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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO______
COMMISSION FILE NUMBER:0-9160
INTEK DIVERSIFIED CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2450145
(STATE OF INCORPORATION) I.R.S. EMPLOYER
IDENTIFICATION NUMBER
214 CARNEGIE CENTER, SUITE 304 08549-6237
PRINCETON, NEW JERSEY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (609) 419-1222
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
(Title of Each 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 twelve months, 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 (229.405 of this chapter) 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. [ ]
As of December 31, 1997, the aggregate market value of voting stock held by
non-affiliates was approximately $17,116,747. The number of shares outstanding
of the Registrant's Common Stock was 41,973,946 as of December 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock trades on The Nasdaq Small Cap Market tier of The
Nasdaq Stock Market ("Nasdaq") under the symbol "IDCC." The following table
sets forth the high and low trade price as reported by Nasdaq for each
quarter period indicated.
TRADE PRICE
------------------
HIGH LOW
---- ---
Fiscal 1996
December 31, 1995 $8-5/8 $5-7/8
March 31, 1996 8-3/4 4-7/8
June 30, 1996 9-3/8 6
September 30, 1996 6-7/8 4
Fiscal 1997
December 31, 1996 $5-1/5 $4-1/2
March 31, 1997 5-1/2 2-1/2
June 30, 1997 3-1/8 1-3/4
September 30, 1997 2-1/8 1-5/8
The number of common stockholders of record was approximately 550 on
December 31, 1997. The last reported trade price for the Common Stock by
Nasdaq on December 31, 1997 was $1.531.
The Company has never paid a cash dividend and has no present intention
to pay any cash dividends on the Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
On August 15, 1997, under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), the Company issued 787,921 shares of Common
Stock to Ventel, Inc. as partial consideration for the purchase by the
Company of certain outstanding loans made by Ventel, Inc. to Pagers Plus Corp
and American Digital Corporation ("ADC") for the purpose of constructing 220
MHz systems, security agreements, and the rights related to the collateral
for such security agreements.
On August 27, 1997, under Section 4(2) of the Securities Act, the
Company issued 300,000 shares of Common Stock to Robert J. Shiver, Chairman
and Chief Executive Officer of Intek, pursuant to his employment agreement,
and in partial consideration of his services as an officer of Intek.
On August 31, 1997, under Section 4(2) of the Securities Act, the
Company issued 418,381 shares of Common Stock to ADC as partial consideration
for the acquisition of certain equipment from ADC and certain 220 MHz FCC
licenses.
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ITEM 6. SELECTED FINANCIAL DATA
The following data is derived from the Company's audited financial and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto appearing elsewhere herein.
YEAR ENDED SEPTEMBER 30,
(THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1996 1995
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Total Revenues (1) $42,284 $23,899 $32,601
Total Costs and Expenses 68,222 34,317 33,997
Operating Loss (25,938) (10,418) (1,396)
Net Loss (26,999) (9,089) (1,171)
Loss applicable to Common Shareholders $(27,999) $(9,089) $(1,171)
Net Loss Per Share applicable to Common
Shareholders $(0.74) $(0.36) $(0.05)
Weighted Average Number of
Shares Outstanding 37,885,371 25,000,000 25,000,000
BALANCE SHEET DATA:
Total Assets $112,565 $50,253 $37,463
Working Capital 21,289 (5,268) 3,538
Long Term Debt 45,136 32,837 23,187
Shareholders' Equity (Deficit) $54,289 $(21,289) $(12,949)
(1) See Note 2a "Summary of Significant Accounting Policies -- Principles of
Consolidation" in Consolidated Financial Statements and Notes thereto
appearing elsewhere herein.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
those discussed herein. Factors that might cause such a difference include, but
are not limited to, those discussed under the caption "Business-Forward-Looking
Statements" and "Business - Risk Factors". The following discussion should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere herein. Historical results of operations are
not necessarily indicative of results for any future period. All material
intercompany transactions have been eliminated in the results presented herein.
OVERVIEW
The Company has devoted, and expects to continue to devote, substantial
financial and management resources to the development of the Roamer One Network
utilizing the Company's proprietary LM Technology. Additionally, the Company is
also developing new products utilizing LM Technology for other frequency bands
with a focus on the world-wide need for spectrum efficiency. The Company,
through its various subsidiaries, designs, develops, manufactures and
distributes LMR products including those utilizing LM Technology.
The Company presently has in inventory a substantial number of completed
220 MHz base stations and 220 MHz radios, as well as components for the
manufacture of additional base stations and radios. This inventory is
intended for sale to third parties and for utilization on the Roamer One
Network. The Company has recently commenced the marketing of the Roamer One
Network and intends to continue to expand that network over the next several
years. The construction and expansion of the Roamer One Network, as well as
equipment sales to third parties has been, and may continue to be, impacted
by factors such as the Phase II Licensing auctions by the FCC of additional
220 MHz licenses. The FCC announced a commencement date of May 19, 1998 for
the Phase II Licensing auction. A delay in the auction would significantly
hinder the Company's ability to reduce these inventory levels, especially
through third party sales in the near term.
The Company expects to incur substantial operating losses and have a
negative cash flow from operations for approximately the next two years. This
mainly results from operating, sales, marketing and general and
administrative expenses related to the roll-out of the Roamer One Network as
well as the Company's continuing investment in research and development
related to LM Technology and products.
RESULTS OF OPERATIONS
As discussed more fully in Note 1 "Business Acquisitions and Significant
Risks" to the Consolidated Financial Statements and Notes thereto appearing
elsewhere herein, results of operations for the years ended September 30,
1997, 1996 and 1995 include Radiocoms for the entire three year periods but,
Roamer One, MUSA and corporate are only included for the ten months ended
September 30, 1997.
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The following table sets forth, by the Company's various lines of
business for fiscal 1997, the percentage to total revenue represented by
certain Consolidated Statements of Operations data. Line of business
information is not available for fiscal 1996 and 1995.
1997
----
Revenues:
Communications Services 2%
Equipment Distribution 68%
Technology -
Manufacturing 30%
---
Consolidated 100%
----
Cost of Goods and Services Provided:
Communications Services 4%
Equipment Distribution 49%
Technology -
Manufacturing 40%
---
Consolidated 93%
----
Other Operating Expenses:
Communications Services 7%
Equipment Distribution 16%
Technology 11%
Manufacturing 15%
Corporate 8%
--
Consolidated 57%
---
Operating loss, before depreciation and
amortization:
Communications Services (9%)
Equipment Distribution 3%
Technology (11%)
Manufacturing (25%)
Corporate (8%)
----
Consolidated (50%)
Depreciation and Amortization 11%
---
Operating Loss (61%)
-----
FISCAL 1997 COMPARED TO FISCAL 1996 (DOLLAR AMOUNTS IN THOUSANDS)
REVENUES
U.K. OPERATIONS
With respect to the Company's U.K. communication service, manufacturing,
distribution and technology segments, a meaningful breakdown of other operating
expenses prior to fiscal 1997 is not available. During fiscal 1997 those units
had operating results of $445, ($10,661), $424 and ($4,721) respectively for an
aggregate operating loss of ($14,513) compared to ($8,985) in fiscal 1996.
COMMUNICATIONS SERVICES
The Company redirected its direct marketing campaign for the Roamer One
Network late in fiscal 1997 from a national campaign to a focused specific
geographic campaign beginning with targeted businesses in four wide-area
geographic markets. At September 30, 1997, Roamer One had approximately
1,000 subscribers compared to less than 100 at June 30, 1997 and at December
30, 1997, approximately 2,000 subscribers. Subscriber revenues for the ten
months ended September 30, 1997 were $34.
Relayfone at September 30, 1997 had approximately 1,800 subscribers, a
slight decrease in the number of subscribers at September 30, 1996. However,
revenues were down by approximately $186 (21%) because in fiscal 1997 the
average monthly subscriber count was less than in 1996.
EQUIPMENT DISTRIBUTION
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Sales by the Company's U.S. equipment distribution business for the ten
months ended September 30, 1997 were $16,676. MUSA sales for the current fiscal
year were positively impacted from the filling of orders that had been
previously backordered by the prior owner because of working capital
limitations. MUSA sales, however, were negatively impacted because of shipping
delays of new products from MUSA's major supplier. The Company's sales of LM
related products to third parties, mostly base stations, were $1,162 in fiscal
1997.
Radiocoms for fiscal 1997 had revenues from equipment distribution and
related services of $12,313, a 66% increase from that reported in fiscal 1996.
The major component of this increase results from an equipment supply contract
the Company obtained from the U.K. Ministry of Defence.
TECHNOLOGY
Technology license fees were $1,961 for the year ended September 30,
1996 and no such license fees were received in fiscal 1997 due to the E.F.
Johnson ("EFJ") transaction (see Note 3 "Summary of Non-Cash Activities" to
Consolidated Financial Statements and Notes thereto appearing elsewhere
herein).
MANUFACTURING
U.K. contract manufacturing revenues were $12,544 in fiscal 1997, an 8%
decline from those reported in the prior fiscal year, resulting from a decline
in contracts from Securicor affiliates. Additionally, during fiscal 1997,
significant portions of Radiocoms' sales were made to Roamer One and MUSA. These
intercompany sales and related costs were eliminated in the consolidated
financial statements of the Company for 1997 although similar sales were
included in fiscal 1996 Radiocoms sales. In fiscal 1997, the Company received
revenues of $5.3 million from contract manufacturing agreements with affiliates
of Securicor.
At September 30, 1997, the Company had a four month backlog for contract
manufacturing, excluding purchase orders from MUSA.
COST OF GOODS AND SERVICES PROVIDED
COMMUNICATIONS SERVICES
Cost of services includes site and certain technical support expenses, net
of reimbursement received from the owners of licenses managed by the Company.
Site expenses are primarily tower lease, telephone, and insurance. Technical
support includes consulting fees, travel and equipment rental required for
optimizing and supporting the network of base stations.
For the ten months ended September 30, 1997, Roamer One's site and
technical support expenses were $1,467. A significant portion of these expenses
are related to operation and maintenance of the various sites that the Company
intends to begin loading in the future.
Relayfone's cost of service for the year ended September 30, 1997 remained
relatively constant with that reported in the prior fiscal year.
EQUIPMENT DISTRIBUTION
For the ten months ended September 30, 1997, the Company's U.S. equipment
business had a cost of sales of $11,791(71% of related sales). Cost of sales as
a percentage of related sales was abnormally high due to the cost of certain LM
base stations sold being in excess of the related revenue realized.
MANUFACTURING
Cost of sales consists principally of costs of raw materials, labor and
factory associated overhead. The percentage of cost of sales to net sales
increased 31% for the year ended September 30, 1997 to 135% of related
revenue from 103% for the year ended September 30, 1996. The increase in the
percentage of cost of sales to sales in fiscal 1997 was largely due to a
one-time write-off of inventory costs (including obsolete and excess
inventory) and to costs (including research and development costs) related to
certain manufacturing contracts, which costs are not anticipated to be
recovered in the future through revenues.
