<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
214 CARNEGIE CENTER, SUITE 304 08549-6237
PRINCETON, NEW JERSEY
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (609) 419-1222
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of Registrant's Common Stock, $0.01 par
value, as of February 6, 1998, is 42,254,930 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEK DIVERSIFIED CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands)
<TABLE>
<CAPTION>
UNAUDITED
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,826 $ 1,909
Marketable securities - 8,148
Accounts receivable, net
of allowance for
doubtful accounts of $901
in December 1997 and $863
in September 1997 7,040 6,488
Inventories 12,662 12,289
Taxation receivable from
related parties 537 779
Amounts due from related
parties 2,721 3,922
Prepaid expenses and
other current assets 2,139 894
-------- --------
Total current assets 27,925 34,429
-------- --------
PROPERTY AND EQUIPMENT, NET 22,542 21,555
OTHER ASSETS:
Note receivable 556 556
Intangible assets, net 48,202 48,340
Inventory-long term 6,980 6,980
Other 733 705
-------- --------
TOTAL ASSETS $106,938 $112,565
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
2
<PAGE>
INTEK DIVERSIFIED CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Thousands)
<TABLE>
<CAPTION>
UNAUDITED
December 31, September 30,
1997 1997
------------ --------------
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft $ 897 $ 120
Accounts payable 7,320 6,110
Amounts due to related parties 713 2,005
Accrued liabilities 2,408 3,762
Deferred income 376 977
Other 179 166
-------- -------
Total current liabilities 11,893 13,140
-------- -------
NOTES PAYABLE-Related Party 25,423 24,223
-------- -------
CAPITAL LEASE LIABILITY 338 354
-------- -------
PREFERRED STOCK OF SUBSIDIARY-
Mandatorily Redeemable 21,371 20,559
-------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value
Authorized - 60,000,000 shares
Issued - 42,905,012 at
December 31, 1997 and
42,398,096 at
September 30, 1997 429 424
Capital in excess of par value 107,022 106,220
Treasury stock, at cost
513,082 shares at December 31, 1997
and 465,582 shares at
September 30, 1997 (849) (770)
Deficit (57,302) (50,199)
Currency translation adjustment (1,387) (1,386)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 47,913 54,289
-------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $106,938 $112,565
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
3
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1996
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Revenues
Net product sales $ 9,039 $ 6,530
Service income 201 204
----------- -----------
Total revenues 9,240 6,734
Costs and expenses:
Cost of goods sold 6,544 4,824
Cost of services sold 1,008 201
Sales and marketing 1,853 665
Research and development 633 858
General and administrative 4,011 2,495
Depreciation and amortization 1,329 651
----------- -----------
Operating loss (6,138) (2,960)
Other income (expense):
Interest (683) (570)
Gain on sale of long term assets - 756
Other 16 38
----------- -----------
Loss before income taxes (6,805) (2,736)
Income tax benefit - 1,506
----------- -----------
Net loss (6,805) (1,230)
Less preferred dividends (298) -
----------- -----------
Net loss applicable to Common
Shareholders $ (7,103) $ (1,230)
----------- -----------
----------- -----------
Basic net loss per share $ (0.17) $ (0.04)
----------- -----------
----------- -----------
Weighted average number of
common shares outstanding 42,056,269 29,346,064
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
4
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1996
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(Thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Net loss $(7,103) $(1,230)
Foreign currency translation adjustments (1) (2,486)
------- -------
Comprehensive loss $(7,104) $(3,716)
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
5
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1996
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS CASH FLOWS (Unaudited)
(Thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $(6,805) $(1,230)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Depreciation and amortization 1,329 649
Loss (gain) on sale of long term assets - (756)
Deferred income taxes - (633)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (481) 659
Amounts due from related parties 1,302 3,224
Notes receivable - (454)
Inventories (243) (413)
Income taxes receivable from related parties 262 -
Prepaid expenses and other current assets (556) (1,127)
Increase (decrease) in:
Accounts payable 1,068 1,460
Amounts due to related parties (771) (2,789)
Accrued liabilities (1,350) (489)
Accrued liabilities to related parties (490) -
Deferred income (627) 1,354
Taxes other than income taxes (25) 247
Other (1) (50)
------- -------
Total Adjustments (583) 882
------- -------
Net cash used in operating
activities (7,388) (348)
</TABLE>
6
<PAGE>
INTEK DIVERSIFIED CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1996
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS CASH FLOWS (Unaudited) (Continued)
(Thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash Flows From Investing Activities:
Proceeds from sale of investment 7,458 -
Expenditures for property, plant & equipment, net (1,338) (1,971)
Expenditures for FCC licenses (28) -
Expenditures for other long term assets 4 (43)
Notes receivable 16 -
Proceeds from sale of long term assets - 2,200
------- -------
Net cash provided by investing activities 6,112 186
------- -------
Cash Flows From Financing Activities:
Net change in bank overdraft 778 (1,383)
Capital lease payments (15) -
Repurchase of shares (79) -
Proceeds from long term debt-related party 1,200 2,691
Repayment on long and short term debt - (1,546)
------- -------
Net cash provided by (used in)
financing activities 1,884 (238)
------- -------
Effect of foreign exchange rates on cash 309 -
------- -------
Net increase (decrease) in cash and cash equivalents 917 (400)
Cash and cash equivalents at beginning of period 1,909 417
Cash acquired in reverse acquisition - 1,572
------- -------
Cash and cash equivalents at end of period $ 2,826 $ 1,589
------- -------
------- -------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 43 $ 404
Cash paid for income taxes $ - $ -
</TABLE>
The accompanying notes are an integral part of these consolidated statements
7
<PAGE>
INTEK DIVERSIFIED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) PRESENTATION
The unaudited condensed consolidated financial statements included
herein have been prepared by Intek Diversified Corporation (the "Company" or
"Intek"), pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K
for the period ended September 30, 1997.
These financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") used in the United States
("U.S."). Such accounting principles differ in certain respects from GAAP
used in the United Kingdom ("U.K."), which is applied by Radiocoms for local
and statutory financial reporting purposes.
The information furnished herein reflects all adjustments which are, in
the opinion of management, necessary for a fair presentation of the condensed
consolidated financial statements for the interim periods presented taken as
a whole. These adjustments are of a normal and recurring nature. The results
of the interim periods are not necessarily indicative of results to be
expected for the entire year.
(2) NEW ACCOUNTING POLICIES ADOPTED
During the current quarter, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") number 128, "Earnings
Per Share", SFAS number 129 "Disclosure Of Information About Capital
Structure," and SFAS number 130 "Reporting Comprehensive Income."
(3) FINANCIAL INSTRUMENTS
The Company may periodically hedge 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 December 31, 1997, the Company had outstanding hedge contracts of Japanese
Yen 233,518,000 to cover its firm foreign purchase commitments of Japanese
Yen 278,330,000, leaving an exposed position of Japanese Yen 44,812,000
equating to $343,000. Additionally, at December 31, 1997, the Company's hedge
contracts totaled $1,985,000 at the contracted rate and had a fair value of
$1,804,000. Gains and losses on foreign currency firm commitment hedges are
deferred and included in the basis of the transactions underlying the
commitments.
(4) MARKETABLE SECURITIES
During fiscal 1997, 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. During the current first
quarter of fiscal 1998, the Company disposed of its investment in Transcrypt
International, receiving net cash proceeds of approximately $7,400,000. The
difference between the proceeds and the carrying value of $10,000,000 will be
reimbursed by Securicor Communications Limited ("Securicor") (see note 14
"Related Party Borrowings").
8
<PAGE>
(5) SUMMARY OF NON-CASH ACTIVITIES
The following summarizes the supplemental disclosure of non-cash
operating, investing and financing activities:
On December 4, 1997, the board of directors of the Company announced
that it had allocated $1,000,000 for the repurchase of up to one percent of
the Company's approximately 42 million outstanding shares of common stock of
Intek, .01 par value ("Common Stock"). Purchases will be made from time to
time in the open market, through block or privately negotiated transactions
or otherwise. As of December 31, 1997, the Company had repurchased 47,500
shares at a cost of $79,000.
During the first quarter of fiscal 1998, the Company issued an aggregate
of 506,916 shares of Common Stock for the acquisition of Federal
Communications Commission ("FCC") licenses as follows:
- The Company consummated two agreements with American Digital
Corporation and 22 holders of licenses of 220MHz FCC licenses. This
transaction is described fully in note 16, "Acquisition of New
Systems." During the first quarter of fiscal 1998, the Company
issued an aggregate of 465,484 shares of Common Stock for the
acquisition of those licenses, valued at $807,000 for book purposes.
- The Company entered into purchase and sale agreements with 25
holders of 220MHz FCC licenses managed by the Company on behalf of
Pagers Plus Cellular, a California Corporation. This transaction is
described fully in note 16, "Acquisition of New Systems." During the
first quarter of fiscal 1998, the Company issued 41,432 shares of
stock as final payment for the acquisition of those licenses. The
value of $75,000 for book purposes was accrued as of September 30,
1997.
(6) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
Raw materials $ 2,826 $ 4,020
Work in progress 1,872 1,311
Finished goods 14,944 13,938
------- -------
Subtotal 19,642 19,269
Inventory not likely to be
used or sold within one year (6,980) (6,980)
------- -------
Total current inventories $12,662 $12,289
------- -------
------- -------
</TABLE>
9
<PAGE>
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
Land $ 412 $ 402
Buildings 3,091 3,008
Site equipment 13,926 13,206
Production & test equipment 3,976 3,843
Furniture, fixtures and computers 2,990 2,755
Equipment held for rental 4,698 4,163
------- -------
Total property and equipment, at cost 29,093 27,377
Less accumulated depreciation (6,551) (5,822)
------- -------
Net property and equipment $22,542 $21,555
------- -------
------- -------
</TABLE>
(8) INTANGIBLE ASSETS
Intangible assets consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ ------------
<S> <C> <C>
Excess of cost over fair value of net
MUSA assets acquired $ 9,755 $ 9,755
Excess of cost over fair value of net
Intek assets acquired in the reverse acquisition $38,573 $38,573
FCC licenses and management agreements acquired
from third parties $ 3,566 $ 2,899
------- -------
Total intangibles 51,894 51,227
Less accumulated amortization (3,692) (2,887)
------- -------
Net intangibles $48,202 $48,340
------- -------
------- -------
</TABLE>
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.
(9) BUSINESS SEGMENTS
On December 3, 1996, the Company consummated the acquisition of all the
issued and outstanding common stock of Radiocoms ("Radiocoms Acquisition"), a
wholly-owned subsidiary of Securicor Communications Limited ("Securicor").
