<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
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, 1998
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 GLOBAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-2450145
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 Park Avenue
New York, NY 10016
---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 949-4200
--------------
</TABLE>
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, $0.01 par
value, as of February 12, 1999, is 42,303,038 shares.
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEK GLOBAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
($'s in thousands, except share and per share amounts)
<TABLE>
Three Months Ended
December 31,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues
Net product sales $ 5,353 $ 8,942
Service income 621 298
----------- -----------
Total revenues 5,974 9,240
Costs and expenses:
Cost of product sales 3,340 6,544
Cost of services provided 988 1,008
Sales and marketing 1,553 1,853
Research and development 676 633
General and administrative 4,030 4,011
Depreciation and amortization 1,393 1,329
----------- -----------
Operating loss (6,006) (6,138)
Other income (expense):
Interest (1,092) (683)
Other (36) 16
----------- -----------
Loss before income taxes (7,134) (6,805)
Income tax benefit -- --
----------- -----------
Net loss (7,134) (6,805)
Less: preferred dividends (665) (298)
----------- -----------
Net loss applicable to common shareholders (7,799) (7,103)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax 390 (1)
----------- -----------
Comprehensive income (loss) $ (7,409) $ (7,104)
----------- -----------
----------- -----------
Net loss per share applicable to common shareholders
(basic & diluted) $ (0.18) $ (0.17)
----------- -----------
----------- -----------
Weighted average number of common shares outstanding
(basic & diluted) 42,303,038 42,056,269
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
2
<PAGE>
INTEK GLOBAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($'s in thousands, except share and per share amounts)
<TABLE>
(Unaudited)
Dec. 31, 1998 Sept. 30, 1998
------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,191 $ 5,719
Accounts receivable, net of allowance for doubtful accounts
of $842 in December 1998 and $993 in September 1998 3,884 3,870
Inventories 20,511 17,677
Deposits 846 1,750
Amounts due from related parties 310 396
Prepaid expenses and other current assets 1,503 1,796
---------- -----------
Total current assets 29,245 31,208
---------- -----------
PROPERTY AND EQUIPMENT, NET 24,160 23,569
OTHER ASSETS:
Note receivable 140 580
Intangible assets, net 20,744 20,961
Inventory-long term 3,549 3,189
Other 612 607
---------- -----------
Total other assets 25,045 25,337
---------- -----------
TOTAL ASSETS $ 78,450 $ 80,114
---------- -----------
---------- -----------
CURRENT LIABILITIES:
Accounts payable 6,356 7,062
Amounts due to related parties 2,930 2,499
Accrued liabilities 6,531 7,420
Notes payable-third party 6,949 3,299
Notes payable-related party 2,500 -
---------- -----------
Total current liabilities 25,266 20,280
---------- -----------
LONG TERM DEBT:
Notes payable--third party 2,044 2,038
Notes payable--related party 30,792 30,733
Other 60 65
---------- -----------
Total long term debt 32,896 32,836
---------- -----------
PREFERRED STOCK - Mandatorily Redeemable 36,117 35,452
---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 60,000,000 shares
authorized 43,305,620 shares issued at December 31, 1998
and September 30, 1998 433 433
Capital in excess of par value 107,840 108,471
Treasury stock, at cost, 1,002,582 shares at
December 31, 1998 and September 30, 1998 (2,099) (2,099)
Accumulated deficit (120,752) (113,618)
Accumulated other comprehensive income--
Currency translation adjustment (1,251) (1,641)
---------- -----------
Total shareholders' equity (deficit) (15,829) (8,454)
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 78,450 $ 80,114
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
3
<PAGE>
INTEK GLOBAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($'s in thousands)
<TABLE>
Three Months Ended
December 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,134) $ (6,805)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,393 1,329
Changes in operating assets and liabilities:
Accounts receivable and amounts due from related parties 68 821
Deposits 904 --
Inventories (3,198) (243)
Income taxes receivable from related parties -- 262
Prepaid expenses and other current assets 298 (556)
Accounts payable and amounts due to related parties (287) 297
Accrued liabilities (897) (1,350)
Accrued liabilities to related parties -- (490)
Deferred income -- (627)
Other (25) (26)
----------- ----------
Net cash used in operating activities (8,878) (7,388)
----------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of marketable securities -- 7,458
Expenditures for property and equipment, net (1,690) (1,338)
Expenditures for FCC licenses (167) (28)
Collection of note receivable 440 --
Other 93 20
----------- ----------
Net cash provided by (used in) investing activities (1,324) 6,112
----------- ----------
Cash Flows From Financing Activities:
Net change in bank overdraft 2,538 778
Proceeds from long term debt 1,651 --
Proceeds from long term debt-related party 2,500 1,200
Repayment on long and short term debt (441) --
Purchase of treasury stock -- (79)
Other 30 (15)
----------- ----------
Net cash provided by financing activities 6,278 1,884
----------- ----------
Effect of foreign exchange rates on cash 396 309
----------- ----------
Net increase (decrease) in cash and cash equivalents (3,528) 917
Cash and cash equivalents at beginning of period 5,719 1,909
----------- ----------
Cash and cash equivalents at end of period $ 2,191 $ 2,826
Supplemental disclosures of cash flow information: ----------- ----------
----------- ----------
Cash paid for interest $ 138 $ 43
Cash paid for income taxes $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements
4
<PAGE>
INTEK GLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) PRESENTATION
The unaudited condensed consolidated financial statements included herein
have been prepared by Intek Global Corporation (the "Company" or "Intek
Global"), 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 Management's Discussion and Analysis and 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, 1998.