OTHER OPERATING EXPENSES
COMMUNICATIONS SERVICES
Roamer One sales and marketing expenses are primarily salaries, travel and
the preparation of promotional material. The selling expenses for the ten months
ended September 30, 1997 were $1,152. Sales and marketing
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expenses are increasing monthly due to the creation of a sales organization in
connection with the loading of the Roamer One Network.
Roamer One general and administrative expenses generally consist of
salaries, consultants, office rent and insurance to support the management of
the Roamer One Network. General and administrative expenses for the ten months
ended September 30, 1997 were $1,876.
EQUIPMENT DISTRIBUTION
MUSA selling expenses are primarily travel, advertising and promotion,
trade shows and the maintenance of a sourcing office in Asia. Selling expenses
for the ten months ended September 30, 1997 were $1,036 (6% of related sales).
General and administrative expenses are salaries, facilities costs, data
processing charges and insurance. General administrative expenses for the ten
months ended September 30, 1997 were $2,992 (18% of related sales.) The Company
anticipates that selling and general and administrative expenses, as a
percentage of sales, will increase in fiscal 1998 as a result of its LM product
sales and support efforts.
In the U.K., selling and general and administrative expenses related to the
Company's equipment distribution and related business aggregated $2,763 (22% of
related sales).
MANUFACTURING
Selling expenses are primarily travel, advertising and promotion, and trade
shows. The selling expenses for the year ended September 30, 1997 were $1,025
(8% of sales). Included in general and administrative expenses are salaries,
facilities, data processing and insurance costs. General and administrative
expenses for the year ended September 30, 1997 were $5,251 (42% of related
sales).
TECHNOLOGY
Research and development expenses, excluding allocated support costs,
increased 4% to $3,266 for the year ended September 30, 1997 from $3,154 in the
prior fiscal year. Research and development expenses in the year ended September
30, 1996 related primarily to LM mobile radio products designed for the 220 MHz
market, with expenses during the year ended September 30, 1997 related primarily
to development of a hand portable radio for the same market.
CORPORATE
Corporate expenses include salaries, consulting and management fees, legal
and audit costs. General and administrative expenses for the ten months ended
September 30, 1997 were $3,341. Compensation expense represents the major
component of this item.
OPERATING LOSS, BEFORE DEPRECIATION AND AMORTIZATION
COMMUNICATIONS SERVICES
Roamer One's loss for the ten months ended September 30, 1997 was $4,461.
This loss results from current subscriber count not being sufficient to offset
the cost of the Roamer One Network's infrastructure and subscriber acquisition
cost.
EQUIPMENT DISTRIBUTION
For the ten months ended September 30, 1997, the operating profit was $857
for the Company's U.S. equipment distribution business or 5% of related sales.
DEPRECIATION AND AMORTIZATION
Depreciation of fixed assets and amortization of the intangible assets
related to the Radiocoms Acquisition and Midland Transaction were $1,828 and
$2,652, respectively, for the ten months ended September 30, 1997. The 21%
increase in depreciation expense for fiscal 1997 from that reported in the prior
fiscal year results from the inclusion of Roamer One and MUSA plant and
equipment in the fiscal 1997 calculation.
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OTHER INCOME (EXPENSE)
INTEREST
Interest expense for the year ended September 30, 1997 was $2,962 which
was offset by interest income of $68 for net interest expense of $2,894
compared to $1,715 in fiscal 1996. Of the interest expense, $883 related to
borrowings from third parties, $1,364 related to borrowings from Securicor
(of which $858 was added to principal and the balance is accrued) and $715
was imputed interest on convertible debt and warrants resulting from the
Company's capital raising efforts.
GAIN ON SALE OF LONG-TERM ASSETS
During the month of December 1996, the Company sold real property
relating to a discontinued operation for a gain of $766. Offsetting this is
a loss on the writedown of fixed assets in the amount of $442.
OTHER
Included in other income is royalty income of $33, gain on sale of
securities of $176 and foreign exchange gains of $142 for a total of $351.
INCOME TAX BENEFIT
Of the reported income tax benefit, $530 results from Securicor reimbursing
the Company for losses incurred by Radiocoms prior to its acquisition by the
Company. An additional benefit of $628 resulted from the reversal of a deferred
tax liability created in fiscal 1995 for a total benefit of $1,158.
NET LOSS
The consolidated net loss after taxes for the year ended September 30, 1997
was $26,999 including Radiocoms for the entire year and Roamer One, MUSA and
corporate for the ten months ended September 30, 1997. For the year ended
September 30, 1996, the net loss (attributable only to Radiocoms) was $9,089.
PREFERRED DIVIDENDS
Pursuant to the terms of the Radiocoms Acquisition, $20 million of
intercompany balances between Radiocoms and Securicor were converted into 20,000
shares of Radiocoms preferred stock with a par value of $1 per share. The
intercompany balance in excess of the redemption value of the Radiocoms
preferred shares was contributed to the capital account of Radiocoms. The
preferred shares must be redeemed on June 30, 2006 and bear a dividend rate of
6%. Dividends of $1 million relating to 1997 shall be paid through the issuance
of preferred shares.
LOSS APPLICABLE TO COMMON SHAREHOLDERS
After deducting unpaid dividends on preferred stock of Radiocoms held by
Securicor related to the Radiocoms Acquisition, the loss applicable to common
shareholders for the year ended September 30, 1997 was $27,999.
FISCAL 1996 COMPARED TO FISCAL 1995 (DOLLAR AMOUNTS IN THOUSANDS)
REVENUES
Radiocoms' reported revenues in the year ended September 30, 1996 declined
by 27% ($8,702) to $23,899 from that reported in the prior fiscal year.
The major reason for the decline was that in fiscal 1995, Radiocoms had
significant sales of LM base stations for the U.S. market in connection with the
planned construction of the Roamer One Network whereas in fiscal 1996 LM sales
were limited mainly to mobile radios.
The decrease in LM related revenue was partially offset by a $1,081
increase in Radiocoms contract revenue business in fiscal 1996 from that
reported in the prior fiscal year. This increase results primarily from an
increase of more than 330% ($5,677) in sales to a Securicor affiliate, and sales
resulting from increased marketing efforts to unaffiliated companies.
Technology license fees in connection with Radiocoms sales of technology
were $1,961 and $2,036 respectively for fiscal 1996 and 1995.
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COST OF GOODS AND SERVICES PROVIDED
In fiscal 1996, cost of goods and services provided increased to 84% of
revenue from 60% in fiscal 1995. This increase was a result of higher component
costs in the manufacture of LM radios versus base stations and Radiocoms
incurring approximately $2,150 in start-up costs associated with new products.
OTHER OPERATING EXPENSES
Sales and marketing expenses declined $460 (3%) in fiscal 1996 from
those reported in fiscal 1995 because of reorganization efforts and other
economies.
General and administrative expenses on a dollar basis remained
relatively constant between fiscal 1996 and 1995 although as a percentage of
revenue they increased 9% because staffing and expense levels remained
constant in anticipation of an increased demand for Radiocoms in contract
manufacturing services and LM product sales.
Research and development expenses increased $323 (11%) as a result of
increase development efforts related primarily to a LM hand portable mobile
radio.
INTEREST EXPENSE
Interest expense increased $1,203 (235%) primarily resulting from a
significant increase in the debt due to Securicor to fund increased
receivables, inventories, LM development cost and other operating expenses.
INCOME TAX BENEFIT
Radiocoms received a tax benefit of $3,044 and $737, respectively, for
fiscal 1996 and 1995. Tax laws in the U.K. permit the exchange of taxable income
and losses between companies within a group, as defined in the statute. Taxable
members of the Securicor group pay the loss making companies at the corporate
rate applied to the losses. Radiocoms does not receive group tax benefits for
operating results subsequent to the Radiocoms Acquisition.
NET LOSS
The reported net loss in fiscal 1996 increased $7,818 over that reported in
the prior fiscal year for the reasons stated above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Radiocoms Acquisition, the Company's primary historical
sources of cash were selling shares of Common Stock and other securities,
borrowing against the Company's assets, selling the assets relating to
discontinued operations, and obtaining vendor financing. Subsequent to the
Radiocoms Acquisition, the Company's primary source of cash has been
borrowings from Securicor.
For the year ended September 30, 1997, the Company used $4,239 in cash
for operating activities and $9,226 was spent for capital expenditures.
Through its financing activities, the Company raised approximately $23,523 in
gross proceeds from Securicor. The Company also retired $6,599 in previous
borrowings from unaffiliated third parties.
The Board of Directors of the Company also adopted a share repurchase
plan whereby the officers of the Company are authorized to expend up to $1
million to acquire up to 1% of the outstanding Common Stock. Through
December 31, 1997, the Company had acquired 35,000 shares of Common Stock in
open market transactions.
The Company has invested a significant portion of its capital in the
equipment and licenses necessary to construct the Roamer One Network.
Additionally, the Company has invested significantly in inventory for the 220
MHz market either for sale to third parties or to be used to expand the Roamer
One Network.
In the future, the Company will require capital to link sites into the
Roamer One Network and perform other upgrading functions to the current
Roamer One Network and to fund operating expenses. In addition, the Company
intends to continue to build out the Roamer One Network through the
acquisition of additional licenses through direct purchase of existing
licenses and through participation in the Phase II Licensing auction. The
requirement for future working capital will be driven and highly dependent on
the rate of loading subscribers (with mobile radios) onto the Roamer One
Network and the capital requirements of the Company's distributing,
manufacturing and research and development subsidiaries.
In December 1997, the Company entered into various agreements in connection
with the funding of its
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future operations. MUSA has entered a revolving credit agreement ("Credit
Agreement") with a non-bank lender making $5 million available to MUSA
through December 1999. The Company intends to use borrowings under this
Credit Agreement to fund MUSA's capital requirements thereby making any
available amounts under the December 1997 Facility discussed below available
for Intek's general corporate purposes.
In December 1997, the Company entered into various agreements with
Securicor:
A) A new loan agreement ("December 1997 Facility"), which replaces the
prior agreements, provides the Company the ability to borrow up to
$29.5 million (including the outstanding indebtedness of $25.4
million). The December 1997 Facility bears interest at 11 1/2% per
annum payable at June 30, 2003. Principal payments will be
$500,000 per month for 12 months beginning July 1, 2001, $1 million
per month for 11 months beginning July 1, 2002 with the remaining
balance due and payable on June 30, 2003. The obligations under
the December 1997 Facility may be prepaid by the Company at any
time in $1.65 million increments without penalty. The December
1997 Facility must be repaid upon Securicor ceasing to be the
beneficial owner of more than 50% of the Common Stock as a result
of any transaction except the direct or indirect transfer of the
Common Stock by Securicor and also is subject to mandatory prepayments
at the rate of 50% of the net proceeds of any financing by the
Company in excess of $8 million. Subject to the release of
Securicor from certain letter of credit commitments, at December 31,
1997, the Company had approximately $4 million in availability for
future borrowings under the December 1997 Facility.