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 U.S. and the U.K. The equipment distribution segment sells
10
<PAGE>
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 (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
Communications services $ 201 $ 204
Equipment distribution 6,143 3,458
Manufacturing 2,896 3,072
------- -------
9,240 6,734
REVENUES FROM OTHER SEGMENTS:
Equipment distribution 116 -
Manufacturing 98 278
------- -------
214 278
------- -------
TOTAL REVENUES 9,454 7,012
------- -------
INTER-SEGMENT ELIMINATIONS (214) (278)
------- -------
CONSOLIDATED REVENUES $ 9,240 $ 6,734
------- -------
------- -------
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
NET PROFIT (LOSS):
Communications services $(2,951) $ (403)
Equipment distribution (776) (301)
Technology (1,216) (1,181)
Manufacturing (686) (626)
Other (1,176) 1,338
------- -------
TOTAL NET LOSS (6,805) (1,173)
------- -------
INTER-SEGMENT ELIMINATIONS - (57)
------- -------
CONSOLIDATED NET LOSS $(6,805) $(1,230)
------- -------
------- -------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
DEPRECIATION AND AMORTIZATION:
Communications services $ 779 $ 253
Equipment distribution 379 207
Technology 73 25
Manufacturing 98 166
------- --------
TOTAL DEPRECIATION AND AMORTIZATION 1,329 651
------- --------
INTER-SEGMENT ELIMINATIONS - -
------- --------
CONSOLIDATED DEPRECIATION AND AMORTIZATION $ 1,329 $ 651
------- --------
------- --------
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
INTEREST INCOME (EXPENSE):
Communications services $ 2 $ 7
Equipment distribution (215) (58)
Technology (89) (258)
Manufacturing (44) (250)
Other (337) (11)
------- --------
TOTAL INTEREST INCOME (EXPENSE) (683) (570)
------- --------
INTER-SEGMENT ELIMINATIONS - -
------- --------
CONSOLIDATED INTEREST INCOME (EXPENSE) $ (683) $ (570)
------- --------
------- --------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
INCOME TAX BENEFIT (EXPENSE):
Communications services $ - $ (14)
Equipment distribution - 39
Technology - 303
Manufacturing - 545
Other - 633
------- ------
TOTAL INCOME TAX BENEFIT (EXPENSE) - 1,506
------- ------
INTER-SEGMENT ELIMINATIONS - -
------- ------
CONSOLIDATED INCOME TAX BENEFIT (EXPENSE) $ - $1,506
------- ------
------- ------
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
EXPENDITURES TO ACQUIRE LONG-LIVED ASSETS:
Communications services $ 1,510 $ 24
Equipment distribution 452 375
Technology 91 -
Manufacturing 48 1,611
Other 68 (39)
------- ------
TOTAL EXPENDITURES TO ACQUIRE LONG-LIVED ASSET 2,169 1,971
------- ------
INTER-SEGMENT ELIMINATIONS - -
------- ------
CONSOLIDATED EXPENDITURES TO ACQUIRE LONG-LIVED ASSETS $ 2,169 $ 1,971
------- ------
------- ------
</TABLE>
13
<PAGE>
SEGMENT INFORMATION BY GEOGRAPHIC AREA:
Revenues are attributed to geographic area by destination of the goods
or services (e.g. U.K. revenues will comprise only those sales to U.K.
customers. Radiocoms sales to external U.S. customers will be U.S. sales).
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
------------ -------------
<S> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
United States $ 3,300 $ 1,528
United Kingdom 5,940 5,206
------- -------
CONSOLIDATED REVENUES 9,240 6,734
------- -------
REVENUES BETWEEN GEOGRAPHIC AREAS:
United States 214 278
------- ------
ELIMINATIONS (214) (278)
------- ------
$ 0 $ 0
------- ------
------- ------
<CAPTION>
December 31, September 31,
1997 1996
------------ -------------
<S> <C> <C>
ASSETS:
Communications services $ 55,064 $ 54,247
Equipment distribution 35,350 32,641
Technology 1,272 1,218
Manufacturing 13,541 16,574
Other 4,740 10,930
-------- --------
TOTAL ASSETS 109,967 115,610
-------- --------
INTER-SEGMENT ELIMINATIONS (3,044) (3,045)
-------- --------
CONSOLIDATED ASSETS $106,923 $112,565
-------- --------
-------- --------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
December 31, September 31,
1997 1996
------------ -------------
<S> <C> <C>
LONG-LIVED ASSETS:
Communications services $53,757 $53,114
Equipment distribution 20,638 20,515
Technology 1,272 1,218
Manufacturing 4,450 4,465
Other 1,590 1,519
-------- -------
TOTAL LONG-LIVED ASSETS 81,707 80,831
-------- -------
INTER-SEGMENT ELIMINATIONS (2,694) (2,695)
-------- -------
CONSOLIDATED LONG-LIVED ASSETS $79,013 $78,136
-------- -------
-------- -------
</TABLE>
The Company has applied the principles of SFAS 131 "Disclosures about
Segments of an Enterprise and Related Information" in the above presentation
of Segment and Geographic Information.
(10) 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 Simmonds Capital Limited ("SCL"), Simmonds
Mercantile and Management Inc. ("SMM") which is a company that is controlled
by SCL and Midland International Corporation ("MIC"), a wholly-owned
subsidiary of SCL. 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 $4,000 per year
plus $500 per meeting to a maximum of $10,000 per director. For the three
months ended December 31, 1997, the Company did not pay any directors fees
and accrued $9,000 for unpaid directors fees.
On September 19, 1996, the Company's Midland USA, Inc. ("MUSA")
subsidiary 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 the three
months ended December 31, 1997, MUSA paid $42,000 to MIC. This agreement
continues on a month-to-month basis.