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 the Company's Securicor Electronics
Limited ("SEL") subsidiary (formerly known as Securicor Radiocoms Limited) 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. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses.
Actual results may differ from these estimates. The results of the interim
periods are not necessarily indicative of results to be expected for the entire
year.
(2) 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, 1998, the Company had outstanding hedge contracts of Japanese Yen
Y104,451,000 to cover its firm foreign purchase commitments of Y239,594,000
leaving an exposed position of Y135,143,000 equating to $1,189,000.
Additionally, at December 31, 1998, the Company's hedge contracts totaled
$861,000 at the contracted rate and had a fair value of $919,000. Gains and
losses on foreign currency firm commitment hedges are deferred and included in
the basis of the transactions underlying the commitments.
(3) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
December 31, September 30,
1998 1998
(Unaudited)
------------ ------------
<S> <C> <C>
Raw materials $ 6,981 $ 6,077
Work in progress 2,928 2,681
Finished goods 14,151 12,108
---------- -----------
Subtotal 24,060 20,866
Inventory not likely to be used or sold within one year (3,549) (3,189)
---------- -----------
Total current inventories $ 20,511 $ 17,677
---------- -----------
---------- -----------
</TABLE>
5
<PAGE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
Estimated December 31, September 30,
Useful Lives 1998 1998
(Years) (Unaudited)
------------- ------------- -------------
<S> <C> <C> <C>
Land -- $ 413 $ 423
Buildings 11 to 50 2,882 2,735
Site equipment 10 16,109 15,893
Production & test equipment 3 to 10 4,101 4,077
Furniture, fixtures and computers 3 to 10 3,181 3,190
Equipment held for rental 3 to 5 3,587 2,451
----------- -----------
Total property and equipment, at cost 30,273 28,769
Less accumulated depreciation (6,113) (5,200)
----------- -----------
Net property and equipment $ 24,160 $ 23,569
----------- -----------
----------- -----------
</TABLE>
(5) INTANGIBLE AND LONG LIVED ASSETS
Intangible assets consists of the following (in thousands):
<TABLE>
December 31, September 30,
1998 1998
(Unaudited)
------------- -------------
<S> <C> <C>
Excess of cost over fair value of net assets acquired (goodwill):
Intek Global USA USA, Inc. $ 9,755 $ 9,755
Data Express 1,386 1,386
---------- ----------
11,141 11,141
FCC licenses acquired from third parties 11,500 11,333
Trademarks and patents 81 81
---------- ----------
Total intangibles 22,722 22,555
Less accumulated amortization (1,978) (1,594)
---------- ----------
Net intangibles $ 20,744 $ 20,961
---------- ----------
---------- ----------
</TABLE>
(6) SEGMENT REPORTING
During fiscal 1998, the Company restructured itself to integrate its
design, manufacturing, distribution and airtime operations. The Company operates
in one industry segment as defined by FAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company is a provider of
spectrum-efficient wireless communications technology, products and services.
This conclusion is based upon how the Company's chief operating decision makers
view the Company's operations and how decisions are made to invest resources and
to assess performance. Products include linear modulation ("LM") and non-LM
based radios, and products manufactured under contract for third parties.