B) Securicor has agreed pursuant to the Preferred Stock Purchase
Agreement dated December 29, 1997 ("Preferred Stock Purchase
Agreement") to purchase from the Company (subject to the approval of
the Company's stockholders to authorize "blank check" preferred
stock), approximately $12.4 million of a new series of preferred
stock.
C) Securicor has agreed pursuant to the Termination and Release dated
December 29, 1997 ("Termination and Release") to reimburse the Company
approximately $2.6 million representing the difference between the
Company's carrying value of its investment in EFJ and the proceeds
received upon the ultimate disposition of the investment in EFJ.
Through the funds available under the Credit Agreement, the December
1997 Facility, the Preferred Stock Purchase Agreement and the Termination and
Release, the Company believes it has adequate financial resources for its
fiscal 1998 operating budget. If the Company acquires more licenses for the
Roamer One Network as it currently plans, through cash purchases from other
220 MHz licenses holders and/or through the FCC auction process, additional
funding will be required by the Company in fiscal 1998. The Company is
considering a number of financing alternatives, including strategic partners,
joint ventures, and, if market conditions permit, a financing involving a
private or public placement of its or an affiliate's securities. Management
believes that although it has adequate financing arrangements to meet the
Company's near term cash needs, the Company does need additional financing
but there can be no assurance that the Company will be able to obtain
additional financing on a timely basis or on acceptable terms.
EFFECTS OF INFLATION
The Company was not affected in any material respect by inflation during
fiscal 1997 or 1996.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
Page
(1) The following financial statements are included in
this Annual Report:
Report of Independent Public Accountants for the
year ended September 30, 1997 F-1
Report of Independent Auditors for the years ended
September 30, 1996 and 1995 F-2
Consolidated Balance Sheets at September 30, 1997
and 1996. F-3, F-4
Consolidated Statements of Operations for the years
ended September 30, 1997, 1996 and 1995. F-5
Consolidated Statements of Shareholders' Equity (Deficit)
for the years Ended September 30, 1997, 1996 and 1995. F-6, F-7
Consolidated Statements of Cash Flows for the years
ended September 30, 1997, 1996 and 1995. F-8, F-9
Notes to Consolidated Financial Statements F-10 to F-29
(B) REPORTS ON FORM 8-K
The Registrant filed one report on Form 8-K during the fourth quarter of
fiscal 1997. The report, filed on September 5, 1997, related to the appointment
of Mr. Robert J. Shiver as Chairman and Chief Executive Officer of the Company.
The report was filed pursuant to Item 5 of Form 8-K.
(C) EXHIBITS
See Index to Exhibits at Page 24 of this Annual Report on Form 10-K for a
list of Exhibits filed with this Annual Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on January 20, 1998.
INTEK DIVERSIFIED CORPORATION
By: /s/ D. Gregg Marston
-------------------------
D. Gregg Marston
Vice President Finance
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Intek Diversified Corporation:
We have audited the accompanying consolidated balance sheet of Intek Diversified
Corporation (a Delaware corporation) and subsidiaries as of September 30, 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for the year then ended, (Post-Reverse Acquisition - See Note 1),
consisting of the statements of operations, shareholders' equity and cash flows
of Securicor Radiocoms Limited (Radiocoms), predecessor corporation in the
continuing business of Intek Diversified Corporation and subsidiaries for the
period from October 1, 1996 through December 2, 1996 (Pre-Reverse Acquisition),
and the statements of operations and cash flows of Intek Diversified Corporation
and subsidiaries for the period from December 3, 1996 through September 30,
1997, (Post-Reverse Acquisition). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intek Diversified Corporation
and subsidiaries, as of September 30, 1997 and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Los Angeles, California
January 2, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors of Securicor Radiocoms Limited
We have audited the accompanying balance sheet of Securicor Radiocoms Limited
(predecessor company to Intek Diversified Corporation), as of September 30, 1996
and the related statements of operations and cash flows for the years ended
September 30, 1995 and 1996. These financial statements are the responsibility
of the Radiocoms' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards
in the United Kingdom which are substantially the same as those used in the
United States of America. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Securicor Radiocoms Limited at
September 30, 1996, and the results of its operations and its cash flows for the
years ended September 30, 1995 and 1996, in conformity with generally accepted
accounting principles used in the United States of America.
/s/ Baker Tilly
--------------------------------
London, England BAKER TILLY
24 January 1997 Chartered Accountants
F-2
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS ONLY AT SEPTEMBER 30, 1996 (PRE-REVERSE ACQUISITION)
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands)
September 30,
-------------------------
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,909 $ 417
Marketable securities 8,148 -
Accounts receivable, net
of allowance for doubtful
accounts of $863 in 1997
and $128 in 1996 6,488 4,074
Inventories 12,289 18,895
Taxation receivable from related parties 779 2,983
Amounts due from related parties 3,922 5,587
Prepaid expenses and
other current assets 894 1,481
---------- ----------
Total current assets 34,429 33,437
---------- ----------
PROPERTY AND EQUIPMENT, NET 21,555 6,639
OTHER ASSETS:
Note receivable 556 -
Investment in E.F. Johnson, at cost - 10,177
Intangible assets, net 48,340 -
Inventory-long term 6,980 -
Other 705 -
---------- ----------
TOTAL ASSETS $ 112,565 $ 50,253
---------- ----------
---------- ----------
The accompanying notes are an integral part of these
consolidated balance sheets
F-3
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS ONLY AT SEPTEMBER 30, 1996 (PRE-REVERSE ACQUISITION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
(Thousands)
September 30,
-------------------------
1997 1996
---------- ----------
CURRENT LIABILITIES:
Bank overdraft $ 120 $ 1,313
Accounts payable 6,110 3,051
Amounts due to related parties 2,005 2,660
Accrued liabilities 3,762 1,373
Deferred income 977 760
Related party notes payable - 29,345
Other 166 203
---------- ----------
Total current liabilities 13,140 38,705
---------- ----------
NOTES PAYABLE - Related Party 24,223 32,837
---------- ----------
CAPITAL LEASE LIABILITY 354 -
---------- ----------
PREFERRED STOCK OF SUBSIDIARY-Mandatorily
Redeemable 20,559 -
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value.
Authorized - 60,000,000 shares at
September 30, 1997 and 25,000,000 at
September 30, 1996
Issued - 42,398,096 at
September 30, 1997 and 25,000,000 at
September 30, 1996 424 250
Capital in excess of par value 106,220 (100)
Treasury stock, at cost - 465,582 shares (770) -
Deficit (50,199) (22,200)
Currency translation adjustment (1,386) 761
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 54,289 (21,289)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 112,565 $ 50,253
---------- ----------
---------- ----------
The accompanying notes are an integral part of these
consolidated balance sheets
F-4
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1994 AND
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Net product sales $ 41,533 $ 22,996 $ 32,601
Service income 751 903 -
---------- ---------- ----------
Total revenues 42,284 23,899 32,601
Costs and expenses:
Cost of goods sold 37,846 19,853 19,426
Cost of services sold 1,739 231 -
Sales and marketing 4,214 1,268 1,728
Research and development 3,266 3,154 2,831
General and administrative 16,677 8,301 8,306
Depreciation and amortization 4,480 1,510 1,706
---------- ---------- ----------
Operating loss (25,938) (10,418) (1,396)
Other income (expense):
Interest (2,894) (1,715) (512)
Gain on sale of long term assets 324 - -
Other 351 - -
---------- ---------- ----------
Loss before income taxes (28,157) (12,133) (1,908)
Income tax benefit 1,158 3,044 737
---------- ---------- ----------
Net loss (26,999) (9,089) (1,171)
Less preferred dividends (1,000) - -
---------- ---------- ----------
Net loss applicable to Common Shareholders $ (27,999) $ (9,089) $ (1,171)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share applicable to Common Shareholders $ (0.74) $ (0.36) $ (0.05)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of
Common shares outstanding 37,885,371 25,000,000 25,000,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated statements
F-5
<PAGE>
INTEK DIVERSIFIED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Thousands, except shares)
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Capital Currency Total
In Trans- Share-
Common Stock Excess Treas- lation holders'
-------------------------- of Par ury Adjust- Equity
Shares Amount Value Stock Deficit ment (Deficit)
------------ ----- ---------- ------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
SEPTEMBER 30, 1994 100,000 $250 $(100) $- $(11,940) $- $(11,790)
Net loss - - - - (1,171) - (1,171)
Currency translation
adjustment - - - - - 12 12
------------ ----- ---------- ------ ---------- ------- ----------
BALANCE
SEPTEMBER 30, 1995 100,000 250 (100) - (13,111) 12 (12,949)
Net loss - - - - (9,089) - (9,089)
Currency translation
adjustment - - - - - 749 749
------------ ----- ---------- ------ ---------- ------- ----------
BALANCE
SEPTEMBER 30, 1996 100,000 250 (100) - (22,200) 761 (21,289)
Eliminate stock
of Radiocoms (100,000) (250) 100 - - - (150)
Purchase Radiocoms
for stock 25,000,000 250 84,982 - - - 85,232
Intek shares
December 3, 1996 14,239,416 142 26,383 (770) (11,025) - 14,730
Intek loss
October 1, 1996 through
December 3, 1996 - - - - (3,407) - (3,407)
Eliminate Intek
historic deficit - - (14,432) - 14,432 - -
Adjust shares for
Midland assets (155,000) (1) (644) - - - (645)
Imputed interest
on warrants - - 652 - - - 652
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued for
loan extension fee 34,000 - 203 - - - 203
Exercise of warrants 1,758,776 18 6,495 - - - 6,513
Write off deferred
financing cost
related to note
converted to stock - - (215) - - - (215)
Shares issued for
interest 14,602 - 60 - - - 60
Shares issued for
equipment purchases 1,206,302 12 2,176 - - - 2,188
Employee stock grant 300,000 3 560 - - - 563
Net loss - - - - (26,999) - (26,999)
Preferred stock dividends
settled through issue of
bonus preferred shares - - - - (1,000) - (1,000)
Currency translation
adjustment - - - - - (2,147) (2,147)
------------ ----- ---------- ------ ---------- ------- ----------
BALANCE
SEPTEMBER 30, 1997 42,398,096 424 106,220 (770) (50,199) (1,386) 54,289
------------ ----- ---------- ------ ---------- ------- ----------
------------ ----- ---------- ------ ---------- ------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated statements
F-7
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1994 AND
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (26,999) $ (9,089) $ (1,171)
---------- ---------- ----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 4,480 1,510 1,706
Increase in fixed asset valuation reserve 855 - -
Loss (gain) on sale of long term assets (324) 29 -
Gain on sale of investments (260) - -
Deferred income taxes (633) - (183)
Non-cash interest and loan extension fees on
convertible debt and warrants 712 - -
Stock compensation to employees 563 - -
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable and amounts due from related parties 1,384 3,477 (7,320)
Inventories 11,376 (2,984) (10,303)
Income taxes receivable from related parties 2,330 - -
Prepaid expenses and other current assets 1,375 67 (755)
Increase (decrease) in:
Accounts payable 2,219 (1,513) 1,851
Amounts due to related parties (1,317) - -
Accrued liabilities (443) (601) 1,146
Accrued liabilities to related parties 342 - -
Deferred income 194 (1,209) 2,015
Other (93) - -
---------- ---------- ----------
Total Adjustments 22,760 (1,224) (11,843)
---------- ---------- ----------
Net cash used in operating activities (4,239) (10,313) (13,014)
---------- ---------- ----------
F-8
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Cash Flows From Investing Activities:
Proceeds from sale of investments 1,853 - -
Expenditures for property, plant & equipment, net (9,226) (1,657) (2,377)
Expenditures for FCC licenses (2,016) - -
Expenditures for other long term assets (6,477) - -
Proceeds from sale of long term assets 2,311 96 56
Notes receivable (428) - -
---------- ---------- ----------
Net cash used in investing activities (13,983) (1,561) (2,321)
---------- ---------- ----------
Cash Flows From Financing Activities:
Net change in bank overdraft (1,252) (731) 130
Capital lease 282 - -
Proceeds from short term debt 71 - -
Proceeds from long term debt 4,000 - -
Proceeds from long term debt-related party 19,452 12,463 15,537
Repayment of long and short term debt (5,347) - -
---------- ---------- ----------
Net cash provided by financing activities 17,206 11,732 15,667
---------- ---------- ----------
Effect of foreign exchange rate changes on cash 936 (42) (1)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (80) (184) 331
Cash and cash equivalents at beginning of year 417 601 270
Cash acquired in reverse acquisition 1,572 - -
---------- ---------- ----------
Cash and cash equivalents at end of year $ 1,909 $ 417 $ 601
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 578 $ 1,715 $ 230
Cash paid for income taxes $ - $ - $ -
Cash received for income taxes
(U.K. group tax relief received from related party) $ 3,117 $ 285 $ 319
Non-cash transactions (see Note 3)
</TABLE>
The accompanying notes are an integral part of these
consolidated statements
F-9
<PAGE>
INTEK DIVERSIFIED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) BUSINESS ACQUISITIONS AND SIGNIFICANT RISKS
BUSINESS ACQUISITIONS
On May 2, 1996, Intek formed Midland USA, Inc. ("MUSA"), a Delaware
corporation and a wholly-owned subsidiary of Intek. Effective August 1, 1996,
MUSA acquired from Midland International Corporation ("MIC"), a wholly-owned
subsidiary of Simmonds Capital Limited ("SCL"), its U.S. land mobile radio
distribution business and certain of its assets (the "Midland Transaction") in
exchange for 2,345,000 shares of the Company's common stock ("Common Stock").