Pursuant to a Support Services Agreement dated December 3, 1996, by and
between the Company and Securicor, the Company agreed, in connection with the
Radiocoms Acquisition, 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. As of December 31, 1997, $666,000 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 $20,000 during the
first quarter of fiscal 1998. In addition, Mr. Wasserman receives $2,000 per
month as compensation for his services as the Secretary of the Company.
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 the first quarter of fiscal 1998,
Kelly & Povich, P.C. received fees of approximately $32,000.
15
<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 14 "Related Party
Borrowings."
(11) 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
December 31, 1997, total future minimum lease payments are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $1,474
1999 1,708
2000 897
2001 221
2002 39
Thereafter 7
------
$4,346
------
------
</TABLE>
As of December 31, 1997, MUSA had a purchase commitment with its main
supplier of radios to purchase $2,141,000 of inventory, see note 3. "Financial
Instruments."
(12) 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 $1,500,000.
(13) THIRD PARTY BORROWINGS
In December 1997, MUSA entered into a revolving credit agreement
("Credit Agreement") with a non-bank lender. The Credit Agreement makes
available $5,000,000 though December 1999. Borrowing under the Credit
Agreement is secured by the assets of MUSA and bears 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 the use of the December 1997 Facility (defined
below 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. As of December 31, 1997, there was no outstanding indebtedness
under this new line of credit.
16
<PAGE>
(14) RELATED PARTY BORROWINGS
In December 1997, the Company entered into 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
$29,500,000 (including the outstanding indebtedness of $25,400,000).
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, $1,000,000 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 $1,650,000
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 exceeding $8,000,000.
Subject to the release of Securicor from certain letter of credit
commitments, at December 31, 1997, the Company had approximately
$4,000,000 in availability for future borrowings under the December
1997 Facility.
b) Securicor has agreed pursuant to a 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 $12,400,000 of a new
series of preferred stock.
c) Securicor has agreed pursuant to a Termination and Release dated
December 29, 1997 to reimburse the Company approximately $2,600,000,
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. During January 1998, Securicor
reimbursed the Company in fulfillment of this obligation.
As a result of the above agreements, the December 31, 1997 related party
borrowings will be repaid as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year
-----------
1998 $ -
1999 -
2000 -
2001 1,500
2002 7,500
Thereafter 16,423
-------
$25,423
-------
-------
</TABLE>
(15) PREFERRED STOCK OF SUBSIDIARY
In December 1996, the Company consummated the Radiocoms Acquisition. Prior
to the consummation of this transaction, Securicor forgave approximately
$12,000,000 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. The preferred stock is mandatorily redeemable on June
30, 2006 and bears a dividend rate of 6%.
(16) ACQUISITION OF NEW SYSTEMS
KRYSTAL SYSTEMS
On November 11, 1996, the Company entered into an agreement to acquire
from Krystal Systems, Inc. up
17
<PAGE>
to 25 constructed, but unloaded, 220MHz systems and related FCC licenses
("Krystal Systems"). Through December 31, 1997, the Company has paid
$4,095,000 of the purchase price for 23 of the Krystal Systems. The remaining
balance of $45,000 was accrued at December 31, 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
$1,925,000. 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 $84,000); (b) issuance of approximately 682,735 shares of
Common Stock (valued for purposes of the transaction at $1,250,000); (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 $301,000); (d) forgiveness of approximately
$95,000 of debt owed by ADC to Radiocoms; (e) a cash payment of $119,000.
Closing of such transactions (and payment of the purchase price) was to occur
upon receipt of, and uncontested grant by the FCC, of the licenses to Roamer
One. During the first quarter of fiscal 1998, the Company issued an aggregate
of 465,484 shares of Common Stock for the acquisition of those licenses,
valued at $807,000 for book purposes.
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 Cellular, a
California Corporation ("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 $938,000) plus cash payments
totaling $759,000. Closing of such transactions (and payment of the purchase
price) occurs 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. During the first quarter of fiscal 1998, the Company issued 41,432
shares of Common Stock as final payment for the acquisition of those
licenses. The value of $75,000 for book purposes was accrued as of September
30, 1997.
(17) LEGAL PROCEEDINGS
The Company, Mr. David Neibert, the Company's executive vice president
and Mr. Nicholas R. Wilson, a former Chairman of the Company ("Intek
Defendants") were 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 ("RICO"), 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 specialized mobile radio ("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 filed a motion to dismiss the complaint on various grounds. In
response plaintiffs sought leave to file an amended complaint, which request
was granted by the court. Intek requested plaintiffs to withdraw all claims
against the Intek defendants on the grounds that they are frivolous. On
February 3, 1998, plaintiffs filed an amended complaint which purports to
allege claims under RICO, the Securities Act of 1933, the Securities Exchange
Act of 1934 and various common law state claims in connection with (i) the
sale and marketing of interests in certain SMR partnerships and (ii)
purported improper dissipation of assets of certain of the SMR partnerships.
Plaintiffs seek
18
<PAGE>
rescissory damages with interest and punitive damages relating to such
asserted claims. No specific amount of alleged damages is mentioned in the
amended complaint. The Intek Defendants have until March 3, 1998 to answer,
move, or otherwise respond to the amended complaint. In the opinion of the
management of the Company, this lawsuit will not have a material adverse
affect on the Company.
On January 30, 1998, a related lawsuit was commenced in Illinois State
Court by Consulting 220, Inc., on behalf of the Los Angeles II SMR
Partnership (the "Partnership"), against Charlotte Scott (one of the
plaintiffs in the SCOTT ET AL. v. STEINGOLD ET AL. action), her attorneys
Gardiner, Koch & Hines and the Managing Partners of the Partnership alleging
that Scott and the Managing Partners breached fiduciary duties to the
Partnership and its partners by permitting Partnership money designated and
reserved for Partnership operations to be used for prosecution of the SCOTT
v. STEINGOLD action. Plaintiff seeks a constructive trust of the Partnership
monies allegedly provided to Scott's attorneys.