Services include subscriber revenues, royalties, equipment rental, and
non-warranty repair. All prior year segment information has been restated to
reflect the current year's structure of the Company's internal organization. The
Company's geographic data from continuing operations for the three months ended
December 31, 1998 and 1997 are as follows ($'s in thousands):
6
<PAGE>
<TABLE>
Revenues (Unaudited)
3 Months Ended
December 31
------------------------
1998 1997
------- -------
<S> <C> <C>
GEOGRAPHIC AREAS
United States
Unaffiliated $ 3,568 $ 3,202
To foreign affiliates -- --
Foreign
Europe (primarily United Kingdom) 2,406 6,038
To United States affiliates 777 98
Total sales between geographic areas (777) (98)
---------- ----------
Total Consolidated Revenues $ 5,974 $ 9,240
---------- ----------
---------- ----------
</TABLE>
<TABLE>
Long Term Assets (Unaudited)
-------------------------------
December 31, September 30,
1998 1998
------------- -------------
<S> <C> <C>
United States $ 44,896 $ 44,270
United Kingdom 4,309 4,636
---------- ----------
Total consolidated long term assets $ 49,205 $ 48,906
---------- ----------
---------- ----------
</TABLE>
(7) RELATED PARTY TRANSACTIONS
Related parties of Intek Global include Securicor Communications Limited
("Securicor"), a corporation formed under the laws of England and Wales, and its
ultimate parent company, the directors and officers of Intek Global and
companies that are affiliated with Directors of the Company. Related party
transactions, other than those disclosed elsewhere in the Notes to the
Consolidated Financial Statements and in the Company's annual report on Form
10-K, are disclosed below.
The Company believes that the terms of the transactions and the agreements
described below are on terms at least as favorable as those which it could
otherwise have obtained from unrelated parties. Ongoing 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.
SECURICOR
Pursuant to a Support Services Agreement dated December 3, 1996, by and
between the Company and Securicor, the Company agreed to obtain certain support
and administrative services for SEL from Securicor and/or its affiliates for the
purpose of enabling the Company to manage an orderly transition in its ownership
of SEL during fiscal 1997. During fiscal 1997, approximately $0.7 million of
support and administrative service costs (including services of Edmund Hough,
Intek Global's former Chief Executive Officer) were billed to Intek Global by
Securicor. As of December 31, 1998, these costs remained unpaid by Intek Global.
SEL sells products to Securicor. In the first quarter of fiscal year 1999,
revenues from such sales were $451,000. There were no sales to Securicor during
the first quarter of fiscal year 1998.
DIRECTORS, OFFICERS AND AFFILIATED COMPANIES
John Simmonds, a former 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
7
<PAGE>
International Corporation ("MIC"). Mr. Simmonds resigned from the Board of
Directors in July 1998. 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 Squire, Sanders & Dempsey
L.L.P., which acquired the practice of Kelly & Povich, P.C. John Wareham, a
director of the Company, is the President of the management consulting and
executive recruiting firm Wareham Associates, Inc.
The law firm Kohrman Jackson & Krantz performs legal services for the
Company and its subsidiaries for which it received fees of approximately $ 9,000
during the first quarter of fiscal 1999. In addition, Mr. Wasserman receives
$2,000 per month as compensation for his services as the secretary of the
Company.
The law firm of Squire, Sanders & Dempsey L.L.P., which acquired the
practice of Kelly & Povich, P.C., received fees of approximately $203,000 during
the first quarter of fiscal 1999. Mr. Kelly is a member of the Company's Board
of Directors.
The firm of Wareham Associates, Inc. provides management consulting and
executive recruiting services to the Company for which it received fees of
approximately $66,000 during the first quarter of fiscal 1999.
The Company retired $440,625 in debt related to the repurchase in March,
1998 of 352,500 shares of Intek Global common stock from Simmonds Capital
Limited in a private transaction.
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.
The Company has entered into several related party borrowings with
Securicor (see note 8). Roger Wiggs and Michael Wilkinson, directors of the
Company, are also officers of Securicor. Directors fees for Messrs. Wiggs and
Wilkinson are paid to Securicor plc.
(8) DEBT
RELATED PARTY BORROWINGS
In December 1997, the Company entered into a loan agreement ("December 1997
Facility") with Securicor replacing all prior loan agreements providing the
Company the ability to borrow up to $29.5 million. The December 1997 Facility
bears interest at 11.5% per annum, payable at June 30, 2003. Interest is accrued
each month, and on June 30 of each year, is to be added to the principal amount
outstanding. Principal payments are to be $0.5 million per month for 12 months
beginning July 1, 2001, $1.0 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 can be prepaid by the Company at
any time in $1.65 million increments without penalty. The December 1997 Facility
has to be repaid if Securicor ceases to be the beneficial owner of more than 50
percent of Intek Global common stock as a result of any transaction except the
direct or indirect transfer of the Intek Global common stock by Securicor and
also is subject to mandatory prepayments at the rate of 50 percent of the net
proceeds of any financing by the Company exceeding $8.0 million. At December 31,
1998, the amount payable under the December 1997 Facility totaled $30.7 million,
consisting of original principal borrowings of $29.5 million and capitalized
interest of approximately $1.2 million.
In December, 1998 the Company entered into an additional financing
arrangement ("December 1998 Facility") with Securicor providing the Company the
ability to borrow up to $25 million. Loans provided under this convertible
subordinated debt facility will accrue interest at the rate of 11.5 percent per
annum and will mature on December 31, 1999. The rate of conversion, if the
conversion feature is selected by Securicor Communications, will be based on the
market value of Intek Global common stock over specified periods. At December
31, 1998, the amount payable under the December 1998 financing arrangement
totaled $2.5 million.