On December 3, 1996, Intek consummated the acquisition (the "Radiocoms
Acquisition") of all the issued and outstanding common stock of Securicor
Radiocoms Limited ("Radiocoms"), a wholly-owned subsidiary of Securicor
Communications Limited ("Securicor"). Radiocoms designs, develops,
manufactures, distributes and installs a range of land mobile radio equipment,
including its own proprietary linear modulation technology ("LM Technology")
equipment. The purchase price for the Radiocoms Acquisition was 25,000,000
shares of Common Stock. The Radiocoms Acquisition, approved by the stockholders
of Intek at a Special Meeting held on December 3, 1996, was consummated on the
same date.
Upon the consummation of the Radiocoms Acquisition, the Company became a
provider of spectrum-efficient wireless communications technology, products
and services. With the exception of certain products distributed by MUSA and
Radiocoms, the communication services and products of the Company utilize LM
Technology. Roamer One, Inc. ("Roamer One"), a Delaware corporation and a
wholly-owned subsidiary of Intek, is a provider of high quality wireless
voice and data communications services in the U.S., operating on the
220-222MHz ("220MHz") frequency and Radiocoms is a manufacturer of the
systems and radios used by among others, the Company's Specialized Mobile
Radio ("SMR") sites. In addition, Radiocoms, through its LMT division, is
involved in the research and development of products and other applications
of LM Technology. As a result of the Radiocoms Acquisition, the Company is
no longer considered to be in the development stage, as was the case in prior
years.
a. The following unaudited proforma income statement information (in
thousands except shares and per share amounts) is presented as though the
Radiocoms Acquisition and the Midland Transaction had occurred on October 1,
1994:
Year Ended September 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues $ 44,475 $ 22,569 $ 65,137
Net loss $ (32,780) $ (20,073) $ (9,794)
Net loss per share $ (0.81) $ (0.53) $ (0.27)
Weighted average shares outstanding 40,381,715 38,172,732 36,570,973
The proforma financial information is presented for informational purposes
only and it is not necessarily indicative of the operating results that would
have occurred had the Radiocoms Acquisition and the Midland Transaction been
consummated as of the above date, nor is it necessarily indicative of future
operating results.
b. As discussed below, the Radiocoms Acquisition has been accounted for
as a reverse acquisition, and the Company's financial statements have been
prepared as if Radiocoms acquired Intek under the purchase method of accounting.
The excess of cost over the fair value of net assets acquired at December 3,
1996 is being amortized over 15 years. The purchase price was determined based
on the fair value of the Common Stock outstanding at the date of the Radiocoms
Acquisition and has been allocated to the underlying Intek assets and
liabilities based on fair values at the date of the Radiocoms Acquisition. A
summary of the purchase price allocation is as follows:
F-10
<PAGE>
(in thousands)
----------
Net working capital $(1,138)
Excess of cost over fair value of
net assets acquired 38,573
Net property, plant & equipment 10,179
Other non-current assets 12,918
Other non-current liabilities (6,054)
----------
Total $54,478
----------
----------
SIGNIFICANT RISKS
The Company's business, financial condition and future prospects are
subject to a number of risks and contingencies. Those that the Company regards
currently as among the most significant are summarized below.
NEED FOR ADDITIONAL CAPITAL
The Company believes that its current available capital is sufficient to
fund its fiscal 1998 operations. However, the current available capital is
not sufficient to allow the Company to acquire more licenses for the Roamer
One Network through cash purchases from other 220 MHz licenses holders or
through the FCC auction process. Additional funding will be required by the
Company in fiscal 1998, if it decides to acquire more licenses.
Subsequent to fiscal 1998, the Company will require additional cash
resources to fund operations. The amount of cash required will depend on, among
other things, the rate of subscriber loading on the Roamer One Network and LM
Technology and product development requirements and costs.
There can be no assurance that additional financing will be available on
reasonable terms or at all. If additional capital is raised though the sale of
additional equity or convertible debt securities, dilution to the Company's
stockholders could occur.
DEPENDENCE ON GOVERNMENTAL REGULATION
Operating the Roamer One Network, maintaining and obtaining site licenses,
and operating procedures are all subject to FCC and other regulatory approval.
FCC and other regulatory approvals are also required in the U.S. for LMR
products, including those utilizing LM Technology.
In most international markets there are similar, and in some instances
more stringent, governmental regulatory overviews regarding wireless
communications services and products including those offered by the Company.
The current and planned operations of the Company can be adversely impacted
by delayed or adverse actions by the various regulatory authorities and it is
impossible to predict, with any certainty, how the Company's operations will be
impacted by the actions of these regulatory authorities.
DEVELOPMENT AND ACCEPTANCE OF LM TECHNOLOGY AND RELATED PRODUCTS
Today, the focus of the Company's operations is on services and products
utilizing LM Technology. The commercial viability of the Roamer One Network is
dependent upon, among other things, the proper function of LM Technology. LM
Technology provides the Roamer One Network with the capability to network
various sites and control subscriber calling traffic. Because of these
capabilities, the Company believes that the Roamer One Network should be able to
load a sufficient number of subscribers to make it commercially viable.
The Company anticipates that many of the same capabilities believed to be
functional in the Roamer One Network will be included in the LMR products it
plans to develop and market utilizing LM Technology. Accordingly, if products
using LM Technology are not commercially accepted or do not have the
capabilities the Company believes they have or can have, the future results of
operations of the Company could be significantly and negatively impacted.
F-11
<PAGE>
Additionally, until products utilizing LM Technology progress through the
commercial development stage, their manufacturing costs may be substantially
higher than competing products and the Company may be forced to subsidize
equipment selling prices, negatively impacting the Company's result of
operations.
ABILITY TO COMPETE
Competition in the sale of wireless communication products and services
is fierce. With the provision of wireless services, given the wide variety
of available services, new subscribers can only be acquired if the Company
has a service needed by its potential subscribers and priced so that it,
along with the cost of the necessary radio equipment, is attractively priced
when compared to competing services. The Company has geared its marketing of
the Roamer One Network to identifiable targeted groups of business users who
historically have used two-way group dispatch systems. Additionally, the
Company's systems are capable of transmitting data that the Company believes
will be a longer-range benefit to its potential subscribers.
Similarly, the Company believes that LM Technology and related products
will offer substantial benefits to other equipment manufacturers or end users
that purchase the Company's technology or products. However, competing
technologies and products are numerous.
Because the Company is in the early rollout stage of the Roamer One
Network and products utilizing LM Technology have only been recently
introduced and/or are still being developed, there is no assurance that the
services provided on the Roamer One Network or the technology and products to
be developed by the Company will be competitive to other services, technology
and products of other wireless communications companies.
SUPPLIER RISK
MUSA purchases a significant portion of its mobile radios and accessories
from a single supplier in Japan. The Company believes that if this foreign
supplier were no longer available, such event would have a severe impact on
Intek's financial position or results of operations. Additionally, significant
fluctuations in the value of the U.S. dollar versus the Japanese Yen could have
a material effect on MUSA's profit margins.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of these consolidated financial statements. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
a. PRINCIPLES OF CONSOLIDATION
Because Securicor acquired more than a 50 percent controlling interest in
Intek through the Radiocoms Acquisition, the Radiocoms Acquisition was treated
as a reverse acquisition for accounting purposes, with Radiocoms considered the
acquiring company, although Intek is the surviving company under corporate law.
Accordingly, the consolidated financial statements for fiscal 1996 and 1995
include only the accounts of Radiocoms and its subsidiaries, all of which are
wholly-owned. Subsequent to the date of the Radiocoms Acquisition (December 3,
1996) the consolidated financial statements also include the accounts of Intek
and its other subsidiaries.
Included in reported results of operations for the years ended September
30, 1996 and 1995 (pre-reverse acquisition), are revenues of $8,984 and $0
respectively from the sales of products and services by Radiocoms to other
current Intek subsidiaries. The related cost of sales was $8,827 and $0 in
the years ended September 30, 1996 and 1995, respectively.
b. USE OF 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
F-12
<PAGE>
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
c. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
d. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include manufacturing labor and overhead. At September 30, 1997, the
Company has $6,980 of completed base stations and components for the
manufacture of additional base stations. These have been classified as long-term
assets since there is no assurance that they will be utilized by the Company, or
sold to third parties, during the fiscal year ending September 30, 1998.
e. PROPERTY AND EQUIPMENT, AT COST
Property and equipment are stated at cost, or in the case of acquired
businesses, at fair market value. The Company's policy is to begin depreciating
site equipment at such time as it begins to generate subscriber revenues.