(18) SUBSEQUENT EVENTS
The Company announced on January 13, 1998 that its Roamer One subsidiary
entered into a letter of intent to acquire substantially all of the assets,
for cash, of Wireless Plus, Inc., located in Hayward, California, the state's
largest subscriber-based provider of 220MHz wireless services. This
transaction, if completed, will establish Intek in the San Francisco market
and substantially increase coverage and capacity for its existing operations
in Southern California.
The Company announced on February 12, 1998 that South Korea's Kukjae
Electronics, Ltd. Co. ("Kukjae"), one of Korea's leading manufacturers of
mobile radio equipment, has agreed to adopt the Company's patented LM
Technology. The agreement will allow Kukjae to manufacture and sell
LM-compatible radio products and operate narrowband radio networks based on
LM Technology. Product distribution will include Korea and potentially other
Asian markets. Among other things, the agreement calls for the Company to
provide Kukjae with the equipment and technical assistance needed to develop
a demonstration system to introduce LM Technology to Korean industry,
academic and government authorities. Kukjae, a subsidiary of Unimo
Corporation, is a manufacturer and distributor of radio and
telecommunications equipment and a provider of system engineering services.
With six facilities in South Korea, including headquarters in Seoul, Kukjae
has offices in Tokyo, Los Angeles and Shenzhen, China. Its major products
include portable and mobile radios, trunked radios, radio repeaters,
closed-circuit TV and related systems, as well as secured communications
equipment for naval and military applications.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion sets forth certain factors which produced
changes in the Company's results of operations during the three months ended
December 31, 1997 (first quarter of fiscal 1998) as compared with the same
period in 1996 (first quarter of fiscal 1997) as indicated in the Company's
consolidated financial statements. The following should be read in
conjunction with the Financial Statements and related notes contained in Item
1 to this report and in conjunction with the financial statements and notes
thereto included in the Company's latest annual report on Form 10-K for the
year ended September 30, 1997 (the "Annual Report"). 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.
Certain matters discussed in this Quarterly Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and as such may involve
risks and uncertainties. The Annual Report contains a detailed description of
such risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities
in the market and statements regarding the Company's mission and vision. The
Company's actual results, performance or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements.
OVERVIEW
The Company's mission is to create and supply spectrum efficient
wireless technologies, products and services worldwide and to establish the
Company as a dominant force in the communications business.
The Company provides two-way 220 MHz specialized mobile radio ("SMR")
services to its subscribers under the Roamer One brand name on systems
utilizing the Company's patented and proprietary linear modulation ("LM")
technology ("LM Technology"). The Company's SMR sites cover 120 markets and a
U.S. Population base of 175 million people and are referred to herein as the
Roamer One Network. The Company has devoted, and expects to continue to
devote, substantial financial and management resources to the development of
the Roamer One Network. Additionally, the Company also is 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 land mobile
radio ("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. Other than for holders of several national licenses and
non-nationwide systems within the American/Canadian border area as defined by
the FCC, the mandatory construction dates for Phase I licenses have expired
and the Company's marketing efforts for 220 MHz equipment in the U.S. are
limited to the aforementioned license holders of unconstructed systems,
currently licensed system operators who desire to upgrade their systems to
LM, and the public safety market which it is expected will shortly become
able, under FCC regulations, to construct 220 MHz systems. The Company
redirected its marketing campaign of the Roamer One Network from a national
campaign to a focused specific geographic campaign. 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 auction 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 2 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.
20
<PAGE>
RESULTS OF OPERATIONS
Results of operations for the three months ended December 31, 1997 (YTD
Fiscal 1997) include Radiocoms for the entire period but Roamer One, MUSA and
corporate are only included from December 3, 1996.
The following table sets forth, by the Company's various lines of
business for the first quarter of fiscal 1998 compared to the first quarter
of fiscal 1997, the percentage of total revenue represented by certain
Consolidated Statements of Operations data.
<TABLE>
YTD YTD
Fiscal Fiscal
1998 1997
------ ------
<S> <C> <C>
Revenues:
Communications Services 2% 3%
Equipment Distribution 67% 51%
Technology - -
Manufacturing 31% 46%
------ ----
Consolidated 100% 100%
------ ----
Cost of Goods and Services Provided:
Communications Services 501% 99%
Equipment Distribution 70% 69%
Technology - -
Manufacturing 77% 80%
------ ----
Consolidated 82% 75%
------ ----
Other Operating Expenses:
Communications Services 680% 72%
Equipment Distribution 35% 33%
Technology - -
Manufacturing 37% 47%
Corporate - -
------ ----
Consolidated 70% 60%
------ ----
Operating loss, before depreciation and
amortization:
Communications Services (1081%) (70%)
------ ----
Equipment Distribution (3%) (2%)
Technology - -
Manufacturing (19%) (25%)
Corporate - -
------ ----
Consolidated (52%) (34%)
Depreciation and Amortization 14% 10%
------ ----
Operating Loss (66%) (44%)
------ ----
</TABLE>
21
<PAGE>
THREE MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTH PERIOD ENDED
DECEMBER 31, 1996
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
the three months ended December 31, 1996 include the statements of Intek and
its wholly-owned subsidiaries, Roamer One and MUSA from December 3, 1996
through December 31, 1996 and include the accounts of Radiocoms from October
1, 1996 through December 31, 1996. The consolidated statements for the three
months ended December 31, 1997 include the accounts of Intek and all of its
subsidiaries for the entire three months.