As a result of the above arrangements, as of December 31, 1998, related
party borrowings will be repaid as follows (dollars in thousands):
8
<PAGE>
<TABLE>
Fiscal Year
-----------
<S> <C>
1999 $ --
2000 2,500
2001 1,500
2002 7,500
2003 21,792
Thereafter --
-------
$33,292
-------
-------
</TABLE>
During the first quarter of fiscal 1999, interest expense for related party
borrowings totaled approximately $983,000.
THIRD-PARTY BORROWINGS
In December 1997, Intek Global USA entered into a revolving credit facility
("Credit Facility") with a non-bank lender. The Credit Facility makes available
$5.0 million through December 1999. Borrowings under the Credit Facility are
secured by the assets of Intek Global USA and bear interest at 1.5% above the
lender's base rate (as defined). The Credit Facility contains, among other
covenants, a covenant relating to leverage, limitations on Intek Global USA's
ability to repay intercompany indebtedness and repayment provisions related to
change in control of Intek Global USA. The Company uses the Credit Facility for
issuance of letter of credit commitments on behalf of Intek Global USA, and for
borrowings for working capital. As of December 31, 1998, there was indebtedness
outstanding of approximately $2.2 million and letter of credit commitments of
$1.5 million under this Credit Facility.
In December 1997, Intek Global completed the acquisition of selected assets
of Wireless Plus. The purchase price paid by the Company to Wireless Plus
included a secured subordinated note in the amount of approximately $2.6 million
bearing interest at the rate of 8% per annum payable annually. The note
principal is payable in two equal annual installments due in February 1999 and
February 2000.
In March 1998, Intek Global repurchased 352,500 shares of Intek Global
common stock at $2.75 per share in a private transaction for a total of $969,375
(Note 7). The purchase price paid by the Company included notes in the aggregate
amount of $440,625. The notes were non-interest bearing and were repaid on
December 15, 1998.
In August 1998, the Company entered into a purchase agreement with ComTech.
The purchase price paid by the Company to ComTech included a three-year
promissory note in the amount of $408,039, bearing interest at the rate of 9%
per annum. The note principal is payable in two installments in fiscal 2000 and
2001.
SEL has an overdraft agreement of 2.0 million pounds sterling
(approximately U.S. $3.2 million) with a bank. Borrowings under the Agreement
are unsecured at an adjustable rate of 1% over the prevailing U.K. base rate.
The rate at December 31, 1998 was 7.0%. The Company uses the overdraft Facility
for borrowings for working capital. As of December 31, 1998, there was
indebtedness of approximately $3.2 million under this overdraft agreement.
In addition, the Company has other borrowings related primarily to the
acquisition of property and equipment from third parties in the aggregate amount
of $410,000.
As a result of the above agreements, as of December 31, 1998, third party
borrowings will be repaid as follows ($s in thousands):
9
<PAGE>
<TABLE>
Fiscal Year
-----------
<S> <C>
1999 $ 6,950
2000 1,615
2001 384
2002 102
2003 2
Thereafter --
-------
$ 9,053
-------
-------
</TABLE>
(9) COMMITMENTS
SITE LEASES
The Company has entered into 231 site leases for the housing of radio base
station equipment and antenna systems related to the Intek Global USA 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, 1998, total future minimum lease payments are as follows ($'s in
thousands):
<TABLE>
Fiscal Year
-----------
<S> <C>
1999 $ 1,743
2000 1,800
2001 1,041
2002 329
2003 149
Thereafter 221
-------
$ 5,283
-------
-------
</TABLE>
PURCHASE COMMITMENTS
As of December 31, 1998, Intek Global USA had a purchase commitment with
its main supplier of radios to purchase approximately $2.1 million of inventory.
(10) LEGAL PROCEEDINGS
The Company, David Neibert, the Company's Vice President of Spectrum
Management, and Nicholas R. Wilson, a former Chairman of the Company ("Intek
Global 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 in November, 1997. The lawsuit purported 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, among other things, the sale and marketing of interests in
certain partnerships formed to operate specialized mobile radio ("SMR") systems
and in connection with the operation of those partnerships. 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
Global Defendants, a motion for a temporary restraining order and preliminary
injunction seeking to freeze the assets of all defendants. The Intek Global
Defendants filed a motion to dismiss the complaint on various grounds. In
response plaintiffs sought leave to file a second amended complaint, which
request was granted by the court. Intek Global requested plaintiffs to withdraw
all claims against the Intek Global defendants on the grounds that they are
frivolous. On February 3, 1998, plaintiffs filed an amended complaint which
purported to allege claims under RICO, the Securities Act of 1933, the
10
<PAGE>
Securities Exchange Act of 1934 and various common law state claims in
connection with, among other things, (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 Global Defendants moved to dismiss the amended complaint. On
September 30, 1998, the Court granted in part and denied in part the Intek
Global defendants' motion to dismiss the complaint and dismissed plaintiffs'
RICO claims with prejudice. The Court granted plaintiffs leave to replead all
claims (except their RICO claims) that were timely under the applicable statute
of limitations.
