 and for the year then ended (the "Audit") was subject to Arthur Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Arthur Andersen personnel working on the Audit, availability of national office consultation, and availability of personnel at foreign affiliates of Arthur Andersen to conduct the relevant portions of the Audit. P.H. Snyder Senior Vice President and Chief Financial Officer

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