REVENUES
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 December 31, 1997, Roamer One had approximately 2,200
subscribers compared to approximately 1,000 at September 30, 1997 and less
than 100 at June 30, 1997. Subscriber revenues for the three months ended
December 31, 1997 were $52,000.
Subscribers to Relayfone, a public access mobile radio system operating
from 10 sites in the U.K., numbered approximately 1,620 at December 31, 1997
compared to approximately 1,900 at December 31, 1996. The decrease was mainly
due to the loss of a large Securicor affiliate account. The decrease in the
number of subscribers resulted in a decline in revenues from $203,000 for the
first quarter of fiscal 1997 to $149,000 for the comparable quarter of fiscal
1998.
EQUIPMENT DISTRIBUTION
Sales by the Company's U.S. equipment distribution business for the
first quarter of fiscal 1998 were $3,282,000, of which $3,166,000 was to
external customers and $116,000 was to related parties. Compared to the same
period of fiscal 1997, sales were lower by 4%. Sales in fiscal 1997 were
favorably impacted by improved deliveries of products to fill accumulated
backorders, whereas sales in first quarter of fiscal 1998 returned to more
normal levels. MUSA sales in the first quarter of fiscal 1998 were negatively
impacted by late deliveries of a new line of radios from a major supplier.
The supplier began to ship to MUSA on a timely basis in late December 1997.
The Company's sale of LM related products to third parties for the three
months ended December 31, 1997 totaled $285,000, as compared with the same
period in the prior year when no LM related sales were made to third parties.
For first quarter of fiscal 1998, Radiocoms had revenues from equipment
distribution and related services of $2,895,000, a 50% increase from that
reported for the first quarter of fiscal 1997. The increase is due to more
focused management of the sales team, together with the addition of new
Motorola hand-portable radios to the product line. Orders were obtained from
a range of industries including local governmental authorities, large retail
complexes, oil and gas.
Equipment sales by Roamer One during the first quarter of fiscal 1998 were
$82,000, compared to $443,000 for the comparable quarter in fiscal 1997. The
buildout of Phase I 220MHz licenses is essentially complete. Sales of 220MHz
repeater site equipment will be minimal until after the Phase II Licensing
auctions by the FCC, which are scheduled to commence on May 19, 1998. While
marketing will commence after the Phase II auction, there is no assurance that
sales will be made to licensees.
TECHNOLOGY
No technology license fees were earned in either the first quarter of
fiscal 1998 or the comparable quarter of fiscal 1997.
22
<PAGE>
MANUFACTURING
U.K. contract manufacturing revenues were $2,994,000 for the three
months ended December 31, 1998, of which $2,896,000 was to external customers
and $98,000 was to related parties. This was a decline of 11% in total sales
and 6% in third party sales over the comparable period of fiscal 1997. This
shortfall was primarily due to lack of sales of LM products to third parties.
During the first quarter of fiscal 1997, the Company had sales of $381,000 of
LM equipment to third parties for Phase I 220 MHz license construction and
had no such sales during the first quarter of fiscal 1998 as the mandatory
construction dates for Phase I licenses expired prior to fiscal 1998. As of
December 31, 1997, the order backlog was $4,779,000.
COST OF GOODS AND SERVICES PROVIDED
COMMUNICATIONS SERVICES
Cost of services includes site and certain technical and customer
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. Customer support includes phone-based assistance to subscribers.
For the first quarter of fiscal 1998, Roamer One's site and technical support
expenses were $935,000, compared to $124,000 for the comparable quarter of
the prior year. This increase is due to the fact that Roamer One was only
consolidated for 1 month in the quarter ended December 31, 1996, and is due
to the incremental cost of additional sites, the cost of networking sites
together and the cost of supporting subscribers, now the marketing campaign
has begun.
Relayfone's cost of service for the first quarter of fiscal 1998 was
$73,000, a decline of 5% from the comparable period of fiscal 1997. Costs
include licenses and site rentals which are fixed in nature and are not
volume related.
EQUIPMENT DISTRIBUTION
For the first quarter of fiscal 1998, the Company's U.S. equipment
business had a cost of sales of $2,131,000 (65% of sales). Cost of sales as a
percentage of sales was favorably impacted by the rapidly growing strength of
the U.S. Dollar against the Japanese Yen, up 7.8% compared to September 30,
1997, and up 12.8% as compared to the average rate of exchange during the
same period in fiscal 1997, providing substantial reductions in the cost of
products purchased in Japan.
Radiocoms' cost of sales of $2,027,000 for the first quarter of fiscal
1998 was 70% of sales, compared to 65% for the comparable quarter of fiscal
1997. The increase was due to the mix of products sold and a low margin
government contract and did not represent an overall cost increase.
MANUFACTURING
Cost of sales consists of raw materials, labor and factory associated
overhead. The percentage of cost of sales to net sales decreased marginally
to 82% for the first quarter of fiscal 1998, compared to 80% for the
comparable quarter of fiscal 1997. More aggressive purchasing activities have
been instigated to reduce future cost of sales.
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
three months ended December 31, 1997 were $874,000. Sales and marketing
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 three months ended
December 31, 1997 were $493,000.