On October 23, 1998, the plaintiffs filed a third amended complaint which
purported to allege claims under Section 10(b) and 20 of the 1934 Act and Rule
10b-5 promulgated thereunder, Section 12(1) and 12(2) of the 1933 Act and
control person liability thereunder, and various common law state claims in
connection with, among other things, the sale and marketing of certain SMR
Partnerships and the purported dissipation of assets of certain of these
Partnerships. Plaintiffs seek rescissory damages with interest and punitive
damages in an amount to be determined. On December 14, 1998, Intek Global
Defendants filed a motion to dismiss the third amended complaint. Management of
the Company has stated that in its opinion, this lawsuit will not have a
material adverse affect on the Company's consolidated financial position or
results of operations.
In addition, from time to time, the Company is involved in other litigation
relating to claims arising out of its operations in the normal course of
business. In the opinion of the Company's management, after consultation with
outside counsel, the ultimate dispositions of such matters will not have a
materially adverse effect on the Company's consolidated financial position or
results of operations.
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, 1998 as compared with the same period in the prior year 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, 1998 (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 player in the wireless communications business.
The Company provides two-way 220 MHz specialized mobile radio ("SMR")
services to its subscribers under the Roamer One-TM- brand name on systems
utilizing the Company's patented and proprietary linear modulation technology.
The Company is authorized to provide services across the U.S. and will install
sites relative to customer requirements. The Company's SMR sites, including four
major regional and national markets, are referred to herein as the Intek Global
USA Network. The Company has devoted, and expects to continue to devote,
substantial financial and management resources to the development of the Intek
Global USA Network. Additionally, the Company licenses LM Technology and has
developed, and continues to develop, new products utilizing LM Technology for
other frequency bands with a focus on the worldwide need for spectrum
efficiency. The Company, through its various subsidiaries, designs, develops,
manufactures and distributes land mobile radio products including those
utilizing LM Technology and licenses.
The Company presently has in inventory a substantial number of completed
220 MHz base stations and radios, as well as components for the manufacture of
additional base stations and radios. This inventory is intended for sale to the
National Rural Communications Cooperative ("NRTC"), to successful bidders in the
recently
11
<PAGE>
completed Federal Communication Commission ("FCC") Phase II 220 MHz auctions,
public safety market and dealers, as well as for utilization in the Intek Global
USA Network.
The Company has positioned itself strategically as a vertically integrated
provider of spectrum efficient technologies, products and services. In addition
to incorporating the benefits of LM into its products which are sold to third
parties and used on the Intek Global USA Network, the Company also licenses its
technology to third party manufacturers. The Company has redirected its
marketing campaign of the Intek Global USA Network from a national campaign to a
focused specific geographic campaign. The Company has focused its direct sales
effort in the top tier markets while developing marketing relationships with
dealers and others in the middle and lower markets. The construction and
expansion of the Intek Global USA Network, as well as equipment sales to third
parties will be impacted by factors such as the FCC Phase II Licensing auction
which concluded in November 1998. Intek Global has acquired two 10-channel
nationwide, seven 15-channel regional, and 172 10-channel Economic Area ("EA"),
or local, Business Radio airwave licenses. As part of a co-funding partnering
arrangement with the NRTC, Intek Global shares with NRTC the approximately $12
million cost of the new licenses. The Company will assign one nationwide and
certain EA licenses to NRTC, disaggregate six regional and one EA licenses and
partition certain EA licenses to NRTC.
The Company expects to incur operating losses and experience a negative
cash flow from operations for at least one year, primarily because expenses
related to the buildout of the Intek Global USA Network and the investment
required to build the Intek Global USA subscriber base continue to exceed
revenue.
During the third quarter of fiscal 1998, the Company recorded a pre-tax
restructuring charge of $1,613,000, as a result of management's approval of
plans to consolidate and relocate certain administrative services functions
and to eliminate and deconstruct certain communications sites related to its
air time services product line. See Note 3 to the financial statements
included in the Company's Annual Report on Form 10-K for additional
discussions of the restructuring charge and the Cash Flow section of this
MD&A for a summary of activities relating to the resulting reserve.