Normal maintenance and repairs are charged to expense as incurred. Expenditures
which increase the useful lives of assets are capitalized. Gains and losses on
disposal are recognized in the year of the disposition. Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets as follows:
Buildings 11 to 50 years
Site equipment 10 years
Production and test equipment 3 to 10 years
Equipment for rental on operating leases 3 to 5 years
Furniture and fixtures and computers 3 to 10 years
Depreciation expense is shown separately in the accompanying consolidated
financial statements and is not allocated between cost of goods and services
sold and other operating expenses.
f. REVENUE RECOGNITION
With respect to the sale of equipment, including systems and site
equipment, revenue is recognized upon delivery of the equipment or, when
appropriate, upon acceptance of the equipment by the customer. The Company
recognizes subscriber revenue from airtime billings upon provision of the
service. In those instances when subscribers are billed for airtime service
provided from sites managed by the Company, gross billings are included in
service income and distributions to licensees are included in cost of services
sold.
g. INCOME TAXES
The Company and its subsidiaries (except Radiocoms) file consolidated
Federal and combined state income tax returns. The Company accounts for income
taxes in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standard "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires, among other things, the use of the liability method in
computing deferred income taxes.
Radiocoms is a company organized under the laws of England and Wales and
files its tax returns with local U.K. tax agencies. Prior to the Radiocoms
Acquisition, Radiocoms' losses were compensated for by its parent company based
on the effective corporate tax rate.
F-13
<PAGE>
The Company provides for deferred income taxes relating to timing
differences in the recognition of income and expense items (primarily relating
to depreciation, amortization and certain leases) for financial and tax
reporting purposes. Such amounts are measured using current tax laws and
regulations in accordance with the provisions of FAS 109.
In accordance with FAS 109, the Company has recorded valuation allowances
against the realization of its deferred tax assets. The valuation allowance is
based on management's estimates and analysis, which includes tax laws which may
limit the Company's ability to utilize its tax loss carryforwards.
h. NET LOSS PER SHARE
The net loss per share for all periods shown is based upon the weighted
average number of shares outstanding for the periods. No common stock
equivalents are included in the calculation since they would have an
anti-dilutive effect.
i. WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average number of shares outstanding for the years ended
September 30, 1997, 1996 and 1995, and the pro forma income statement
disclosures were restated to reflect the shares issued in connection with the
reverse acquisition based on the exchange ratio of the Common Stock issued in
exchange for each share of Radiocoms' common stock.
j. WARRANTY COSTS
The Company provides, by a current charge to income, an amount it estimates
will be needed to cover future warranty obligations for products sold during the
period. The accrued liability for warranty costs is included in the caption
"Accrued liabilities" in the accompanying consolidated balance sheets.
k. AMORTIZATION OF INTANGIBLE ASSETS
As part of the Midland Transaction, the Company acquired various rights,
permits and trademarks. These intangible assets are amortized on a
straight-line basis over their legal or estimated useful lives, whichever is
shorter (generally not exceeding 15 years).
As a result of the Radiocoms Acquisition, intangible assets of Intek and
its subsidiaries prior to the Radiocoms Acquisition including various
agreements, rights, permits, and trademarks are being amortized on a
straight-line basis over their legal or estimated useful lives, whichever is
shorter (generally not exceeding 15 years).
Intangible assets recorded in connection with the acquisition of FCC
licenses are amortized on the straight-line basis over 15 years effective when
the related site begins commercial operation.
l. RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
m. SUBSCRIBER ACQUISITION COSTS
Marketing and sales costs associated with obtaining new subscribers are
charged to income in the period incurred.
F-14
<PAGE>
n. FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars for consolidation and reporting purposes. Assets
and liabilities are translated into U.S. dollars using the exchange rate at each
balance sheet date and a weighted average exchange rate for each period is used
for revenues and expenses. Translation adjustments are recorded as a separate
component of shareholders' equity.
o. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
The Company's management believes that the fair value of all financial
instruments approximates carrying value.
The equipment sales and contract manufacturing portions of the Company's
business have a broad range of established customers. In contrast, the sales of
products utilizing LM Technology is a new market with a limited number of
customers in an emerging domestic and overseas environment and consequently may
involve greater credit risks. The Company has derived a substantial amount of
its sales from related parties. No formal agreements with these parties exist.
No assurance can be made that these arrangements will continue on the same terms
or at the same volume of business in the future. To the extent these sales do
not continue, it may adversely affect the Company's financial position and
results of operations.
The Company may periodically hedge firm foreign purchase commitments.
The Company regularly monitors its foreign currency exposures and ensures
that hedge contract amounts do not exceed the amounts of the underlying
exposures. At September 30, 1997, the Company had outstanding hedge
contracts of (in thousands) Japanese Yen 210,000 to cover its firm foreign
purchase commitments of Japanese Yen 374,817, leaving an exposed position of
Japanese Yen 164,817 equating to $1,375. Additionally, at September 30, 1997,
the Company's hedge contracts totaled $1,800 at the contracted rate and had a
fair value of $1,762. Gains and losses on foreign currency firm commitment
hedges are deferred and included in the basis of the transactions underlying
the commitments.
p. LONG-LIVED ASSETS
Effective October 1, 1996, the Company adopted FAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
of." Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is measured by
comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the assets and
their eventual disposition. The Company determined that as of September 30,
1997, there had been no impairment in the carrying value of long-lived assets.
q. MARKETABLE SECURITIES
During the year, the Company received stock of Transcrypt International
in exchange for its investment in E.F. Johnson Company ("EFJ"). At September
30, 1997, this investment was classified as available for sale and was
recorded at its fair value at that date. Subsequent to September 30, 1997,
the Company sold the investment for approximately $748 less than its carrying
value. The Company did not realize a loss on this transaction as the
shortfall will be recovered from Securicor plc.
r. NEW ACCOUNTING PRONOUNCEMENTS
During the year, the Financial Accounting Standards Board ("FASB")
issued Statements of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," No. 129 "Disclosure of Information About Capital
Structure," No. 130 "Reporting Comprehensive Income" and No. 131 "Disclosure
About Segments of an Enterprise." These statements of Financial Accounting
Standards will be adopted by the Company in fiscal 1998, except No. 131 which
was adopted in the current fiscal year. Management of the Company does not
believe that there will be any material effect of adopting SFAS No. 128, 129
and 130 in fiscal 1998.
(3) SUMMARY OF NON-CASH ACTIVITIES
The following summarizes the supplemental disclosure of non-cash operating,
investing and financing activities:
F-15
<PAGE>
In March 1995, a wholly-owned subsidiary of Securicor acquired 925,850
voting preferred shares and a warrant to acquire 291,791 shares of common
stock of EFJ, a U.S. based communications company, for $10,000. Concurrent
with this transaction, Radiocoms entered into an agreement with EFJ to pay
for the EFJ shares acquired by the delivery to EFJ of certain inventory
products and by granting manufacturing and technology licenses to EFJ for
approximately $9,671. Of this amount, $3,997 was attributable to the
technology license which required future support by Radiocoms through
September 30, 1996. Revenues derived from EFJ have been reflected as related
party sales. On June 17, 1996, Radiocoms acquired the 925,850 shares of
voting preferred stock and a warrant to acquire 291,791 shares of common
stock of EFJ from Securicor at a cost of $10,000, the consideration being a
promissory note payable on June 17, 1997 for $10,000 together with interest
on the principal amount at a rate of 8% per annum ("EFJ Note"). During the
year ended September 30, 1997, Radiocoms exchanged this investment for stock
of a publicly quoted corporation with a market value of $8,148 at September
30, 1997. The shortfall of $1,852 is to be recovered from Securicor and is
included in amounts due from related parties.
On September 20, 1996, Intek, through MUSA, consummated the Midland
Transaction. The original purchase price was 2,500,000 shares of Common Stock.
Pursuant to the terms of the Midland Transaction, a post closing reduction to
the purchase price of 155,000 shares of Common Stock, or $645, was made.
During fiscal 1996, Intek sold two series of notes with warrants attached.
During fiscal 1997, holders of the notes exercised warrants to convert all of
the notes into Common Stock. Accrued interest on certain notes was paid by
issuance of Common Stock. See Note 15 "Sales of Securities".
On December 3, 1997, Intek consummated the Radiocoms Acquisition for
25,000,000 shares of Common Stock. See Note 1 "Business Acquisitions and
Significant Risks".
During fiscal 1997, Intek acquired new systems and management agreements
from Krystal Systems, Inc., American Digital Corporation and Pagers Plus Corp.
Consideration for these transactions included 1,206,302 shares of Common Stock.
See Note 18 "Acquisition of New Systems".
In connection with his employment by the Company, the chief executive
officer of the Company received, among other things, 300,000 shares of Common
Stock. See Note 13 "Employment Agreements".
(4) INVENTORIES
Inventories at September 30 consist of the following (in thousands):
1997 1996
---------- ----------
Raw materials $ 4,020 $ 8,314
Work in progress 1,311 2,321
Finished goods 13,938 8,260
---------- ----------
Subtotal 19,269 18,895
Inventory not likely to be used or
sold within one year (6,980) -
---------- ----------
Total current inventories $ 12,289 $ 18,895
---------- ----------
---------- ----------
F-16
<PAGE>
(5) PROPERTY AND EQUIPMENT
Property and equipment at September 30 consists of the following (in
thousands):
1997 1996
---------- ----------
Land $ 402 $ 469
Buildings 3,008 2,329
Site equipment 13,206 -
Production & test equipment 3,843 4,731
Furniture, fixtures and computers 2,755 555
Equipment held for rental 4,163 3,467
---------- ----------
Total property and equipment, at cost 27,377 11,551
Less accumulated depreciation (5,822) (4,912)
---------- ----------
Net property and equipment $ 21,555 $ 6,639
---------- ----------
---------- ----------
(6) INTANGIBLE ASSETS
Intangible assets at September 30 consists of the following (in thousands):
1997 1996
----------- -----------
Excess of cost over fair value of net
MUSA assets acquired $ 9,755 $ -
Excess of cost over fair value of net
Intek assets acquired in the reverse
acquisition $ 38,573 $ -
FCC licenses and management agreements
acquired from third parties $ 2,899 $ -
----------- -----------
Total intangibles 51,227 -
Less accumulated amortization (2,887) -
----------- -----------
Net intangibles $ 48,340 $ -
----------- -----------
----------- -----------
The excess of cost over fair value of net Intek assets acquired in the
reverse acquisition represents the intangible value of FCC licenses and
management agreements owned by Intek.