23
<PAGE>
EQUIPMENT DISTRIBUTION
MUSA selling expenses are primarily sales staff salaries and bonuses,
travel, advertising and promotion, trade shows and the maintenance of a
sourcing office in Asia. Selling expenses for the first quarter of fiscal
1998 were $621,000 (19% of related sales) as compared to $688,000 (20% of
related sales) for the same period in fiscal 1997. General and administrative
expenses are salaries, facilities costs, data processing charges and
insurance. General administrative expenses for the first quarter of fiscal
1998 were $873,000 (26% of related sales) as compared to $802,000 (23% of
related sales) for the same period in fiscal 1997. 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.
Selling expenses at Radiocoms were $189,000 for the first quarter of
fiscal 1998 or 25% lower than for the comparable quarter of fiscal 1997 as
the sales staff headcount has declined and commission programs have been
restructured. General and administrative expenses remained static at $453,000
due to a high bad debt reserve that is not expected to increase in the near
future.
MANUFACTURING
Combined selling, general and administrative expenses totaled $1,070,000
for the first quarter of fiscal 1998, compared to $1,437,000 for the
comparable quarter of fiscal 1997. The reduction was due to headcount
reductions during the second half of fiscal 1997 and associated reduction of
overhead.
TECHNOLOGY
Research and development expenses of $624,000 for the first quarter of
fiscal 1998 were 27% lower than for the comparable quarter of fiscal 1997.
This reduction was due to an increased focus on high priority projects and a
reduction in use of sub-contract and consulting labor. General and
administrative expenses increased to $430,000 for the first quarter of fiscal
1998 from $343,000 for the comparable quarter of fiscal 1997.
CORPORATE
Corporate expenses include salaries, consulting and management fees,
legal and audit costs. General and administrative expenses for the three
months ended December 31, 1997 were $869,000. Compensation expense represents
the major component of this item as well as the cost of a corporate office.
OPERATING LOSS, BEFORE DEPRECIATION AND AMORTIZATION
COMMUNICATIONS SERVICES
Roamer One's loss for first quarter of fiscal 1998 was $2,250,000. 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.
Relayfone achieved a profit of $76,000 in the first quarter of fiscal
1998. This was a decline of $50,000 compared to a profit of $126,000 in the
comparable quarter of fiscal 1997 as a result of the decline in average
subscriber count on a high fixed cost base.
EQUIPMENT DISTRIBUTION
For the first quarter of fiscal 1998, the operating loss was $343,000
for the Company's U.S. equipment distribution business or 11% of related
sales. This compares to an operating loss of $135,000 or 12% of sales for the
comparable quarter of fiscal 1997.
MANUFACTURING
For the first quarter of fiscal 1998, the operating loss was $529,000 or
18% of sales, compared to an operating loss of $755,000 or 23% of sales for
the comparable quarter of fiscal 1997.
TECHNOLOGY
For the first quarter of fiscal 1998, the operating loss was $1,054,000
as no license fees were earned in this
24
<PAGE>
quarter. For the comparable quarter of fiscal 1997, the operating loss was
$1,201,000 and there were likewise no license fees earned.
DEPRECIATION AND AMORTIZATION
Depreciation of fixed assets and amortization of the intangible assets
related to the Radiocoms Acquisition and Midland Transaction were $1,329,000
and $651,000, respectively, for the first quarter of fiscal years 1998 and
1997. The 104% increase in depreciation expense for fiscal 1998 from that
reported in the same period of the prior fiscal year results from the
inclusion of Roamer One and MUSA plant and equipment in the fiscal 1998
calculation, together with the amortization of the intangible assets related
to the Radiocoms Acquisition which did not begin until December 3, 1996.
Other Income (Expense)
OTHER INCOME (EXPENSE)
INTEREST
Interest expense for the first quarter of fiscal 1998 was $740,000 which
was offset by interest income of $57,000 for net interest expense of $683,000
compared to $570,000 for the comparable quarter of fiscal 1997. Of the
interest expense, $47,000 related to borrowings from third parties and
$693,000 related to borrowings from Securicor (of which $325,000 was added to
principal and the balance is accrued).
OTHER
Other income of $16,000 is interest from notes related to the sale of a
discontinued operation
NET LOSS
The consolidated net loss for the first quarter of fiscal 1998 was
$6,805,000. For the comparable quarter of fiscal 1997, the net loss was
$1,230,000. However, fiscal 1997 included Radiocoms for the entire period but
Roamer One, MUSA and corporate were only included for one month.
PREFERRED DIVIDENDS
Pursuant to the terms of the Radiocoms Acquisition, $20,000,000 of
inter-company balances between Radiocoms and Securicor were converted into
20,000 shares of Radiocoms preferred stock with a par value of $1,000 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 $1,000,000 relating to 1997 will be paid
through the issuance of additional shares of preferred stock.
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 first quarter of fiscal 1998 was $7,118,000.
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 first quarter of fiscal 1998, the Company used $7,320,000 in
cash for operating activities and $1,338,000 was spent for capital
expenditures. Through its financing activities, the Company raised
approximately $1,200,000 in gross proceeds from Securicor. The Company also
borrowed $778,000 from bank lines of credit and received proceeds of
$7,458,000 from the sale of its investment in EFJ.
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
$1,000,000 to acquire up to 1% of the outstanding shares of Common Stock.
Through February 6, 1998, the Company had acquired 184,500 shares of Common
Stock in open market transactions.
25
<PAGE>
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, MUSA entered into a revolving credit agreement
("Credit Agreement") with a non-bank lender. The Credit Agreement makes
available $5,000,000 through December 1999. Borrowing under the Credit
Agreement is secured by the assets of MUSA and bears 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 inter-company 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 the use of the December 1997 Facility (defined
below) 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. As of December 31, 1997, there was no outstanding indebtedness
under this new line of credit.