During the fourth quarter of 1998, the Company determined that the
recovery of the carrying value of its goodwill related to the Radiocoms
Acquisition was not recoverable. Accordingly the Company recorded a non-cash
charge of $34.4 million to write-off the goodwill. See Note 2 to the
financial statements included in the Company's Annual Report on Form 10-K for
additional discussion of the charge.
RESULTS OF OPERATIONS
The Company operates in a single industry segment: provision of
spectrum-efficient wireless communication technology, products and services.
Revenues are generated by product sales and the provision of services including
communications, technology, and non-warranty repair.
During the fourth quarter of fiscal 1998, Intek Global sold its non-core,
U.K.-based land mobile radio distribution and maintenance assets ("ESU Assets")
to Securicor Information Systems Limited ("SIS"), a subsidiary of Securicor. The
three months ended December 31, 1997 include the results of ESU, while the three
months ended December 31, 1998 do not include the results of ESU.
THREE-MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTH PERIOD ENDED
DECEMBER 31, 1997
REVENUES
OVERVIEW
Total revenues decreased by $3,266,000 (35%) from $9,240,000 during the
first quarter of fiscal 1998 to $5,974,000 during the first quarter of fiscal
1999. Product sales decreased by $3,589,000 (40%) from $8,942,000 to $5,353,000
while service revenues increased by $323,000 (108%) from $298,000 to $621,000.
Excluding sales of $2,895,000 by ESU during fiscal 1998, the decrease in product
sales was $694,000 (8%).
PRODUCT SALES
Sales of site equipment and mobile radios for the first quarter of fiscal
1999 were $2,781,000. Sales for the comparable quarter of fiscal 1998 were
$6,046,000. However, sales of radios for the first quarter of fiscal 1998
included revenues of $2,895,000 by ESU. Excluding sales by ESU, sales of radios
for the first quarter of fiscal 1998 were $3,151,000. Compared to the first
quarter of fiscal 1998, the sales of site equipment and mobile radios for the
first quarter of fiscal 1999 decreased by $370,000 or 12%. This decrease was
primarily caused by subscribers renting, rather than purchasing, radios in the
first quarter of fiscal 1999.
Contract manufacturing decreased by $324,000 (11%) from $2,896,000 during
the first quarter of fiscal 1998 to $2,572,000 during the first quarter of
fiscal 1999. Revenues for the first quarter of fiscal 1998 included the first
phase of a large defense contract that was completed during fiscal 1998. The
second phase of the contract is expected to begin subsequent to the first
quarter of fiscal 1999.
In November 1998, Intek Global announced a strategic alliance with NRTC to
develop jointly 220 MHz narrowband business radio networks for NRTC member
utilities across the country relying exclusively on LM-based
12
<PAGE>
equipment. NRTC members will be able to utilize the Roamer One brand under an
exclusive royalty agreement to sell LM-based equipment and airtime services in
their territories. As part of that agreement, the Company and NRTC entered into
a five year non-binding agreement for NRTC to purchase up to $50.0 million of
products from the Company. To date, a binding master purchase order for $5.0
million of products has been issued by NRTC. Subsequent to December 31, 1998 a
specific draw of $1.2 million was issued by NRTC against the master purchase
order. See "Liquidity and Capital Resources--Future Capital Needs and
Resources".
SERVICE INCOME
Service income for the first quarter of fiscal 1999 was $621,000, compared
to $298,000 for the first quarter of fiscal 1998.
Subscriber revenues generated by the Intek Global USA Network were $316,000
for the first quarter of fiscal 1999, an increase of $264,000 compared to
$52,000 for the first quarter of fiscal 1998. At December 31, 1998, Intek Global
USA had approximately 11,388 subscribers compared to 10,500 at September 30,
1998 and approximately 2,200 at December 31, 1997. Due to the sale of ESU, there
were no subscriber revenues during the first quarter of fiscal 1999 compared to
$149,000 for the same period of fiscal 1998. Excluding ESU subscriber revenues,
subscriber revenues increased $472,000 (317%) during the first quarter of fiscal
1999 compared to the first quarter of fiscal 1998.
Non-subscriber income includes royalties, equipment rental and non-warranty
repair. Non-subscriber revenues for the first quarter of fiscal 1999 were
$305,000, compared to $97,000 for the first quarter of fiscal 1998. The increase
of $208,000 was primarily due to non-warranty repair and equipment rental.
COST OF GOODS AND SERVICES PROVIDED AND GROSS PROFIT MARGIN
OVERVIEW
Total cost of revenues decreased by $3,224,000 (or 43%) from $7,552,000 to
$4,328,000. Gross Margin decreased by $42,000 (or 3%) from $1,688,000 to
$1,646,000.