(7) INCOME TAXES
The Company's benefit for the income taxes consists of the following (in
thousands) for the years ended September 30:
1997 1996 1995
---------- ---------- ----------
Current:
Federal $ 628 $ - $ -
Foreign 530 3,044 554
F-17
<PAGE>
---------- ---------- ----------
Total Current $ 1,158 $ 3,044 $ 554
Deferred - - 183
---------- ---------- ----------
Total $ 1,158 $ 3,044 $ 737
---------- ---------- ----------
---------- ---------- ----------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The approximate tax effect of temporary differences which gave rise to
significant deferred tax assets and liabilities are as follows at September 30
(in thousands):
1997 1996
---------- ----------
Deferred tax items (Federal, state and foreign):
Accrued liabilities $ 690 $ -
Allowance for doubtful accounts receivable 16 -
Amortization of Roamer One startup costs 64 -
Disallowed interest expense 174 -
Depreciation (156) -
Depreciation (foreign) (178) (63)
Development costs (foreign) (2,779) 3,275
Operating loss carryforwards 5,453 -
Operating loss carryforwards (foreign) 3,939 145
---------- ----------
7,223 3,357
Valuation allowance (7,223) (3,357)
---------- ----------
Net deferred tax liability $ - $ -
---------- ----------
---------- ----------
Because of the Company's history of losses, the Company has provided a
valuation allowance on deferred tax assets. The valuation reserve was increased
by $3,866 for the year ended September 30, 1997.
The reconciliation of the provision (benefit) for income taxes to the
amount computed at the Federal statutory rate of 34% is as follows at September
30 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Benefit at statutory rate $ (9,573) $ (4,125) $ (649)
Statutory rate difference (foreign) 277 121 20
Goodwill amortization 729 - -
Goodwill amortization (foreign) - - 199
Prior period group loss relief (foreign) - (94) (312)
Prior period tax charge (foreign) 73 - -
Accruals 521 - -
Deferred taxes (628) - -
Other (foreign) 167 9 5
Other 247 - -
F-18
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Operating losses not currently available
for use nor available for group relief
(foreign) 3,660 1,045 -
Operating losses not currently available
for use 3,369 - -
---------- ---------- ----------
$ (1,158) $ (3,044) $ (737)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At September 30, 1997, the Company had net operating loss carryforwards
available for Federal, California and non-California state income tax
purposes of approximately $13,924 and $7,987 respectively. The net operating
loss carryforwards expire in the year 2008 and thereafter for Federal income
tax purposes and 1998 and thereafter for state income tax purposes. The
Company also had foreign net operating losses of $3,939, which do not have an
expiration date.
For Federal income tax purposes, a corporation that undergoes a "change of
ownership" pursuant to Section 382 of the Internal Revenue Code of 1986
("Code"), as amended is subject to limitations on the amount of its net
operating loss carryforwards, which may be used in the future. In addition, the
use of certain other deductions attributable to events occurring in periods
before such an ownership change, that are claimed within the five year period
after such ownership change, may also be limited (such deductions, together with
net operating loss carryforwards, "pre-change losses"). Upon consummation of
the Radiocoms Acquisition, an ownership change under Section 382 did occur. As
a result, the Company's annual limitation for using "pre-change losses" is
$794.
Foreign losses may also be limited due to the change in ownership of the
Company. In addition, Radiocoms will no longer be reimbursed by Securicor for
benefits of Radiocoms losses.
(8) BUSINESS SEGMENTS
Prior to the Radiocoms Acquisition, the operations of Radiocoms were
reported as a single segment. However, since the Radiocoms Acquisition, the
Company has four reportable segments: communications services, equipment
distribution, technology, and manufacturing. The communications services
segment provides high quality wireless voice and data communications services in
the United States and the United Kingdom. The equipment distribution segment
sells radio base stations, mobile radios, spare parts and accessories
manufactured by the Company and by third parties. The technology segment
conducts research and development for products and applications incorporating
linear modulation. The manufacturing segment produces proprietary products
incorporating linear modulation, and produces products and subassemblies on a
contract basis for third parties.
Summarized financial information by business segment, after elimination of
intersegment sales, for the year ended September 30, 1997, the only year for
which this information is available, is as follows (in thousands):
1997
-----------
Net Sales:
Communications services $ 751
Equipment distribution 28,989
Technology -
Manufacturing 12,544
-----------
$ 42,284
-----------
-----------
F-19
<PAGE>
Operating income (loss) after
depreciation and amortization:
Communications services $ (6,322)
Equipment distribution 505
Technology (5,318)
Manufacturing (11,458)
Other (3,345)
-----------
$ (25,938)
-----------
-----------
Total assets:
Communications services 54,382
Equipment distribution 30,263
Manufacturing 16,607
Other 11,313
-----------
$ 112,565
-----------
-----------
The Company has applied the principles of FAS 131 "Disclosures about
Segments of an Enterprise and Related Information" in the above presentation of
Segment Information.
(9) PENSION PLAN
One of the Company's subsidiaries has a Simplified Employees Pension
Individual Retirement Account Plan ("the Plan"). Annual contributions to the
Plan are at the discretion of the Board of Directors and cannot exceed 15
percent of all employee's compensation. No contributions were made for 1997,
1996, or 1995.
Radiocoms contributes to the pension plan of Securicor, which maintains a
defined benefit pension plan that covers executives and selected other employees
based on merit. The plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company and
compensation rates near retirement. Contributions to the plan reflect benefits
attributed to employees' services to date, as well as services expected to be
earned in the future. The pension costs are assessed on the advice of
independent qualified actuaries using the projected unit credit method.
Actuarial valuations are performed every three years. The most recent actuarial
valuation was April 5, 1995 and in accordance with the provisions of FASB
Statement No. 87, at September 30, 1997 and 1996, there were no unfunded
accumulated benefit obligations. The assets are held in separate trustee
administered funds. For the years ended September 30, 1997, 1996 and 1995,
Radiocoms' share of the costs of the Securicor's defined benefit pension plan
amounted to $214, $175 and $170 respectively.
(10) STOCK OPTION PLANS
The 1988 Key Employee Incentive Stock Option Plan ("1988 Plan") provides
for the granting of options on up to 500,000 shares of Common Stock. The stock
options are exercisable over a period determined by the Stock Option Committee,
but no longer than ten years after the date they are granted.
The options are exercisable at a price equal to the average of the closing
per share bid and asked price of the Common Stock on the date an option is
granted ("Fair Market Value") or 110 percent of Fair Market Value for persons
who have in excess of a 10 percent voting interest in all classes of the
Company's stock prior to the date of grant. The dollar amount of options issued
under the Plan in any calendar year is limited to $100,000 per person in value
plus any unused limit carry-over. The Board of Directors has approved, subject
to shareholder approval, a
F-20
<PAGE>
modification in the 1988 Plan, so that options granted under this plan qualify
as "incentive stock options" within the meaning of Section of 422 of the Code.
In September 1994, the Board of Directors approved the 1994 Stock Option
Plan ("1994 Option Plan") and the 1994 Director's Option Plan ("1994 Directors
Plan") which plans provide for the granting of options up to 600,000 and 300,000
shares of Common Stock respectively. The 1994 Option Plan and the 1994
Directors Plan were approved by the shareholders at the Annual Meeting of
Stockholders held on July 5, 1995. The 1994 Option Plan provides for the
granting of "incentive stock options" and "nonqualified stock options", which
are not intended to qualify under any provision of the Code. Each grant shall
specify the number of shares of Common Stock to which it pertains; provided,
however, that no optionee may be granted stock options for more than 60,000
shares in any fiscal year.
Under the terms of the 1994 Directors' Plan, each member of the
Compensation Committee received an option to purchase 40,000 shares of Common
Stock on September 24, 1994. All other members of the Board at September 24,
1994, received an option to purchase 40,000 shares of Common Stock under the
1994 Stock Option Plan. In addition, each director who was not a director on
September 23, 1994 has received or will receive, on the date of his or her
initial election as a director, an option to purchase 20,000 shares of Common
Stock. No person may receive an option pursuant to the Directors' Plan more
than once.
Under both 1994 plans, the option exercise price equals Fair Market Value
at the date of grant and an option vests after one year and expires after ten
years.
Transactions in stock options for the three years ended September 30, 1997
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- ------------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
--------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 315.0 $4.16 475 $3.69 565.0 $3.52
Granted 420.0 $3.30 72.0 $5.88 - $-
Exercised - $- 224.5 $3.80 90.0 $2.64
Forfeited - $- - $- - $-
Expired - $- 7.5 $1.75 - $-
--------- --------- ---------
Outstanding at end of year 735.0 $3.67 315.0 $4.16 475 $3.69
--------- --------- ---------
Exercisable at end of year 315.0 $4.16 315.0 $4.16 475 $3.69
--------- ---------- --------- ---------- --------- -----------
Weighted average fair value of
options Granted $1.93 $4.22 N/A
--------- --------- ---------
--------- --------- ---------
</TABLE>
The 735,000 options outstanding at September 30, 1997 have the following
exercise prices and weighted average remaining contractual lives:
Weighted Average
Remaining
Exercise Price Shares Contractual Life (years)
-------------- ------ ------------------------
$3.00 360,000 9.47
$3.125 20,000 9.40
$3.75 255,000 6.99
$5.875 60,000 8.23
$6.125 40,000 9.18
------
735,000
-------
-------
F-21
<PAGE>
As of September 30, 1997, options available for future grant were as
follows:
1988 Plan 82,500
1994 Stock Option Plan 148,000
1994 Directors Plan 120,000
-------
350,500
-------
-------
The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with FAS 123 "Accounting for
Stock-based Compensation", the Company's net loss and loss per share would
have been increased to the following pro forma amounts in thousands
(except per share amounts):
1997 1996 1995
---- ---- ----
Net Income: As Reported $(26,999) $(9,089) $N/A
Pro Forma $(27,264) $(9,393) $N/A
Primary Loss per Share:
As Reported $(0.74) $(0.36) $N/A
Pro Forma $(0.75) $(0.38) $N/A
Because the FAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for the options granted in the periods ending September 30,
1997 and 1996:
1997 1996
---- ----
Risk free interest rate 5.85% 5.40%
Expected dividend yield 0% 0%
Expected lives of option 3 years 3 years
Expected volatility 84.3% 118.1%
(11) RELATED PARTY TRANSACTIONS
Related parties of Intek include Securicor and its ultimate parent company,
the directors and officers of Intek and companies that are affiliated with
Directors of the Company. John Simmonds, a Director of the Company is
affiliated with SCL, Simmonds Mercantile and Management Inc. ("SMM") which is a
company that is controlled by SCL and MIC. Steven Wasserman, a Director and
Secretary of the Company is a partner of the law firm Kohrman Jackson & Krantz.
Robert Kelly, a Director of the Company, is a partner of the law firm Kelly &
Povich, P.C.
Directors are compensated for services at the rate of $4 per year plus
$.5 per meeting to a maximum of $10 per director. For the twelve months
ended September 31, 1997, the Company paid Directors fees of $48 and accrued
$9 for unpaid directors fees.
Pursuant to a consulting agreement, the Company paid $10 per month to
Nicholas R. Wilson until the Company notified Mr. Wilson on March 21, 1997
that it was terminating the agreement. Mr. Wilson was the Chairman of the
Board of Directors until his resignation on December 3, 1996. During fiscal
1997, 1996 and 1995,
F-22
<PAGE>
the Company paid Mr. Wilson $80, $120 and $30 respectively.