In December 1997, the Company entered into 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
$29,500,000 (including the outstanding indebtedness of $25,400,000).
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, $1,000,000 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 $1,650,000
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 exceeding $8,000,000.
Subject to the release of Securicor from certain letter of credit
commitments, at December 31, 1997, the Company had approximately
$4,000,000 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 $12,400,000 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 $2,600,000, 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
26
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
27
<PAGE>
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
The Company, Mr. David Neibert, the Company's executive vice president
and Mr. Nicholas R. Wilson, a former Chairman of the Company ("Intek
Defendants") were 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 ("RICO"), 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 specialized mobile radio ("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 filed a motion to dismiss the complaint on various grounds. In
response plaintiffs sought leave to file an amended complaint, which request
was granted by the court. Intek requested plaintiffs to withdraw all claims
against the Intek defendants on the grounds that they are frivolous. On
February 3, 1998, plaintiffs filed an amended complaint which purports to
allege claims under RICO, the Securities Act of 1933, the Securities Exchange
Act of 1934 and various common law state claims in connection with (i) the
sale and marketing of interests in certain SMR partnerships and (ii)
purported improper dissipation of assets of certain of the SMR partnerships.
Plaintiffs seek rescissory damages with interest and punitive damages
relating to such asserted claims. No specific amount of alleged damages is
mentioned in the amended complaint. The Intek Defendants have until March 3,
1998 to answer, move, or otherwise respond to the amended complaint. In the
opinion of the management of the Company, this lawsuit will not have a
material adverse affect on the Company.
On January 30, 1998, a related lawsuit was commenced in Illinois State
Court by Consulting 220, Inc., on behalf of the Los Angeles II SMR
Partnership (the "Partnership"), against Charlotte Scott (one of the
plaintiffs in the SCOTT ET AL. v. STEINGOLD ET AL. action), her attorneys
Gardiner, Koch & Hines and the Managing Partners of the Partnership alleging
that Scott and the Managing Partners breached fiduciary duties to the
Partnership and its partners by permitting Partnership money designated and
reserved for Partnership operations to be used for prosecution of the SCOTT
v. STEINGOLD action. Plaintiff seeks a constructive trust of the Partnership
monies allegedly provided to Scott's attorneys.
Item 2. Changes In Securities.
(a) None.
(b) None.
(c) Recent Sales of Unregistered Securities
During the first quarter of fiscal 1998, the Company issued
an aggregate of 506,916 shares of Common Stock for the
acquisition of FCC licenses as follows:
1. The Company consummated two agreements with American
Digital Corporation and 22 holders of licenses of
220MHz FCC licenses. This transaction is described
fully in Item 1. FINANCIAL STATEMENTS. Note 16,
"Acquisition of New Systems." During the first quarter
of fiscal 1998, the Company issued, under Section 4(2)
of the Securities Act of 1933, as amended
(the "Securities Act"), an aggregate of 465,484 shares
of Common Stock for the acquisition of those licenses.
2. The Company entered into purchase and sale
agreements with 25 holders of 220MHz FCC licenses
managed by the Company on behalf of Pagers Plus
Cellular, a California Corporation. This transaction
is described fully in Item 1. FINANCIAL STATEMENTS.
Note 16, "Acquisition of New Systems." During the
first quarter of fiscal 1998, the Company issued
41,432 shares of stock, under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities
Act"), as final payment for the acquisition of those
licenses.
(d) Not applicable.
28
<PAGE>
Item 3. Defaults Upon Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a)
<TABLE>
<S> <C> <C>
Exhibit No.
- -----------
3.1(i) Articles of Incorporation of Intek Diversified
Corporation (the "Registrant"). (2)
3.1(ii) By-Laws of the Registrant. (2)
10 Material contracts (3)
11 Statement re computation of per share earnings. (3)
12 Statement re computation of ratios. (3)
15 Letter re unaudited interim financial information (3)
21 Subsidiaries (4)
22 Published Report regarding matters submitted to vote
of security holders (3)
27 Financial Data Schedule (1)
</TABLE>
(1) Included in this Report.
(2) This exhibit is contained in the Registrant's Annual Report on Form 10K
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.
(3) Not Required
(4) This exhibit is contained in the Registrant's Annual Report for the
year ended September 30, 1997, filed with the Commission on January 13,
1998 (Commission File No. 0-9160), and incorporated herein by reference.
(b) Reports on Form 8-K.
None.
29
<PAGE>
INTEK DIVERSIFIED CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATED: February 13, 1998
INTEK DIVERSIFIED CORPORATION
By: /s/ D. Gregg Marston
---------------------------------------
D. Gregg Marston
Vice President, Finance
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 371,000
<SECURITIES> 2,455,000
<RECEIVABLES> 7,941,000
<ALLOWANCES> 901,000
<INVENTORY> 12,662,000
<CURRENT-ASSETS> 27,910,000
<PP&E> 29,093,000
<DEPRECIATION> 6,551,000
<TOTAL-ASSETS> 106,923,000
<CURRENT-LIABILITIES> 11,893,000
<BONDS> 0
0
21,371,000
<COMMON> 106,602,000
<OTHER-SE> (58,704,000)
<TOTAL-LIABILITY-AND-EQUITY> 106,923,000
<SALES> 9,039,000
<TOTAL-REVENUES> 9,240,000
<CGS> 6,544,000
<TOTAL-COSTS> 7,552,000
<OTHER-EXPENSES> 7,826,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (683,000)
<INCOME-PRETAX> (6,805,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,805,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,103,000)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