COST OF PRODUCT SALES
The cost of product sales decreased by $3,204,000 from $6,544,000 (73%
sales) to $3,340,000 (62% sales). Cost of sales as a percentage of sales was
favorably impacted by improved manufacturing cost controls and the growing
strength of the U.S. Dollar against the Japanese Yen, providing reductions in
the cost of products purchased in Japan. Gross margin decreased by $385,000 from
$2,398,000 (27% sales) to $2,013,000 (38% sales).
COST OF SERVICE PROVIDED
The cost of service provided decreased by $20,000 from $1,008,000 during
the first quarter of fiscal 1998 (338% revenues) to $988,000 during the first
quarter of fiscal 1999 (159% revenues). Gross margin increased by $343,000 from
a loss of $710,000 (238% revenues) to a loss of $367,000 (59% revenues).
Cost of subscriber service revenue 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 system maintenance,
consulting fees, travel and equipment rental required for optimizing and
supporting the network of base stations. Customer support includes phone-based
assistance to subscribers. Support for additional licenses acquired from third
parties after the first quarter of fiscal 1998 and creation of the
infrastructure to support subscribers resulted in increases during the first
quarter of fiscal 1999. Intek Global USA's site and technical support expenses
were $878,000 during the first quarter of fiscal 1999, compared to $637,000
during the first quarter of fiscal 1998.
OTHER OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses decreased by $300,000 (16%) from $1,853,000
during the first quarter of fiscal 1998 (20% revenues) to $1,553,000 during the
first quarter of fiscal 1999 (26% revenues). The decrease is due to a
redirection of the Company's marketing campaign of the Intek Global USA Network
from a national campaign
13
<PAGE>
to a focused specific geographic campaign. Sales and marketing expenses are
primarily salaries and commissions, travel, advertising promotion, trade shows,
and preparation of promotional materials.
RESEARCH AND DEVELOPMENT
Research and development expenses of $676,000 (11% revenues) for the first
quarter of fiscal 1999 were 7% higher than the expenses of $633,000 (7%
revenues) for the first quarter of fiscal 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses of $4,030,000 (68% revenues) for the
first quarter of fiscal 1999 were $19,000 higher than the expenses of $4,011,000
(43% revenues) for the first quarter of fiscal 1998. General and administrative
expenses consist of salaries, consultants, office rent, legal, audit, public
relations and shareholder relations costs, insurance, and recruiting.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization increased by $64,000 (5%) from
$1,329,000 during the first quarter of fiscal 1998 to $1,393,000 during the
first quarter of fiscal 1999.
OPERATING LOSS
Intek Global's operating loss was $6,006,000 for the first quarter of
fiscal 1999, compared to a loss of $6,138,000 for the first quarter of fiscal
1998.
INTEREST EXPENSE
Interest expense for the first quarter of fiscal 1999 was $1,092,000
compared to $683,000 for the first quarter of fiscal 1998. Of the total,
$109,000 related to borrowings from third parties and $983,000 related to
borrowings from Securicor.
NET LOSS
The consolidated net loss after taxes for the first quarter of fiscal 1999
was $7,134,000. The net loss for the first quarter of fiscal 1998 was
$6,805,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary historical source of cash has been borrowings from
Securicor.
CASH FLOWS
For the first quarter of fiscal 1999, the Company used $8,878,000 in cash
for operating activities, $1,690,000 was spent for capital expenditures and
$167,000 was spent for FCC licenses. The Company received $440,000 from the
collection of a note related to the sale in December 1996 of non-core assets
consisting of land and building owned by the Company. Through its financing
activities, the Company obtained approximately $6,689,000 in new debt, of which
$2,500,000 was from Securicor and the balance related to bank lines of credit.
The Company retired $441,000 in debt related to the repurchase in March 1998 of
352,500 shares of Intek Global common stock from Simmonds Capital Limited in a
private transaction.
In December 1998, the Company entered into an additional financing
arrangement ("December 1998 Facility") with Securicor providing the Company with
the ability to borrow up to $25 million. The arrangement provides that amounts
outstanding bear interest at 11.5%, payable quarterly in cash or deferred at the
Company's discretion, and is due December 31, 1999. Outstanding debt under the
arrangement is convertible at any time at Securicor's discretion into the
Company's common stock at various conversion prices. The conversion price for
the first $12.5 million of amounts outstanding will be the average closing price
for the last 20 trading days prior to
14
<PAGE>
the date the Company's Board of Directors approved the arrangement and the next
$12.5 million of amounts outstanding will be set at the average closing price of
the Company's common stock for the 20 trading days prior to the date of each
draw by the Company comprising that amount. At December 31, 1998, the amount
payable under the December 1998 Facility totaled $2.5 million.