Pursuant to an oral management agreement between SCL and the Company,
the Company paid SCL $10 per month and SCL made available to the Company the
services of Messrs. Simmonds, Dunstan and Heinke, each of whom were officers
and directors of the Company. The agreement was terminated effective
January, 1997. During fiscal 1997, the Company paid $40 to SCL pursuant to
this agreement.
Pursuant to an oral consulting agreement with SMM, the Company paid SMM
$8 per month for consulting services. During fiscal 1997, the Company paid
$32 to SMM. Effective February 1, 1997, the Company terminated the agreement
and ceased such payments.
On September 19, 1996, MUSA entered into an agreement with MIC, whereby MIC
agreed to permit MUSA to make use of the services of the supplier liaison office
maintained by MIC in Japan and MIC's purchasing representative in Korea. During
fiscal 1997, MUSA paid $140 to MIC. This agreement continues on a
month-to-month basis.
On September 19, 1996, MUSA and SCL entered into a Computer Services
Agreement pursuant to which SCL agreed to provide MUSA access to the IBM AS400
computer system, including hardware and software, currently owned by SCL, for
data processing purposes. During fiscal 1997, MUSA paid $218 to SCL. This
agreement was terminated on October 31, 1997.
During fiscal 1995 pursuant to a Financing Agreement and related
agreements between the Company, Roamer One, SCL and Radiocoms, the Company
received approximately $4,000 worth of base station equipment and mobile
radios in exchange for 937,042 shares of the Company's Common Stock to
Securicor. Pursuant to the Financing Agreement, such shares were issued at a
share price of $4.26875.
The Company and SCL had an arrangement whereby Roamer One purchased
equipment and installation services from SCL. During the year ended
September 30, 1995, Roamer One purchased $10,195 of radio equipment and
installation services from SCL. During the year ended September 30, 1996,
Roamer One purchased $2,307 of radio equipment and installation services from
SCL. During the year ended September 30, 1997, Roamer One purchased $8 of
radio equipment and installation services from SCL.
On December 3, 1996, the Company entered into a Registration Rights
Agreement to provide certain holders of Common Stock, including SCL, MIC,
Roamer One Holdings, Securicor, Securicor International Limited and Anglo
York Industries, Inc. with certain demand and "piggy-back" registration
rights with respect to the Common Stock owned by the holders. Each is a
stockholder of the Company and, collectively, such stockholders own
approximately 78% of the Company's Common Stock.
Pursuant to a Support Services Agreement dated December 3, 1996, by and
between the Company and Securicor, the Company agreed, in connection with the
Securicor Transaction, to obtain certain support and administrative services
for Radiocoms from Securicor and/or its affiliates for the purpose of
enabling the Company to manage an orderly transition in its ownership of
Radiocoms during fiscal 1997. During fiscal 1997, $666 of support and
administrative service costs (including services of Edmund Hough, Intek's
former Chief Executive Officer) were accrued, but unpaid.
The law firm Kohrman Jackson & Krantz performs legal services for the
Company and its subsidiaries for which it received fees of $237 during fiscal
1997. In addition, Mr. Wasserman received $1 per month as compensation for
his services as the secretary of the Company until January 1, 1997 at which
time his compensation was increased to $2 per month.
The law firm Kelly & Povich, P.C. performs legal services for the
Company and its subsidiaries as of December 1996. Mr. Kelly is a member of
the Company's Board of Directors. During fiscal 1997, Kelly & Povich, P.C.
received fees of approximately $55.
F-23
<PAGE>
The Company believes that the terms of the transactions and the agreements
described above are on terms at least as favorable as those which it could
otherwise have obtained from unrelated parties. On-going and future
transactions with related parties will be (1) on terms at least as favorable as
those which the Company would be able to obtain from unrelated parties; (2) for
bona fide business purposes; and (3) approved by a majority of the disinterested
and non-employee directors.
For details of related party borrowings, see Note 16 "Related Party
Borrowings".
(12) COMMITMENTS
The Company has entered into 178 site leases for the housing of radio base
station equipment and antenna systems related to the Roamer One network. These
leases may vary in term from 1 to 5 years with provisions for subsequent
extensions upon the mutual agreement of the parties. In addition, the Company
has lease commitments for office space, vehicles and office equipment. As of
September 30, 1997, total future minimum lease payments are as follows:
1998 $1,800
1999 1,840
2000 893
2001 221
2002 39
Thereafter 7
-------
$4,800
-------
-------
(in thousands)
As of September 30, 1997, MUSA had a purchase commitment with its main
supplier of radios to purchase $3,126 of inventory, see Note 2 o. "Financial
Instruments and Concentrations of Risk."
(13) EMPLOYMENT AGREEMENTS
The Company has employment agreements with various key employees. None of
these agreements have terms exceeding two years and these agreements have
varying expiration dates and provide for aggregate annual base compensation of
approximately $1.5 million.
In connection with his employment by the Company in August 1997, the
chief executive officer of the Company received, among other things, 300,000
shares of Common Stock. These shares are non-returnable to the Company if he
continues to be employed by the Company until September 1, 1998 or he has
terminated his employment with the Company prior to the Anniversary Date for
good reason, or he has been terminated without cause. The agreement provides
that in the event the fair market value of the 300,000 shares on December 31,
1998 ("FMV") is less than $1 million, the Company will pay the executive a
sum equal to the difference between $1 million and the FMV in, at executive's
option, cash or Common Stock or a combination thereof. For financial
reporting purposes, the Company has recorded $1 million in compensation
expense for the year ended September 30, 1997.
(14) SALE OF BUILDING
In December 1996, the Company sold land and property, realizing a profit of
$775 relating to a business
F-24
<PAGE>
the Company had conducted prior to the Radiocoms Acquisition, which was
discontinued in 1994.
(15) SALES OF SECURITIES OUTSIDE THE UNITED STATES UNDER REGULATION S OF THE
SECURITIES ACT
a) On February 29, 1996, the Company raised $2,500 through the
issuance of a Senior Secured Debenture ("Senior Debenture") to MeesPierson
ICS Limited, a U.K. limited liability company ("MeesPierson"). The Senior
Debenture was secured by land and a building owned by the Company (the
"Property"). Intek also issued 50,000 shares of Common Stock to MeesPierson
as a closing fee for its investment banking services. The Senior Debenture
matured on August 31, 1996. In exchange for an extension until the earlier
of October 31, 1996 or the sale of the Property, Intek paid to MeesPierson
accrued interest through August 1, 1996, issued 25,000 shares of Common Stock
to MeesPierson and issued 5,000 shares of Common Stock to Octagon Capital
Canada Corporation for an agent's fee. In exchange for a further extension to
January 31, 1997, Intek issued MeesPierson 34,000 shares of Common Stock
valued at $203. The Senior Debenture was paid in full on December 31, 1996.
b) On April 26, 1996, The Company sold a series of 6.5% Notes in the
aggregate principal amount of $5,000 (the "Notes"), maturing April 25, 1999.
During fiscal 1997, holders of the Notes exercised warrants to convert all
$5,000 of the Notes into Common Stock at an average discount of 18% below
market price. This discount, in the amount of $907, was a pre-reverse
acquisition expense of Intek. A portion of accrued interest was repaid
through issuance of Common Stock valued at $60.
c) On November 1, 1996, the Company sold a series of 6.5% Notes in the
aggregate principal amount of $2,000 (the "November 1996 Notes") maturing on
October 31, 1999. Net proceeds to the Company, after fees and broker's
commissions, were $1,995. All accrued interest is due and payable at the
time the November 1996 Notes mature or upon the exercise of the warrants.
During the quarter ended March 31, 1997, holders of the Notes exercised
warrants to convert all $2,000 of the Notes into Common Stock at an average
discount of 28% below market price. This discount, in the amount of $552 was
charged to interest expense during fiscal 1997.
On February 6, 1997, the Company sold a series of 7.5% Convertible
Debentures (the "February 1997 Debentures") and (the "February 1997
Warrants") to three purchasers. Net proceeds to the Company, after fees and
broker's commissions, were $3,990. The February 1997 Debentures matured on
February 6, 2000 and bore interest at the rate of 7.5% per annum. All
accrued interest was due and payable at the time the February 1997 Debentures
matured or upon their conversion to Common Stock. The debt conversion price
was the lesser of $3.825 or 80% of the average closing bid price for the 5
trading days prior to conversion resulting in a discount of $800. In May
1997 the Company redeemed the February 1997 Debentures in exchange for a cash
payment equal to the principal amount of the debentures plus a redemption
premium of 10 percent and all accrued and unpaid interest resulting in a $400
reduction in the originally anticipated discount. The February 1997 Warrants
are exercisable at $4.59 per share and are subject to customary anti-dilution
adjustments. The February 1997 Warrants were estimated by the broker to have
a value of $100 which was included in interest expense in fiscal 1997.
(16) RELATED PARTY BORROWINGS
Prior to the Radiocoms Acquisition, Securicor had extended a limited use
$15 million line of credit to MUSA. In connection with the Radiocoms
Acquisition, Securicor made available to the Company a $15 million line of
credit (the "September 1996 Facility") to fund Intek's working capital needs.
The September 1996 Facility may be drawn upon by Intek so long as it
maintains a net worth of at least $20,000. The September 1996 Facility bears
interest at the rate of prime (to be defined as the average of prime rates
announced by certain specified banks) plus 1% through December 31, 1997 and
thereafter interest will accrue at the rate of 11% compounded annually on the
outstanding principal balance, payable upon the repayment in full of the
outstanding principal
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<PAGE>
balance but no later than June 30, 2001. The obligations under the September
1996 Facility may be prepaid at any time without any penalty. The September
1996 Facility must be redeemed upon a change of control of Intek or upon the
sale of the majority of its assets. The unsecured September 1996 Facility
ranks senior in all rights to any common or preferred stock or any other
subordinated debt of the Company. Intek may redeem the September 1996
Facility, at par plus accrued interest, subject to restrictions contained in
any senior debt facility it may obtain, in increments of $500. The principal
balance at September 30, 1997 was $10,753 plus accrued interest of $971.
In March 1997, the Company borrowed $6 million for working capital purposes
from Securicor. The unsecured borrowings are evidenced by an 11% note payable
due the earlier of (1) the receipt of funds by Intek from a private or public
offering of Intek shares; and (2) October 18, 1998. Additionally, during May
1997, the Company borrowed $4.5 million from Securicor to retire the February
1997 Debentures and an additional $2 million in September 1997. The May and
September loans bear interest at 12.5% and are repayable under the same terms as
the 11% note payable. Interest on these notes is due upon maturity of the
notes.
In December 1997, the Company entered various agreements with Securicor
as follows:
a) A new loan agreement ("December 1997 Facility"), which replaces the
prior agreements, provides the Company the ability to borrow up to
$29.5 million (including the outstanding indebtedness of $25.4
million). The December 1997 Facility bears interest at 11 1/2% per
annum payable at June 30, 2003. Principal payments will be $500
per month for 12 months beginning July 1, 2001, $1 million per
month for 11 months beginning July 1, 2002 with the remaining
balance due and payable on June 30, 2003. The obligations under
the December 1997 Facility may be prepaid by the Company at any
time in $1.65 million increments without penalty. The December
1997 Facility must be repaid upon Securicor ceasing to be the
beneficial owner of more than 50% of the Common Stock as a result
of any transaction except the direct or indirect transfer of the
Common Stock by Securicor and also is subject to mandatory
prepayments at the rate of 50% of the net proceeds of any financing
by the Company in excess of $8 million. Subject to the release of
Securicor from certain letter of credit commitments, at December 31,
1997, the Company had approximately $4 million in availability for
future borrowings under the December 1997 Facility.
b) Securicor has agreed pursuant to the Preferred Stock Purchase
Agreement dated December 29, 1997, to purchase from the Company
(subject to the approval of the Company's stockholders to authorize
"blank check" preferred stock), approximately $12.4 million of a
new series of preferred stock.
c) Securicor has agreed pursuant to the Termination and Release dated
December 29, 1997, to reimburse the Company approximately $2.6
million representing the difference between the Company's carrying
value of its investment in EFJ and the proceeds received upon the
ultimate disposition of the investment in EFJ.
As a result of the above agreements, the September 30, 1997 related
party borrowings will be repaid as follows:
Fiscal Year
--------------
1998 $ -
1999 -
2000 -
2001 1,500
2002 7,500
Thereafter 15,223
-----------
$24,223
-----------
-----------
(17) PREFERRED STOCK OF SUBSIDIARY
In December 1996, the Company consummated the Radiocoms Acquisition. Prior
to the consummation of
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<PAGE>
this transaction, Securicor forgave approximately $12 million due it by
Radiocoms and accepted 20,000 shares of $1,000 par value per share of preferred
stock from Radiocoms ("Radiocoms Preferred Stock") for the remaining balance due
including the EFJ Note, see Note 3. The preferred stock is mandatorily
redeemable on June 30, 2006 and bears a dividend rate of 6%.
(18) ACQUISITION OF NEW SYSTEMS
KRYSTAL SYSTEMS
On November 11, 1996, the Company entered into an agreement to acquire
from Krystal Systems, Inc. up to 25 constructed, but unloaded, 220MHz systems
and related FCC licenses ("Krystal Systems".) Through September 30, 1997, the
Company has paid $3,735 of the purchase price for 22 of the Krystal Systems.
The remaining balance of $225 was accrued at September 30, 1997 and is due
and payable upon receipt, and uncontested grant by the FCC, of the licenses
to Roamer One. Applications for such transfers have been filed with the FCC
and 22 assignments have been granted as of September 30, 1997. Applications
can typically take between 30-120 days for processing by the FCC, however, no
assurance can be made that the FCC will grant the remaining pending
applications.
AMERICAN DIGITAL CORPORATION
During 1997, the Company consummated two agreements with American
Digital Corporation ("ADC") and 22 holders of 220MHz FCC licenses. The
agreements provided for the Company to acquire the licenses from the
licensees and the equipment from ADC for total consideration equal to $1,925.
The purchase price paid by the Company was as follows: (a) return of shares
of ADC stock owned by the Company (valued for purposes of the transaction at
$84); (b) issuance of approximately 682,735 shares of Common Stock
(valued for purposes of the transaction at $1,250); (c) transfer of all
rights held by the Company to acquire 2,666,666 shares of Ventel, Inc.
("Ventel"), a publicly traded company in Canada (valued for purposes of the
transaction at $301); (d) forgiveness of approximately $95 of debt owed
by ADC to Radiocoms; (e) a cash payment of $119. Closing of such
transactions (and payment of the purchase price) will occur upon receipt of,
and uncontested grant by the FCC, of the licenses to Roamer One. John
Simmonds (a director of the Company) and SCL are shareholders in ADC.
Applications have been filed for such transfers with the FCC and applications
typically can take between 30-120 days for processing by the FCC. Such
transactions will be recorded in the period in which they close.
PAGERS PLUS
During the period July 12, 1997 through August 12, 1997, the Company
entered into purchase and sale agreements with 25 licensees of 220MHz FCC
licenses managed by the Company on behalf of Pagers Plus Corp ("PPC"). The
agreements provide that the Company will acquire (subject to the satisfaction
of certain conditions) 25 licenses for a purchase price, in the aggregate,
equal to 465,482 shares of Common Stock (valued for purposes of the
transaction at $938) plus cash payments totaling $759. Closing of such
transactions (and payment of the purchase price) occur upon receipt of the
uncontested grant by the FCC of the licenses to Roamer One. Such grants by
the FCC occurred in late December 1997. Such transactions will be recorded in
such period. The contingent liability, which has not been recorded on the
balance sheet is $834.
VENTEL, INC.
In May 1995, Intek contributed $125 for a one-third ownership interest
in Brook SIG Corp., which was subsequently acquired in a stock transaction by
Ventel. Ventel is in the business of providing financing to various 220MHz
SMR management companies in the United States. Intek and SCL (also a
shareholder of Ventel) entered into separate management services agreements
with Ventel to provide certain management services and technical expertise
for the development and implementation of Ventel's ongoing business strategy.
John Simmonds (a director of Intek) is
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<PAGE>
a director of the Board of Directors of Ventel. Intek received a total of
2,666,666 shares of the common stock of Ventel, which represented less than a
10% interest in Ventel.
During 1997, the Company entered into an agreement with Ventel (the
"Ventel Agreement"), which provided for the sale and transfer of certain
outstanding loans, security agreements, and the rights related to the
collateral for such security agreements from Ventel to the Company. Such
loans were made by Ventel to PPC and ADC for the purpose of constructing
220MHz systems. These systems are the subject of purchase agreements
(described above) between various licensees, ADC, PPC and the Company. The
Ventel Agreement provided that the Company would acquire the security
agreements and rights to the collateral in exchange for a payment to Ventel
of 787,921 shares of Common Stock and $100 in cash.
(19) SUBSEQUENT EVENTS
Subsequent to September 30, 1997, the Company disposed of its investment in
Transcrypt International which it received in fiscal 1997 as a result of its
disposition of its investment in EFJ, receiving net cash proceeds of
approximately $7.4 million. The difference between the proceeds and the carrying
value of $8,148 will be reimbursed by Securicor, and is in addition to the
shortfall born by Securicor as described in Note 3.
The Board of Directors of the Company also adopted a share repurchase plan
whereby the officers of the Company are authorized to expend up to $1 million to
acquire up to 1% of the Common Stock. Through December 31, 1997, the Company
had acquired 35,000 shares of Common Stock in open market purchases.
In December 1997, the Company entered into various agreements with
Securicor (see Note 16 "Related Party Borrowings").
In December 1997, MUSA entered into a revolving credit agreement ("Credit
Agreement") with a non-bank lender. The Credit Agreement makes available $5
million though December 1999. Borrowing under the Credit Agreement would be
secured by the assets of MUSA and bear interest at 1 1/2% above the lender's
base rate (as defined). The Credit Agreement contains, among other covenants, a
covenant relating to leverage, limitations on MUSA's ability to repay
intercompany indebtedness and repayment provisions related to change in control
of MUSA. The Company intends to use borrowings under this Credit Agreement as
security for letter of credit commitments on behalf of MUSA, thereby eliminating
use of the December 1997 Facility for letters of credit on behalf of MUSA and
allowing availability under the 1997 December Facility to be used for general
corporate cash flow requirements.
The Company, Mr. David Neibert, the Company's executive vice president and
Mr. Nicholas R. Wilson, a former Chairman of the Company ("Intek Defendants")
have been named with forty other defendants in a complaint (Scott, et al.
Steingold, et al.) filed in U.S. District Court for the Northern District of
Illinois on November 12th, 1997. The lawsuit purports to allege claims under
the Racketeer Influenced Corrupt Organizations Act, the Securities Exchange Act
of 1934 and various common law state claims in connection with the sale and
marketing of interests in certain partnerships formed to operate SMR systems.
Plaintiffs seek rescissory damages with interest and punitive damages allegedly
relating to their purchases of SMR partnership interests. No specific amount of
alleged damages is mentioned in the complaint.
The plaintiffs also had filed, and have now withdrawn against the Intek
Defendants, a motion for a temporary restraining order and preliminary
injunction seeking to freeze the assets of all defendants. The Intek Defendants
have filed a motion to dismiss the complaint on various grounds and in response
the plaintiffs have asked the court to be allowed to file an amended complaint.
The Company does not know when or if such an amendment will be filed or what
specific allegations it will contain with respect to Intek. Intek has requested
the
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<PAGE>
plaintiff withdraw all claims against Intek on the grounds that they are
frivolous. In the opinion of the management of the Company, this lawsuit will
not have a material adverse affect on the Company.
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<PAGE>
INDEX TO EXHIBITS
Exhibit No. Page No.
- ----------- --------
3.1(i) Articles of Incorporation of Intek Diversified (2)
Corporation (the "Registrant").
3.1(ii) By-Laws of the Registrant. (2)
10.1 Employment Agreement dated as of September 8, 1997 (1)
between Intek Diversified Corporation and Robert J. Shiver
10.2 Employment Agreement dated as of February 18, 1997, (1)
by and between Intek Diversified Corporation and Lee R.
Montellaro.
10.3 Employment Agreement dated as of April 21, 1997, by and (1)
between Intek Diversified Corporation and Donald Goeltz.
10.4 Second Amended and Restated Loan Agreement dated as of (1)
December 29, 1997, between Intek Diversified Corporation
as Borrower and Securicor Communications Limited as Lender.
10.5 Promissory note dated December 29, 1997, (1)
in the amount of $29,500,000 made by Intek Diversified
Corporation to the order of Securicor Communications
Limited.
10.6 Preferred Stock Purchase Agreement dated as of December (1)
29, 1997, between Intek Diversified Corporation and
Securicor Communications Limited.
10.7 Loan and Security Agreement dated December 24, 1997, (1)
by and between Summit Commercial/Gibraltar Corp., as
Lender and Midland USA, Inc., as Borrower.
10.8 Subordination Agreement dated December 24, 1997, (1)
by and among Intek Diversified Corporation and Summit
Commercial/Gibraltar Corp.
10.9 Termination and Release dated as of December 29, 1997, (1)
between Intek Diversified Corporation and Securicor
Communications Limited.
11 Statement re computation of per share earnings. (4)
12 Statement re computation of ratios. (4)
21 Subsidiaries. (1)
23.1 Consent of Arthur Andersen LLP. (1)
23.2 Consent of Baker Tilly. (1)
27 Financial Data Schedule. (1)
(1) Included in this Report.
(2) This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994, filed with the Commission
on April 17, 1995 (Commission File No. 0-9160), and incorporated
herein by reference.
(4) Not applicable.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 2, 1998, with
respect to the financial statements of Intek Diversified Corporation included
in the Form 10-K of Intek Diversified Corporation dated September 30, 1997,
as amended.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
January 20, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 2, 1998, with
respect to the financial statements of Intek Diversified Corporation included
in the Form 10-K of Intek Diversified Corporation dated
September 30, 1997.
/s/ Baker Tilly
Baker Tilly
Los Angeles, California
January 12, 1998