During the third quarter of fiscal 1998, the Company recorded a pre-tax
restructuring charge of $1,613,000, as a result of its strategy plan which
included plans to consolidate and relocate certain administrative services
functions and to deconstruct certain communications sites related to its air
time services product line. See Note 3 to the financial statements included in
the Company's Annual Report on Form 10-K for additional discussions of the
restructuring charge and the resulting restructuring reserve. Activities related
to the restructuring reserve are summarized as follows (in thousands):
<TABLE>
STAFF OFFICE LEASE SITE LEASE EQUIPMENT
REDUCTIONS TERMINATIONS TERMINATIONS REMOVAL TOTAL
--------------- ---------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $653 $175 $423 $173 $1,424
Cash payments (290) (48) (98) (24) (460)
--------------- ---------------- --------------- ---------------- -------------
Balance at December 31, 1998 $363 $127 $325 $149 $ 964
--------------- ---------------- --------------- ---------------- -------------
--------------- ---------------- --------------- ---------------- -------------
</TABLE>
The remaining balance of the restructuring reserve at December 31, 1998, is
expected to be paid out in fiscal 1999.
FUTURE CAPITAL NEEDS AND RESOURCES
In the future, the Company will require capital to build sites for the
Intek Global USA Network, perform other upgrading functions to the current
network, and, to fund operating expenses. The requirement for future working
capital will be driven and highly dependent on the rate of loading subscribers
(with mobile radios) onto the Intek Global USA Network and the capital
requirements of the Company's distribution, manufacturing and research and
development subsidiaries.
The Company and NRTC entered into a Master Distribution Agreement, dated
September 4, 1998 (the "Distribution Agreement"), to provide for the appointment
of NRTC and the members of its cooperative ("Members") as distributors to
purchase LM-based equipment (the "Contract Products") from the Company for
resale to their customers in certain exclusive geographic areas. The
Distribution Agreement targets the sale of approximately $50 million of Contract
Products to NRTC and its Members over the first five years of the Distribution
Agreement, and as of December 31, 1998, NRTC and its Members have placed orders
for approximately $5 million of Contract Products. NRTC and each of its Members
will be authorized to use the "RoameR One" trademark and trade name in
connection with resales of the Contract Products to their customers and may
further elect to obtain the exclusive right to such use in designated geographic
areas for an annual royalty fee ranging from $15,000 to $25,000, depending on
the number of base stations constructed. The Distribution Agreement permits NRTC
and its Members to purchase the Contract Products at the lowest rate quoted or
charged by Intek Global USA to any of its dealers or customers within the U.S.
and also provides for a 0.5% discount on future purchases of Contract Products,
if the amount of such purchases for the preceding year exceeds $10 million. In
addition, NRTC has earned an option to purchase up to 200,000 shares
of the Company's common stock and has been given conditional grants to purchase
up to 1,050,000 additional shares of the Company's common stock. The conditional
stock options will vest to NRTC, incrementally, based on the amount of Contract
Products purchased over the term of the Distribution Agreement. The exercise
price of stock options vested in the first two years is the lower of (a) $3.00
per share or (b) the average closing price for the 20 trading days immediately
preceding the exercise date and the exercise price of options vested after the
first two years is the average closing price for the 20 trading days immediately
preceding the exercise date.
At December 31, 1998, NRTC was entitled to receive an option to purchase
200,000 shares of Company common stock and had not earned an entitlement to any
portion of an additional option based upon product sales. Since the option to
purchase 200,000 shares of Intek common stock had not yet been granted to NRTC
at December 31, 1998, and the fair value of the option was not deemed to be
material to the Company's consolidated balance sheet or statement of operations
and comprehensive income the Company had not recorded the fair value of the
option. The Company anticipates recording the fair value of the option to
purchase 200,000 shares of Company common stock on the earlier of the date the
option is granted to NRTC or the date the NRTC becomes entitled to additional
options based upon product purchases.
15
<PAGE>
The management of the Company believes that, with the new $25 million
financing agreement entered into with Securicor on December 16, 1998, the
Company's current available capital is sufficient to fund its fiscal 1999
operations. However, if negative events occur in fiscal 1999 and subsequent to
fiscal 1999, the Company will require additional cash resources to fund
operations. There can be no assurance that additional financing will be
available on reasonable terms or at all.
EFFECTS OF INFLATION
The Company was not affected in any material respect by inflation during
the first quarters of fiscal 1999 or 1998.
YEAR 2000
The Company described its three-phase program for the Year 2000 ("Y2K")
information systems compliance in Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the Company's
annual report on Form 10-K for the period ended September 30, 1998. The Company
is proceeding to implement the program as outlined in the annual report and the
estimated costs associated with Y2K compliance by the Company remain the same.
16
<PAGE>
INTEK GLOBAL 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: July 29, 1999
INTEK GLOBAL CORPORATION
By: /s/ George A. Valenti
---------------------------------------
George A. Valenti
Chief Financial Officer
17
